Fulbright and Jaworski LLP: Briefing

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"Fifth Circuit Holds That Determination Of A Debtor's COMI Or Establishment Must Be Made As Of The Time Of Chapter 15 Recognition" Fulbright Briefing Johnathan C. Bolton  June 2010 In the case of Lavie v. Ran (In re Ran), No. 09-20288, 2010 WL 2106638, (5th Cir. May 27, 2010), the United States Court of Appeals for the Fifth Circuit affirmed a district court’s denial of chapter 15 recognition of an Israeli involuntary bankruptcy proceeding pending against an individual that had moved to the United States years earlier. In so doing, the Fifth Circuit held that the determination of an individual debtor’s “center of main interests” or whether the debtor has an “establishment” for the purposes of chapter 15 must be made as of the time that recognition is sought by a foreign representative. The debtor, Yuval Ran, was a well-known Israeli businessman and promoter who encountered financial difficulties in the late 1990s. Id. at *1. Ran was a director or shareholder in almost one hundred Israeli companies, including Israel Credit Lines Supplementary Financial Services Ltd., which was itself in liquidation in an Israeli bankruptcy proceeding. Id. In 1997, an involuntary bankruptcy proceeding was commenced against Ran individually, in the Israeli District Court of Tel Aviv-Jaffa. Id. Zuriel Lavie was initially appointed as temporary receiver of Ran’s assets and was later appointed as permanent receiver. Id. However, the Court found that before the involuntary bankruptcy proceeding was commenced against him, Ran left Israel and moved to Houston, Texas, where he and his family have continuously resided. Id. Ran’s wife and five children were United States citizens, and Ran is a legal permanent resident of the United States currently seeking United States citizenship. Id. Ran and his wife own a home in Houston and both work in the area. Id. The Court also found that Ran had not carried out any business activity in Israel since 1998. On December 11, 2006, Lavie filed a petition in the United States Bankruptcy Court for the Southern District of Texas in Houston seeking recognition of the Israeli bankruptcy proceeding as a foreign main or nonmain proceeding under Chapter 15 of the Bankruptcy Code. On May 22, 2007, the Bankruptcy Court denied Lavie’s petition for recognition of the Israeli bankruptcy proceeding as either a foreign main or foreign nonmain proceeding. Id. The Bankruptcy Court’s order was the subject of two appeals to the district court, the first resulting in a remand for additional findings and the second resulting in an order affirming the denial of Lavie’s petition for recognition. Id. The Fifth Circuit started its analysis of the case by discussing sections 1501(a) and 1508 of the Bankruptcy Code and the statute’s international origin. Id. at *2. The Court, citing the Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd. case, stated that even in the absence of an objection, the Court has to undertake its own jurisdictional analysis based on the facts of each particular case. Id. The Court found that Lavie satisfied all of the procedural elements required for recognition under section 1517, but not all of the substantive elements. The Court explained: Because the second and third requirements set forth in Section 1517(a) are indisputably met, the only substantive issue before the court becomes the first delineated requirement of Section 1517(a) (1)—whether the foreign proceeding for which recognition is sought, here Ran’s ongoing, involuntary bankruptcy proceeding pending in Israel, is a foreign main or nonmain proceeding. If the foreign proceeding is neither then it is simply ineligible for recognition under Chapter 15.  Id. at *3. The Fifth Circuit then discussed the concept of COMI or “center of main interests” which is the focus of a determination of whether a foreign proceeding is a “foreign main proceeding” under chapter 15. The Fifth Circuit explained that because Ran is an individual, the Court had to determine whether or not there wassufficient evidence to rebut the presumption under section 1516(c) that an individual’s habitual residence is his COMI: A foreign main proceeding is “a foreign proceeding pending in the country where the debtor has the center of its main interest.” 11 U.S.C. § 1502(4). The phrase “center of main interest” (“COMI”) is a term of art, which the Bankruptcy Code does not define explicitly. Chapter 15, however, does provide that “[i]n the absence of evidence to the contrary, the debtor’s registered office, or habitual residence in the case of an individual, is presumed to be the center of the debtor’s main interests.” Id. § 1516(c). This presumption can be rebutted by evidence to the contrary. See In re Tri-Continental Exch. Ltd., 349 B.R. at 634. Thus, to determine where Ran’s presumptive COMI lies, we must determine the location of his habitual residence and then determine if any evidence to the contrary was presented by Lavie to rebut the presumption that Ran’s habitual residence is his COMI. If so, our inquiry does not end and we must consider all evidence to determine the location of Ran’s COMI. Id. at. *4. The Fifth Circuit explained that, although the Bankruptcy Code does not define the term “habitual residence,” this phrase has been analyzed recently by foreign courts as virtually identical to the more commonly used, at least in the United States, concept of domicile. Id. The Court explained: Under our law, domicile is established by physical presence in a location coupled with an intent to remain there indefinitely. Texas v. Florida, 306 U.S. 398 (1939).One acquires a “domicile of origin” at birth, and that domicile continues until a new one (a “domicile of choice”) is acquired. Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30 (1989). To defeat the presumption of continuing domicile and establish a new domicile, an individual must demonstrate residence in a new state and an intention to remain in that state indefinitely.  Acridge v. Evangelical Lutheran Good Samaritan Soc’y . Id. (emphasis added). The Court stated: “it is evident that, when Lavie filed the petition for recognition, Ran’s habitual residence was in Houston, Texas.” Id. The Court concluded that Ran’s habitual residence in the United States was his presumptive COMI based on its review of the record and the totality of the circumstances, which showed that Ran left Israel nearly a decade prior to the filing of the petition, had no intent to return, and has established employment and a permanent residence in Houston, was a legal permanent resident of the United States, his children are United States citizens and he maintained his finances exclusively in Texas. Id. The Court looked at non-exhaustive factors cited in the case of In re SPhinX, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006), aff’d, 371 B.R. 10 (S.D.N.Y. 2007), which dealt with the COMI of a corporate debtor and the non-exclusive factors set forth in In re Loy, 380 B.R. 154, 162 (Bankr. E.D. Va. 2007), which discussed the COMI of an individual debtor. Id. The Loy factors include: (1) the location of a debtor’s primary assets; (2) the location of the majority of the debtor’s creditors; and (3) the jurisdiction whose law would apply to most disputes. Id. Lavie attempted to rebut the presumption of Ran’s COMI in the United States with the following evidence: (1) Ran’s creditors are located in Israel; (2) Ran’s principal assets are being administered in bankruptcy pending in Israel; and (3) Ran’s bankruptcy proceedings initiated in Israel and would be governed by Israeli law. Id. at *6. However, the Fifth Circuit found that these factors were insufficient to prove, by a preponderance of the evidence, that Israel was Ran’s COMI. Id. Lastly, Lavie argued that the COMI determination should be made with reference to Ran’s operational history, and not merely by focusing upon where Ran’s COMI lies on the date the petition for recognition was filed. Id. The Fifth Circuit disagreed. The Court looked at the text of section 1502 of the Bankruptcy Code, explaining: While Section 1502 does not expressly discuss a temporal framework for determining COMI, the grammatical tense in which it is written provides guidance to the court. Every operative verb is written in the present or present progressive tense. More specifically, Section 1502 defines foreign main proceeding as a “foreign proceeding pending in the country where the debtor has the center of its main interests.” 11 U.S.C. § 1502(4). Congress’s choice to use the present tense requires courts to view the COMI determination in the present, i.e. at the time the petition for recognition was filed. If Congress had, in fact, intended bankruptcy courts to view the COMI determination through a lookback period or on a specific past date, it could have easily said so. Id. at *7. Moreover, the Court explained, “examining a debtor’s COMI at the time of the filing of the petition for recognition fulfills Congress’s purpose for implementing Chapter 15 since Chapter 15 was implemented by Congress in an attempt to harmonize transnational insolvency proceedings.” The Court explained: If we were to assess COMI by focusing upon Ran’s operational history, there would be an increased likelihood of conflicting COMI determinations, as courts may tend to attach greater importance to activities in their own countries, or may simply weigh the evidence differently which may lead to the possibility of competing main proceedings, thus defeating the purpose of using the COMI construct. See In re Betcorp Ltd., 400 B.R. at 290.In fact, a meandering and never-ending inquiry into the debtor’s past interests could lead to a denial of recognition in a country where a debtor’s interests are truly centered, merely because he conducted past activities in a country at some point well before the petition for recognition was sought. See Jay Lawrence Westbrook, Locating the Eye of the Financial Storm, 32 BROOK. J. INT’L L. 1019, 1020 (2007). Id. Finally, the Court explained: it is important that the debtor’s COMI be ascertainable by third parties. If the debtor’s main interests are in a particular country and third parties observe this situation, it should be irrelevant that the debtor’s interests were previously centered in a different country almost a decade prior to the receiver attempting to have the foreign bankruptcy proceeding recognized. See In re Betcorp Ltd., 400 B.R. at 290. The presumption is that creditors will look to the law of the jurisdiction in which they perceive the debtor to be operating to resolve any difficulties they have with that debtor, regardless of whether such resolution is informal, administrative or judicial. This is consistent with English cases interpreting the European Union Regulation, which seem to select a time linked to the commencement or service of the relevant insolvency proceeding. Shierson v. Vlieland-Boddy, [2005] EWCA (Civ) 974, §§ 39, 55, 2005 WL 1860177 (Eng); Re Collins & Aikman Corp. Group, [2005] EWHC (Ch) 1754, § 39, 2005 WL 4829623 (Eng.). Id. The Fifth Circuit noted that this case does not involve Ran recently changing his domicile. Id. at *8. TheCourt noted, in dicta, that “[a] similar case brought immediately after the party’s arrival in the United States following a long period of domicile in the county where the bankruptcy is pending would likely lead to a different result.” Id. Finally, although it had determined that the Israeli bankruptcy proceeding was not a “foreign main proceeding,” Court also had to determine whether or not the Israeli bankruptcy proceeding qualified as a “foreign nonmain proceeding” for the purposes of chapter 15. In making this determination, the Court explained that section 1502(5) defines a foreign nonmain proceeding as “a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment.” Id. Section 1502 (2) defines an “establishment” as “any place of operations where the debtor carries out nontransitory economic activity.” Id.; see also 11 U.S.C. § 1502(2). The Fifth Circuit stated that, “similar to a determination of Ran’s COMI, the relevant time period to determine whether Ran has an establishment in Israel is at the time Lavie filed his petition for recognition.” Id. The Court again explained that the use of thepresent tense in the statute by Congress implied that the court’s establishment analysis should focus on whether the debtor has an establishment in the foreign country where the bankruptcy is pending at the time the foreign representative files the petition for recognition under Chapter 15. Id. The Court explained that “in order for Ran to have an establishment in Israel, Ran must have (1) had a place of operations in Israel and (2) been carrying on nontransitory economic activity in Israel at the time that Lavie brought the petition for recognition in the United States.” Id. at *9. The Court looked to the EU Convention’s legislative history and stated that in order to have a “place of operations” in Israel, Ran must have had “a place from which economic activities are exercised on the market (i.e. externally), whether the said activities are commercial, industrial or professional” at the time that Lavie filed the petition for recognition. Id. The Court concluded that: Even if the court were to conclude that Ran possessed a place of operations in Israel at the time the petition was filed, Ran did not carry out any nontransitory economic activity in Israel and as a result the second part of the establishment requirement is not met. Id. In affirming the district court’s denial of recognition of the Israeli proceeding as a foreign main ornonmain proceeding, the Fifth Circuit concluded: This court does not attempt to define the scope of possible activities that would suffice in demonstrating the existence of an individual debtor’s COMI or establishment in a particular location. Rather, we conclude only that on the record before us today Lavie’s petition for recognition is insufficient to support a finding that Ran’s COMI or establishment are located in Israel. Id. at *11. This case is important to foreign creditors of debtors located in the United States because it makes clear that a delay in pursuing recognition of a foreign proceeding under chapter 15 may be fatal if the Court determines that the debtor’s COMI is no longer in the country where the foreign proceeding is pending and where the debtor no longer has an establishment.