In most cases seeking recognition of a foreign bankruptcy proceeding in the United States under chapter 15 of the Bankruptcy Code, the foreign debtor's "foreign representative" has been appointed by the foreign court or administrative body overseeing the debtor's bankruptcy case. However, this is not always the case, especially if the foreign debtor retains operating control over its operations under court supervision as the functional equivalent of a chapter 11 debtor-in-possession ("DIP") with the power to appoint individuals or entities to represent it even without formal court approval.
The U.S. Bankruptcy Court for the Southern District of New York confronted this scenario in In re Agro Santino, OOD, 653 B.R. 79 (Bankr. S.D.N.Y. 2023). The court granted a petition for chapter 15 recognition of a Bulgarian bankruptcy proceeding even though the debtor's foreign representative was appointed by the foreign debtor's manager pursuant to a power of attorney ("PoA") rather than an order of the foreign court. According to the U.S. bankruptcy court, because the Bulgarian debtor was the functional equivalent of a DIP with the power to appoint foreign representatives, the individual appointed by the debtor in the PoA as its "foreign representative" qualified as such for purposes of chapter 15 eligibility and recognition.
Recognition of Foreign Bankruptcy Cases Under Chapter 15
Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which has been enacted in some form by more than 50 countries.
Under section 1515(a) of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding." The Bankruptcy Code defines "person" to include an "individual." See 11 U.S.C. § 101(41).
Section 1515(b) provides that:
A petition for recognition shall be accompanied by—
(1) a certified copy of the decision commencing such foreign proceeding and appointing the foreign representative;
(2) a certificate from the foreign court affirming the existence of such foreign proceeding and of the appointment of the foreign representative; or
(3) in the absence of evidence referred to in paragraphs (1) and (2), any other evidence acceptable to the court of the existence of such foreign proceeding and of the appointment of the foreign representative.
11 U.S.C. § 1515(b) (emphasis added).
Under section 1516(a), "[i]f the decision or certificate referred to in section 1515(b) indicates that the foreign proceeding is a foreign proceeding and that the person or body is a foreign representative, the [U.S. bankruptcy] court is entitled to so presume." However, in the absence of any such order or certificate, no such presumption is created, and the petition must be accompanied by "any other evidence acceptable to the court of the existence of such foreign proceeding and of the appointment of the foreign representative." In re PT Bakrie Telecom Tbk, 601 B.R. 707, 716 (Bankr. S.D.N.Y. 2019).
The basic requirements for recognition under chapter 15 are outlined in section 1517(a), namely: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the "foreign representative" applying for recognition must be a "person or body"; and (iii) the petition must satisfy the requirements of section 1515, including that it be supported by the documentary evidence specified in section 1515(b).
"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the United States of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. § 1502(4))—and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)). A debtor's COMI is presumed to be the location of the debtor's registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c).
An "establishment" is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity." Unlike with the determination of COMI, there is no statutory presumption regarding the determination of whether a foreign debtor has an establishment in any particular location. U.S. bankruptcy courts weigh a variety of considerations to determine whether nontransitory economic activity exists in the applicable jurisdiction, including where the debtor engages in local business activity and such business has an effect on the local market, the presence of an asset together with some degree of management of such asset, a minimum level of organization that is stable and apparent to third parties, and the activities of other entities within an integrated corporate group.
Must a Foreign Representative Be Appointed by the Foreign Court?
In PT Bakrie, the unsecured noteholders of a subsidiary of an Indonesian telecommunications company that guaranteed $380 million of the notes argued that the U.S. bankruptcy court should refuse to recognize the parent company's "suspension of payments" proceeding in a Jakarta court. Among other things, the noteholders argued that the appointment of the debtor's foreign representative was invalid under Indonesian law because the foreign debtor's board of directors did not have the authority to appoint the representative unilaterally without the consent of the debtor's court-appointed administrators.
The bankruptcy court rejected this argument, initially explaining that the requirement that a foreign representative be authorized directly by a foreign court or administrative body in a foreign proceeding "is not an onerous one." PT Bakrie, 601 B.R. at 717. It further noted that, in Ad Hoc Grp. Of Vitro Noteholders v. Vitro, S.A.B. de C.V. (In re Vitro, S.A.B. de C.V.), 470 B.R. 408 (N.D. Tex. 2012), aff'd, 701 F.3d 1031 (5th Cir. 2012), the courts rejected the same argument regarding a foreign representative appointed by the debtor's board of directors without the consent of a court-appointed administrator. According to the PT Bakrie bankruptcy court, the "ultimate issue" was whether the purported representative's appointment comported with sections 101(24), 1515, and 1517 of the Bankruptcy Code, rather than Indonesian law.
In Vitro, the debtor, a Mexican holding company, appointed two individuals to file a Mexican bankruptcy case on its behalf as well as a petition seeking chapter 15 recognition of its Mexican bankruptcy case. The U.S. bankruptcy court entered an order recognizing the debtor's Mexican bankruptcy case even though the debtor's foreign representatives were not appointed by the Mexican court. An ad hoc group of the debtor's noteholders appealed, arguing that the foreign representatives did not satisfy section 101(24) because neither representative was directly approved by the Mexican bankruptcy court.
The U.S. District Court for the Northern District of Texas affirmed. The district court interpreted the language of section 101(24) more broadly "to mean authorized in the context of a foreign bankruptcy proceeding." Vitro, 470 B.R. at 411. Foreign representatives appointed by a corporation engaged in a foreign bankruptcy case, the court reasoned, would therefore be considered "authorized in a foreign proceeding." The district court noted that case law suggests a debtor is permitted to appoint its own foreign representative and that under Mexican law, a debtor—like a DIP in the United States—is generally authorized to manage its business during a bankruptcy case.
According to the district court, although there are differences between the two nations' concepts of a DIP, the difference is not so great as to preclude the debtor from appointing its own foreign representative under section 101(24). The court also emphasized that the question of whether a foreign representative is qualified is a matter of U.S. law. The district court concluded that the debtor's appointment of its foreign representatives satisfied the requirements of section 101(24).
The U.S. Court of Appeals for the Fifth Circuit affirmed on appeal, noting that the representatives were "not disqualified from serving as foreign representatives merely because they were not the subject of an official court appointment." Vitro, 701 F.3d at 1049. Examining the language of section 101(24), the Fifth Circuit noted that the provision is "wholly devoid of any statement that a foreign representative must be judicially appointed." Id. at 1047. Moreover, it reasoned, section 101(24)'s "requirement that a representative be 'authorized in a foreign proceeding' is certainly compatible with appointment by a foreign court, but it is hardly necessary" because it would also be compatible with a requirement that a representative be appointed in the context of a foreign proceeding or during a foreign proceeding. Id.
Looking for guidance to the Model Law, the Fifth Circuit explained that, in drafting the Model Law definition of "foreign representative" upon which section 101(24) is patterned, the UNCITRAL Working Group on Insolvency Law expressly rejected any requirement that a foreign representative be specifically authorized by statute or court order to act in connection with a foreign proceeding. Id. at 1048. In addition, the Fifth Circuit noted, the Working Group "clearly intended to include foreign representatives of proceedings in which a debtor in possession remains in control of its assets"—a conclusion shared by the National Bankruptcy Review Commission created by U.S. lawmakers in 1994 based upon its review of the (then draft) Model Law. Id.
The Fifth Circuit also rejected the noteholders' argument that foreign law determines whether an entity or individual qualifies as a "foreign representative" for purposes of chapter 15. Instead, the court explained, section 101(24) governs that determination, and it is satisfied if the proposed representative is authorized in a foreign proceeding to "act as a representative of such proceeding," or if the proposed representative is authorized "to administer the reorganization of the liquidation of the debtor's assets or affairs." Id. at 1049 (quoting section 101(24)).
The Fifth Circuit explained that the relevant inquiry under section 101(24) is whether the representatives had "administrative power over the reorganization of [the debtor's] business." Id. The Fifth Circuit agreed with the lower courts that this was the case because the debtor was acting as the functional equivalent of a DIP under U.S. law.
Other courts have similarly concluded that a foreign representative need not be appointed by a foreign bankruptcy court to qualify as a foreign representative under chapter 15. See, e.g., In re Servicos de Petroleo Constellation S.A., 600 B.R. 237, 270 (Bankr. S.D.N.Y. 2019) (concluding that a representative appointed pursuant to Brazilian debtors' corporate resolutions was a proper "foreign representative" within the meaning of section 101(24) and thus met the section 1517(a)(2) eligibility requirements); In re Cell C Proprietary Ltd., 571 B.R. 542, 553 (Bankr. S.D.N.Y. 2017) (recognizing that a South African debtor's board resolution appointing foreign representatives satisfied section 101(24)); In re OAS S.A., 533 B.R. 83, 98 (Bankr. S.D.N.Y. 2015) (a foreign representative appointed by a debtor's board of directors satisfied section 101(24)).
Agro Santino
Agro Santino OOD (the "debtor") is a limited liability company formed under the laws of the Republic of Bulgaria formerly engaged in the production and sale of agricultural products. It has 12 shareholders and is run by a single manager wielding exclusive executive and managerial authority.
In 2017, the debtor opened a commodities futures and option contract trading account with StoneX Markets LLC ("StoneX") to hedge its exposure to price declines in the crops that it grew and maintained in inventory. In August 2018, StoneX presented the debtor with a margin call in the amount of $2.2 million due to substantial losses suffered by the debtor on its open positions. The debtor made margin payments in the amount of $825,000, but disputed the remaining liabilities under its account. StoneX then liquidated the debtor's open positions and set off the proceeds from the liquidation against the outstanding margin call, leaving a net settlement amount of approximately $1.3 million, which the debtor refused to pay.
Based on its right to payment under the account agreement with the debtor, StoneX obtained a preliminary injunction from a Bulgarian court freezing all of the debtor's Bulgarian bank accounts to the extent of the net settlement amount plus interest and costs. An appellate court later affirmed the preliminary injunction order.
Because the account agreement was governed by New York law and included a New York State or New York federal forum selection clause, StoneX sued the debtor in March 2020 in the U.S. District Court for the Southern District of New York to collect the net settlement amount. The debtor counterclaimed, seeking to recover the proceeds from its liquidated positions and the entirety of its net trading losses with StoneX (in excess of $1.5 million).
In July 2021, one of the debtor's creditors filed an insolvency proceeding against the debtor in a Bulgarian court. StoneX joined in the petition.
In March 2022, the Bulgarian court issued a judgment under the Bulgarian Commercial Act (the "BCA") initiating a Bulgarian bankruptcy proceeding (the "Bulgarian Proceeding"), finding that the debtor was unable to pay its debts as they matured. In accordance with the BCA, the debtor continued to operate its business under the supervision of a court-appointed trustee, but was required to obtain the prior consent of the trustee to "conclude new transactions."
On March 31, 2022, the debtor's manager executed a PoA appointing attorney Yordanka Ivanova Panchovska ("Panchovska") as the debtor's "attorney in fact and agent." The PoA granted Panchovska:
the full extent of [the debtor's] authority [to] represent it in all matters related in any way whatsoever to the Bulgarian commercial bankruptcy case in which [the debtor] is a debtor ... currently before the [Bulgarian court] ... including for purposes of seeking any relief available to a "foreign representative" (as that term is defined in U.S. Code, Title 11, Section 101) under U.S. Code, Title 11, Chapter 15, and any other applicable United States legislation and/or relevant court rules) without limitation or exclusion to the maximum extent permitted by law.
The court-appointed trustee did not approve the debtor's retention of Panchovska, but the trustee never formally objected to the retention.
On June 15, 2022, Panchovska, as the debtor's putative "foreign representative," filed a petition in the U.S. Bankruptcy Court for the Southern District of New York seeking chapter 15 recognition of the Bulgarian Proceeding as a foreign main proceeding, as well as a determination that Panchovska is the debtor's "foreign representative" within the meaning of section 101(24).
StoneX objected to recognition, arguing that the debtor had not demonstrated that Panchovska qualified as its foreign representative because her appointment in that capacity violated the relevant provisions of the BCA, having never been approved by the trustee. StoneX also argued that the U.S. bankruptcy court must apply Bulgarian law to determine whether Panchovska could serve as the debtor's foreign representative in its chapter 15 case.
The Bankruptcy Court's Ruling
The U.S. bankruptcy court granted the petition for chapter 15 recognition of the Bulgarian Proceeding.
Initially, U.S. Bankruptcy Judge James L. Garrity, Jr. concluded that, other than the requirement in section 1515(a) that the debtor's chapter 15 petition be filed by its "foreign representative," the Bulgarian Proceeding clearly satisfied all of the requirements for recognition under chapter 15.
Next, Judge Garrity agreed with Vitro that the relevant issue in assessing whether Panchovska qualified as a "foreign representative" for purposes of chapter 15 recognition is whether section 101(24) was satisfied, "i.e., whether the foreign debtor [is] the functional equivalent of a debtor in possession" with the power to appoint foreign representatives. Agro Santino, 653 B.R. at 94.
According to Judge Garrity, the unrefuted evidence, including the PoA, correspondence between the trustee and the debtor's manager, and correspondence between the manager and the Bulgarian court notifying it of the filing of the chapter 15 case, demonstrated that the debtor was acting as the functional equivalent of a DIP, "as contemplated by section 101(24)"—a point that was not contested by StoneX. Id. at 95. The U.S. bankruptcy court accordingly found that "[the debtor] retains the ability to operate as a debtor in possession during the Bulgarian insolvency, and ... has sufficient authority to authorize Ms. Panchovska to act as the foreign representative in this insolvency." Id.
Although reluctant to opine on questions of Bulgarian law in keeping with principles of comity, Judge Garrity explained, but did not decide, that Panchovska's appointment as the debtor's foreign representative was likely valid under the BCA despite StoneX's contention that the appointment was "a new transaction" requiring the trustee's approval. Among other things, Judge Garrity was skeptical that the debtor was required by the BCA to seek the trustee's approval before retaining an attorney to coordinate the insolvency process. Moreover, he wrote, "[t]ellingly, this Court has not been apprised of any actions taken by the Trustee to challenge Ms. Panchovska's appointment," nor were there any actions taken by the Bulgarian court to prevent Panchovska's participation in the debtor's chapter 15 case. Id. at 97 and n.17.
The U.S. bankruptcy court accordingly recognized the Bulgarian Proceeding as a foreign main proceeding under chapter 15.
Outlook
Agro Santino does not represent a sea change regarding the requirements for the appointment of a foreign representative in a chapter 15 case. Even so, the ruling is significant for a number of reasons.
First, the decision clarifies that a foreign representative need not be appointed by the foreign court overseeing a foreign debtor's bankruptcy or insolvency proceeding, as evidenced by a certified court order or certificate described in sections 1515(b)(1) and 1515(b)(2) of the Bankruptcy Code. Instead, as contemplated by section 1515(b)(3), in the absence of such an order or certificate, a U.S. bankruptcy court, in assessing whether recognition of a foreign bankruptcy case is warranted under chapter 15, may rely on "any other evidence acceptable to the court of the existence of such foreign proceeding and of the appointment of the foreign representative." According to Agro Santino (and other similar rulings), such evidence can include evidence demonstrating that the foreign debtor is the "functional equivalent" of a DIP, and therefore has the authority to direct its affairs, including the power to appoint a foreign representative—via power of attorney or otherwise—to seek recognition of the foreign debtor's bankruptcy case in the United States and other Model Law jurisdictions.
Second, the ruling clarifies that U.S. law (namely, section 101(24) of the Bankruptcy Code), rather than the law governing a foreign debtor's bankruptcy or insolvency case, determines whether the debtor's representative qualifies as a "foreign representative" for purposes of chapter 15 eligibility and recognition.
Third, Agro Santino and other similar rulings effectively reduce barriers to chapter 15 access, particularly in cases involving foreign jurisdictions that have adopted restructuring frameworks that do not contemplate courts or other administrative bodies formally appointing foreign representatives (e.g., the German Corporate Stabilization and Restructuring Act and the Dutch Act on Confirmation of Extrajudicial Plans (Wet Homologatie Onderhands Akkoord).
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