The United States Bankruptcy Court for the Southern District of New York (Bernstein, J.), following a trial, granted recognition to the Chapter 15 case application filed by the Cayman Joint Provisional Liquidators (“JPLs”) of Suntech Power Holdings Co., Ltd. (“Suntech”), rejecting arguments made by the residual trust of former competitor Solyndra that Suntech manipulated the venue of the case and impermissibly manipulated its Center of Main Interests (“COMI”) in order to qualify for Chapter 15.
In so doing, the Court held that a bank account funded in New York just prior to the Chapter 15 filing to constitute Suntech’s sole property in the United States was permissible to satisfy jurisdiction under 11 U.S.C. § 109. The Court further held that a shift of Suntech’s COMI from China to the Cayman Islands was permissible and not improperly manipulated, and that the JPLs efforts to establish COMI in the Cayman Islands were consistent with their duties as provisional liquidators. The decision is a welcome one for foreign companies without a history of U.S. assets or business who desire to use Chapter 15 to facilitate international restructurings.
Suntech is a Cayman Islands holding company and the ultimate parent for a group of subsidiaries that engage in various aspects of the solar panel business, including an American indirect subsidiary based in San Francisco. None of Suntech’s subsidiaries are incorporated in the Cayman Islands or do business there, and until shortly prior to the commencement of the provisional liquidation proceeding (“Foreign Proceeding”) in the Cayman Islands, Suntech listed the location of its principal executive offices as being in China.
At the time the Foreign Proceeding was initiated, Suntech’s principal debt consisted of a U.S. notes offering in the amount of $575 million issued in 2008. Suntech was also a defendant in various pending litigations, including an antitrust suit brought by Solyndra in California seeking to recover at least $1.5 billion in damages. Suntech’s assets consisted primarily of stock in subsidiaries and $1.46 billion in receivables, most of which were due from subsidiaries, and whose collectability was questionable.
Suntech defaulted on its note obligations when they matured and executed a restructuring agreement with several of its large creditors that contemplated restructuring through a scheme of arrangement in the Cayman Islands and a potential Chapter 15 filing. After the filing of a winding up petition in the Cayman Islands by a director of Suntech, the Cayman Court entered an ordering commencing the Foreign Proceeding and appointing the JPLs.
Following Suntech’s default, certain small noteholders filed suit in New York to enforce the notes (the indenture was governed by New York law and provided for venue in New York), and after obtaining judgment commenced an involuntary Chapter 7 case against Suntech in New York. A restructuring support agreement was later negotiated to resolve the involuntary case, and provided that the JPLs were required to commence a Chapter 15 case in New York.
Eligibility to be a Debtor
Suntech had no property or business in New York (or anywhere else in the United States) at the time the JPLs agreed to file a Chapter 15 case there. The Bankruptcy Code, however, provides that “only a person that resides or has a domicile, a place of business, or property in the United States [...] may be a debtor under” the Bankruptcy Code, including under Chapter 15. 11 U.S.C. § 109(a). The JPLs accordingly sought to establish a bank account in New York to meet the property requirement. Suntech contacted a restructuring consultant with bank accounts in New York who agreed to accept transfer of Suntech’s funds into its account. A day after Suntech transferred $500,000 into the account, the Chapter 15 case was commenced, with the JPLs seeking recognition of the Foreign Proceeding as a foreign main proceeding, or alternatively, as a foreign non-main proceeding.
The court, following In re Octaviar Admin. Pty Ltd., 511 B.R. 361, 372-73 (Bankr. S.D.N.Y. 2014) and In re Yukos Oil Co., 321 B.R. 396, 407 (Bankr. S.D. Tex. 2005), found that the establishment of the account was sufficient to meet the property requirement of § 109 and render Suntech eligible to be a debtor. The Court quoted Octaviar: “[Section 109(a)] says nothing about the amount of such property nor does it direct that there be any inquiry into the circumstances surrounding the debtor’s acquisition of the property, and is thus consistent with other provisions of the Code that reject lengthy and contentious examination of the grounds for a bankruptcy filing.”
Notably, the court stated:
Solyndra argues that the JPLs’ conduct was somehow improper, but I disagree. Interpreting the Bankruptcy Code to prevent an ineligible foreign debtor from establishing eligibility to support needed chapter 15 relief will contravene the purposes of the statute to provide legal certainty, maximize value, protect creditors and other parties in interests and rescue financially troubled businesses. See 11 U.S.C. § 1501(a). The Debtor oversees a multi-national group of corporations engaged in the solar energy business. Despite the lack of a United States presence, it owes a substantial amount of United States debt and requires recognition as a condition to the enforcement of the scheme of arrangement in the United States that the JPLs hope to achieve in the Foreign Proceeding. Absent the enforcement of the scheme, which will presumably include a form of discharge or injunction restraining the collection of some or all of the pre-scheme debts, the Debtor will be hindered from ever establishing a United States presence or conducting future business in the United States for fear that creditors will seize its United States assets. Shutting the door on the Debtor, where it has no other access, will hinder the restructuring of this multi-national business as contemplated by chapter 15.”
The court found that the “JPLs established the BONY account to solve the eligibility problem, and the BONY account also had the effect of establishing a basis for venue in this district under 28 U.S.C. § 1410(1).”
Determining Center of Main Interests
Suntech sought recognition of the Foreign Proceeding under 11 U.S.C. § 1502 as a “foreign main proceeding,” which is defined as “a foreign proceeding pending in the country where the debtor has the center of its main interests.” Generally, “a debtor’s COMI is determined as of the time of the filing of the Chapter 15 petition,” but, “[t]o offset a debtor’s ability to manipulate its COMI, a court may also look at the time period between the initiation of the foreign liquidation proceeding and the filing of the Chapter 15 petition.” Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 133, 137 (2d Cir. 2013).
In Suntech’s case, the Cayman Islands (which was Suntech’s presumptive COMI because Suntech was incorporated there), was not its actual COMI when the Foreign Proceeding was commenced, because up to that point Suntech did not conduct activities in the Cayman Islands and maintained its principal executive offices in China. The question the court faced was whether the activities of the JPLs had the effect of transferring COMI to the Cayman Islands.
After noting that whether COMI shifted in a case like this is not obvious, the court went on to analyze the shift of duties and responsibilities from the debtor’s management to the JPLs and the steps taken by the JPLs to move COMI. The JPLs generally took control of the management of Suntech’s affairs pursuant to the powers granted by the Cayman Court’s appointment order. Suntech’s Board retained the ability to manage day-to-day affairs of the Debtors, subject to the JPLs’ oversight, which distinguishes this case from a true liquidation, but in practice the Board’s role was minimal following the JPLs’ appointment. The JPLs, among other things, opened a bank account in the Cayman Islands, worked to preserve Suntech’s value by dealing with litigation and entering into business agreements with third parties, entered into a restructuring agreement with its creditors, recovered the physical shares in Suntech’s direct subsidiaries as well as the shareholder registry and statutory records, and centralized the administration of the Foreign Proceeding in the Cayman Islands (including by changing the address on SEC filings and providing notice to interested parties and lenders of the Cayman Islands address).
The court also found that the evidence did not support a finding that Suntech’s creditors would have expected it to restructure its businesses in China, noting that the notes indenture was governed by New York law and provided for non-exclusive jurisdiction in the New York courts, and that Suntech’s largest creditors urged the Cayman Islands as the restructuring venue.
The court concluded that Suntech’s COMI on the date of commencement of the Chapter 15 case was the Cayman Islands, and rejected Solyndra’s argument that the JPLs manipulated COMI in bad faith. The court stated that the transfer of stock certificates and records was “consistent with the JPLs’ duties under the Appointment Order as was the conduct of the Board meeting in PwC’s offices in the Cayman Islands,” and that the steps taken by the JPLs were “consistent with the Appointment Order and their roles in the Foreign Proceeding and they would have taken these actions even if they had never intended to file a chapter 15 case.” The court found that the actions of the JPLs “were taken in furtherance of the JPLs duties under the Appointment Order and were not intended to transfer the Debtor’s COMI from China or anywhere else even if they had that effect.”
As a result, the court granted Suntech’s petition for Chapter 15 recognition as a foreign main proceeding.
The Court also rejected Solyndra’s arguments that Suntech manipulated venue. It concluded that 28 U.S.C. § 1412 and Federal Rule of Bankruptcy Procedure 1014(a)(1) permit a Bankruptcy Court to transfer the venue of a properly venued Chapter 15 case, but found that where the case is initially brought in a proper venue, the debtor’s choice of forum is entitled to great weight, and that in this case Solyndra did not establish that the interests of justice or convenience of the parties dictates a transfer to a California court.
Ronald J. Silverman and Joshua Dorchak are partners of Bingham McCutchen LLP resident in the New York City office. Bingham represents an ad hoc group of noteholders in Suntech’s Chapter 15 case.
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This article was originally published by Bingham McCutchen LLP.