US Recognition of Individual Foreign Bankruptcies: What It (Doesn’t) Take
From the Fifth Circuit Court of Appeals, a recent decision regarding the curious (and well-aged) bankruptcy of Yuval Ran offers a thought-provoking consideration of what is required to obtain US recognition of a foreign individualâ€™s bankruptcy case.
The Curious Case of Mr. Ran
Mr. Ran, an Israeli citizen, was at one point a director or shareholder in almost one hundred Israeli companies â€“ some publicly-traded, and the largest of which was Israel Credit Lines Supplementary Financial Services Ltd. (â€śCredit Linesâ€ť), a public company co-founded and run by Ran, who served as CEO.
After raising millions of dollars from investors and acquiring interests in numerous other companies, Credit Lines ultimately found itself in liquidation through an Israeli bankruptcy proceeding. Credit Linesâ€™ bankruptcy receiver asserted claims against Ran for millions of dollars in damages.
In June 1997, an involuntary bankruptcy proceeding was commenced against Ran in the Israeli District Court of Tel Aviv-Jaffa â€“ but not before Ran and his family had departed Israel for Houston, Texas. Since their departure, Ran and his wife purchased a home and went to work for a local furniture company. Ranâ€™s wife and five children are US citizens, and Ran himself is a permanent resident seeking US citizenship. With the exception of some minimal collection work on Credit Linesâ€™ behalf shortly after he arrived in the US, Ran did no further business in Israel.
In December 2006 â€“ nearly a decade after Ran and his family emigrated, and more than eight years after being appointed receiver of Ranâ€™s estate â€“ Zuriel Lavie, the receiver appointed for Ranâ€™s Israeli assets, sought recognition of the Israeli bankruptcy proceeding as a foreign main or non-main proceeding under Chapter 15 of the Bankruptcy Code in the Southern District of Texasâ€™ Bankruptcy Court.
Levieâ€™s petition was denied the following May. After two rounds of appeals to the District Court, the parties finally found themselves before the Fifth Circuit Court of Appeals.
In affirming the District Court and the Bankruptcy Courtâ€™s denials, the Fifth Circuit briefly reviewed the procedural requirements for recognition set forth in Section 1517 of the Bankruptcy Code, then turned its attention to the one item of substance â€“ whether the debtorâ€™s bankruptcy proceeding qualified either as a foreign â€śmainâ€ť or â€śnon-mainâ€ť proceeding as contemplated by Chapter 15.
â€śMain Proceedingâ€ť â€“ Where is COMI?
Under US law â€“ as under the UNCITRAL Model Law upon which it is based â€“ a foreign â€śmain proceedingâ€ť qualifies as such if the jurisdiction where it is pending is the debtorâ€™s â€ścenter of main interestsâ€ť (COMI). In the case of an individual such as Ran, COMI is presumptively the debtorâ€™s â€śplace of habitual residenceâ€ť â€“ a concept roughly equivalent to the debtorâ€™s â€śdomicile,â€ť or physical presence coupled with an intent to remain there. One acquires a â€śdomicile of originâ€ť at birth, and that domicile continues until a new one (a â€śdomicile of choiceâ€ť) is acquired.
A similar concept â€“ that of â€śhabitual residenceâ€ť â€“ likewise applies under foreign law when the individual intends to stay in a specified location permanently. Factors pertinent to establishing an individualâ€™s â€śhabitual residenceâ€ť include: (1) the length of time spent in the location; (2) the occupational or familial ties to the area; and (3) the location of the individualâ€™s regular activities, jobs, assets, investments, clubs, unions, and institutions of which he is a member.
Under these facts, Ranâ€™s COMI was presumptively in the US â€“ and not in Israel. However, the presumption of COMI may be rebutted. Levie sought to do so by introducing evidence at the District Court that: (1) Ranâ€™s creditors are located in Israel; (2) Ranâ€™s principal assets are being administered in bankruptcy pending in Israel; and (3) Ranâ€™s bankruptcy proceedings initiated in Israel and would be governed by Israeli law.
Ran countered by pointing out that: (1) Ran along with his family left Israel nearly a decade prior to the filing of the Chapter 15 petition; (2) Ran has no intent to return to Israel; (3) Ran has established employment and a residence in Houston, Texas; (4) Ran is a permanent legal resident of the United States and his children are United States citizens; and (5) Ran maintains his finances exclusively in Texas.
In weighing this evidence, the Fifth Circuit relied on earlier analysis in In re SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006), affâ€™d, 371 B.R. 10 (S.D.N.Y. 2007) â€“ and more specifically, on analysis in In re Loy, 380 B.R. 154. 162 (Bankr. E.D. Va. 2007) (the only case to address the concept of COMI with respect to an individual debtor) â€“ in which the Bankruptcy Court noted that factors such as (1) the location of a debtorâ€™s primary assets; (2) the location of the majority of the debtorâ€™s creditors; and (3) the jurisdiction whose law would apply to most disputes, may be used to determine an individual debtorâ€™s COMI when there exists a serious dispute. The Fifth Circuit found that, unlike the Loy decision, the initial presumption (and the ultimate preponderance of evidence) under these factors weighed in Ranâ€™s favor.
Undeterred, Lavie argued that the Fifth Circuit ought not to confine its COMI inquiry to the â€śsnapshotâ€ť of Ranâ€™s domicile that existed at the time the Chapter 15 petition was filed. Instead, he argued that the Fifth Circuit ought to look back to Ranâ€™s â€śoperational historyâ€ť in Israel for a more comprehensive determination of COMI.
The Fifth Circuit panel was not persuaded. Instead, it looked to the statuteâ€™s use of present tense (i.e., a â€śmain proceedingâ€ť is a â€śforeign proceeding pending in the country where the debtor has the center of its main interestsâ€ť) to determine the COMI inquiry as dispositive of what evidence was relevant, and what evidence was not.
The panel then went on to provide policy bases for the â€śsnapshotâ€ť approach to COMI, explaining that locating COMI as of the date the petition is filed aids international harmonization and promotes predictability. Perhaps most significantly the panel noted â€śit is important that the debtorâ€™s COMI be ascertainable by third parties . . . . 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.â€ť
On the question of whether Ranâ€™s proceeding was a foreign â€śnon-mainâ€ť proceeding, the Fifth Circuit panel pondered its definition, i.e., â€śa foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment.â€ť Lavie argued that Ranâ€™s involuntary proceeding in Israel was, in itself, an â€śestablishment.â€ť Section 1502(2), however, defines an â€śestablishmentâ€ť as â€śany place of operations where the debtor carries out a nontransitory economic activity.â€ť
Unlike COMI, the existence of an â€śestablishmentâ€ť is a simple factual determination with no presumptions in anyoneâ€™s favor.Â However, one court has noted that â€śthe bar is rather highâ€ť to prove the debtor maintains an â€śestablishmentâ€ť in a foreign jurisdiction.
In essence, the Fifth Circuit found that in order to have an â€śestablishment,â€ť Ran must have had â€śa place from which economic activities are exercised on the market (i.e. externally), whether the said activities are commercial, industrial or professionalâ€ť at the time that Lavie filed the petition for recognition.
For the same reasons that gave rise to the Fifth Circuitâ€™s weight of the evidence in Ranâ€™s favor regarding the â€śmain proceeding,â€ť the Israeli proceeding was determined not to be a â€śnon-mainâ€ť proceeding â€“ and, therefore, not entitled to any recognition within the US.
In addition to being the first appellate decision addressing an individualâ€™s COMI, the Ran case is noteworthy for the proposition that the mere existence of an individualâ€™s insolvency proceeding, pending in another jurisdiction, is insufficient to qualify for recognition under US law. Instead, there must be a demonstration of ongoing activity â€“ either through a showing of COMI, or through the â€śestablishmentâ€ť of ongoing activity â€“ to qualify.
Further, though it is specifically limited to its own facts, the Ran decision offers a glimpse into the Fifth Circuitâ€™s general approach to COMI â€“ in particular, its observance that the debtorâ€™s COMI should be ascertainable by third parties. This observance may prove significant in the event that similar disputes over the much larger and more contentious Stanford proceedings (see prior posts about Stanford here) ever make their way to the Circuit Court.