In re Suntech Power Holdings Co: SDNY Bankruptcy Court Liberally Interprets Chapter 15 Eligibility, Venue and COMI Determinations | Practical Law

In re Suntech Power Holdings Co: SDNY Bankruptcy Court Liberally Interprets Chapter 15 Eligibility, Venue and COMI Determinations | Practical Law

In In re Suntech Power Holdings Co., Ltd., the US Bankruptcy Court for the Southern District of New York held that a foreign debtor may avail itself of the US Chapter 15 bankruptcy process by opening a bank account in the US for the specific purpose of establishing US jurisdiction and that its center of main interests (COMI) was the Cayman Islands, despite not having conducted any business in that country before filing its winding-up proceedings there.

In re Suntech Power Holdings Co: SDNY Bankruptcy Court Liberally Interprets Chapter 15 Eligibility, Venue and COMI Determinations

by Practical Law Bankruptcy & Restructuring and Practical Law Finance
Published on 09 Jan 2015 • USA (National/Federal)
In In re Suntech Power Holdings Co., Ltd., the US Bankruptcy Court for the Southern District of New York held that a foreign debtor may avail itself of the US Chapter 15 bankruptcy process by opening a bank account in the US for the specific purpose of establishing US jurisdiction and that its center of main interests (COMI) was the Cayman Islands, despite not having conducted any business in that country before filing its winding-up proceedings there.
On November 17, 2014, the US Bankruptcy Court for the Southern District of New York, in In re Suntech Power Holdings Co., Ltd., held that a foreign debtor may avail itself of the US Chapter 15 bankruptcy process by opening a bank account in the US for the specific purpose of establishing US jurisdiction and that its center of main interests (COMI) was the Cayman Islands, despite not having conducted any business in that country before filing its winding up proceeding there (520 B.R. 399 (Bankr. S.D.N.Y. 2014)).

Background

Suntech Power Holdings Co., Ltd. (Debtor) is a holding company and ultimate parent for a group of direct and indirect subsidiaries (Suntech Group) that are engaged in the business of developing, manufacturing and marketing photovoltaic (PV) modules and cells and providing PV integration services worldwide for residential, commercial and industrial use. Although none of the Suntech Group conducts business in the Cayman Islands, the Debtor was incorporated there and maintained its principal executive offices in China. The Debtor's principal indirect subsidiary, Suntech America, Inc. (Suntech America), is incorporated in Delaware, is registered to do business in California and is based in San Francisco.
In March 2013, the Debtor defaulted on its principal debt, consisting of $575 million in US bonds (Notes). The Debtor's other debts include a $50 million loan from the International Finance Corporation (IFC) and a substantial amount owed to its affiliates. The Debtor is also a defendant in several pending litigations, including a $1.5 billion antitrust action brought by Solyndra Residual Trust (Solyndra) in the Northern District of California. The Debtor's assets totalled $2.6 million in cash and $1.46 billion in receivables of questionable collectability, most of which were due from its subsidiaries.
Certain noteholders (Petitioning Creditors) filed lawsuits against the Debtor in the US District Court for the Southern District of New York to enforce the Notes, which were issued under an indenture governed by New York law and provided for venue in New York. In September 2013, these noteholders obtained judgments in the aggregate sum of $578,230.88, plus post-judgment interest and then filed an involuntary Chapter 7 bankruptcy case against the Debtor in the US Bankruptcy Court for the Southern District of New York.
Also in September 2013, the Debtor and another group of bondholders (funds managed by Clearwater Capital Partners, LLC (Clearwater) and Spinnaker Capital LLC) executed a Restructuring Framework Agreement (RFA). Under the RFA, the Notes and the IFC loan would be restructured through a scheme of arrangement implemented in the Cayman Islands, and if necessary, a Chapter 15 filing. Clearwater flatly rejected the possibility of a restructuring in China.
In November 2013, a director of the Debtor who was owed board fees filed a winding up petition in the Grand Court of the Cayman Islands (Cayman Court). The Cayman Court placed the Debtor into a provisional liquidation proceeding (Foreign Proceeding) and entered an order appointing joint provisional liquidators (JPLs) (Appointment Order). The Appointment Order granted the JPLs substantial authority to monitor, oversee and supervise the Debtor, while allowing the Board to retain its control to manage the Debtor's day-to-day affairs. The JPLs managed the Debtor's affairs from the Cayman Islands and, among other things, changed the address of the Debtor's principal offices in its SEC filings from China to the Cayman Islands, opened a Cayman Islands bank account, held Board meetings in the Cayman Islands and generally began to wind up its affairs.
In January 2014, the Debtor, the JPLs, the Petitioning Creditors and certain other noteholders entered into a Restructuring Support Agreement (RSA) to resolve the involuntary case. The RSA required, among other things, that in exchange for dismissing the involuntary case, the JPLs would commence a Chapter 15 case in the SDNY Bankruptcy Court and obtain Chapter 15 recognition by May 31, 2014. However, the Debtor had no property or business in New York or elsewhere in the United States. Therefore, the JPLs took steps to open a New York bank account. Because of the time constraints, the Debtor contacted a restructuring consultant (KCC), who agreed to accept transfer of the Debtor's funds into its account in New York for the Debtor's benefit. The JPLs transferred $500,000 from the Debtor's Cayman Islands account into this New York account. The JPLs filed a Chapter 15 case on the following day, February 21, 2014.
Solyndra opposed recognition of the Chapter 15 case and cross-moved to transfer venue to the Northern District of California, the venue in which its litigation was pending.

Outcome

The Court held that the Debtor's New York bank account was sufficient to satisfy the Chapter 15 eligibility requirements and that the Debtor did not impermissibly manipulate its COMI and venue in order to qualify for Chapter 15. Therefore, it held that the Debtor's COMI on the date of the commencement of the Chapter 15 case was the Cayman Islands and that venue was proper in New York.
The Court started by examining section 1517(a) of the Bankruptcy Code. Under section 1517(a), a court must recognize a foreign proceeding if all of the following requirements are satisfied:
Solyndra disputed only the first requirement. To resolve this issue, the Court explained that it must first determine if:
  • The Debtor is eligible to be a debtor under the US Bankruptcy Code.
  • Venue is proper in the Southern District of New York.

Eligibility and Venue

The Court concluded that the Debtor was eligible to be a debtor under section 109(a) of the Bankruptcy Code, which requires that a debtor have a domicile, place of business or property in the US. The Court followed the Second Circuit's recent decision in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), in which it held that this requirement applies to Chapter 15 debtors (see 737 F.3d 238 (2d Cir. 2013) and Legal Update, In re Barnet: Second Circuit Applies Debtor Eligibility Requirements to Chapter 15 Cases).
The Court rejected Solyndra's argument that the bank account did not belong to the Debtor, and therefore could not be used to meet the requirement of section 109(a). The Court explained that the Debtor successfully rebutted the presumption under New York law that the titleholder of the account owns the account by showing that KCC held the funds in the New York account as the Debtor's agent, for its benefit and subject to its control. Then, following its own recent decision in In re Octaviar Administration Pty Ltd., the Court held that the establishment of the bank account in New York before the commencement of the Chapter 15 proceeding was sufficient to render the Debtor eligible under section 109(a), which does not require "an inquiry into the circumstances surrounding the debtor's acquisition of property" (see 511 B.R. 361, 372-73 (Bankr. S.D.N.Y. 2014) and Legal Update, In re Octaviar: Minimal US Property Satisfies Chapter 15 Foreign Debtor Eligibility Requirements Imposed by Second Circuit).
The Court then rejected Solyndra's argument that the JPLs acted improperly by opening the New York bank account to manipulate the placement of the case in New York rather than in the Northern District of California, where the Debtor allegedly had its principal place of business in the US at the time the JPLs filed the Chapter 15 petition. The Court reasoned that to interpret the Bankruptcy Code to prevent an ineligible foreign debtor from establishing eligibility to support Chapter 15 relief would "contravene the purposes of the statute to provide legal certainty, maximize value, protect creditors and other parties in interests and rescue financially troubled businesses."
The Court also rejected Solyndra's cross-motion to transfer venue to the Northern District of California, on the grounds that only the Debtor's indirect subsidiary, Suntech America, operated in California. The Court reasoned that the assets of a subsidiary are not the assets of the parent, and the place of business and assets of Suntech America were not the Debtor's place of business and assets, and did not make the Debtor eligible to be a debtor or provide a basis for venue. Rather, the Debtor opened the New York bank account to solve the eligibility problem, and that account, which represented the Debtor's principal US assets at the time the JPLs filed the Chapter 15 petition, had the effect of establishing a basis for venue in the Southern District of New York. Therefore, the Court held that the JPLs did not manipulate venue because the Debtor was ineligible to be a debtor in California or anywhere else until it established the New York bank account.
Finally, the Court noted that while 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, the foreign representative "gets the first crack" at selecting venue. Further, the Court found that Solyndra did not establish that transfer of venue was warranted in the interests of justice or for the convenience of the parties.

COMI

The Debtor sought recognition of the Foreign Proceeding as a foreign main proceeding, which is defined under section 1502(4) of the Bankruptcy Code as "a foreign proceeding pending in the country where the debtor has the center of its main interests," or COMI. Section 1516(c) of the Bankruptcy Code further provides that, in the absence of evidence to the contrary, the debtor's registered office is presumed to be the debtor's COMI.
Citing Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), the Court determined that a debtor's COMI "is determined as of the time of the filing of the Chapter 15 petition," but "to 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" (714 F.3d 127 (2d Cir. 2013)).
The Court rejected Solyndra's argument that the JPLs failed to establish that the Foreign Proceeding qualified as a main or nonmain proceeding. While noting that the Debtor's presumptive COMI was the Cayman Islands because it was incorporated there, the Court conceded that the Cayman Islands was not the Debtor's actual COMI when the Foreign Proceeding was commenced. The Court first noted that, up until the commencement of the Foreign Proceeding, the Debtor did not conduct any activities in the Cayman Islands and maintained its principal executive offices in China. The issue before the Court was therefore whether the commencement of the provisional liquidation and the activities of the JPLs had the effect of transferring the Debtor's COMI from China to the Cayman Islands.
The Court analyzed the shift of duties and responsibilities from the Debtor's management to the JPLs and the steps taken by the JPLs to centralize the administration of the Foreign Proceeding in the Cayman Islands. This shift of authority was reflected in the Appointment Order. The Court noted that while the Debtor's board of directors retained authority to manage the Debtor's day-to-day affairs, they generally did not exercise that authority and in practice, the JPLs assumed significant control of the Debtor's affairs. In addition to managing the Debtor's winding up in the Cayman Islands, the JPLs, among other things, also:
  • Worked to preserve the value of the Debtor by dealing with litigation and entering into business agreements.
  • Met with employees and creditors.
  • Opened a bank account in the Cayman Islands.
  • Entered into the RSA and took steps to recover the physical shares in the Debtor's direct subsidiaries as well as the shareholder registry and statutory records.
The Court further found that the evidence did not support a finding that the Debtor's creditors would have expected it to restructure its business in China, reasoning that:
  • The Notes indenture was governed by New York law and the parties to the indenture submitted to the non-exclusive jurisdiction of the New York state and federal courts.
  • The Debtor's largest creditors urged the Cayman Islands as the most logical restructuring venue.
Therefore, the Court held that the Debtor's COMI at the time of the commencement of the Chapter 15 case was the Cayman Islands. Furthermore, the Court rejected Solyndra's argument that even if the Cayman Islands was the Debtor's COMI, the JPLs manipulated the COMI in bad faith because the JPLs, among other things, transferred stock certificates, shareholder registries and statutory records to the Cayman Islands. However, the Court declined to find bad faith, reasoning that these actions 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." As a result, the Court concluded that the JPLs did not manipulate the Debtor's COMI in bad faith.

Practical Implications

This decision continues the trend of courts liberally interpreting the eligibility requirements for foreign debtors seeking relief under Chapter 15 of the Bankruptcy Code. This decision also demonstrates that foreign administrators can shift a debtor's COMI to a more debtor-friendly jurisdiction if doing so furthers the debtor's restructuring and if the foreign administrators act consistently with the powers they are granted by the court in the foreign proceeding.
For more information on Chapter 15 of the Bankruptcy Code, see Practice Note, Chapter 15 Overview: US Bankruptcy Cases Ancillary to Foreign Proceedings.