Case: 09-20288 Document: 00511124097 Page: 1 Date Filed: 05/27/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 27, 2010
No. 09-20288 Lyle W. Cayce
Clerk
In the Matter of: YUVAL RAN,
Debtor
ZURIEL LAVIE,
Appellant
v.
YUVAL RAN,
Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before STEWART, DENNIS, and HAYNES, Circuit Judges.
CARL E. STEWART, Circuit Judge:
In a matter of first impression before this court, Zuriel Lavie (“Lavie”), an
Israeli bankruptcy receiver, appeals the district court’s denial of his petition for
recognition under Chapter 15 of the Bankruptcy Code of an ongoing, involuntary
bankruptcy proceeding pending in Israel, for debtor Yuval Ran (“Ran”). In
particular, the petition sought recognition of the Israeli bankruptcy proceeding
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No. 09-20288
as a foreign main or nonmain proceeding. If granted, that recognition would
have entitled Lavie to the protections of a variety of Bankruptcy Code provisions.
For the reasons discussed below, we affirm the district court’s denial of Lavie’s
petition for recognition under Chapter 15 of the Bankruptcy Code.
I. FACTUAL AND PROCEDURAL BACKGROUND
Ran was a well-known Israeli businessman and promoter when he
encountered financial difficulties in the late 1990’s. In fact, he was a director or
shareholder in almost one hundred Israeli companies, some of them
publicly-traded. The largest company in which Ran had a controlling interest
was Israel Credit Lines Supplementary Financial Services Ltd. (“Credit Lines”),
a public company that was co-founded by Ran and for which he served as CEO.
Credit Lines raised millions of dollars from investors and owned interests in
numerous other companies. It is now in liquidation through an Israeli
bankruptcy proceeding, and its receiver has asserted claims against Ran for
millions of dollars in damages. On June 16, 1997, an involuntary bankruptcy
proceeding was commenced against Ran, in the Israeli District Court of Tel
Aviv-Jaffa. Lavie was initially appointed as temporary receiver of Ran’s assets
and later, on November 28, 1998, Lavie was appointed permanent receiver.
In April 1997, before the involuntary bankruptcy proceeding was
commenced, Ran left Israel and has never returned. After leaving, Ran moved
to Houston, Texas, in May or June of 1997, where he and his family have since
resided continuously. Ran’s wife and five children are United States citizens, and
Ran is a legal permanent resident of the United States and is currently seeking
United States citizenship. Ran and his wife own a home in Houston and are
both employees of a furniture company in the area. After leaving Israel, Ran
temporarily assisted in collecting debts owed to Credit Lines, but ceased doing
so when receivership and liquidation proceedings began for Credit Lines in 1998.
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Currently, Ran carries out no business activity in Israel, and has not done so
since 1998.
On December 11, 2006, nearly a decade after Ran and his family
emigrated from Israel and more than eight years after being appointed receiver
of Ran’s estate, Lavie filed a petition seeking recognition of the Israeli
bankruptcy proceeding as a foreign main or nonmain proceeding under Chapter
15 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern
District of Texas. On May 22, 2007, the Bankruptcy Court denied the petition.
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. This
appeal followed.
II. DISCUSSION
A. Standard of Review
“We review a district court’s affirmance of a bankruptcy court decision by
applying the same standard of review to the bankruptcy court decision that the
district court applied.” In re Martinez, 564 F.3d 719, 725-26 (5th Cir. 2009). “We
thus generally review factual findings for clear error and conclusions of law de
novo.” Id. at 726 (quoting In re OCA, Inc., 551 F.3d 359, 366 (5th Cir. 2008))
(internal quotation marks omitted). While a determination of whether Ran’s
bankruptcy proceeding is a foreign main or nonmain proceeding is inherently a
fact-driven inquiry, the facts in this case are not in dispute and the appeal to the
district court was de novo, as is the appeal to this court. See, e.g., In re Belsome,
434 F.3d 774, 776 (5th Cir. 2005); see also, William H. Schrag, William C. Heuer,
& Robert E. Cortes, Cross-Border Insolvencies and Chapter 15: Recent U.S. Case
Law Determining Whether a Foreign Proceeding Is “Main” or”Nonmain” or
Neither, 17 J. B ANKR. L. & P RAC. 5, art. 4 (Aug. 2008) (noting that “[t]he
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determination of whether a foreign proceeding is ‘main’ or ‘nonmain’ is fact-
driven”).
B. Chapter 15’s Framework
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(“BAPCPA”) enacted Chapter 15 of the Bankruptcy Code, “so as to provide
effective mechanisms for dealing with cases of cross-border insolvency.” 11
U.S.C. § 1501(a). It replaced former Section 304 of the Bankruptcy Code and
“incorporate[s] the Model Law on Cross-Border Insolvency” drafted by
UNCITRAL, the United Nations Commission on International Trade Law, which
in turn, is based upon the European Union Convention on Insolvency
Proceedings (the “EU Convention”). See 11 U.S.C. § 1501(a) et seq.; see also In re
Tri-Continental Exch. Ltd., 349 B.R. 627, 633-34 (Bankr. E.D. Cal. 2006). The
statutory intent to conform American law with international law is explicit in
the text of Section 1501(a), and also is expressed in Section 1508, which states
that “[i]n interpreting this chapter, the court shall consider its international
origin, and the need to promote an application of this chapter that is consistent
with the application of similar statutes adopted by foreign jurisdictions.” 11
U.S.C. § 1508; see also House Report on the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, H.R. Rep. No. 109-31, pt. I, at 105 (2005),
reprinted in 2005 U.S.C.C.A.N. 88, 169 (“[Chapter 15] incorporates the Model
Law on Cross-Border Insolvency to encourage cooperation between the United
States and foreign countries with respect to transnational insolvency cases . . .
. [hereinafter “House Report”]; 8 A LAN N. R ESNICK & H ENRY J. S OMMER,
C OLLIER ON B ANKRUPTCY § 1501.01 (15th ed. rev. 2008) (explaining the basis for
Chapter 15).
A non-exhaustive list of relief available to a foreign proceeding’s
representative in a Chapter 15 case includes: (1) an automatic stay of actions
against the debtor under Bankruptcy Code Section 362; (2) the ability to operate
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the debtor’s business; (3) examination of witnesses; and (4) the entrusting of the
administration of the debtor’s United States assets to the foreign representative.
See generally 11 U.S.C. § 1520(a)(1)-(3); see also id. § 1519(a)(1)-(3). In order for
a foreign proceeding to gain recognition within the framework of Chapter 15, the
following prerequisites must be met:
(1) such foreign proceeding for which recognition is sought is a
foreign main proceeding or foreign nonmain proceeding within the
meaning of section 1502;
(2) the foreign representative applying for recognition is a person or
body; and
(3) the petition meets the requirements of section 1515.
11 U.S.C. § 1517(a); see also In re Betcorp Ltd,, 400 B.R. 266, 285 (Bankr. D.
Nev. 2009).
This statutory mandate is subject to a narrow public policy exception
which permits a court to refuse recognition “if the action would be manifestly
contrary to the public policy of the United States.” 11 U.S.C. § 1506. But, the
exception is intended to be invoked only under exceptional circumstances
concerning matters of fundamental importance for the United States. See In re
Iida, 377 B.R. 243 (9th Cir. BAP 2007); In re Atlas Shipping A/S, 404 B.R. 726
(Bankr. S.D.N.Y. 2009); In re Ernst & Young, Inc., 383 B.R. 773, 781 (Bankr. D.
Colo. 2008). Nevertheless, recognition under Section 1517 of the Bankruptcy
Code is not a “rubber stamp exercise.” In re Basis Yield Alpha Fund (Master),
381 B.R. 37, 40 (Bankr. S.D.N.Y. 2008). Even in the absence of an objection,
courts must undertake their own jurisdictional analysis and grant or deny
recognition under Chapter 15 as the facts of each case warrant. See In re Bear
Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R.
325, 335 (S.D.N.Y. 2008). The ultimate burden of proof on the requirements of
recognition is on the foreign representative. See id. at 334.
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Although listed as the third element, the first requirement for recognition
under Section 1517 is purely procedural in nature; that is, the petition must
meet the pleading requirements of Section 1515. See 11 U.S.C. § 1517(a)(3).
Section 1515 establishes several pleading requirements. First, it requires that
the foreign representative has filed a petition for recognition. Id. § 1515(a).
Second, Section 1515 requires the petitioner to establish that a foreign
proceeding exists, and that the petitioner has been appointed as the foreign
representative. Id. § 1515(b). The first two paragraphs of this subsection provide
for what constitutes sufficient evidence, and specify that the petitioner may
satisfy this requirement by providing a “certified copy of the decision
commencing such foreign proceeding and appointing the foreign representative”
and “a certificate from the foreign court affirming the existence of the foreign
proceeding and the appointment of the foreign representative.” Id. Third,
Section 1515 requires that the petition for recognition must be accompanied by
a statement identifying all foreign proceedings with respect to the debtor that
are known to the foreign representative. Id. § 1515(c). Lavie has satisfied all of
these procedural requirements. Thus, Section 1517(a)(3) has been satisfied.
Lavie has also met the requirements of the second element of Section 1517(a)
because “the foreign representative applying for recognition is a person or
body[.]” Id. § 1517(a)(2).
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 Israeli, is a foreign main or nonmain
proceeding. If the foreign proceeding is neither then it is simply ineligible for
recognition under Chapter 15. See In re Bear Stearns, 389 B.R. at 334; see also
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In re SPhinX, Ltd., 351 B.R. 103, 120 n.22 (Bankr. S.D.N.Y. 2006), aff’d, 371
B.R. 10 (S.D.N.Y. 2007).
C. Determining Status as a Foreign Main Proceeding
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)
(emphasis added). 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.
The Code does not define “habitual residence,” but it has been analyzed
recently by foreign courts as virtually identical to the more commonly used, at
least in the United States, concept of domicile. 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, 334 F.3d 444, 448 (5th Cir. 2003).
Similarly, according to foreign courts, the existence of a habitual residence
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largely depends on whether the debtor intends to stay in the location
permanently. See, e.g., Pinna v. Caisse d’ Allocations Familiales de la Savoie,
[1986] E.C.R. 1 (ECJ 1986) (France). Other factors pertinent to a finding of an
individual’s habitual residence 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 individual’s regular activities, jobs, assets, investments, clubs, unions, and
institutions of which he is a member. See, e.g., id.; see also George A. Rosenberg,
Israeli Tax Reform, J. INT’L T AX’N 31, 2003 WL 1871011 at *31 (April 2003);
Geveran Trading Co. v. Skjevesland, 2002 WL 31947334 (Ch. D. Bankruptcy
Ct.) (Eng.); Israel Doran & Tal Golan, Aging, Globalization, and the Legal
Construction of “Residence:” The Case of Old Age Pensions in Israel, 15 E LDER
L.J. 1, 16 (2007).
Here, it is evident that when Lavie filed the petition for recognition, Ran’s
habitual residence was in Houston, Texas. Our conclusion is supported by our
review of the record which reveals that Ran left Israel nearly a decade prior to
the filing of the petition, has no intent to return, and has established
employment and a permanent residence in Houston. Ran is a legal permanent
resident of the United States and his children are United States citizens. And
the record also reflects that Ran maintains his finances exclusively in Texas.
The totality of the circumstances before us indicates that the United States is
Ran’s habitual residence and thus his presumptive COMI.
Before the district court, Lavie introduced evidence to rebut the
presumption that Ran’s COMI is located in the United States. Because of this,
we cannot rely solely upon Section 1516(c)’s presumption. Instead, in order to
determine Ran’s COMI we must consider all evidence, while keeping in mind
that it is Lavie’s burden to persuade the court by a preponderance of the
evidence that Ran’s COMI is in Israel. See In re Bear Stearns, 389 B.R. at
335-36; see also F ED. R. E VID. 301 (explaining that a party’s rebuttal of a
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presumption does not shift the burden of proof; rather, the risk of nonpersuasion
remains upon the party on whom it was originally cast—in this case, Ran); In re
Tri-Continental Exch. Ltd., 349 B.R. at 635 (discussing the 11 U.S.C. § 1516(c)
presumption); Schaflein v. Comm’n of the European Cmtys., (Case 284/87)
[1988] ECR 4475 (ECJ 2d Chamber 1988) (noting that although an individual’s
habitual residence is presumed to be his COMI, this presumption is not outcome
determinative if other evidence suggests the debtor’s COMI is elsewhere); see
also Guide to Enactment of the UNCITRAL Model Law on Cross-Border
Insolvency § 122 (noting that the presumption does “not prevent, in accordance
with applicable procedural law, calling for or assessing other evidence if the
conclusion suggested by the presumption is called into question by the court or
an interested party”).
Neither Chapter 15 nor the Model Law on Cross-Border Insolvency
describes the factors that may be relevant to a determination of the debtor’s
COMI in a case where it is disputed. But, the SPhinX court suggested the
following list of non-exhaustive factors to be considered when a debtor’s COMI
is in dispute:
Various factors, singly or combined, could be relevant to such a
determination: the location of the debtor’s headquarters; the
location of those who actually manage the debtor (which,
conceivably could be the headquarters of a holding company); the
location of the debtor’s primary assets; the location of the majority
of the debtor’s creditors or a majority of the creditors who would be
affected the case; and/or the jurisdiction whose law would apply to
most disputes.
351 B.R. at 117, aff’d, 371 B.R. 10 (S.D.N.Y. 2007). In SPhinX the court was
concerned with the COMI of a debtor corporation. It noted that in the absence
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of evidence to the contrary, the COMI of a corporation is presumed to be the
place of its registered office which it equated with the corporation’s principal
place of business. Id. at 116. Considering the above listed factors, the court
then determined that the statutory presumption regarding COMI had been
overcome and that the debtor corporation’s COMI was not the place of its
registered office. Id.
While the factors set forth in SPhinX offer a useful analytical framework
to determine the disputed COMI of a corporate debtor, the relevant factors to
determine the disputed COMI in the case of an individual debtor who has no
registered office, headquarters, or holding company may be somewhat different.
Nevertheless, 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, the
court noted that factors such as (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, may be used to determine an individual
debtor’s COMI when there exists a serious dispute. In other words, the Loy
court considered factors which are normally applied to the determination of a
corporate debtor’s COMI in order to determine the disputed COMI of an
individual debtor. After weighing the evidence before it concerning each factor,
the bankruptcy court concluded that Loy’s COMI was England. Id.
The applicability vel non of the SPhinX factors to the determination of the
disputed COMI of an individual debtor is an argument that we need not address
today. Even assuming arguendo their applicability to the instant case our
review of the record reveals that Lavie’s evidence, while sufficient to rebut the
presumption that Ran’s COMI was in the United States, was nevertheless
insufficient to prove by a preponderance of the evidence that Israel is the
location of Ran’s center of main interests.
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Lavie proffered the following evidence before the district court to establish
that Ran’s center of main interests lies in Israel: (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. These factors, however, when weighed against
the following: (1) Ran along with his family left Israel nearly a decade prior to
the filing of the 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, are insufficient
to prove by a preponderance of the evidence that Israel is Ran’s COMI. See
Pennzoil Co. v. F.E.R.C., 789 F.2d 1128, 1136 (5th Cir. 1986) (noting that a fact
finder can still credit the evidence of the party in favor of whom the rebutted
presumption operates despite the existence of contrary evidence and despite the
resultant destruction of the presumption).
Lavie’s reliance upon Loy to provide support for his argument that Lavie’s
COMI is Israel is misplaced because it is plainly distinguishable for a number
of reasons. First, in Loy the court concluded that the debtor’s habitual residence
was the United Kingdom. Loy, 380 B.R. at 163. Thus, the presumption
identified in Section 1516(c) weighed in favor of the court finding that the United
Kingdom was Loy’s COMI. Id. In contrast, in the instant case, before being
rebutted, the Section 1516(c) presumption weighed in favor of Ran’s COMI being
in the United States, the location of his habitual residence. Second, unlike in the
instant case, the debtor in Loy was involved in the bankruptcy proceedings in
the United Kingdom prior to his departure for the United States. Unlike Ran,
Loy never successfully transferred his COMI before the petition for recognition
was filed.
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Although our review of the objective factors establishes that Ran’s COMI
is in the United States, Lavie has another argument. He contends 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. In other words, Lavie argues that because Ran’s COMI
was located in Israel at some point in time before he filed the petition for
recognition, we should lookback at Ran’s operational history in Israel to conclude
that his COMI lies in Israel. We disagree.
An analysis of the proper COMI timeframe starts with, as it must, the text
of Section 1502 of the Code. See Mark Lightner, Determining the Center of Main
Interest Under Chapter 15, 17 J. B ANKR. L. & P RAC. 5, art. 2 (2009). In the
bankruptcy context, the analysis must end with the text if the language is clear
and does not lead to an absurd result. See, e.g., United States v. Ron Pair
Enters., Inc. (In re Ron Pair Enters.), 489 U.S. 235, 298 (1989). 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. This is particularly
significant because Congress is clearly capable of creating lookback periods in
the Bankruptcy Code. See, e.g., id. § 522 (b)(3)(A) (creating a lookback provision
for property exemptions).
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Moreover, examining a debtor’s COMI at the time the petition for
recognition is filed fulfills Congress’s purpose for implementing Chapter 15. As
noted above, Chapter 15 was implemented by Congress in an attempt to
harmonize transnational insolvency proceedings. 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 B ROOK. J. INT’L L. 1019, 1020 (2007).
Additionally, 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
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(Eng); Re Collins & Aikman Corp. Group, [2005] EWHC (Ch) 1754, § 39, 2005
WL 4829623 (Eng.).
Lavie urges the court to recognize the Israeli proceeding to effect the
principles of comity and deference encompassed in Chapter 15 by deferring to
the jurisdictional choice of the Israeli creditors. This argument has no merit.
The plain language of Chapter 15 requires a factual determination with respect
to recognition before principles of comity come into play. See 11 U.S.C. § 1507.
By arguing comity without first satisfying the conditions for recognition, Lavie
urges this court to ignore the statutory requirements of Chapter 15.
Lastly, we note that this case does not involve a recent change of domicile
by the party in question. 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.
In sum, the district court’s denial of recognition of the Israeli bankruptcy
proceeding as a foreign main proceeding is affirmed.
D. Determining Status as a Foreign Nonmain Proceeding
Although the Israeli bankruptcy proceeding is not a foreign main
proceeding, our inquiry does not end there. We must next determine whether
it may be recognized as a foreign nonmain proceeding. While recognition of a
foreign proceeding as a foreign nonmain proceeding may provide the same relief
as recognition as a foreign main proceeding, the relief is not automatic; rather,
whether any such relief is appropriate is determined by the bankruptcy court
after notice and a hearing, at the court’s discretion, and subject to the
requirement that all creditors be sufficiently protected. See 11 U.S.C. § 1521.
Lavie argues that the administration of Ran’s bankruptcy estate in Israel
is itself an establishment within the meaning of Chapter 15 and that it therefore
should be recognized as a foreign nonmain proceeding. Notably, no United
States court has decided whether an individual’s bankruptcy proceeding pending
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in another country and related debts alone are sufficient to constitute an
establishment under Chapter 15. A foreign nonmain proceeding is “a foreign
proceeding, other than a foreign main proceeding, pending in a country where
the debtor has an establishment.” 11 U.S.C. § 1502(5) (emphasis added). Section
1502(2) defines an establishment as “any place of operations where the debtor
carries out a nontransitory economic activity.” Id. § 1502(2) (emphasis added).
In contrast to COMI, “[t]he existence of an establishment is essentially a factual
question, with no presumption in its favor.” In re Bear Stearns, 389 B.R. at 338.
As one court noted, “the bar is rather high” to prove that a debtor has an
establishment in a particular location. In re Bear Stearns High-Grade
Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 131 (Bankr.
S.D.N.Y. 2007), aff’d, 389 B.R. 325 (S.D.N.Y. 2007).
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. Our conclusion is again supported by a plain
language reading of Chapter 15, which notes that a foreign nonmain proceeding
can exist where a debtor “has an establishment.” 11 U.S.C. § 1502(5) (emphasis
added). Likewise, Section 1502(2) refers to an establishment as “any place of
operations where the debtor carries out a nontransitory activity.” Id. § 1502(2)
(emphasis added). The use of the present tense implies 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. See Mark
Lightner, Determining the Center of Main Interest Under Chapter 15, 17 J.
B ANKR. L. & P RAC. 5, art. 2 (2009).
So 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
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recognition in the United States. Neither Chapter 15 nor its legislative history
explain what it means for a debtor to have “any place of operations” or to have
“been carrying on nontransitory economic activity” in a location. See H.R. Rep.
No. 109-31(I), at 107, reprinted in 2005 U.S.C.C.A.N. at 170 (mentioning only
that the definition was taken from Model Law for Cross-Border Insolvency
Article 2). However, the Model Law for Cross-Border Insolvency and the sources
from which it emanates provide guidance concerning what it means for a debtor
to have an establishment in a location.
The drafters of the Model Law for Cross-Border Insolvency relied on the
EU Convention to define an establishment. See Guide to Enactment of the
UNCITRAL Model Law on Cross-Border Insolvency § 75 (1997). P er the EU
Convention’s legislative history, 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. C OUNCIL
R EPORT ON THE C ONVENTION ON INSOLVENCY P ROCEEDINGS, at 49, No. 6500/96.
The mere presence of assets in a given location does not, by itself, constitute a
place of operation. Id. at 48. In the context of corporate debtors, there must be
a place of business for there to be an establishment. In re Bear Stearns, 374 B.R.
at 131; see also Daniel M. Glosband, SPhinX Chapter 15 Opinion Misses the
Mark, 25 A M. B ANKR. INST. J. 44, 45 (Dec./Jan. 2007). Equating a corporation’s
principal place of business to an individual debtor’s primary or habitual
residence, a place of business could conceivably align with the debtor having a
secondary residence or possibly a place of employment in the country where the
receiver claims that he has an establishment. See 11 U.S.C. § 1516(c) (equating
a corporate debtor’s registered office with the habitual residence in the case of
an individual). At the time Lavie filed his petition for recognition, Ran possessed
neither a secondary residence nor place of employment in Israel.
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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. Since Ran’s departure from Israel in
1997, he has engaged in almost no economic activity in that country; rather, the
evidence suggests that almost all of his economic activities are centered in
Houston and Harris County, Texas. At the time Lavie brought his suit for
recognition of the foreign bankruptcy proceeding the Israeli insolvency
proceedings, brought involuntarily and in Ran’s absence, and corresponding
debts were the only evidence of Ran’s purported establishment in Israel. These
debts, however, only represent evidence of previous economic activity and are
insufficient to show that Ran carried on transitory activity in Israel at the time
the petition for recognition was filed. Nevertheless, Lavie argues that as trustee
of Ran’s estate there exists a principal-agent relationship between himself and
Ran and that he has carried out economic activity in Israel on behalf of Ran, his
principal. The law is clear—Lavie as the trustee of Ran’s estate is not Ran’s
agent and cannot act on behalf of Ran. See 11 U.S.C. § 323.
Further, as the district court noted, recognition based on the existence of
the bankruptcy proceeding and debts alone poses problems. First, a bankruptcy
proceeding is by definition a transitory action, but recognition as a nonmain
proceeding requires that the debtor carry out nontransitory activity in a location.
W EBSTER’s N EW INTERNATIONAL D ICTIONARY 2692 (2d ed. 1939) (defining
“transitory action” as “[a]n action which may be brought in any country, [such]
as actions for debts, etc.”). To permit a transitory action, i.e., the existence of the
Israeli bankruptcy proceeding and corresponding debts alone to constitute the
basis for finding nontransitory economic activity, would be inappropriate because
it would go against the plain meaning of the statute. Second, if Ran’s
bankruptcy proceeding and associated debts, alone, could suffice to demonstrate
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an establishment, this would render the framework of Chapter 15 meaningless.
There would be no reason to define establishment as engaging in a nontransitory
economic activity. The petition for recognition would simply require evidence of
the existence of the foreign proceeding. But the statute requires more than
that—it requires evidence of a foreign proceeding and that the proceeding meet
the definition of foreign nonmain proceeding. Lavie’s argument that Chapter 15
would not apply to any individuals if the Israeli bankruptcy is not an
establishment, making Chapter 15 a nullity, is unconvincing. Debtors with
ongoing business operations located in the country where the foreign proceeding
is pending would be subject to Chapter 15. Finding that a foreign proceeding
itself is not an establishment does not make Chapter 15 a nullity.
In sum, the district court’s denial of recognition of the Israeli bankruptcy
proceeding as a foreign nonmain proceeding is affirmed.
III. CONCLUSION
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. Therefore, the
district court’s denial of recognition of the Israeli proceeding as a foreign main or
nonmain proceeding is AFFIRMED.
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