The Second Circuit's decision is significant in
international insolvency cases because wind-down activities conducted in
advance of a foreign insolvency proceeding can impact the center of main
In Morning Mist Holdings Limited v. Krys (In re Fairfield
Sentry Limited), 2013 U.S. App. LEXIS 7608, Case No. 11-4376, (2d Cir.
April 16, 2013) [an enhanced version of this opinion is available to lexis.com
subscribers], the United States Court of Appeals for the Second
Circuit (the "Second Circuit") held that the relevant point in time
for determining where the "center of main interests"
("COMI") of a debtor under chapter 15 of the United States Bankruptcy
Code, 11 U.S.C. § 101 et seq. (the "Bankruptcy Code"), lies is
the commencement of the case under chapter, and also held that a broad range of
activities can properly be considered in determining a debtor's COMI. The
Second Circuit's decision is significant in international insolvency cases
because wind-down activities conducted in advance of a foreign insolvency
proceeding can impact the COMI analysis.
The foreign debtor in this case is Fairfield Sentry
Limited ("Sentry"), which became the subject of insolvency
proceedings in the British Virgin Islands ("BVI") in July 2009.
Sentry was the largest of the "feeder funds" that invested with
Bernard Madoff Investment Securities LLC ("BLMIS") with 95 percent of
its assets, totaling more than $7 billion, having been invested in BLMIS. In
June 2010, the liquidator appointed in the BVI proceedings petitioned the
United States Bankruptcy Court for the Southern District of New York for
"recognition" of the BVI liquidation proceedings as "foreign
main proceedings" under chapter 15 of the Bankruptcy Code. The
significance of a "foreign main proceeding" designation under chapter
15 is that certain key Bankruptcy Code provisions-including the stay provided
by section 362-automatically apply, whereas in "foreign non-main
proceedings," such relief is discretionary.
The Second Circuit affirmed the decision of the district
court, which in turn, had affirmed the decision of the Bankruptcy Court
(Lifland, J.). The Bankruptcy Court's analysis focused on the period of time
between December 2008 (when Madoff was arrested and Sentry stopped doing
business) and June 2010 (when the chapter 15 petition was filed). During this
period of time, Sentry was winding down and was not conducting business. In
opposition, creditors who challenged foreign main proceeding status argued that
Sentry's historical operations, spanning 18 years, should be considered, rather
than the period of time shortly before the chapter 15 filing. In essence, the
creditors' contention was that the COMI analysis should be the equivalent of a
"principal place of business" analysis under principles of United
The Second Circuit rejected that approach, focusing on
the fact that the Bankruptcy Code was phrased in the present tense (and, thus,
did not support a rule requiring a historical analysis for a COMI
determination). See 11 U.S.C. § 1517(b). The Second Circuit's analysis
of the relevant point in time for a COMI determination placed considerable
weight on the United States Court of Appeals for the Fifth Circuit's (the
"Fifth Circuit") analysis and reasoning in In re Ran, 607 F.3d
1017 (5th Cir. 2010) [enhanced version], which likewise focused on the
statutory text. In rejecting a historical approach, the Fifth Circuit noted
that "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." With those principles in focus, and after noting that
"[m]ost courts in this Circuit and through the country appear to have
examined a debtor's COMI as of the time of the Chapter 15 petition," the
Second Circuit joined the majority, holding that "a debtor's COMI should
be determined based on its activities at or around the time the Chapter 15
proceeding is filed. Recognizing that such a targeted time frame can
potentially lead to abuse, the Second Circuit included one key caveat-the
analysis is "subject to an inquiry into whether the process has been
manipulated" to alter the debtor's COMI in bad faith. .
As for the factors that can properly be considered in
determining where a debtor's COMI is located, the Second Circuit observed that
most courts have found a broad range of factors and activities relevant in the
analysis. Moreover, the Second Circuit noted that federal courts have looked to
international law on this issue, as directed by Congress through chapter 15.
The European Union Council Regulation enacting the Convention on Insolvency
Proceedings provides that COMI "should correspond to the place where the
debtor conducts the administration of his interests on a regular basis and is
therefore ascertainable by third parties." Id. With these
considerations in mind, as well as the fact that COMI is not defined in the
Bankruptcy Code, the Second Circuit stated: "The absence of a statutory
definition for a term that is not self-defining signifies that the text is
open-ended, and invites development by courts, depending on facts presented,
without prescription or limitation."
The Second Circuit's focus on the point in time at which
a chapter 15 proceeding is commenced is likely to impact not only chapter 15
cases in the Second Circuit, but also may be persuasive in other courts around
the country. It joins the Fifth Circuit's approach, and is only the second
Circuit Court to decide the issue. Likewise, the Second Circuit's broad
interpretation of the factors to be considered in a COMI analysis is likely to
impact new chapter 15 cases. [citations omitted]
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