This Trend May Not Be Your Friend: Could Catalyst Paper Spawn a New Breed of Chapter 15 Cases for U.S. Debtors?
April 02, 2012
The Bankruptcy Court for the District of Delaware in In re Catalyst Paper Corp., et al. recently granted recognition of the debtors’ proceedings under Canada’s Companies’ Creditors Arrangement Act as a foreign main proceeding under chapter 15 of the Bankruptcy Code with respect to the Canadian parent company as well as its Canadian and U.S. debtor subsidiaries. As part of the recognition order, the Bankruptcy Court found that the center of main interest of all debtors, including the subsidiaries incorporated under U.S. law, was located in Canada. The U.S. subsidiaries were thus able to obtain the benefits under the Bankruptcy Code (including the automatic stay of enforcement against their U.S. assets), while avoiding the cost and some of the hallmark creditor protections of chapter 11. Practically, this decision means that the legal entitlements of Catalyst’s U.S. creditors vis-à-vis the U.S. debtor subsidiaries will generally be governed by the CCAA, the Canadian insolvency statute used in that case.
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Although the Bankruptcy Court may have correctly concluded that each of the debtors’ COMI was in Canada the recognition order may be a precursor of things to come. Notably, the U.S. subsidiaries had significant operations in the United States, were guarantors of secured and unsecured notes issued by their Canadian parent under New York law-governed indentures (which also included a New York forum selection clause), and granted liens on their U.S. assets to secure these guarantees. On these facts, a U.S. creditor may be somewhat surprised to hear that a bankruptcy court would find that a U.S. debtor’s COMI could lie anywhere other than the United States.
The Catalyst Paper decision paves the way for a new breed of insolvency proceedings: U.S. debtors that are part of a corporate group headquartered in a foreign jurisdiction can commence a foreign insolvency proceeding together with their foreign corporate parent and then seek recognition of that proceeding as a foreign main proceeding under chapter 15.