The Bankruptcy Court for the Southern District of New York last week issued a decision denying the Joint Official Liquidators of the Cayman Islands branch of Silicon Valley Bank recognition under Chapter 15 of the US Bankruptcy Code. While this was a set-back for the Cayman depositors in their fight with the Federal Deposit Insurance Corporation, the Court suggested an alternative path forward. The Liquidators have quickly responded, filing a complaint against the FDIC in the District Court for the District of Columbia. This article considers the Bankruptcy Court’s decision, and puts it in the context of Cayman office-holders’ prior attempts to seek Chapter 15 recognition.
Introduction and Background
Seeking recognition under Chapter 15 of the US Bankruptcy Code (“Chapter 15”) is a well-trodden path for Cayman office-holders.[1] Recognition is important as it facilitates office-holders’ access to various types of relief in the US.[2] Further, if a compromise or arrangement is reached during the insolvency proceedings, recognition ensures that these will take effect as matter of US law. That is important if, for example, a Cayman scheme of arrangement seeks to compromise US law (typically New York) governed debt.[3]
In the case of the Joint Official Liquidators (“JOLS”) of the Cayman branch of Silicon Valley Bank (“SVB Cayman”), the story is more complicated. The saga of Silicon Valley Bank (“SVB”) has been well-publicised. We considered it from a Cayman perspective in this prior article. To recap: prior to its dramatic collapse in March 2023, SVB had a branch in Cayman. While SVB Cayman was regulated by the Cayman Islands Monetary Authority, it was not separately incorporated and had no employees in Cayman itself. At the time of the collapse, SVB Cayman had US$866 million in deposits, held in three different types of accounts.[4]
After the Federal Deposit Insurance Corporation (“FDIC“) was appointed receiver of SVB, and the announcement was made that depositors would be fully repaid (beyond the standard US$250,000 limit), the FDIC determined that many SVB Cayman depositors were ineligible for FDIC coverage and would instead be treated as junior unsecured creditors (with little chance of any recovery).[5] An estimated 90 per cent of the uninsured depositors had connections with China.[6] Some SVB Cayman depositors responded by seeking the appointment of the JOLs over SVB Cayman, and the Grand Court obliged.[7] We considered the Grand Court’s decision in our prior article.
The JOLs proceeded to file claims with the FDIC on behalf of the SVB Cayman depositors. The FDIC then summarily rejected those claims without explanation.[8] That in turn led to the Chapter 15 recognition application, which was apparently motivated by the JOLs’ desire to seek discovery from the FDIC in relation to its decision to deny coverage.
The Decision
Requirements of Chapter 15
The Bankruptcy Court’s decision focused on Chapter 15’s eligibility requirements. To be eligible, amongst other things, the foreign debtor must be “a debtor”, which is defined to mean “a person that resides or has a domicile, a place of business or property in the United States, or a municipality” (emphasis added).[9] “Person” is defined to include an “individual, partnership, and corporation”.[10] Despite the particularity suggested by these definitions, as the Bankruptcy Court points out, the test for eligibility has been broadly applied and may be satisfied by reference to an undrawn lawyers’ retainer or to the debtor’s contractual rights (e.g. being a party to a contract governed by New York law and with a New York forum selection clause).[11] However, there are also some specific carve-outs. In particular, Chapter 15 does not apply to entities that are excluded from qualifying as “a debtor”, which relevantly includes banks that are insured under the Federal Deposit Insurance Act (being the governing legislation of the FDIC).[12]
Where a foreign debtor meets these eligibility requirements and is not otherwise excluded from Chapter 15, the “foreign proceeding” must,[13] subject to a general public policy exception,[14] be recognised where:[15]
- The proceeding is a “foreign main proceeding” or “foreign nonmain proceeding”. For reference, the former is defined as “a foreign proceeding pending in the country where the debtor has the center of its main interests” (commonly referred to as COMI).[16] The latter is defined as “a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment”.[17]
- The foreign representative applying for recognition is a person or body. “Foreign representative” is defined as “a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding.”[18]
- Certain procedural requirements are met.[19]
As Applied to SVB Cayman
In applying the eligibility requirements described above, the Bankruptcy Court straightforwardly held that SVB Cayman was ineligible for Chapter 15 recognition as it “possessed no separate legal existence outside of [SVB], which was indisputably U.S.-incorporated and ineligible for bankruptcy relief… as a domestic FDIC-insured bank.”[20] It was common ground that SVB Cayman had no employees. Its operations were run by SVB in the US pursuant to a “intra-entity agreement” that – because it was an agreement between two parts of a single entity – had no legal effect.[21] All that could be shown in Cayman was a mail-drop presence, and the limited connections with Cayman itself would constitute an independent roadblock to recognition under Chapter 15.[22] Because the eligibility requirements were not met, Chapter 15 recognition could not be granted.
An Alternative Path Forward
Despite reaching this conclusion, the Bankruptcy Court noted that “the JOLs are not without remedy.”[23] That was because a separate provision of Chapter 15 provides that “the failure of a foreign representative to commence a case or to obtain recognition under [Chapter 15] does not affect any right the foreign representative may have to sue in a court in the United States to collect or recover a claim which is the property of the debtor.”[24] The Court noted that despite its conclusion on eligibility, the JOLs would likely still be considered “foreign representatives” for the purposes of this section.[25] Accordingly, the JOLs may still have access to the US Courts to challenge the FDIC’s denial of coverage to the SVB Cayman depositors.
More generally, the Court floated the prospect that Chapter 15 may not be the exclusive path for recognition of foreign insolvency judgments. The Court noted that it was an “unsettled question” as to whether principles of international comity “allow courts to recognize foreign judgments in insolvency cases absent Chapter 15 recognition”.[26] While recorded in a footnote, the pointed analysis of Judge Glenn, a noted expert in the international insolvency space, is likely to pique the interest of practitioners as it relates to unconventional cases like SVB Cayman.
The JOLs’ Response
The JOLs promptly took up the Bankruptcy Court’s suggestion by filing a complaint in the District Court for the District of Columbia alleging that the FDIC acted arbitrarily in its decision to deny coverage to the SVB Cayman depositors. It remains to be seen how the FDIC will respond to this latest development.
Cayman Office-Holders & Chapter 15 Generally
The SVB Cayman case is a timely reminder that while Chapter 15 is a powerful mechanism for Cayman office-holders needing to take steps in the US, and Cayman office-holders have, in many instances, been successful in obtaining recognition,[27] this is not a foregone conclusion.
It follows the well-publicised case of In re Global Cord Blood Corp., where the Bankruptcy Court denied recognition of Cayman-appointed joint provisional liquidators on the basis that the Cayman proceeding did not meet the definition of “foreign proceeding” under Chapter 15.[28] In that case, the provisional liquidators had been appointed in the context of a just and equitable winding up petition, where allegations of fraud and mismanagement were the focus, rather than a winding up predicated on insolvency.[29] The provisional liquidators were appointed to investigate those allegations of fraud and mismanagement and to prevent further dissipation of the company’s assets. The Bankruptcy Court explained that the Cayman proceeding was more “akin to a corporate governance and fraud remediation effort, and is not a collective proceeding for the purpose of dealing with insolvency, reorganization, or liquidation.”[30]
Further back, during the Global Financial Crisis in 2007, the Cayman-appointed joint provisional liquidators of two Bear Stearns funds were denied recognition on the basis that the funds’ on-Island activities were insufficient for the purposes of establishing that the Cayman liquidation constituted a foreign main or nonmain proceeding.[31] Subsequent cases have clarified that the relevant assessment should be made at the time the Chapter 15 petition is filed, rather than considering the company’s entire operational history.[32] That increases the prospect of recognition, particularly where concerted efforts are made to establish COMI in Cayman. Nevertheless, these decisions show that Chapter 15 recognition should not be taken for granted.
Looking ahead, in cases where Chapter 15 may not be a realistic option, the commentary in the SVB Cayman decision may prove to be of assistance in showing that there may still be alternatives paths to relief. In any case, like many in Cayman, we will continue to watch the JOLs’ claims against the FDIC with interest.
For further information, please contact:
Sebastian Said, Partner, Appleby
ssaid@applebyglobal.com
[1] In re Ocean Rig UDW Inc., 570 B.R. 687 (Bankr. S.D.N.Y. 2017) (“Ocean Rig”); and In re Modern Land (China) Co. Ltd, 641 B.R. 768 (Bankr. S.D.N.Y. 2022) (“Modern Land”) are well-known and oft-cited examples. See fn 27 below for further examples.
[2] The types of relief that are available, and whether they apply automatically or may be granted as a matter of discretion, depend on whether the foreign proceedings are considered main or nonmain proceedings as defined in 11 U.S.C. § 1502(4) and (5): see §§ 1520 and 1521. Importantly, in the case of a foreign main proceeding, the automatic stay in § 362 of the Bankruptcy Code applies as a matter of right. The discretionary relief that may be granted includes entrusting the administration and realisation of the foreign debtor’s property in the foreign representative, the provision of information and evidence gathering powers, and the imposition of a stay (as it relates to foreign nonmain proceedings).
[3] Modern Land is an example where recognition was sought and granted for the purposes of giving effect to a Cayman scheme of arrangement. Other recent examples include E-House (China) Enterprise Holdings Ltd., Case No. 22-11326 (JPM), Dkt. No. 22 (Bankr. S.D.N.Y. Nov. 15, 2022) (“E-House”); and In re Luckin Coffee Inc., Case No. 21-10228, Dkt. No. 48 (Bankr. S.D.N.Y. Feb. 5, 2021) (“Luckin Coffee”).
[4] Eurodollar Sweep Accounts, Eurodollar Money Market Accounts and Eurodollar Operating Accounts.
[5] In re Silicon Valley Bank (Cayman Islands Branch), Case No. 24-10076 (MG), Dkt. No. 44 (Bankr. S.D.N.Y. Feb. 22 2024) (“Bankruptcy Court Decision”) at 3. Depositors who had Eurodollar Sweep Accounts were deemed to be eligible for FDIC coverage as in their case, accounts had been opened in their own names with SVB in the US.
[6] Bankruptcy Court Decision at 14.
[7] In re Silicon Valley Bank (Cayman Islands Branch) (unrep., 21 July 2023, Doyle J).
[8] In relation to this, the Bankruptcy Court commented (at fn 1) that “One would ordinarily expect an administrative agency that rejects claims that in this case exceed $500 million would explain more than that the claim ‘is not proved to the satisfaction of the Receiver.’ The FDIC’s denial brings to mind a quote from Kafka: ‘And why am I under arrest?’ he then asked. ‘That’s something we’re not allowed to tell you. Go into your room and wait there. Proceedings are underway and you’ll learn about everything all in good time.’ FRANZ KAFKA, THE TRIAL (1914).”
[9] 11 U.S.C. § 109(a). It should be noted that whether this requirement actually applies to Chapter 15 is disputed, and some other courts and academic commentators have suggested that it does not apply. The Southern District of New York, whose decisions Cayman practitioners will be most familiar with, is bound by Second Circuit precedent holding that it does apply: Drawbridge Special Opportunities Master Fund LP v Barnet (In re Barnet), 737 F.3d 238, 249–50 (2d Cir. 2013).
[10] 11 U.S.C. § 101(41).
[11] Bankruptcy Court Decision at 20.
[12] 11 U.S.C. §§ 109(b) and 1501(c), as described in the Bankruptcy Court Decision at 20-21.
[13] “Foreign proceeding” is defined as “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation”, per 11 U.S.C. §101(23).
[14] 11 U.S.C. § 1506.
[15] 11 U.S.C. § 1517(a). See also Bankruptcy Court Decision at 21, citing Ocean Rig (supra) at 698.
[16] 11 U.S.C. § 1502(4).
[17] 11 U.S.C. § 1502(5). “Establishment” is further defined to mean “any place of operations where the debtor carries out a non-transitory economic activity”.
[18] 11 U.S.C. § 101(24).
[19] 11 U.S.C. § 1515. Specifically, the petition for recognition must be accompanied by: (1) a certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; (2) a certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or (3) in the absence of (1) or (2), other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative. The petition must also be accompanied by a statement identifying all foreign proceedings with respect to the debtor that are known to the foreign representative.
[20] At 23.
[21] At 23-24.
[22] At 25.
[23] At 27.
[24] 11 U.S.C. § 1509(f).
[25] At 28-29.
[26] At fn 7.
[27] For examples of successful recognition applications, see In re Bancredit Cayman Ltd., Case No. 06-11026 (SMB), Dkt. No. 13 (Bankr. S.D.N.Y. Jun. 15 2006); In re SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006) (albeit as a nonmain proceeding); In re Amerindo Internet Growth Fund Ltd., Case No. 07 – 10327 (RDD), Dkt. No. 7 (Bankr. S.D.N.Y. Mar. 7 2007); In re Saad Invs. Fin. Co. (No. 5) Ltd., Case No. 09-13985 Dkt. No. 47 (Bankr. D. Del. Feb. 3 2009); In re AJW Offshore Ltd., Case No. 13-70078, Dkt. No. 31 (Bankr. E.D.N.Y. Feb. 5 2013); In re Suntech Power Holding Co., 520 B.R. 399 (Bankr. S.D.N.Y. 2014); In re LDK Solar Co., Ltd., Case No. 14-12387, Dkt. No. 43 (Bankr. D. Del. Nov. 21 2014); Ocean Rig (supra); In re Platinum Partners Value Arbitrage Intermediate Fund Ltd., Case No. 17-12269, Dkt. No. 12 (Bankr. S.D.N.Y. Oct. 12 2017); In re Ascot Fund Ltd., 603 B.R. 271 (Bankr. S.D.N.Y. 2019); In re Premier Assurance Group SPC Ltd., Case No. 20-20230-RAM, Dkt. No. 45 (Bankr S.D. Fla., Nov. 17 2020); Luckin Coffee (supra); Modern Land (supra); and E-House (supra).
[28] For the definition of that term, see fn 13 above.
[29] See In re Global Cord Blood Corp. (unrep., 22 September 2022, Kawaley J) for the decision appointing the joint provisional liquidators.
[30] In re Global Cord Blood Corp., No. 22-11347 (DSJ), 2022 WL 17478530, at *1 (Bankr. S.D.N.Y. Dec. 5 2022).
[31] In re Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 389 B.R. 325 (S.D.N.Y. 2008), aff’d, 389 B.R. 325 (S.D.N.Y. 2008). See also In re Basis Yield Alpha Fund, 381 B.R. 37 (Bankr. S.D.N.Y. 2007).
[32] See the discussion in Modern Land (supra) at 792, citing In re Fairfield Sentry Ltd., 714 F.3d 127, 138 (2d Cir. 2013).
