By: Micaela Manley
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re Northshore Mainland Services, Inc., the Bankruptcy Court for the District of Delaware dismissed Bahamian companies’ chapter 11 cases, relating to the construction of the Baha Mar Resort, under the abstention provision of the United States Bankruptcy Code (the “Code”), and refrained from dismissal of the Delaware companies’ chapter 11 case.[1] Construction of the Baha Mar Resort, which included four new hotels, a Las Vegas style casino, and a premier Jack Nicklaus Signature 18-hole golf course, broke ground in February 2011 with completion estimated by November 20, 2014.[2] By 2013 it was clear that the contractors were not going to meet the planned schedule.[3] Almost two years later, the Baha Mar Resort remained incomplete.[4] Subsequently, the debtors filed chapter 11 petitions under the Code with the Delaware bankruptcy court.[5] In addition, the debtors requested recognition of the chapter 11 cases in the Bahamas.[6] The Bahamian Attorney General opposed the debtors’ request for recognition and asked the Bahamian court to issue an order winding up of all the Bahamian debtors’ business.[7] The Bahamian court concluded that subordinating the local proceedings to the Delaware proceedings where the locale had little connection to the debtors would not be equitable.[8] The Bahamian Court thereafter dismissed the winding up proceedings for certain debtors and appointed joint provisional liquidators to seven others.[9] In the meantime, two of the debtors filed motions in the bankruptcy court to dismiss their chapter 11 cases.[10] According to the debtors, the best interests of the debtors and creditors would be served by dismissal of the chapter 11 cases and the continuation of proceedings in the Bahamas.[11] Ultimately, the United States bankruptcy court dismissed the cases of the Bahamian debtors under Section 305(a) of the Code.[12] The bankruptcy court, however, refused to dismiss the chapter 11 case filed by Northshore Mainland Services, Inc., a Delaware corporation.[13]
Section 305(a) of the Code allows a court, in its discretion, to dismiss a case if, after considering the totality of the circumstances; dismissal would better serve the interests of both the creditors and the debtors.[14] Dismissal under this provision is considered to be extraordinary relief.[15] According to the Bankruptcy Appellate Panel for the Ninth Circuit, in considering whether to dismiss or abstain under Section 305, a bankruptcy court should consider whether both the creditors and the debtors would be “better served” by granting this relief.[16] The moving party bears the burden of proving that dismissal better serves both the debtors and creditors.[17] While there seems to be no straightforward way to balance the interests between the debtors and creditors, courts have laid out numerous factors, which are to be considered with neither equal weight nor strict balancing.[18]
Because of the high standard of demonstrating that both the interests of the creditors and debtors would be better served elsewhere, courts rarely abstain.[19] A court may abstain when a foreign proceeding is pending with respect to the same debtor.[20] Courts have dismissed cases in deference to foreign proceedings where the debtors or creditors would anticipate a liquidation to occur and where the parties are best served.[21] For example, the Court in In re RHTC Liquidating Co. denied a motion to dismiss a chapter 7 bankruptcy case because there was no evidence that the interests of the parties would be better served in a Canadian proceeding.[22] Further, the court weighed the parties’ expectations finding that it would be reasonable to conclude the parties would anticipate liquidation to occur in the same country where most of its operations, assets, and customers were.[23]
Similarly, the In re Northshore Court considered the factors in their analysis and deferred to the foreign proceedings based on the stakeholders’ expectation of insolvency proceedings taking place in the Bahamas.[24] In particular, the court concluded that the two debtors that filed for dismissal failed to prove that their interests would be better served in the Bahamas, and the movants’ argument is best supported by the September 4, 2015 ruling in the Bahamian Supreme Court.[25] The court acknowledged the truly international aspect of this case, and despite venue provisions in the contracts, the central focus of the bankruptcy proceeding is the unfinished project in the Bahamas.[26] The court recognized “the deep and important economic interest of the Government of The Bahamas in the future of [this] Project” and placed tremendous weight on the stakeholders’ “expectation” of the insolvency proceedings occurring in the Bahamas.[27] Further, the court found that in light of international comity, abstention was supported, and the proceedings that occurred in Bahamian Supreme Court had treated the debtors fairly and impartially.[28]
In re Northshore imposed an unqualified subjective element, the expectation of stakeholders, to the test of determining the interests of both a creditor and debtor in deciding whether to abstain a case under Section 305(a).[29] For both creditors and debtors, the location of investment may have tremendous weight in determining the expected location and tribunal for an insolvency proceeding.[30] Therefore, foreign debtors and their counsel should be cognizant of the strengths or weaknesses of venue provisions in foreign investment contracts.[31] With the growth and expansion of foreign investments, the In re Northshore decision could subject many foreign creditors or debtors to foreign tribunals and bankruptcy cases, despite eligibility to file in United States Courts.[32]
[1] In re Northshore Mainland Services, Inc., et al., Debtors, 537 B.R. 192, 208 (Bankr. Del. September 15, 2015).
[2] Id. at 196.
[3] Id.
[4] Id.
[5] Id. at 197.
[6] In re Northshore, 537 B.R. at 197.
[7] Id. 198.
[8] Id.
[9] Id. at 199.
[10] See id. at 192.
[11] Id. (moved to dismiss pursuant to sections 105(a), 109(a), 305(a), and 1112(b) of United States Bankruptcy Code).
[12] In re Northshore, 537 B.R. at 208.
[13] Id. at 192.
[14] 11 U.S.C. § 305 (2005) (discussing courts discretion in dismissing bankruptcy cases under abstention exception in order to better serve parties’ interests).
[15] In re Aerovias Nacionales De Colombia S.A. Avianca, 303 B.R. 1, 10 (Bankr. S.D.N.Y. 2003) (citing In re RCM Global Long Term Capital Appreciation Fund, Ltd., 200 B.R. 514, 524 (Bankr. S.D.N.Y. 1996)).
[16] 3 Collier on Bankruptcy ¶ 305.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2015) (citing RHTC Liquidating Co. v. Union Pac. R.R. (In re RHTC Liquidating Co.), 424 B.R. 714, 720–21 (Bankr. W.D. Pa. 2010); In re Eastman, 188 B.R. 621, 624–25 (B.A.P. 9th Cir. 1995)).
[17] In re RHTC Liquidating Co., 424 B.R. at 720–21 (discussing interests of both parties must be met and party moving for dismissal bears burden of proof).
[18] In re AMC Investors, LLC, 406 B.R. 478, 488 (Bankr.Del.2009) (granting abstention requires more than balancing of the harm to both parties); see also, In re Mylotte, David & Fitzpatrick, No. 07-14109bf, 2007 WL 3027352, *5, *6 (Bankr. E.D. Pa. Oct. 11, 2007); In re Paper I Partners, L.P., 283 B.R. 661, 679 (Bankr. S.D.N.Y. 2002) (non-exclusive factors include: (1) economy and efficiency of administration; (2) whether another forum is available to protect interests of both parties or there is already pending proceeding in state court; (3) whether federal proceedings are necessary to reach just and equitable solution; (4) whether there is alternative means of achieving equitable distribution of assets; (5) whether debtor and creditors are able to work out less expensive out-of court arrangement which better serves all interests in this case; (6) whether non-federal insolvency has proceeded so far in those proceedings that it would be costly and time consuming to start afresh with the federal bankruptcy process; and (7) purpose for which bankruptcy jurisdiction has been sought).
[19] 3 Collier on Bankruptcy ¶ 305.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2015).
[20] Id. ¶ 305.02(a)(1)[2][e].
[21] See e.g., In re RHTC Liquidating Co., 424 B.R. 714, 726.
[22] Id. at 721.
[23] Id. at 726.
[24] In re Northshore, 537 B.R. at 204–08.
[25] Id. at 205 (in which provisional liquidators were appointed to preserve debtors’ assets and promote compromise among shareholders).
[26] Id.
[27] Id. at 205–06.
[28] Id., at 208.
[29] 11 U.S.C. § 305 (2005).
[30] See RHTC Liquidating Co., 424 B.R. 714, 726.
[31] See In re Northshore, 537 B.R., at 206.
[32] See id. at 201, 208.