Asset recovery column: Recognition of an individual debtor’s insolvency proceeding – beware the perils

Ed Davis, Leyza Blanco and Juan Mendoza

Shareholders Edward Davis Jr and Leyza Blanco, and attorney Juan Mendoza from Sequor Law in Miami discuss the things to watch out for when seeking recognition of an individual debtor’s foreign insolvency proceedings in the US.

Recognition of a foreign insolvency proceeding in the United States allows the use of an arsenal of asset recovery weapons for a cross-border practitioner, including the opportunity to obtain discovery relating to the financial condition of the debtor, and to commence actions to collect property and liquidate claims. This arsenal may be particularly effective in situations where an individual debtor flees the jurisdiction of his or her pending bankruptcy case to the United States.

Such a change of circumstances may disturb the debtor’s ties with the jurisdiction of the pending insolvency, however, and alter the foreign trustee’s ability to obtain recognition of the foreign insolvency in the United States. This column discusses the nuances a practitioner must consider when pursuing recognition of an individual debtor’s foreign insolvency under Chapter 15.

To obtain recognition of a “foreign main proceeding” under Chapter 15 – the United States’ analogue to the Model Law on Cross-Border Insolvency – a foreign representative of the foreign insolvency proceeding must show, among other things, that the foreign proceeding is pending in the country where the debtor has his or her centre of main interests (COMI). An individual debtor’s COMI is defined as the debtor’s “habitual residence”. The foreign representative may also obtain recognition of the foreign proceeding as a foreign non-main proceeding if the debtor has an “establishment” in the country where the foreign proceeding is pending. “Establishment” is defined as a place of operations where a debtor carries out non-transitory economic activity.

As the determination of an individual debtor’s COMI or establishment is a fact-intensive inquiry, the operative date for the determination of COMI or establishment could be pivotal in obtaining recognition. US courts are split on the operative date for the determination of the COMI. Some courts have noted that the operative date to determine the COMI is the date on which the Chapter 15 petition was filed. However, several US courts have held that the operative date for determining a debtor’s COMI or establishment is the date on which the foreign insolvency commenced.

Though this split of authority is yet to be specifically addressed in the text of Chapter 15, UNCITRAL’s revision to the Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency in 2013 clarified that the date of the commencement of the foreign proceeding is the operative date to determine the COMI. It would be up to the US Congress to pass an amendment to Chapter 15 to conform it to this development, which to date remains an open issue for US courts.

In a situation where an individual debtor moves to the United States after the commencement of the initial insolvency proceeding and establishes residence and financial ties in the US, the determination of the COMI or establishment – and possibility of recognising the foreign insolvency proceeding – is a function of whether the operative date for the determination of COMI or establishment is the date of the filing of the initial proceeding or the Chapter 15 proceeding.

If the operative date were the commencement of the foreign proceeding, as clarified by the Guide to the Model Law, the individual debtor’s habitual residence would likely be located in the foreign jurisdiction. This would likely result in the finding that the debtor’s COMI or establishment was the jurisdiction of the foreign proceeding. The opposite is true if the operative date is the date of the Chapter 15 filing, as the individual debtor may have developed close ties to the United States, such as changing address, opening new bank accounts and establishing other signs of permanency.

Once the operative date is established, the court must analyse the debtor’s circumstances to determine the debtor’s COMI or establishment. As habitual residence is not defined by the bankruptcy statute, it raises yet another level of uncertainty. Though there is no definition for the term habitual residence, courts seem to equate habitual residence with domicile, a concept typically used in the bankruptcy context in the analysis of venue and exemptions to discharge.

Like domicile, habitual residence refers to both an individual debtor’s physical presence, or residency, and the debtor’s intent to remain at that residence. The former consideration may seem like a straightforward one since it is hard to dispute a debtor’s physical presence. Yet situations arise where a debtor travels between two separate countries, which makes the analysis of physical presence more difficult.

The latter consideration of intent requires an inquiry relating to the debtor’s state of mind, which involves both objective and subjective considerations. To assist with the analysis of the debtor’s state of mind, courts consider the location of a debtor’s family, the debtor’s reasons for moving, the length and continuity of the debtor’s residence, the stability and continuity of the debtor’s employment, and apparent intentions to remain at his or her residence. Courts also consider documents filed with governmental agencies, such as immigration documents, to discern whether a debtor intended to remain in a certain place.

As every individual has different circumstances, the factual scenarios regarding the debtor’s habitual residence are endless. Consider the following examples: a businessperson who travels between offices in different countries with family in both countries; a couple that move to the United States on an investor visa but leave their children in their home country; and a person with no family who moves to the United States as a permanent resident but is incarcerated for a significant period. Each scenario would entail a unique analysis regarding the debtor’s state of mind.

A Florida decision displays the factual complexity that may complicate an individual debtor’s Chapter 15 COMI analysis. In Richardson, the court analysed the habitual residence of an individual debtor who was in the process of moving to Florida from the UK under an investor visa, shortly after the commencement of an insolvency proceeding against him in the UK.

Analysing the debtor’s COMI as of the commencement of the UK insolvency proceeding, the bankruptcy court noted that as of that date, the debtor no longer owned a home in the UK or operated a business in the UK, but retained his UK passport, UK pension account, UK email address, and immediate and extended family in the UK. Importantly, the court emphasised the debtor’s investor visa documentation, which contained a sworn statement that he fully intended to return to Great Britain upon the expiration of his visa term. Accordingly, the court held that the UK was the debtor’s habitual residence and COMI, and granted recognition of the debtor’s UK insolvency proceeding.

Practitioners must be aware of the uncertainty in the case law with respect to the operative date for the determination of an individual debtor’s COMI or establishment, and the lack of uniformity presently employed by US courts in assessing an individual debtor’s habitual residence. Most importantly, practitioners must be prepared to make factual assessments of the debtor’s circumstances and face challenges presented by such factors required to prove an individual debtor’s habitual residence.

 

References

Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency (2013 revision), section 141.

In re Richardson, Case No. 9:14-bk-04875-FMD, DE 120 (Bankr. M.D. Fla. 1 June 2016).

In re Loy, 380 B.R. 154 (Bankr. E.D. Va. 2007).

In re Ran, 607 F.3d 1017 (5th Cir. 2010).

In re Kemsley, 489 B.R. 346 (Bankr. S.D.N.Y. 2012).

United Nations Commission on International Trade Law (UNCITRAL), Model Law on Cross-Border Insolvency, 10, U.N. Gen. Assembly, UNCITRAL 30th Sess., U.N. Doc. A/CN.9/442 (1997), available at www.uncitral.org/uncitral/en/commission/sessions/30th.html.

German filmmaker’s estate files Florida Chapter 15

Funds in a Florida bank account belonging to the late German filmmaker and Federico Fellini collaborator Gideon Bachmann are at the centre of a new Chapter 15 application, two years after he died seemingly bankrupt in Germany.

Peter Jost, a partner at Jost Rechtsanwälte in Stuttgart, applied to the Tampa division of the US Bankruptcy Court for the Middle District of Florida for recognition as foreign representative of Bachmann’s estate on 13 March.

Represented by Sequor Law, Jost is seeking US$495,000 held in two Bank of America accounts in Bachmann’s name to pay off debts Bachmann owed to eight creditors at his death.

In the Chapter 15 application, under which Bachmann is referred to by his birth name of Hans Werner Bachmann, Jost says the filmmaker’s creditors have US$12,617 in claims against him, an amount easily exceeded by the amount in the Bank of America account.

Bachmann, who died in Karlsruhe, a city in the south west German region of Baden-Württemberg, on 24 November 2016 at the age of 89, was born to a Jewish family in Germany in 1927 before emigrating to Tel Aviv in 1936 after the rise of the Nazi party.

He initially worked as a journalist for Haaretz, returning to Germany in 1947 to document concentration camps left by the Nazi regime.

The following year he began to study under the celebrated Dadaist film director Hans Richter in New York, moving in the 1960s to Italy, where he was a close friend of Federico Fellini, even creating a documentary film about the Italian director, Ciao, Federico!, in 1970. He also performed in a number of Fellini’s films.

His film output also included Underground New York, a 1967 portrait of the underground film movement in which he was a player, which featured rare films of Andy Warhol, Shirley Clarke and Allen Ginsberg. That moved him to direct A Camera Is Not a Molotov Cocktail in 1977, in which he explained his belief that film’s purpose was not to “convince the unconvinced” but to provide solidarity for people of shared views.

He also performed in films, including for Fellini and his own 1983 film Peppermint Peace.

He returned to Germany in 1996, and in his latter years worked as a film critic for a US radio programme, also establishing and editing periodical magazine Cinemages.

The District Court of Karlsruhe appointed Jost as liquidator over Bachmann’s estate in November 2018, two years after his death.

In the US Bankruptcy Court for the Middle District of Florida

  • Chief Judge Michael Williamson

Counsel to Jost

  • Sequor Law

Partner Gregory Grossman and attorney Amanda Finley in Miami

March 2019 Quarterly Newsletter

FBI has new Miami squad to fight international corruption

By David Lyons

For many South Floridians, it’s no secret that the place they call home is a longtime haven for illicit drug money or cash stolen from foreign governments.

So it should come as no surprise that the FBI is now setting up an international corruption squad office in Miami.

The squad, scheduled to start its work this month, will be focusing on South America. Agents will be out to bust white-collar criminals who bribe foreign public officials and then launder the proceeds through the purchase of local real estate or fancy boats.

The squad, the fourth one to be established nationally, will be staffed by senior FBI agents, forensic accountants and prosecutors and investigators who are experienced chasing white-collar criminals and public corruption. The bureau currently operates squads in New York, Washington, D.C., and Los Angeles. Between 2016 and 2018, according to The Associated Press, prosecutors have won 34 convictions in cases brought by the international unit.

‘It’s about time’

There’s plenty of demand for a dedicated effort to investigate the region’s link to corruption in Latin America, say former U.S. attorneys for South Florida.

“My first reaction is it’s about time,” said Marcos Jimenez, who served between 2002 and 2005. “The FBI should have done this years ago.”

“South Florida has been the corruption capital of Latin America that entire time, and they haven’t dedicated sufficient resources to it,” said Jimenez, a commercial litigator based in Coral Gables.

That was mainly because the terrorist attacks on New York and Washington diverted resources to counterterrorism work.

‘Follow the money’

A typical case pattern is for people who receive bribes to salt their money away in South Florida real estate.

Jimenez surmised that the government has received an uptick in leads from a reporting program operated by the U.S. Treasury Department’s Financial Crimes Enforcement Network.

It requires title insurers to report the identities of people who buy residential real estate valued at $300,000 or more. South Florida is one of eight regions subjected to a geographic targeting order designed to flag money laundering through real-estate deals.

“It’s the same old rule that has never changed, which is follow the money,” Jimenez said.

Wifredo Ferrer, who was U.S. attorney between 2010 and 2017, said that increasingly, he has seen U.S. law enforcement partnering with counterparts in Brazil, Argentina, Peru and Mexico, nations that are all cracking down on corruption.

And then there is Venezuela, whose well-connected officials and businessmen have become rich as the socialist government of Nicolas Maduro has edged toward collapse.

American sanctions against corrupt Venezuelan officials have reportedly prompted the U.S. Treasury to freeze billions under the control of military officers and others with government ties, including $500 million in assets belonging to a former vice president, Tarak El Aissami.

“In Venezuela there is such a focus right now by the U.S. government in making sure they bring to justice those who have laundered money stolen from the country,” said Ferrer, who is executive partner of the Miami office of Holland & Knight.

Bringing indictments

South Florida’s federal courts have been the scene of indictments and guilty pleas involving defendants who handled illicit Venezuelan money, with the cases led by the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations.

Last August, Matthias Krull, a German-born managing director of a Swiss bank in Panama, pleaded guilty in Miami to a single money laundering count and admitted laundering embezzled funds from PDVSA, the state oil company, for relatives of an unnamed Venezuelan government official.

And last November, Alejandro Andrade Cedeno, a former Venezuelan national treasurer residing in Wellington, was sentenced to 10 years for a money laundering conspiracy involving more than $1 billion in bribes, according to the U.S. attorney’s office in Miami.

Ferrer asserted that throughout much of the hemisphere, Latin Americans are weary of corruption and yearn for local authorities to curtail it.

“There is an increase in public outcries,” he said. “There have been marches in certain countries. Citizens don’t want to keep having to suffer the negative effects of corruption. There is a real will and desire in these countries to have this focus.”

A special investigative squad for Miami makes sense to private lawyers who help clients recover stolen or missing assets and advise them on compliance laws. South Florida, according to one, is not only a convenient place to hide money, it is a place to make arrangements to cut bribery deals in other countries.

“People just don’t call up and say, ‘Can I pay you a bribe?’” said Edward Davis, of Sequor Law in Miami. “There is a negotiation process. It’s common to have a place where they meet and talk things through. If you’re a European manufacturer trying to get a contract, the last thing you want to do is to be seen talking to an official in that country.”

The Miami squad will work with the U.S. Attorney’s Office for the Southern District of Florida, and the Miami regional office of the Securities and Exchange Commission, the FBI said. Neither the FBI in Washington nor the

U.S. Attorney’s Office for the Southern District of Florida responded to follow- up questions to the announcement.

The existing squads work in conjunction with the Department of Justice’s fraud and money laundering asset forfeiture sections, and report directly to the department in Washington.

“The squads routinely partner with foreign law enforcement and FBI legal attache offices … to combat international corruption matters,” the FBI said in a statement.

This story has been corrected to reflect that the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations, not the FBI, led the cases involving money laundering schemes related to Venezuela.

How cryptocurrency assets are becoming a new battleground in divorce disputes

By Kelly Anne Smith

Fighting over money is one thing; dealing with bitcoin and other types of cryptocurrency in a divorce is an entirely different story.

As cryptocurrency has surged in popularity, it’s become much more common for investors to carry shares in the largely unregulated market. For married couples looking to part ways, this means dealing with cryptocurrency as an asset could make for a difficult and lengthy divorce process.

Considering regulations and standards on digital currencies such as bitcoin are still being weighed by governments and financial regulators across the world, could the future of hiding assets during a nasty divorce be lying in its hands?

The role cryptocurrency is beginning to play in divorces

Cryptocurrency is virtual currency; it lives online and is traded on a blockchain, an encrypted ledger detailing transactions. Since each transaction is associated with a public and private key, it’s possible for each transaction to be traced back to a single individual.

Cryptocurrency has been around for about a decade, but it became more mainstream around 2017 when bitcoin skyrocketed to a price of $20,000 per coin and caught the public eye, before giving back much of its value in the time since.

In 2018, only 5 percent of the American population held cryptocurrency, according to a survey by the Global Blockchain Business Council. An additional 21 percent of respondents, however, said they were considering adding it to their portfolio.

As cryptocurrency grows in popularity, lawyers all over the world are beginning to face divorce cases with high-value disputes over these digital assets.

Jacqueline Newman, a New York-based matrimonial law attorney, represents all different types of clients, including those divorcing with cryptocurrency. She asks all of her clients to fill out a statement of net worth — a comprehensive document detailing income, assets and debt of each party. She says her forms now ask parties to include cryptocurrency, too.

“It hasn’t gotten to the point where the court forms include it yet, but we have asked on ours and people list it under their general assets,” Newman says.

Hiding assets: Is cryptocurrency a new way to do it?

Since bitcoin and other cryptocurrencies are largely unregulated and encrypted, some might think it’s a perfect place to anonymously stash away funds.

But that’s not necessarily the case.

Mark DiMichael, CPA, certified Financial Forensics accountant and fraud examiner, specializes in cryptocurrency. In one recent case, a husband didn’t report $100,000-plus in cryptocurrency assets on his statement of net worth. During the discovery process, DiMichael closely analyzed his bank statements and was able to trace the crypto transactions through a crypto-trading platform.

DiMichael warns, however, that cases can get more complicated. The more knowledgeable someone is in crypto, the bigger the threat they pose to successfully hiding the assets.

Although he hasn’t worked on a large number of cases involving cryptocurrency so far, DiMichael gives the example of a cybersecurity expert exchanging cash for bitcoin as payment. By conducting the transaction in person, there would be no “proof” of the transaction occurring — making the asset-hiding much more difficult to reveal to the court.

“It’s really hard to trace if the individual knows what they’re doing,” DiMichael says. “An expert is going to know not to leave any evidence on their computer, and it can be much more difficult to subpoena.”

The future of spouses hiding money in crypto should be seen as a threat

Edward Davis, a Miami-based asset-recovery attorney and founding shareholder of Sequor Law, says cases of financial infidelity involving crypto are only going to become more frequent in the coming years.

In 15 to 20 years, Davis expects people with large sums of money to turn toward cryptocurrency as a way to hide their assets.

“It’s a real threat,” Davis says. “It’s not going to come up in the average divorce of Joe versus Mary where they both have regular jobs and are a middle class family. But the wealthy and uber-wealthy who have access to this are going to use it to hide their value.”

Matrimonial attorneys interviewed for this story say there aren’t currently any specific laws regarding cryptocurrency protection during a divorce process. Davis says these laws to protect consumers from fraudulent crypto activity are likely coming, but they will be slow to implement.

“The legal infrastructure and regulatory infrastructure for this stuff is way behind,” Davis says. “If you look at some of the people sitting in Congress — some of them are in their 70s and 80s — they have no idea what this is. They don’t even know what Snapchat is. You’re talking about a generational change [that] is going to [have to] happen before people are confronting this kind of issue.”

Another issue for getting a hand on regulating crypto, Davis says, is that there’s a wide misunderstanding of how blockchain technology works.

“Whenever something new comes along, everyone tends to minimize it,” Davis says. “Predicting technology is a very hard thing. People who are intimidated or scared or don’t understand technology tend to minimize it.”

How the financial and divorce industries are adjusting to this rising trend

As interest and commonality surrounding crypto continues to increase, experts in the legal field are having to quickly educate themselves on the asset to keep up. Some experts say there isn’t enough being done to inform and train legal counsel on the inner workings of the asset.

Most of what DiMichael knows about crypto is self-taught. In 2018, DiMichael published “A Forensic Guide to Finding Cryptocurrency in Divorce Litigation.” He created the guide after his own research found there weren’t many resources available on the matter.

“I’ve seen some courses for it, but I think there should be more training,” DiMichael says. “Uncovering crypto is fairly complicated, and that can be even harder for someone not trained in crypto.”

Most accountants don’t understand cryptocurrency, DiMichael adds. More complicated divorce cases involving cryptocurrency can be a lengthy and complicated process — and for an accountant learning everything on the fly, this can mean longer hours and a higher bill for the client. DiMichael says that he currently charges $435 per hour.

Davis hasn’t worked directly on a case recovering cryptocurrency assets yet, but he has noticed an upswing in industry-related conversations in the past two years. Lawyers, who he says aren’t technology-savvy by nature, should pay close attention to cryptocurrency and educate themselves on how to manage it in court cases.

“The main concern about crypto is how little we understand it and how dangerous it is because it’s an unregulated, untethered currency,” Davis says. “This is a real threat and one we have to think about.”