New York Bankruptcy Court: Dismissal of Involuntary Chapter 11 Case Filed Prior to Commencement of Foreign Restructuring Proceeding Unwarranted
The vast majority of bankruptcy filings in the United States are voluntary bankruptcy cases filed by or on behalf of a debtor. However, the Bankruptcy Code also contemplates that eligible creditors (or, in some cases, a partner or an accredited representative of a foreign debtor) can file an involuntary chapter 7 or chapter 11 case against a debtor that is allegedly not paying its undisputed debts as they come due. Because involuntary bankruptcy is a drastic course of action, courts carefully scrutinize such filings to ascertain whether they are being used improperly as an effort to enforce collection efforts or enhance negotiating leverage.
In In re Xinyuan Real Estate Co. Ltd., No. 25-10745 (PB), 2026 WL 592250 (Bankr. S.D.N.Y. Mar. 3, 2026), the U.S. Bankruptcy Court for the Southern District of New York considered the bona fides of an involuntary chapter 11 petition filed by certain holders of U.S. dollar-denominated notes against a holding company for a group of Chinese property development companies. The holding company commenced a Cayman Islands restructuring proceeding only after the noteholders filed the involuntary chapter 11 petition. The court denied the debtor's motion to dismiss the chapter 11 case.
Given the timing of the Cayman Islands proceeding, the absence of meaningful progress in that proceeding, the notes' U.S. dollar denomination and New York governing-law and forum-selection provisions, and the debtor's limited connections to the Cayman Islands, dismissal or suspension was unwarranted under section 305(a), section 1112(b), or the doctrine of forum non conveniens. Further, the principles of comity did not require a different result.
Involuntary Bankruptcy Cases
Section 303(a) of the Bankruptcy Code provides that, with certain exceptions, an involuntary chapter 7 or chapter 11 case may be commenced against a "person" (i.e., an individual, partnership, corporation, or certain governmental units) eligible to be a debtor under either chapter. Section 303(b) provides that such a case may be commenced:
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $21,050 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $16,750 of such claims;
(3) if such person is a partnership—
(A) by fewer than all of the general partners in such partnership; or
(B) if relief has been ordered under this title with respect to all of the general partners in such partnership, by a general partner in such partnership, the trustee of such a general partner, or a holder of a claim against such partnership; or
(4) by a foreign representative of the estate in a foreign proceeding concerning such person.
11 U.S.C. § 303(b).
The debtor may file an answer to an involuntary petition. If it fails to file a timely answer, "the court shall order relief against the debtor." 11 U.S.C. §§ 303(d) and (h). If the debtor contests the petition, the bankruptcy court "shall," after a trial, order relief against the debtor, but only if: (i) the debtor is generally not paying its undisputed debts as they come due; or (ii) a custodian, other than a trustee, receiver, or agent appointed to take charge of less than substantially all of the debtor's property for the purpose of enforcing a lien against such property, was appointed or took possession of the property within 120 days before the bankruptcy filing. Id.
Dismissal or Suspension of a Bankruptcy Case Under Section 305
Section 305 of the Bankruptcy Code provides as follows:
(a) The court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at any time if—
(1) the interests of creditors and the debtor would be better served by such dismissal or suspension; or
(2)(A) a petition under section 1515 for recognition of a foreign proceeding has been granted; and
(B) the purposes of chapter 15 of this title would be best served by such dismissal or suspension.
(b) A foreign representative may seek dismissal or suspension under subsection (a)(2) of this section.
(c) An order under subsection (a) of this section dismissing a case or suspending all proceedings in a case, or a decision not so to dismiss or suspend, is not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of title 28 or by the Supreme Court of the United States under section 1254 of title 28.
Other provisions of the Bankruptcy Code also authorize the bankruptcy court to dismiss cases filed under chapters 7, 9, 11, 12, and 13. See 11 U.S.C. §§ 707, 930, 1112, 1208, and 1307. These provisions permit the court to dismiss a bankruptcy case for "cause" and include non-exhaustive catalogues of the circumstances under which cause exists, many of which involve the debtor's misconduct.
Except for a municipal bankruptcy under chapter 9, to which section 305 does not apply (see 11 U.S.C. §§ 103(f) and 901(a)), dismissal of a case under chapters 7, 11, 12, and 13 may be sought under section 305(a) as well.
It is generally understood that "abstention in a properly filed bankruptcy case is an extraordinary remedy, and that dismissal is appropriate under § 305(a)(1) only in the situation where the court finds that both creditors and the debtor would be better served by dismissal." In re Nogin Com. LLC, 670 B.R. 711, 726 (Bankr. S.D.N.Y. 2025) (cleaned up); accord In re Globo Comunicacoes E Participacoes S.A., 317 B.R. 235, 255 (S.D.N.Y. 2004); In re Genger, 2023 WL 4311219, at *18 (Bankr. S.D.N.Y. June 30, 2023); see generally Collier on Bankruptcy ("Collier") ¶ 305.01[1] (16th ed. 2026) (noting that dismissal under section 305 "is reserved for those rare occasions when both the creditors generally and the debtor itself are better served by dismissal or suspension").
Occasions for dismissal under section 305 may include the filing of an involuntary bankruptcy by disgruntled creditors in an out-of-court restructuring, a bankruptcy filing prompted by a two-party dispute between the debtor and a creditor pending in a non-bankruptcy forum, a bankruptcy filing without any "true bankruptcy purpose," or circumstances in which adjudicative comity to a pending foreign bankruptcy or insolvency proceeding warrants dismissal or suspension (discussed below). Id. at ¶ 305.02[2] (citing cases).
Most courts employ a "totality of the circumstances" test in determining whether to grant relief under section 305. See In re Northshore Mainland Servs., Inc., 537 B.R. 192, 203 (Bankr. D. Del. 2015). Factors relevant to such an inquiry include:
(1) the economy and efficiency of administration;
(2) whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court;
(3) whether federal proceedings are necessary to reach a just and equitable solution;
(4) whether there is an alternative means of achieving an equitable distribution of assets;
(5) whether the debtor and the creditors are able to work out a less expensive out-of-court arrangement which better serves all interests in the case;
(6) whether a 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) the purpose for which bankruptcy jurisdiction has been sought.
Id. (citations omitted); accord In re Monitor Single Lift I, Ltd., 381 B.R. 455, 464–65 (Bankr. S.D.N.Y. 2008); In re Navient Sols., LLC, 625 B.R. 801, 819–20 (Bankr. S.D.N.Y. 2021), aff'd, 2022 WL 863409 (S.D.N.Y. Mar. 23, 2022), aff'd, 2023 WL 3487051 (2d Cir. May 17, 2023); In re Newbury Operating LLC, 2021 WL 1157977, at *10 (Bankr. S.D.N.Y. Mar. 25, 2021).
In connection with involuntary bankruptcy filings, the purpose for which a bankruptcy petition is filed can be accorded substantial weight, particularly "when [an] involuntary petition appears to be a debt collection tool in a two-party dispute." Newbury, 2021 WL 1157977, at *11; accord Navient, 625 B.R. at 820 (stating that "'the prototypical fact pattern under section 305(a)(1)' as noted by Congress involves out-of-court workouts and efforts by recalcitrant creditors to commence an involuntary case to gain leverage") (quoting Collier at ¶ 305.02[2][a]); In re Stillwater Asset Backed Offshore Fund Ltd., 485 B.R. 498, 509 (Bankr. S.D.N.Y. 2013); see also S. Rep. No. 95-989, at 36 (1978) (noting that dismissal or suspension under section 305(a) may be warranted "if an arrangement is being worked out by creditors and the debtor out of court, there is no prejudice to the results of creditors in that arrangement, and an involuntary case has been commenced by a few recalcitrant creditors").
The seven factors delineated above are not exclusive. Although "no one factor is more important than another," In re EB Holdings II, Inc., 589 B.R. 704, 727 n.73 (Bankr. D. Nev. 2017), the factors may be given different weight, depending on the circumstances of the case. Monitor, 381 B.R. at 465.
Section 305 is entitled "Abstention." However, the relief it authorizes—suspension or dismissal of a case—is distinct from the court's discretion or obligation to "abstain" from hearing a particular "proceeding" in a bankruptcy case (e.g., an adversary proceeding, a contested matter, or another discrete controversy, however denominated) under the permissive and mandatory abstention rules set forth in 28 U.S.C. §§ 1334(c)(1) and 1334(c)(2), which apply when another forum is or may be more appropriate. Abstention under section 305 "is of the entire case and reflects Congress's recognition that there may be situations where creditors and the debtor would be better served outside of bankruptcy." Collier at ¶ 305.01[1].
Forum Non Conveniens
The doctrine of forum non conveniens permits a court to dismiss litigation even if the court is a proper venue with jurisdiction over the claims asserted. Application of the doctrine to dismiss a case is committed to a court's broad discretion, which may be deployed "when considerations of convenience, fairness, and judicial economy so warrant." Magi XXI, Inc. v. Sato della Citta del Vaticano, 714 F.3d 714, 729 n.6 (2d Cir. 2013).
Courts in the Second Circuit apply a three-step process to determine whether an action should be dismissed under the doctrine. The court must: (i) determine the degree of deference to give the plaintiff's choice of forum; (ii) determine whether an adequate alternative forum exists; and (iii) balance the private interests of the parties in pursuing litigation in the competing forums against any public interests at stake. See Iragorri v. United Techs. Corp., 274 F.3d 65, 73–74 (2d Cir. 2001).
A plaintiff's choice of forum is ordinarily entitled to deference, and the defendant bears a heavy burden in seeking to have a case dismissed on the ground of forum non conveniens.
A court will accord less deference to a plaintiff's choice of forum if it appears that the selection was motivated by forum shopping, because it "is much less reasonable to presume that the choice was made for convenience." Id. at 71. Other factors that courts consider in determining the degree of deference include: (i) the convenience of the plaintiff's residence in relation to the chosen forum; (ii) the proximity of the chosen forum to witnesses or evidence; (iii) the defendant's amenability to suit in the chosen forum; (iv) the availability of suitable legal assistance; and (v) other matters pertaining to convenience or expense. Id. at 72.
Comity
A court may also choose not to exercise jurisdiction under principles of international comity. "Comity" is "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895).
"Adjudicative" comity is an act of deference whereby the court of one nation declines to exercise jurisdiction in a case that is properly adjudicated in a foreign court. Id. at 238. U.S. courts generally extend comity whenever a foreign court has proper jurisdiction and "enforcement does not prejudice the rights of United States citizens or violate domestic public policy." CT Inv. Mgmt. Co., LLC v. Cozumel Caribe, S.A. de C.V. (In re Cozumel Caribe, S.A. de C.V.), 482 B.R. 96, 114 (Bankr. S.D.N.Y. 2012).
Because a foreign nation's interest in the equitable and orderly distribution of a foreign debtor's assets is an interest deserving respect and deference, foreign bankruptcy proceedings are one category of foreign litigation that generally mandates dismissal of parallel U.S. district court litigation under adjudicative comity. Royal and Sun Alliance Ins. Co. of Canada v. Century Int'l Arms, 466 F.3d 88, 92–93 (2d Cir. 2006).
In this context, deference to the foreign court is warranted "so long as the foreign proceedings are procedurally fair and … do not contravene the laws or public policy of the United States." Cozumel Caribe, 482 B.R. at 114; accord In re Board of Directors of Telecom Arg., S.A., 528 F.3d 162, 171–72 (2d Cir. 2008); JP Morgan Chase Bank v. Altos Hornos de Mexico, S.A. de C.V., 412 F.3d 418, 424 (2d Cir. 2005). Courts examine a number of factors in assessing procedural fairness, including:
(1) whether creditors of the same class are treated equally in the distribution of assets; (2) whether the liquidators are considered fiduciaries and are held accountable to the court; (3) whether creditors have the right to submit claims which, if denied, can be submitted to a bankruptcy court for adjudication; (4) whether the liquidators are required to give notice to the debtor's potential claimants; (5) whether there are provisions for creditors meetings; (6) whether a foreign country's insolvency laws favor its own citizens; (7) whether all assets are marshalled before one body for centralized distribution; and (8) whether there are provisions for an automatic stay and for the lifting of such stays to facilitate the centralization of claims.
Finanz AG Zurich v. Banco Economico S.A., 192 F.3d 240, 249 (2d Cir. 1999).
Xinyuan
Cayman Islands-incorporated and New York Stock Exchange-listed Xinyuan Real Estate Co. Ltd. (the "debtor") is a pure holding company for an enterprise group (the "XRE group") that operates a large property development business in the People's Republic of China. Of the debtor's 115 direct and indirect subsidiaries, 95 are located in China. The debtor's management resides and works in China, where the bulk of the XRE group's operations and assets are located. The debtor does not have any employees, physical offices, or meaningful assets in the Cayman Islands, where, as an "exempted company," it cannot conduct business except to the extent necessary to support its international operations.
In April 2025, after earlier debt restructurings failed to resolve the XRE group's financial problems, three Hong Kong-based investment funds holding approximately $65.8 million of the debtor's 2024 Notes filed an involuntary chapter 11 petition against the debtor in the U.S. Bankruptcy Court for the Southern District of New York (the "U.S. bankruptcy court"). Shortly before the deadline to respond to the petition, the debtor announced that it intended to restructure in the Cayman Islands and had entered into a restructuring support agreement (the "RSA") with creditors holding 25% of the outstanding principal amount of the senior notes.
In June 2025, the debtor commenced a judicial proceeding in the Cayman Islands (the "CI proceeding") to restructure approximately $731 million in defaulted U.S.-dollar-denominated debt (principal and accrued interest), including the senior notes held by the petitioning creditors in the involuntary chapter 11 case, by means of a "scheme of arrangement" under the Cayman Islands Companies Act (the "CICA"). The debt to be restructured under the scheme was subject to New York choice-of-law and forum-selection provisions and guaranteed by a number of the debtor's subsidiaries. The scheme provided that the debtor would exchange the senior notes for a combination of new senior notes, perpetual securities, and shares issued by Xinyuan.
Although the debtor itself does not have any direct operations or employees in the United States, the XRE group has significant U.S. operations through 11 U.S. incorporated affiliates. These affiliates operate three New York City real estate projects and employ a small number of U.S. professionals to oversee project development. The debtor does not have any U.S. employees or material U.S. assets, other than the stock of its U.S. affiliates and certain intercompany debt.
The debtor moved to dismiss the chapter 11 case principally on abstention grounds under section 305(a) of the Bankruptcy Code. Alternatively, the debtor sought dismissal for "cause" under section 1112(b) of the Bankruptcy Code or on forum non conveniens grounds, and it also argued that comity favored dismissal in light of the CI proceeding. According to the debtor, dismissal was warranted because: (i) it would enhance the prospects for a successful restructuring of the senior notes; and (ii) the involuntary chapter 11 filing served no legitimate rehabilitative purpose but was instead a litigation tactic designed to improve the petitioning creditors' negotiating leverage.
From the time the debtor filed the scheme in the Cayman Islands in June 2025 until it moved to dismiss the involuntary chapter 11 case in November 2025, there had been no activity whatsoever in the CI proceeding: No convening hearing had occurred, and no date for such a hearing had been set. During that period, creditor support for the scheme grew only from 25% to 31.48%.
The Bankruptcy Court's Ruling
The U.S. bankruptcy court denied the debtor's motion to dismiss the involuntary chapter 11 case.
U.S. Bankruptcy Judge Philip Bentley explained that the debtor provided only minimal support for its "sweeping assertions" that dismissal would facilitate the debtor's Cayman Islands restructuring and thwart the petitioning creditors' illegitimate ploy to gain negotiating leverage. As such, the U.S. bankruptcy court ruled that dismissal of the involuntary chapter 11 case was unwarranted under section 305 because the debtor failed to satisfy its burden of demonstrating that dismissal would further the interests of creditors or that the petition was filed for an improper purpose. Xinyuan, 2026 WL 592250, at *9.
Judge Bentley found that dismissal of the chapter 11 case would not benefit creditors because the CI proceeding "appears to be on a path to failure." Id. He elaborated that the approximately 31% creditor support for the debtor's scheme fell far short of the 75% threshold necessary for approval under the CICA, and the debtor had given the court no reason to conclude that it would obtain the necessary support "any time soon." In addition, Judge Bentley noted, even if the debtor could muster sufficient creditor support for the scheme, it was still "far from clear" that the CI court would approve the scheme because there was "significant uncertainty" as to whether the scheme's creditor classification scheme was valid under the CICA.
The court also explained that, as the debtor acknowledged, even if the CI court were to approve the scheme, the debtor would likely need to seek chapter 15 recognition of the CI proceeding in the United States to enforce the scheme because the debt to be restructured was denominated in U.S. dollars and governed by New York forum-selection and choice-of-law clauses. Judge Bentley reasoned that the debtor would face significant challenges in obtaining the necessary COMI finding because the debtor's "nerve center" was in China, not the Cayman Islands. Id. at **9–10.
Moreover, unlike in In re Modern Land (China) Co., Ltd., 641 B.R. 768 (Bankr. S.D.N.Y. 2022), where the court granted chapter 15 recognition to a China-based company that was incorporated and elected to restructure in the Cayman Islands in a proceeding that was overwhelmingly supported by creditors and unopposed, there was no such support for the debtor's scheme, and the scheme's prospects for success were "remote."
The U.S. bankruptcy court emphasized that allowing the chapter 11 case to proceed would likely increase the chances of a successful restructuring, either by leading to confirmation of a chapter 11 plan restructuring the senior notes or "by jump-starting the stalled negotiations in the [CI proceeding]." Id. at *11. Because creditors cannot propose a competing scheme under the CICA without the debtor's support, the court viewed the debtor's effort to dismiss the chapter 11 case as a potential delay tactic to wear down creditor opposition to the scheme. By contrast, the Bankruptcy Code addresses such dilatory tactics by permitting creditors to propose a competing chapter 11 plan after the expiration of a debtor's exclusive right to propose and solicit acceptances for a plan. Id. at *12.
The U.S. bankruptcy court rejected the debtor's argument that the court should dismiss the chapter 11 case as a matter of comity. According to Judge Bentley, "comity appears to be a distinctly secondary consideration" because the debtor has only minimal connections with the Cayman Islands, the debtor commenced the CI proceeding only after the involuntary petition was filed, and the debtor had made no progress in the CI proceeding for seven months. Id. Moreover, he explained, rather than "irreparable harm," the only possible injury cited by the debtor if the chapter 11 case were not dismissed was the delisting of its stock on the New York Stock Exchange, and the debtor had not shown how denial of dismissal would cause that harm or significantly harm creditors.
Judge Bentley also rejected the debtor's argument that the involuntary chapter 11 case was filed for an improper purpose—namely, "to gain a tactical advantage in restructuring negotiations." Id. at *13. He noted that the debtor had presented no direct evidence of the petitioning creditors' motivations and was asking the court to infer an improper motive from the circumstances. In addition, given the debtor's obvious financial distress, the involuntary filing served a legitimate rehabilitative purpose, and the sole question was which forum (the CI court or the U.S. bankruptcy court) should preside over the restructuring. Id.
Next, the U.S. bankruptcy court held that, for the same reasons that dismissal was unwarranted under section 305, the involuntary chapter 11 case should not be dismissed for "cause" under section 1112(b) of the Bankruptcy Code. Id. at *14.
Finally, Judge Bentley concluded that no basis existed to dismiss the case on forum non conveniens grounds. According to the court, the debtor "made only a token attempt to show that the relevant private and public interest factors" tilted in favor of the Cayman Islands; it did not identify Cayman witnesses or any practical or public interest factor favoring the Cayman Islands over New York, and the debtor's China-based witnesses did not tip the balance toward the Cayman Islands. Id. at **14–15.
Outlook
Xinyuan is an unusual case. Even so, the bankruptcy court's analysis does not represent a sea change in the conventional understanding of when dismissal or suspension of a chapter 11 case is warranted under sections 305 or 1112(b) of the Bankruptcy Code, or when a bankruptcy court should decline jurisdiction based on comity or forum non conveniens.
In the vast majority of cross-border bankruptcy cases, the accredited representative of a debtor in a foreign bankruptcy proceeding files a chapter 15 petition in the United States seeking recognition of the foreign bankruptcy (and typically enforcement of a restructuring plan approved by the foreign court). The U.S. bankruptcy court then determines whether to grant recognition of the bankruptcy case as a "foreign main proceeding" or a "foreign nonmain proceeding" in accordance with the rules set forth in chapter 15, including a determination that the debtor has either its COMI or an "establishment" in the jurisdiction where the foreign bankruptcy case was filed.
In Xinyuan, the funds holding the senior notes stole a march on the debtor by filing an involuntary chapter 11 case in the United States, where the debtor had at least some assets and the notes were U.S.-dollar-denominated and subject to New York choice-of-law and forum-selection provisions, before the debtor commenced a restructuring proceeding abroad. Given the debtor's undisputed financial distress, the lack of meaningful progress in a foreign restructuring proceeding whose prospects for success appeared remote, and the likelihood that chapter 11 would improve restructuring leverage either directly or by jump-starting the Cayman Islands negotiations, the U.S. bankruptcy court concluded that dismissal of the chapter 11 case was not in the best interests of stakeholders and was therefore unwarranted. The court also viewed the debtor's pursuit of dismissal as a potential attempt to force the petitioning creditors to sign on to a proposed restructuring that had little chance of approval.
Additional key takeaways from Xinyuan include:
- Bankruptcy courts carefully scrutinize involuntary bankruptcy filings to ensure that petitioning creditors are not attempting to use bankruptcy as a cudgel to compel collection of debts or gain improper negotiating leverage. However, an involuntary chapter 11 petition can serve a legitimate rehabilitative purpose where the debtor is financially distressed and the filing may increase the prospects for a successful restructuring.
- Although principles of international comity remain important in cross-border insolvency matters, Xinyuan underscores that comity is not dispositive in a section 305(a) analysis. Where a debtor has minimal ties to the foreign forum, the foreign case was filed only after the U.S. involuntary petition, and the foreign case has not progressed, comity may be a secondary consideration rather than a basis for dismissal.
