United States: U.S. Causes Of Action And Attorney Retainer Fund Sufficient Assets For Chapter 15 Recognition

In December 2013, the U.S. Court of Appeals for the Second Circuit held as a matter of first impression in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), that section 109(a) of the Bankruptcy Code, which requires a debtor "under this title" to have a domicile, a place of business, or property in the U.S., applies in cases under chapter 15 of the Bankruptcy Code. The Second Circuit accordingly vacated a bankruptcy court order granting recognition under chapter 15 to a debtor's Australian liquidation proceeding, concluding that the bankruptcy court erred in ruling that section 109(a) does not apply in chapter 15 cases and that it improperly recognized the debtor's Australian liquidation proceeding in the absence of any evidence that the debtor had a domicile, a place of business, or property in the U.S.

However, the Second Circuit did not provide any guidance as to how extensive a foreign debtor's property holdings in the U.S. must be to qualify for chapter 15 relief. The bankruptcy court recently answered that question on remand from the Second Circuit's ruling in Barnet. In In re Octaviar Administration Pty Ltd., 511 B.R. 361 (Bankr. S.D.N.Y. 2014), the bankruptcy court found that, consistent with case law analyzing the scope of section 109 for the purpose of determining who is eligible to commence a case under chapter 11, the requirement of property in the U.S. should be interpreted broadly. In this case, the fact that the Australian debtor had causes of action governed under U.S. law against parties in the U.S. and also had an undrawn retainer maintained in the U.S. satisfied the requirement for the debtor to have property located in the U.S.

Recognition of Foreign Insolvency Proceedings by U.S. Bankruptcy Courts

Enacted in 2005, chapter 15 of the Bankruptcy Code is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which was designed to provide effective mechanisms for dealing with cross-border insolvency cases. The basic requirements for recognition of a "foreign proceeding" in the U.S. under chapter 15 are outlined in section 1517(a) of the Bankruptcy Code: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the foreign representative applying for recognition must be "a person or body"; and (iii) the petition must be supported by the documentary evidence specified in section 1515.

"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code 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.

More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the U.S. of both a foreign "main" proceeding—a proceeding pending in the country where the debtor's "center of main interests" is located—and foreign "nonmain" proceedings, which may have been commenced in countries where the debtor merely has an "establishment," i.e., "any place of operations where the debtor carries out a nontransitory economic activity."

Who May Be a Debtor Under Chapter 15?

Section 109(a) of the Bankruptcy Code provides that, "[n]otwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title." Section 103(a) provides that "this chapter"—i.e., chapter 1, including section 109(a)—"appl[ies] in a case under chapter 15."

Even so, chapter 15, unlike chapters 7, 9, 11, 12, and 13, contains its own definition of "debtor." Section 1502(1) of the Bankruptcy Code defines "debtor," "[f]or the purposes of [chapter 15]," as "an entity that is the subject of a foreign proceeding." The Second Circuit addressed the apparent inconsistency between sections 109(a) and 1502(1) in Barnet.


In July 2009, Octaviar Administration Pty Ltd. ("OA"), a company incorporated in Queensland, Australia, was ordered to liquidate by an Australian court. As part of an investigation into OA's affairs, various Australian affiliates of Drawbridge Special Opportunities Fund LP ("Drawbridge") were sued in Australia. Drawbridge itself refused to consent to the jurisdiction of the Australian courts.

In August 2012, the OA liquidators, as foreign representatives, sought recognition of the Australian liquidation proceeding as a foreign main proceeding under chapter 15 in a New York bankruptcy court. Drawbridge objected on the basis that OA did not meet the requirements to be a debtor under section 109(a) of the Bankruptcy Code.

The bankruptcy court entered an order recognizing OA's Australian liquidation proceeding on September 6, 2012. It overruled Drawbridge's objection, holding that the definition of "debtor" in section 1502(1) determines whether a foreign debtor can be granted relief under chapter 15 and that the debtor need not have a domicile, a place of business, or property in the U.S. In response to a joint request by Drawbridge and OA's foreign representatives, the bankruptcy court certified a direct appeal of the recognition order to the Second Circuit, which agreed to review the case.

The Second Circuit's Ruling

The Second Circuit ruled as a matter of first impression that section 109(a) applies in a chapter 15 case, on the basis of a "straightforward" interpretation of the statute. According to the court, section 103(a) expressly provides that chapter 1—of which section 109(a) is a part—applies in a case under chapter 15. "Section 109, of course," the Second Circuit wrote, "is within Chapter 1 of Title 11 and so, by the plain terms of the statute, it applies 'in a case under chapter 15.' "

The court emphasized that "[s]ection 109(a) . . . creates a requirement that must be met by any debtor." Because OA's foreign representatives had made no attempt to establish that OA had a domicile, a place of business, or property in the U.S., the Second Circuit held that the bankruptcy court should not have granted recognition to OA's Australian liquidation proceeding.

The Second Circuit rejected the foreign representatives' argument that section 109(a) does not apply because OA is a "debtor" under the Australian Corporations Act (rather than under the Bankruptcy Code) and because the foreign representatives (rather than the debtor) were seeking recognition of the foreign proceeding. According to the court:

[T]he presence of a debtor is inextricably intertwined with the very nature of a Chapter 15 proceeding . . . [and] [i]t stretches credulity to argue that the ubiquitous references to a debtor in both Chapter 15 and the relevant definitions of Chapter 1 do not refer to a debtor under the title [title 11] that contains both chapters.

The Second Circuit also flatly rejected the foreign representatives' argument that, even if OA were required to qualify as a debtor under the Bankruptcy Code, it need satisfy only the chapter 15-specific definition of "debtor" in section 1502(1), rather than the section 109 requirements. "This argument also fails," the court wrote, "as we cannot see how such a preclusive reading of Section 1502 is reconcilable with the explicit instruction in Section 103(a) to apply Chapter 1 to Chapter 15."

According to the Second Circuit, not only a "plain meaning" analysis but also the context and purpose of chapter 15 support the application of section 109(a) to chapter 15. The court explained that Congress amended section 103 to state that chapter 1 applies in cases under chapter 15 at the same time it enacted chapter 15, which strongly supports the conclusion that lawmakers intended section 103(a) to mean what it says—namely, that chapter 1 applies in cases under chapter 15.

The court acknowledged that the strongest support for the foreign representatives' arguments lies in 28 U.S.C. § 1410, which provides a U.S. venue for chapter 15 cases even when "the debtor does not have a place of business or assets in the United States." However, the Second Circuit explained that this venue statute "is purely procedural" and that, "[g]iven the unambiguous nature of the substantive and restrictive language used in Sections 103 and 109 of Chapter 15 [sic], to allow the venue statute to control the outcome would be to allow the tail to wag the dog."

Finally, the Second Circuit found that the purpose of chapter 15 is not undermined by making section 109(a) applicable in chapter 15 cases. Section 1501(a) of the Bankruptcy Code provides that the purpose of chapter 15 "is to incorporate the Model Law . . . so as to provide effective mechanisms for dealing with cases of cross-border insolvency." Although section 109(a), or its equivalent, is not included in the Model Law, the Second Circuit emphasized, the Model Law allows a country enacting it to "modify or leave out some of its provisions." In any case, the court concluded, the omission of a provision similar to section 109(a) from the Model Law does not suffice to outweigh the express language Congress used in adopting sections 103(a) and 109(a).

The Second Circuit accordingly vacated the recognition order and remanded the case to the bankruptcy court for further proceedings consistent with its ruling.

On Remand: Octaviar

Shortly after the Second Circuit handed down its ruling in Barnet, OA's foreign representatives, having determined not to pursue their initial petition, filed a second chapter 15 petition alleging that OA satisfies the requirements of section 109(a) in accordance with the Second Circuit's ruling. According to the new chapter 15 petition, OA has property in the U.S. consisting of: (i) claims or causes of action against Drawbridge and other U.S. entities; and (ii) an undrawn retainer in the possession of the foreign representatives' U.S. counsel.

Drawbridge objected to the second chapter 15 petition, arguing that: (i) Octaviar failed to satisfy the requirements of section 109(a) as of the filing of the initial chapter 15 petition; (ii) the second petition should be dismissed as an abuse of process; and (iii) even if recognition of the second petition is granted, the court should immediately dismiss the case pursuant to section 305(a)(2) of the Bankruptcy Code (authorizing the court to dismiss or suspend all proceedings in a chapter 15 case if "the purposes of chapter 15 . . . would be best served by such dismissal or suspension") to further the objectives of chapter 15.

The bankruptcy court rejected each of these arguments. The court acknowledged that OA's claims against Drawbridge and the other U.S. entities may have been merely "potential causes of action" at the time of the filing of the first chapter 15 petition. However, it explained, such causes of action predated the first filing, and OA's foreign representatives, after being granted discovery, commenced litigation in New York state and federal court on the causes of action prior to the second chapter 15 filing. The court wrote that Drawbridge's arguments, including its abuse of process claim:

amount to a procedural "Catch-22" in which the Foreign Representatives do not deserve to be caught, to wit: since the Foreign Representatives did not identify existing causes of action or other property in the First Chapter 15 Petition, now that the Foreign Representatives have properly obtained discovery and alleged the existence of causes of action in the Second Chapter 15 Petition, this Court should refuse to grant recognition.

The court rejected Drawbridge's assertion, relying on In re Fairfield Sentry Ltd., 484 B.R. 615 (Bankr. S.D.N.Y. 2013), that OA's causes of action should be deemed located in Australia, rather than the U.S., because causes of action, as intangible assets, are located where the plaintiff, rather than the defendant, is domiciled. In Fairfield Sentry, the court wrote, the bankruptcy court emphasized that the situs of intangibles depends on a "common sense appraisal of the requirements of justice and convenience" in the particular circumstance at issue. Unlike in Fairfield, the court explained, the foreign representatives in Octaviar "have asserted claims under U.S. law that involve defendants located in the United States and include allegations that certain funds were wrongfully transferred by Drawbridge and other U.S. entities to the United States." According to the court, although these claims may be related to transactions and issues that are the subject of the Australian litigation, they do not involve the same parties, and "[a]s a general matter, where a court has both subject matter and personal jurisdiction, the claim subject to the litigation is present in that court."

In dicta, the bankruptcy court found that OA also has property in the U.S. in the form of an undrawn retainer in the possession of the foreign representatives' U.S. counsel. Because the funds were deposited after the first chapter 15 filing but prior to the second, Drawbridge argued that the creation of the account was an improper or bad-faith attempt to "manufacture eligibility" for chapter 15 recognition and to evade the consequences of Barnet. The Octaviar court rejected this argument, finding that the foreign representatives acted in good faith in transferring the funds to the retainer account. Section 109(a), the court wrote, "says nothing about the amount of . . . [U.S.] property nor does it direct that there be an inquiry into the circumstances surrounding the debtor's acquisition of the property." It is "thus consistent with other provisions of the Code that reject lengthy and contentious examination of the grounds for a bankruptcy filing."

Finally, the bankruptcy court concluded that the policy and purposes of chapter 15 would be undermined if the foreign representatives were deprived of an opportunity to prosecute causes of action in the U.S. on behalf of Octaviar for the benefit of its creditors. Recognition of the Australian liquidation proceeding, the court wrote, "will not prejudice Drawbridge or abridge its rights to assert all available defenses it has" in the state and federal court litigation, including a defense on the basis of forum non conveniens. Moreover, it noted, "[c]ourts have frequently expressed concern that the recognition provisions of chapter 15 not be used by a defendant who is attempting to evade its legitimate foreign creditors." According to the court, where, as here, Drawbridge refused to consent to the jurisdiction of the Australian courts, granting recognition of OA's Australian liquidation proceeding would promote cooperation between U.S. and Australian courts and would foster the fair, efficient, and timely adjudication of the Australian liquidation as well as assist in protecting the interests of both OA and its creditors. 


By holding that relatively minimal U.S. assets are required to qualify for chapter 15 recognition of a foreign bankruptcy or insolvency proceeding, Octaviar sets a low bar for recognition. However, this low threshold is arguably consistent with the goals of chapter 15 in, among other things, providing an effective vehicle for foreign debtors to collect assets outside the jurisdiction where their primary bankruptcy or insolvency proceedings are pending.

Barnet does not represent the only view on whether U.S. assets are required before a foreign proceeding can be recognized under chapter 15. A Delaware bankruptcy court (which is in the Third Circuit) issued a bench ruling to the contrary in In re Bemarmara Consulting A.S., Case No. 13-13037(KG) (Bankr. D. Del. Dec. 17, 2013). The court ruled that section 109(a) does not apply in chapter 15 because it is the foreign representative, rather than the debtor in the foreign proceeding, who petitions the court. Moreover, the court wrote, "there is nothing in [the] definition [of "debtor"] in Section 1502 which reflects upon a requirement that [a] Debtor have assets." See Transcript of Hearing at 9, l. 11‒18, In re Bemarmara Consulting A.S., Case No. 13-13037(KG) (Bankr. D. Del. Dec. 17, 2013) [Document No. 39]. "A Debtor," the court noted, "is an entity that is involved in a foreign proceeding."

Given Octaviar's pronouncement that minimal U.S. property is adequate to satisfy the requirements of chapter 15, however, the distinction between the two courts' approaches may be of little consequence in the vast majority of cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Mark G. Douglas
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions