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.
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.
Outlook
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.