United States: Raising A Drawbridge Objection: Eligibility In Chapter 15 Cross-Border Insolvency Cases

Insolvency like international law can lend itself to aggressive protectionism as parties or countries try to preserve their own interests, like medieval lords surrounded their castles with moats and towering walls to fend off raiding parties and protect their holdings. Protectionism to its extreme leads to cloistering, to isolation, and inhibits growth and trade. Thus, realizing the need to balance protection with easy access to the fields and trade outside, the medieval lords developed drawbridges, which could be quickly lowered in good times but rapidly withdrawn in bad times. Chapter 15 of the U.S. Bankruptcy Code on cross-border insolvencies is a similar innovation that aims to bridge the interests of foreign courts and debtors with the related interests within the territorial bounds of the United States while at the same time protecting against anything that is "manifestly contrary to the public policy of the United States."

A chapter 15 case ordinarily known as an "ancillary case" is commenced by filing a "petition for recognition" in the U.S. Bankruptcy Court. As the name of the petition suggests, the primary goal of a chapter 15 case is merely to recognize the foreign proceeding and then coordinate the foreign and domestic proceedings. A chapter 15 recognition order is a prerequisite for a foreign debtor to obtain relief in a U.S. court other than seeking to collect or recover a claim that is property of the debtor. The debtor must meet a very low standard for recognition, as most of the requirements are procedural.

The first barrier to cross for eligibility is whether the proceeding to be recognized is indeed a "foreign proceeding" as statutorily defined in 11 U.S.C. §§ 1502 and 101(23). A foreign proceeding must be a collective judicial or administrative proceeding in a foreign country and must relate to insolvency or the adjustment of debt. Furthermore, the assets and affairs of the debtor must be subject to the control or supervision by a foreign court for the purposes of reorganization or liquidation. In most advanced economic nations, the proceedings that qualify as "foreign proceedings" are easily identifiable; however, some nations may not have as clearly operative courts and insolvency systems and disputes may arise as to their qualifications as "foreign proceedings."

Additional, though very unintimidating, eligibility barriers include assuring that the foreign representative is a person or body and fulfilling the procedural requirements of Section 1515 (for example, the debtor must file (1) a certified copy of the foreign proceeding commencement and (2) a certificate affirming the foreign proceeding and the appointment of the foreign representative). Yet even these procedural requirements may be relaxed by the court. These low barriers indicate that the bankruptcy court has little discretion to deny a petition. Only if the foreign proceeding cannot be evidenced or if granting the petition would be manifestly contrary to the public policy of the United States will a court likely deny a petition.

Despite the low statutory barriers, the Second Circuit in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2nd Cir. 2013), recently held that a foreign representative seeking recognition must also demonstrate eligibility under section 109(a) of the Bankruptcy Code, which requires the debtor to have a place of business or property in the United States. This may arm parties with a more meaningful objection to recognition; although, other courts and circuits may be leery to adopt a similar requirement.

In enacting chapter 15, Congress specifically defined "debtor" for purposes of Chapter 15 to mean "an entity that is the subject of a foreign proceeding." 11 U.S.C. § 1502(1). Yet, the Drawbridge court merged the specific definition in § 1502(1) with the more general debtor requirements of § 109(a), which requires a debtor under any chapter to be "a person that resides or has a domicile, a place of business, or property in the United States . . ." This merger means that a debtor must be the subject of a foreign proceeding and have a place of business or property in the U.S.

Seemingly, this holding derogates the purposes of chapter 15 and the fundamental statutory canon of generalia specialibus non derogant (the general does not detract from the specific). Chapter 15 is intended to coordinate foreign and domestic insolvency proceedings and related litigation and is very specific in its purposes. Contrarily, the general bankruptcy definitional statutes govern across chapters. Where Congress enacts a more exacting statute, courts typically do not let general interpretations detract from the specific intent of Congress.

This type of Drawbridge objection may impose unneeded barriers to foreign representatives who seek chapter 15 recognition to coordinate litigation in the United States or to conduct discovery regarding potential claims or assets that may reside in the United States (i.e., fraudulent transfers). Though the debtor in Drawbridge was denied an order of recognition upon its first petition, its second petition was granted because the bankruptcy court found that the debtor's cause of action against Drawbridge and funds in its attorneys' trust accounts were sufficient enough to establish assets in the United States. Foreign representatives should prepare to demonstrate that assets exist in the United States because parties seeking to contest recognition may now raise the Drawbridge objection and attempt to deny foreign representative access to the U.S. courts.

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.

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