United States: Foreign Debtors' Access To U.S. Bankruptcy Courts: Expansion Of "Property In The United States" Definition In Chapter 15 Cases

Last Updated: December 3 2015
Article by Peter J. Amend and Monica Perrigino

When is a foreign entity eligible to file a chapter 15 petition?  This question has been the subject of debate over the last few years, and Judge Martin Glenn's recent opinion in In re Berau Capital Resources Pte Ltd. will add to this debate.  Although the debtor in the case was foreign and did not have a place of business in the United States, Judge Glenn concluded that the debtor had satisfied the eligibility provisions under section 109(a) of the Bankruptcy Code because the New York choice of law and forum selection clause in the underlying bond indenture rendered the bonds "property in the United States."  No. 15-11804 (MG), 2015 WL 6507871 (Bankr. S.D.N.Y. Oct. 28, 2015).

Background

Chapter 15 of the United States Bankruptcy Code enables foreign debtors to obtain access to United States bankruptcy courts.  A chapter 15 proceeding is a U.S. proceeding ancillary to a main proceeding pending in a foreign debtor's home country.  Chapter 15 facilitates cooperation in cross-border insolvency cases.

In Berau, the debtor was based in Singapore and filed an insolvency proceeding there on July 4, 2015.  Berau, through its duly authorized foreign representative, subsequently filed a chapter 15 petition for recognition of the Singapore insolvency in the United States Bankruptcy Court for the Southern District of New York on July 10, 2015.  Berau asserted that the U.S. court should recognize its pending Singapore proceeding as a foreign main proceeding and grant other appropriate relief.  Although no party objected to Berau's request for recognition, the court unilaterally opined on Berau's eligibility to be a debtor under chapter 15 of the Bankruptcy Code.

Analysis

Judge Glenn began his analysis in Berau by looking at a recent opinion from the Court of Appeals for the Second Circuit, Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013).  Under section 1502(1) of the Bankruptcy Code, a chapter 15 debtor is an entity that is the subject of a foreign proceeding.  In Barnet, the Second Circuit considered whether section 109(a) of the Bankruptcy Code, which governs who may be a debtor under the Bankruptcy Code, applies to chapter 15 debtors.  Section 109(a) states that "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 the Bankruptcy Code.  Accordingly, the Second Circuit held that, like all other Bankruptcy Code debtors, a chapter 15 debtor must reside, or have a domicile, place of business, or property in the United States.

Because foreign debtors seeking to file chapter 15 cases in New York often lack places of business in the United States, a critical question is whether the foreign debtor has property in New York that will establish eligibility and venue.  Section 109(a) of the Bankruptcy Code does not address how much property must be present or when or how long property must have a situs in New York.  Courts have generally deemed bank accounts, attorney retainers deposited in New York, or causes of action owned by the foreign debtor with a situs in New York as "property in the United States" for purposes of section 109(a) and eligibility to be a debtor in chapter 11.

In Berau, Judge Glenn likewise held that the attorney retainer held by the foreign representative's New York counsel provided a sufficient basis for eligibility to be a debtor under chapter 15.  But he took his analysis one step further, asserting that "another substantial (and frequently recurring) basis for chapter 15 eligibility exists here."

Judge Glenn held that Berau further satisfied the eligibility requirements to file for chapter 15 in the Southern District of New York because the New York choice of law and forum selection clause in the debtor's indenture constituted sufficient property to satisfy section 109(a) of the Bankruptcy Code.  Judge Glenn also pointed to several other important factors, such as Berau's status as an obligor on over $450 million of U.S. dollar denominated debt; Berau's appointment of an authorized agent for service of process in New York; and a number of acts in the indenture that could only be performed at the Bank of New York Mellon in New York City.  In concluding that the indenture is Berau's "property in the United States," Judge Glenn mused: "It would be ironic if a foreign debtor's creditors could sue to enforce the debt in New York, but in the event of a foreign insolvency proceeding, the foreign representative could not file and obtain protection under chapter 15 from a New York bankruptcy court."

Judge Glenn also pointed to three New York statutory provisions to bolster his conclusion that the situs of the indenture was New York.  N.Y. General Obligations Law § 5-1401, N.Y. General Obligations Law § 5-1402, and CPLR 327(b) all reflect a legislative policy that permits contract counterparties to establish a contract situs in New York by designating New York governing law and a New York forum for contracts involving transactions of the requisite amounts.  Noting that the Berau indenture "easily satisfies these requirements," Judge Glenn concluded that there was sufficient evidence to fix the location of the indenture to New York.

Because virtually all indentures are New York law documents, Berau may open the door for expansive chapter 15 eligibility for foreign debtors without any other property in the United States.  This could allow foreign entities the advantages offered by a stay in the United States, namely safeguarding the foreign entities' U.S. assets from the reach of creditors.

An interesting question is whether Judge Glenn's decision opens the door for companies without domestic assets or business to file for chapter 11.  Under section 109(a) of the Bankruptcy Code, an entity may be a debtor if it has property in the United States.  In light of Judge Glenn's liberal read of the meaning of the term "property" with respect to U.S. indentures of foreign companies, he may be willing to consider the same analysis in a chapter 11 case, provided that the debtor satisfies the additional requirements for chapter 11 eligibility delineated under section 109(d).  While this is probably more of an academic possibility than a realistic consequence, this could nonetheless expand chapter 11 eligibility for foreign entities.

Chapter 11 gives those entities even greater rights than chapter 15.  For example, chapter 11 offers a comprehensive reorganization scheme with a plan to liquidate or reorganize.  In most chapter 11 cases, the debtor remains in control of its business as debtor in possession, subject to the oversight and jurisdiction of the bankruptcy court.  The debtor may be able to secure financing and loans, and the bankruptcy court may grant the debtor permission to reject and cancel contracts.  Additionally, chapter 11 offers the protection of the worldwide automatic stay, which (at least in theory) prohibits creditors from seizing the debtor's assets anywhere in the world.

A chapter 15 proceeding, by contrast, is not the main bankruptcy proceeding relating to the foreign individual or entity.  Rather, it deals with jurisdiction and allows foreign representatives to access U.S. courts, but only insofar as the representative seeks U.S. recognition of a "foreign proceeding."  Once the U.S. court has recognized the foreign proceeding, only certain portions of the Bankruptcy Code apply.  These provisions contemplate relief such as adequate protection; the automatic stay; use, sale, or lease of property; postpetition transactions; and postpetition effect of security interest.  However, the reach of these provisions is more limited than in a chapter l1 context.  For example, while chapter 15 debtors also benefit from automatic stay protection, the stay only applies to the debtor's property within the United States.  As such, creditors could pursue a chapter 15 debtor's non-U.S. assets to the extent that the foreign proceeding's law permits.

Even if the foreign debtor is eligible under chapter 11, it would face many logistical hurdles in successfully filing a U.S. bankruptcy proceeding under chapter 11 given the vastly different purposes served by chapter 11 and chapter 15.  First, although the automatic stay applies worldwide in chapter 11 proceedings, it would be very difficult to enforce against foreign creditors with no ties to the United States.  If the stay cannot be effectively enforced, it is essentially rendered meaningless.  Second, from a purely practical point of view, it would be very complicated for a foreign debtor with only an attenuated link to the United States to pursue reorganization under the Bankruptcy Code while its assets, claims, and other parties in interest are likely abroad.  By contrast, these same complications are not present under chapter 15, where the foreign court presiding over the main proceeding has a closer link to the relevant interests in the case.

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.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.