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).


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.


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.

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