A decision by the US District Court for the Northern District of California earlier in 2018 has potentially important implications for the future recognition of foreign insolvency proceedings in the US.

There is no consensus among US courts whether they have the power to recognize a foreign insolvency proceeding if the foreign debtor has no US footprint in terms of assets or business operation. In In re Forge Group Power Pty, Ltd., 2018 WL 827913 (N.D. Cal. 2018), the district court ruled that a US footprint is a threshold criterion, but nevertheless vacated the bankruptcy court's order denying recognition to an Australian liquidation proceeding -- despite the bankruptcy court's finding that the foreign debtor's purported US footprint was illusory. If followed by other courts, this decision could open the door for more foreign debtors to seek US recognition by potentially rendering meaningless any US footprint requirement.

The case involved a foreign insolvent company with no business operations and no assets in the US at the time the Australian liquidation was commenced. In seeking US recognition, the Australian liquidator solely relied on the fact that he had paid a retainer to his US counsel to commence and prosecute the petition for US recognition. In vacating the bankruptcy court's order, the district court appeared to endorse the use of an attorney's revocable retainer as means to manufacture a US footprint for purposes of recognizing a foreign insolvency proceeding.

Added to the US Bankruptcy Code in 2005, Chapter 15 provides a procedural framework to achieve fair and efficient handling of cross-border insolvencies. It incorporates a model law on cross-border insolvency that more than 45 countries have adopted in whole or in part, including the UK and Australia. A qualifying "foreign proceeding" must be a foreign proceeding pending in the country where the debtor has the center of its main interests (a "foreign main proceeding") or a foreign proceeding pending in a country where the debtor has an "establishment" (a "foreign non-main proceeding") 11 U.S.C. § 1502 (4) & (5).

For foreign debtors, US recognition of foreign proceedings gives them the ability to sue — and be sued— in US courts, and it also provides access to significant relief available under other chapters of the US Bankruptcy Code. Accordingly, the liquidator for Forge Power initiated the Chapter 15 petition for the purpose of obtaining certain bankruptcy relief, namely staying certain US litigation related to an underlying dispute with an equipment leasing company, arguing that the US litigation threatened to interfere with or frustrate the Australian insolvency proceeding.

Jurisdictional chess match

Forge Power filed its Chapter 15 petition after a series of proceedings in Australia, the UK and US regarding the equipment lease dispute. The convoluted procedural history illustrates a jurisdictional chess match and legal maneuvering, which often take place in cross-border insolvency disputes, for which Chapter 15 was intended to resolve.

Following Forge Power's default on a lease of gas turbine generators, which had been shipped to its plant in Australia, the lessor filed actions in Florida, Texas and California, and requested arbitration with the London Court of International Arbitration. The lessor opposed the Chapter 15 petition on the grounds that Forge Power had no business operation or assets in the US. The lessor cited section 109(a) of the US Bankruptcy Code, which specifies that only a person or entity with a domicile, place of business or property in the US "may be a debtor under this title."

The liquidator countered that the Australian liquidation proceeding qualified for Chapter 15 relief because he had paid a $100,000 retainer to his US bankruptcy counsel in Northern California in connection with the filing. The liquidator asserted the retainer constituted a sufficient asset to satisfy any US presence requirement.

The bankruptcy court denied the petition, holding that a revocable retainer, though property in a technical sense, was "illusory" for purposes of granting recognition to the Australian proceeding.

Amicus brief supports appeal

The liquidator appealed to the district court. Interestingly, a distinguished group of US professors, retired US bankruptcy judges and US insolvency practitioners were permitted to file an amicus brief in support of the appeal. Among them were original drafters of Chapter 15 and the Model Law on which it is based.

They argued that Chapter 15 was never intended to be limited to foreign insolvency proceedings that solely involved debtors with a US presence. They offered a number of statutory construction arguments — structural, textual and policy — in support of their central thesis: The debtor's legal attributes and whereabouts are "extraneous" to the recognition of foreign proceedings under Chapter 15.

The amicus brief participants contended that section 109 is an eligibility test for debtors who file plenary bankruptcy cases under the other chapters of the US Bankruptcy Code, and has no applicability to Chapter 15 proceedings, which are filed purely as ancillary cases. The amicus brief also cited the Chapter 15 venue statute, which they argued expressly, contemplates that a Chapter 15 ancillary case may be commenced even if the debtor does not have a place of business or any assets located in the US.

The lessor countered that the appeal amounted to an improper invitation to rewrite the plain meaning of clear and unambiguous Bankruptcy Code provisions, which, the lessor argued, limit Chapter 15 relief to debtors with a US footprint. The lessor further argued that granting recognition to a foreign proceeding solely upon the payment of a retainer to US counsel would not only render this footprint requirement meaningless, but also encourage or condone forum shopping.

The decision's implications

The district court vacated the bankruptcy court's decision, holding that the existence of the retainer, by itself, could suffice for recognition of the Australian liquidation proceeding – even in the absence of any other US presence. The court cited to other published decisions in which courts had relied upon attorney retainers, among other US assets, to satisfy the eligibility requirements under section 109. However, the court acknowledged it was the first court to explicitly sanction US recognition solely upon the foreign representative's payment of a retainer in the absence of any other factual basis for a US footprint. The court also readily acknowledged it was essentially endorsing the ability of a foreign representative to "manufacture" eligibility for US recognition through such "strategic maneuvers."

Undoubtedly, Forge Power is not the last word, and there will be more decisions regarding this issue from other jurisdictions. To date, there is no well-established case precedent endorsing the alternative contextual interpretation of Chapter 15. Some courts might agree with the bankruptcy court's reasoning that the footprint requirement cannot be circumvented by the foreign representative's mere payment of a revocable retainer to US counsel on the eve of filing a Chapter 15 petition. On the other hand, the district court essentially endorsed the continued use of an attorney's retainer as an artifice to render the US footprint requirement perfunctory. Indeed, a bankruptcy court in the Southern District Court of New York subsequently has rejected a similar challenge to a Chapter 15 petition on the basis that a $1,250 retainer, among other US assets, was obtained in bad faith to manufacture US recognition. In re B.C.I. Finances Pty. Ltd., 583 B.R. 288 (Bankr. S.D.N.Y. 2018).

Until there is more clarity, counsel for foreign representatives in similar circumstances should at least consider the possibility of filing their Chapter 15 petitions in alternative judicial districts, which might be more receptive to a contextual interpretation of Chapter 15, and ways to augment a US presence for the foreign proceeding.

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.