Chapter 15 of the United States Bankruptcy Code (the "Code") is the exclusive remedy for a foreign debtor seeking recognition of foreign insolvency proceedings in US courts. Such recognition, if obtained, affords the foreign debtor certain protections from creditors such as the automatic stay of actions in US courts, and other benefits in support of the foreign insolvency proceedings. Chapter 15 evolved from the Model Law on Cross-Border Insolvency and recognizes a desire to "formalize cross-border coordination and cooperation." In re Fairfield Sentry Ltd., 484 B.R. 615, 626 (Bankr. S.D.N.Y. 2013).
As Chapter 15 petitions have increased, there has been a growing divide in courts as to the application of Section 109(a) of the Code to a Chapter 15 petitioner. Section 109(a) governs who is permitted to be a debtor under the Code. Section 109(a) requires that the petitioning debtor either reside or be domiciled, have a place of business, or property in the United States. Since the Second Circuit Court of Appeal's holding in Drawbridge Special Opp. Fund LLP v. Katherine Elizabeth Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013) that the requirements of Section 109(a) apply in Chapter 15 proceedings, courts have split both on the applicability of Section 109(a) to a Chapter 15 petitioner in the first instance, and as to what constitutes "property in the United States."
Applicability of Section 109(a)
To date, the only decision of precedential authority on the applicability of Section 109(a) to Chapter 15 proceedings is the Second Circuit's holding in In re Barnet. However, in the US system of law, the holding in In re Barnet is binding only on courts within the Second Circuit's jurisdiction, and informative, at best, in all other jurisdictions. With the lack of any national, binding precedent, some courts are following In re Barnet, and others, namely bankruptcy courts in Delaware, are not. As a result, would-be-Chapter 15 petitioners should be aware of the law that applies in the jurisdiction in which the petition is filed.
The facts of In re Barnet are straightforward. Foreign representatives of Octaviar Admin. Pty Ltd. an Australian company, sought Chapter 15 recognition of Australian insolvency proceedings in order to pursue certain avoidance actions. Drawbridge Special Opp. Fund, LLP ("Drawbridge"), a creditor, objected to the Chapter 15 petition on the basis that Octaviar lacked a domicile, place of business or property within the United States as required to be a "debtor" for the purposes of Section 109(a). The Bankruptcy Court determined that Section 109(a) is not applicable to Chapter 15 petitioners, and granted recognition of Octaviar's foreign insolvency proceeding. Drawbridge appealed.
Before the Second Circuit, Drawbridge argued that the bankruptcy court erred in concluding that a Chapter 15 petitioner does not need to satisfy Section 109(a)'s requirement of a domicile, place of business or property in the United States. The Second Circuit agreed. The Court reasoned that although Section 1502 of the Code defined a Chapter 15 debtor as "an entity that is the subject of a foreign proceeding," the section could not be read in isolation but in the context of the Code on the whole. Because nothing in Chapter 15 expressly rendered Section 109(a) inapplicable to Chapter 15 petitioners, the Second Circuit vacated the bankruptcy court's recognition order and remanded the petition for further consideration whether Octaviar satisfied Section 109(a)'s requirements.
In re Barnet, has not, however, been universally adopted outside of the Second Circuit – and the Second Circuit is the only appellate court to address the applicability of Chapter 1 of the Bankruptcy Code to Chapter 15. For example, the Bankruptcy Court for the District of Delaware has expressly disagreed with the Second Circuit. Rather, bankruptcy courts in Delaware routinely do not hold Chapter 15 petitioners to the requirements of Section 109(a). See In re Bemarmara Consulting as, Case No. 13-13037 (KG) (Bankr. D. Del. Dec 17, 2013) ("[T]his Court does not agree with the decision of the Second Circuit. And it is this Court's belief that there is a strong likelihood that the Third Circuit, likewise, would not agree with that decision."); see also Svitlana Romanova and Metinvest B.V., Dkt. No. 17-bk-10130 (LSS) (Bankr. D. Del. Feb. 8, 2017). The Bemarmara court focused on the distinction between a debtor under the Code and who may be a "foreign representative." The court was persuaded that, under Chapter 15, it is a foreign representative that petitions for recognition of the foreign proceeding, not a debtor, accordingly Section 109(a)'s requirements for debtors did not apply.
Although the Delaware bankruptcy court rulings, which are found in court transcripts and recognition orders that do not cite Section 109(a), are not binding on any other court, it is instructive that bankruptcy courts considered to have great expertise and a source of persuasive authority on the Code have declined to apply Section 109(a) to Chapter 15 petitions. The Delaware bankruptcy courts are not alone, some commentators have also opined that application of Section 109(a) to a foreign debtor is inappropriate. See Hardy DeLaughter, Why Two Facets of Chapter 15 Rulings Hinder Cross-Border Insolvency Petitions in the United States, 32 Emory Bankr. Dev. J. 397, 412 (2016) ("courts should not apply § 109(a) to chapter 15 proceedings. Chapter 15 contains all necessary requirements for granting recognition to a foreign proceeding, and Bemarmara illustrates that uses of "debtor" and "foreign representative" are exclusive of one another in various sections of the Code."); see also Danial M. Glosband & Jay Lawrence Westbrook, Opinion: No Debtor "Presence" Is Required for Chapter 15 Recognition, Am. Bankr. Inst. J. (May 2015); Collier on Bankruptcy 1501.03 (Alan N. Resnick & Henry J. Somme reds., 16th ed. 2017) ("The Barnet decision should not be followed outside of the Second Circuit.").
Property in the United States
The story of In re Barnet and Section 109(a) did not end with the Second Circuit's reversal. On remand to the bankruptcy court, the critical question concerned whether Octaviar could demonstrate that it had a domicile, place of business or property in the United States. Many foreign businesses will not satisfy the domicile or place of business requirements of Section 109(a). As a result, the golden ticket to US court recognition of foreign insolvency proceedings turns on whether the Chapter 15 petitioner can demonstrate that it has property in the United States.
On remand, the bankruptcy court in In re Barnet needed to determine whether Octaviar, which was neither domiciled nor had a place of business in the United States, held a minimum level of property to satisfy the requirements of Section 109(a). Octavia demonstrated that it had property in the form of claims and causes of action against Drawbridge, and a $10,000 retainer in the possession of US legal counsel for the foreign representatives. A retainer in the possession of legal counsel has widely been accepted by US courts as sufficient "property in the United States" for the purposes of seeking protection under Chapter 11. The bankruptcy court concluded that a retainer was similarly sufficient for Chapter 15 and Section 109(a) purposes and granted recognition.
A recent decision in the Bankruptcy Court for the Northern District of California has called into question the reliance on a retainer to satisfy the property requirements of Section 109(a). In In re Forge Group Power Pty. Ltd., No. 17-30008 (Bankr. N.D. Cal. Mar. 22, 2017), the bankruptcy court, seemingly accepting the Second Circuit's holding that Section 109(a) applied to a Chapter 15 petition, denied recognition of Forge Group Power's Australian liquidation process on the basis that the retainer paid to US-based legal counsel and held in a California bank account was not sufficient property for the purposes of Section 109(a).
Forge Group Power sought recognition of the Australian liquidation process, in part, to obtain the benefit of the automatic stay provisions of the Code with respect to pending litigation against the foreign debtor. Forge Group Power's petition was met with strong resistance from creditors, who challenged that the cases in which a court granted recognition based on a property interest in the form of a retainer, other facts favored recognition (i.e., the foreign debtor had claims or causes of action in the United States, had rights under debt instruments governed by US law, or the existence of US debtholders). Because Forge Group Power's sole property was its retainer in the possession of US legal counsel, the Court determined that the property interest was plainly insufficient to satisfy the Code's requirements. In an oral ruling, the court stated "When a Chapter 15 is initiated because the person in charge of the proceeding in another country delivers a retainer check to a lawyer who is going to be involved in the Chapter 15, that is not sufficient identification of property that I believe Congress had in mind. . . the retainer . . . I don't accept it.") Transcript at 75.
Plainly put, application of Section 109(a) to a Chapter 15 petitioner outside of the Second Circuit is unusual, and concluding that a retainer is not a sufficient property interest is highly unusual. Danner v. US Trustee (In re Danner), 2012 WL 3205242, at *5 (B.A.P. 9th Cir. July 31, 2012) ("Because a security retainer remains the client's property until it is earned and applied to services rendered, it must be held in an attorney's client trust account. Thus, security retainers are routinely held to be property of the estate."); see also In re Inversora Electrica de Buenos Aires S.A., 560 B.R. 650, 655 (Bankr. S.D.N.Y. 2016) (holding that deposits in a New York bank account, an attorney retainer on deposit in New York, and debt instruments containing a New York forum selection clause "whether considered alone or together . . . provide a sufficient basis for jurisdiction and venue in New York); and In re Global Ocean Carriers Ltd., 251 B.R. at 39 (holding that an attorney retainer alone is sufficient to satisfy Section 109(a)). Furthermore, nothing in Section 109(a) sets forth a requirement for how much property a debtor must possess, the nature of that property or how long that property has been in the United States. Forge Group Power has appealed the bankruptcy court's ruling.
Foreign debtors seeking recognition in US courts of their foreign insolvency proceedings should therefore consider whether they satisfy the elements of Section 109(a) before filing a Chapter 15 recognition petition, and should be sure to research and understand whether the jurisdiction will follow the Second Circuit's holding and pre-condition recognition on satisfaction of Section 109(a). Furthermore, if the jurisdiction does impose the requirements of Section 109(a), a prudent debtor should pay careful attention to what is needed to satisfy that jurisdiction's requirements for property.