In December 2013, the U.S. Court of Appeals for the Second Circuit held as a matter of first impression in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), that section 109(a) of the Bankruptcy Code, which requires a debtor “under this title” to have a domicile, a place of business, or property in the U.S., applies in cases under chapter 15 of the Bankruptcy Code. The Second Circuit accordingly vacated a bankruptcy court order granting recognition under chapter 15 to a debtor’s Australian liquidation proceeding, concluding that the bankruptcy court erred in ruling that section 109(a) does not apply in chapter 15 cases and that it improperly recognized the debtor’s Australian liquidation proceeding in the absence of any evidence that the debtor had a domicile, a place of business, or property in the U.S.

However, the Second Circuit did not provide any guidance as to how extensive a foreign debtor’s property holdings in the U.S. must be to qualify for chapter 15 relief. The Barnet bankruptcy court provided one answer to that question in 2014 on remand from the Second Circuit’s ruling. In In re Octaviar Administration Pty Ltd., 511 B.R. 361 (Bankr. S.D.N.Y. 2014), the bankruptcy court found that, consistent with case law analyzing the scope of section 109 for the purpose of determining who is eligible to commence a case under chapter 11, the requirement of property in the U.S. is satisfied when the debtor has causes of action governed under U.S. law against parties in the U.S. as well as an undrawn attorney retainer maintained there.

More recently, the bankruptcy court in In re Berau Capital Resources Pte Ltd, 540 B.R. 80 (Bankr. S.D.N.Y. 2015), had an opportunity to consider what qualifies as U.S. property for the purposes of chapter 15 eligibility and venue. In Berau, the court ruled that a debtor which had been granted a Singapore debt moratorium was eligible to file a chapter 15 case in the Southern District of New York, even though the debtor did not have a place of business in the U.S., because: (i) the debtor had deposited a retainer with its New York City attorneys; (ii) the debtor had $450 million in U.S. dollar-denominated debt issued under an indenture governed by New York law with a New York choice of forum clause; (iii) the debtor had appointed an authorized agent for the service of process in New York; and (iv) the debt was in default when the debtor’s foreign representative filed the chapter 15 case.    

Who May Be a Debtor Under Chapter 15?

Section 109(a) of the Bankruptcy Code provides that, “[n]otwithstanding any other provision of this section, 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].” Section 101(13) defines a “debtor” as a “person [which includes a partnership or corporation] or municipality concerning which a case under [the Bankruptcy Code] has been commenced.” Section 103(a) provides that “this chapter”—i.e., chapter 1, including sections 101(13) and 109(a)—“appl[ies] in a case under chapter 15.”

However, chapter 15, unlike chapters 7, 9, 11, 12, and 13, contains its own definition of “debtor.” Section 1502(1) of the Bankruptcy Code defines “debtor,” “[f]or the purposes of [chapter 15],” as “an entity that is the subject of a foreign [bankruptcy or insolvency] proceeding.” 

Venue for a Chapter 15 Case

Twenty-eight U.S.C. § 1410 provides that a chapter 15 case may be filed in a district in which the debtor has “its principal place of business or principal assets in the United States” or, absent a place of business or assets in the U.S., in a district “in which there is pending against the debtor an action or proceeding” in a federal or state court. If neither of those requirements is satisfied, the chapter 15 case may be filed in a district “in which venue will be consistent with the interests of justice and convenience of the parties, having regard to the relief sought by the foreign representative.”

Barnet

In Barnet, the Second Circuit ruled that section 109(a) applies in a chapter 15 case on the basis of a “straightforward” interpretation of the statute. According to the court, section 103(a) expressly provides that chapter 1—of which section 109(a) is a part—applies in a case under chapter 15. “Section 109, of course,” the Second Circuit wrote, “is within Chapter 1 of Title 11 and so, by the plain terms of the statute, it applies ‘in a case under chapter 15.’ ”

The court emphasized that “[s]ection 109(a) . . . creates a requirement that must be met by any debtor.” Because the Australian company’s foreign representatives had made no attempt to establish that the company had a domicile, a place of business, or property in the U.S., the Second Circuit held that the bankruptcy court should not have granted recognition to the company’s Australian liquidation proceeding.

The Second Circuit flatly rejected the foreign representatives’ argument that, even if the Australian debtor were required to qualify as a debtor under the Bankruptcy Code, it need satisfy only the chapter 15-specific definition of “debtor” in section 1502(1), rather than the section 109 requirements. “This argument also fails,” the court wrote, “as we cannot see how such a preclusive reading of Section 1502 is reconcilable with the explicit instruction in Section 103(a) to apply Chapter 1 to Chapter 15.”

The court acknowledged that the strongest support for the foreign representatives’ arguments lies in 28 U.S.C. § 1410, which provides a U.S. venue for chapter 15 cases even when “the debtor does not have a place of business or assets in the United States.” However, the Second Circuit explained that this venue statute “is purely procedural” and that, “[g]iven the unambiguous nature of the substantive and restrictive language used in Sections 103 and 109 . . . , to allow the venue statute to control the outcome would be to allow the tail to wag the dog

The Second Circuit accordingly vacated the recognition order and remanded the case to the bankruptcy court for further proceedings consistent with its ruling.

On remand, the bankruptcy court ruled that, because the Australian debtor had property in the U.S. consisting of claims or causes of action against various U.S. entities and an undrawn retainer in the possession of the foreign representatives’ U.S. counsel, the debtor was eligible for relief under chapter 15. In so ruling, the court concluded that the debtor’s causes of action should be deemed to be located in the U.S. because the debtor’s foreign representatives “have asserted claims under U.S. law that involve defendants located in the United States and include allegations that certain funds were wrongfully transferred by . . . U.S. entities to the United States.” “As a general matter,” the court wrote, “where a court has both subject matter and personal jurisdiction, the claim subject to the litigation is present in that court.”

Noting that Barnet “continues to be a frequent subject of discussion and criticism at international bankruptcy conferences and in scholarly writing” (see generally Daniel M. Glosband and Jay Lawrence Westbrook, Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?, 24 Int’l Insolv. Rev. 28 (2015)), the bankruptcy court in Berau revisited what constitutes U.S. property for the purpose of chapter 15 eligibility.

Berau

Berau Capital Resources Pte Ltd. (“BCR”), a unit of Indonesian coal mining concern PT Berau Coal Energy Tbk, was granted a debt moratorium in July 2015 by a Singapore court to implement a restructuring agreement. BCR is headquartered in Singapore. It does not have a place of business in the U.S.

BCR is an obligor on approximately $450 million of U.S. dollar-denominated notes. The note indenture is expressly governed by New York law and contains a New York choice of forum clause. Under the indenture, BCR appointed an authorized agent for the service of process in New York City. The company also retained New York lawyers, with whom BCR deposited a retainer.

After BCR defaulted on the notes and the Singapore court granted a debt moratorium, BCR’s foreign representative filed a chapter 15 petition for BCR in the Southern District of New York.

The bankruptcy court ruled that, consistent with the rulings in Barnet, the existence of an attorney retainer in the U.S. provides a sufficient basis for chapter 15 eligibility. However, the court also held that the note indenture “is property of [BCR] in the United States, thereby satisfying the section 109(a) eligibility requirement.”

The bankruptcy court explained that a debtor’s contract rights are intangible property and that section 1502(8) of the Bankruptcy Code expressly provides that the location of intangible property is to be determined under applicable nonbankruptcy law. Because the notes issued by BCR “are to be discharged in New York City,” the court concluded, “[t]he attributes of the indenture would be sufficient to establish the situs of the property in New York.”

In addition, the court noted, the New York State Legislature has adopted several laws clearly making New York a situs of the property, including: (i) sections 5-1401 and 5-1402 of the N.Y. General Obligations Law, which, with certain exceptions, make enforceable New York choice of law and choice of forum provisions in contracts; and (ii) section 327(b) of the N.Y. Civil Practice Law and Rules, which provides that a court may not stay or dismiss an action on the grounds of inconvenient forum where the action relates to a contract with an enforceable choice of law or forum clause. These provisions, the court wrote, are “sufficient to fix the situs of the contracts in New York, whether [or not] the contract has a situs elsewhere for other purposes.”

Outlook

Because U.S. dollar-denominated debt subject to New York governing law and a New York forum selection clause is quite common in international finance, the rulings in Barnet and Berau offer relatively easy access to chapter 15 for foreign debtors that otherwise qualify for relief under chapter 15. However, this low threshold is arguably consistent with the goals of chapter 15 in, among other things, providing an effective vehicle for foreign debtors to collect and preserve assets outside the jurisdiction where their primary insolvency proceedings are pending. 

It bears noting that Barnet does not represent the only view on whether U.S. assets are required before a foreign proceeding can be recognized under chapter 15, although the Second Circuit is the only circuit court to have addressed the issue to date. A Delaware bankruptcy court (which is in the Third Circuit) issued a bench ruling to the contrary in In re Bemarmara Consulting A.S., Case No. 13-13037(KG) (Bankr. D. Del. Dec. 17, 2013). In that case, the court ruled that section 109(a) does not apply in chapter 15 because it is the foreign representative, rather than the debtor in the foreign proceeding, who petitions the court. Moreover, the court wrote, “there is nothing in [the] definition [of “debtor”] in Section 1502 which reflects upon a requirement that [a] Debtor have assets.” Transcript of Hearing at 9, l.11‒18, In re Bemarmara Consulting A.S., Case No. 13-13037(KG) (Bankr. D. Del. Dec. 17, 2013) [Document No. 39]. “A Debtor,” the court noted, “is an entity that is involved in a foreign proceeding.”

Finally, the bankruptcy court in Berau did not address whether other kinds of contract rights, such as rights under patents, trademarks, or other intellectual property, might also suffice as a basis for chapter 15 eligibility.

Additional discussion of the rulings in Barnet and Octaviar can be found in the January/February 2014 and September/October 2014 editions of theBusiness Restructuring Review, both of which are accessible at http://www.jonesday.com/newsknowledge/Publications.aspx.