Before we offend our fellow law practitioners outside of the United States, we want to emphasize that this blog entry is not about what is “better” – chapter 11 or other bankruptcy laws, U.S. courts or other courts, Coke or Guaraná. Like soda, local law tends to match local tastes. So in most cases, a business is best off seeking the protection of its home courts when considering an in-court restructuring. Unique circumstances, however, may cause a business to consider other restructuring options, and it may be helpful to know that chapter 11 provides a viable forum for businesses incorporated outside of and (surprisingly) with little or no business activities in the U.S. In this installment of Breaking the Code, we cover the section of the Bankruptcy Code that makes coming to America possible: section 109(a).
Section 109(a) sets forth the basic requirements for commencing a case under the Bankruptcy Code:
(a) Notwithstanding 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 this title.
Thus, two basic requirements apply to all cases under the Bankruptcy Code. First, the debtor must be a municipality (for chapter 9 cases) or a “person” (for all other cases). Section 101(41) defines a “person” as an individual, partnership, or corporation, but not a governmental unit (with some exceptions). Second, the debtor must either be incorporated, have a business, or some property in the U.S.
By definition, a foreign corporation is not incorporated in the U.S. It may have subsidiaries incorporated in the U.S., but this alone will not make the foreign corporation eligible to be a debtor. Each entity seeking the protection of the bankruptcy court will need to satisfy the requirements of section 109(a). So if circumstances demand that the foreign corporation obtain relief under the Bankruptcy Code (e.g., if the debt that needs to be restructured is issued or guaranteed by a foreign entity), eligibility will depend on having either a place of business or property in the U.S.
In keeping with the in rem nature of bankruptcy law in the U.S., the easiest and most common way to gain entrée to the U.S. bankruptcy process is to have some property in the U.S. This was true even under the laws that preceded the current Bankruptcy Code (the Bankruptcy Act of 1978). Section 2(a)(1) of the Bankruptcy Act of 1898 authorized U.S. courts to oversee the bankruptcies of persons who “do not have their principal place of business, reside, or have their domicile within the United States, but have property within [the courts’] jurisdiction.” One court has surmised that this willingness to hear the bankruptcy cases of foreign debtors “possibly had its origins in times when bankruptcies were an involuntary remedy only. It is obvious why creditors might wish to seize American property of a foreign debtor, to obtain some satisfaction on what they are owed.”
How much property is sufficient? Section 109(a) is silent on that point. At least one court, however, has held that even a “dollar, a dime or a peppercorn” may suffice.
The most common way to satisfy the property requirement is to have a bank account in the U.S., or to pay a U.S. law firm a retainer on behalf of the debtor and its affiliates. In Global Ocean Carriers, for example, a group of affiliated shipping companies qualified to be debtors under chapter 11 on the grounds that they had “funds in various bank accounts.” One of these accounts was even “opened shortly before the bankruptcy filing.” The amount in these accounts was approximately $100,000 – a relatively small amount for a company with more than $100 million in debt. Nevertheless, the court considered the amount “not relevant” because “the bank accounts constitute property in the United States for purposes of eligibility under section 109 of the Bankruptcy Code, regardless of how much money was actually in them on the petition date.”
The debtors in Global Ocean Carriers faced another hurdle: the two bank accounts in the U.S. were both opened in the name of only one of the debtors, Global Ocean Carriers Ltd. (“Global Ocean”). The other debtors argued that they held claims to the funds in Global Ocean’s accounts, and that these claims constituted sufficient property in the U.S. The court, however, was more persuaded by the fact that a $400,000 retainer had been paid by the debtors to their bankruptcy counsel in the U.S. and that the retainer was still held in escrow. “The retainers were paid on behalf of all the Debtors and, therefore, all the Debtors have an interest in those funds. It is not relevant who paid the retainer, so long as the retainer is meant to cover the fees of the attorneys for all the Debtors, as it clearly was in these cases.”
While it is relatively easy for a foreign enterprise to qualify as a debtor under section 109(a), the debtor may still face several challenges to its case after it begins, any one of which could result in the case being dismissed. These will be summarized in our next entry on foreign enterprises as debtors.