In December 2013, the Second Circuit Court of Appeals 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 an order granting recognition of an Australian liquidation proceeding of a debtor that did not have a domicile, a place of business, or property in the U.S.
The Second Circuit, however, did not provide any guidance as to how extensive a foreign debtor’s U.S. property must be to qualify for chapter 15 relief. The second time around, the same debtor gave its U.S. counsel a retainer before its chapter 15 filing. 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, an undrawn retainer maintained in the U.S. satisfied the requirement for the debtor to have property located in the U.S. In re Octaviar Admin. Pty Ltd., 511 B.R. 370 (Bankr. S.D.N.Y. 2014).
Although a minimum level of property in the U.S. is necessary for a foreign debtor that does not have a place of business in the U.S., is it sufficient to justify a chapter 15 filing? That was the issue addressed by the Bankruptcy Court for the Northern District of California in In re Forge Group Power Pty. Ltd., No. 17-30008 (Bankr. N.D. Cal. Mar. 22, 2017). Certain Australian-based creditors argued that the other cases in which courts granted recognition based upon minimal property in the U.S. had additional facts (which they claimed were absent in Forge Group Power) that supported recognition — pending claims or causes of action in the U.S., rights (as borrower) under debt documents governed by U.S. law, or the existence of U.S. debtholders. On March 22, 2017, the bankruptcy court entered an order denying recognition of Forge Group Power’s Australian liquidation proceeding on the grounds that the undrawn legal retainer paid to U.S. counsel and held in a California-based bank account was insufficient property to satisfy section 109(a).
Why did Forge Group Power even bother to seek chapter 15 recognition if it does not have property in the U.S.? The apparent impetus for the request was to obtain the benefit of the automatic stay with respect to litigation that was pending against the foreign debtor in Texas. In at least one case, a court has held that a foreign company seeking a stay of U.S. litigation as a result of a pending foreign proceeding must, under section 1509(c) of the Bankruptcy Code, first obtain chapter 15 recognition of that foreign proceeding. See, e.g., United States v. J.A. Jones Const. Group LLC, 333 B.R. 637, 639 (Bankr. E.D.N.Y. 2005). In J.A. Jones Const. Group, though, the court did give the foreign representative 60 days to file a chapter 15 petition, but also questioned why a creditor might even pursue the foreign company, noting that “as a practical matter, a plaintiff or other creditor with little prospect of recovery has little incentive to pursue a defunct defendant foreign corporation.”
The bankruptcy court’s decision in Forge Group Power is now on appeal, but it bears watching as it may raise the bar for foreign representatives seeking access to chapter 15. In a situation in which a foreign company has no real assets in the U.S. and no other facts warranting U.S. involvement, the Forge Group Power holding suggests that the company might find itself without standing to seek an injunction in the U.S. against litigation that could disrupt its foreign proceeding.