In Re: Katherine Elizabeth Barnet, No. 13-612 (2d Cir. Dec. 11, 2013) [click for opinion]

The court-appointed liquidators of an insolvent Australian debtor, Octaviar Administration Pty Ltd., filed a petition in the United States Bankruptcy Court for the Southern District of New York, asking that the debtor’s Australian insolvency proceeding be recognized as a foreign proceeding under Chapter 15 of the Bankruptcy Code. 

Under section 109(a) of the Bankruptcy Code, a bankruptcy court may not recognize a foreign insolvency proceeding under the cross-border provisions of Chapter 15 unless the debtor has a domicile, residence, business, or property in the United States.  The liquidators admitted that Octaviar had no domicile, residence, business, or property in the United States, except for unspecified potential claims against U.S. citizens. They also admitted that the purpose of the petition was to take discovery from Octaviar's affiliates, as well as their officers and directors, in connection with the proceeding in Australia.  The Bankruptcy Court nonetheless allowed the Chapter 15 filing, holding that foreign debtors could file for Chapter 15 bankruptcy relief for the sole purpose of taking discovery in aid of the foreign proceedings.  The court did not think the debtor-eligibility requirements of Bankruptcy Code section 109(a) applied to Chapter 15 bankruptcy cases.

The Second Circuit reversed and held that section 109(a)’s eligibility requirements are applicable to a foreign entity seeking relief under Chapter 15.  When Congress enacted Chapter 15 in 2005, the court noted, it applied to Chapter 15 all the provisions in Chapter 1 of the Bankruptcy Code, including section 109(a).  Moreover, the plain language of the statute showed that section 109(a) applies to Chapter 15 proceedings. Accordingly “[b]ecause Foreign Representatives made no attempt to establish that [Octaviar] had a domicile, place of business or property in the United States, recognition should not have been granted.”

The Second Circuit panel rejected various arguments offered by the liquidators, including that (a) they were not required to comply with 109(a) because Octaviar was not technically a debtor under the Bankruptcy Code, but rather a debtor under Australian law; (b) even if Octaviar had been required to qualify as a debtor under the Bankruptcy Code, it would only have been required to meet the definition of a “foreign debtor” under Chapter 15 (“an entity that is the subject of a foreign proceeding”) rather than the eligibility requirements of section 109(a); and (c) the “context and purpose” of Chapter 15, which is based on the UNCITRAL Model Law on Cross-Border Insolvency, precluded the application of section 109(a)’s eligibility requirements.  In considering the last argument, the court noted that 28 U.S.C. § 1782(a) provides for discovery in aid of foreign proceedings without any requirement akin to section 109(a), and that Congress may have intended to limit the relief provided by Chapter 15 because it knew that additional relief was already available outside of Chapter 15.

The practical import of this ruling is that foreign debtors cannot use Chapter 15 without having the same presence in the United States (“residence, domicile, business or property”) required by section 109(a) for all other bankruptcy filings.