Is a Foreign Debtor with No Assets in the U.S. Eligible for Chapter 15 Relief?

Chapter 15 of the Bankruptcy Code was enacted in 2005. It adopted, nearly verbatim, the Model Law on Cross-Border Insolvency (the Model Law) promulgated by the United Nations Commission on International Trade Law (UNCITRAL), and replaced the prior procedure for ancillary cases of foreign debtors under former Section 304 of the Bankruptcy Code. See In re ABC Learning Centres Ltd., 728 F.3d 301, 305 (3d Cir. 2013). At the same time, Congress amended 11 U.S.C. ' 103(a) to state, in relevant part, that “this chapter appl[ies] in a case under [C]hapter 15.” This gives rise to an argument that Section 109(a)'s eligibility requirements apply in Chapter 15 cases because Section 109 is part of the “this chapter” to which Section 103(a) refers.

However, interpreting Section 109(a)'s eligibility requirements to apply in Chapter 15 cases causes significant tension with other sections of Chapter 15 itself, as well as the venue statute for Chapter 15 cases, 28 U.S.C. ' 1410, which support an interpretation that a Chapter 15 debtor need not have assets, a place of business or domicile in the United States.

First, Section 1502(1) provides a specific and different definition of “debtor” applicable in Chapter 15 proceedings, stating that “for the purposes of this chapter, the term ' (1) 'debtor' means an entity that is the subject of a foreign proceeding.” 11 U.S.C. ' 1502(1). Section 1502(1) does not define a “debtor” as an entity with assets located in or a domicile in the United States, causing an inference that there is no such requirement.

Second, Section 1528 states that “[a]fter recognition of a foreign main proceeding, a case under another chapter of this title may be commenced only if a debtor has assets in the United States.” This implies that a foreign debtor need not have assets in the United States for commencement of a Chapter 15 ancillary proceeding; otherwise, Section 1528 would be redundant, because a case would not proceed to recognition unless the debtor had assets located in the United States, so the “only if” language would be every case.

Third, and perhaps most fundamentally, 28 U.S.C. ' 1410, the venue statute for Chapter 15 proceedings, seems to mandate an opposite conclusion. It provides: “A case under chapter 15 of title 11 may be commenced in the district court of the United States for the district ' (2) if the debtor does not have a place of business or assets in the United States, in which there is pending against the debtor an action or proceeding in Federal or State court.” 28 U.S.C. ' 1410(2). If a debtor must have assets in the United States to be eligible for relief, there would be no set of circumstances where Section 1410(2) could ever be invoked, since it only applies “if the debtor does not have a place of business or assets in the United States.”

Finally, the Model Law, which Chapter 15 adopts, does not contain any requirement similar to Section 109(a). In re Barnet, 737 F.3d at 250-251. There does not appear to be any legislative history suggesting a desire to depart from the Model Law on this point.

The Second Circuit's Decision in Barnet

In Barnet, the Second Circuit reversed the United States Bankruptcy Court for the Southern District of New York and held that Section 109(a)'s eligibility requirements apply in Chapter 15 cases. The opinion focuses on the plain meaning of Sections 109(a) and 103(a), and rejects arguments that the consideration of the other sections, set forth above, compels a different interpretation. The Second Circuit stated that “statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses legislative purposes.” Id. at 246 (internal citation omitted). The Second Circuit reasoned that because Section 103(a) states that Chapter 1 applies in Chapter 15 cases and that Section 109 is within Chapter 1, Section 109(a) must apply in Chapter 15 cases.

The appellees in Barnet argued that under Chapter 15, a foreign representative seeks recognition of a foreign proceeding rather than a foreign “debtor” seeking relief, and that as a result there is no “debtor” before the court that must meet the requirements of Section 109(a). The Second Circuit rejected this argument, noting that “the presence of a debtor is inextricably intertwined with the very nature of a Chapter 15 proceeding, both in terms of how such proceeding is defined and in terms of the relief that can be granted.” Id. at 248.

Next, the Second Circuit rejected the argument that a Chapter 15 debtor need only meet the requirements of Chapter 15's specific definition of “debtor.” The court reasoned that Section 109 is not a definition, but rather an additional requirement of eligibility; therefore, Section 1502's definition of “debtor” should not “block the application” of Section 109 any more than does the general definition of “debtor” set forth in Section 101(13), which is applicable in cases under Chapters 7, 9, 11, 12 or 13. Id. at 249. Further, the court stated that interpreting Section 1502 to “block” Section 109 “violates the 'most basic interpretive canon[]' requiring us to interpret statutes such that 'no part will be inoperative or superfluous.'” Id. (internal citation omitted). (As will be noted below, this reasoning is somewhat ironic because the Second Circuit's interpretation subjects it to the same criticism, making Section 1410(2) inoperative and superfluous.)

Finally, the Second Circuit addressed contextual arguments. It rejected the argument, described earlier in this article, that the necessary implication of Section 1528 was that a foreign main proceeding could be recognized where the debtor had no assets in the United States because it states that only a subset of recognized foreign main proceedings ' those where the debtor has assets located in the United States ' may result in the filing of a Chapter 11 or 7 case. The Second Circuit was unpersuaded, reasoning that “Section 1528, therefore is more restrictive than Section 109″ and “there is nothing contrary or disharmonious about applying Section 109(a) to Chapter 15 and then further requiring that Section 1528 is met before a case under another chapter of Title 11 may be commenced.” Id. at 250. In addition, the Second Circuit rejected the argument, described earlier in this article, that Section 1410(2) compels a different result because it states that a Chapter 15 case “may be commenced” in a district where litigation is pending “if a debtor does not have a place of business or assets in the United States.” The court called Section 1410(2), the venue statute, “purely procedural,” and stated that “given the unambiguous nature of the substantive and restrictive language used in Sections 103 and 109 of Chapter 15 [sic], to allow the venue statute to control the outcome would be to allow the tail to wag the dog.” The opinion does not grapple with when Section 1410(2) ever could be invoked under the holding of Barnet.

DE Bankruptcy Court's Decision in Bemarmara

Just days after the Second Circuit issued its opinion in Barnet, the Delaware Bankruptcy Court was faced with the same issue in In re Bemarmara Consulting a.s. There, the foreign representative of a Czech Republic insolvency proceeding sought recognition of the foreign proceeding in the Bankruptcy Court for the District of Delaware, the district in which litigation was pending against the debtor. After directing the parties to submit supplemental briefing addressing the Barnet decision, the Delaware Bankruptcy Court issued an oral ruling disagreeing with the Second Circuit's decision.

The court reasoned that Section 109(a) relates to the eligibility of “debtors” under the Bankruptcy Code, but in a Chapter 15 case, “it is the Foreign Representative who is petitioning the Court, not the Debtor in the foreign proceeding.” In re Bemarmara Consulting a.s., Tr. at 9. The court further relied on Section 1502(1)'s specific definition of “debtor,” articulating the argument discussed above. In addition, the court noted, “Commentators have reflected on the possibility that it was a scrivener's error and that the intent was that 109(a) not apply,” id., an apparent reference to the Johnston article cited below.

Impact of Barnet and Bemarmara

As a result of Barnet and Bemarmara, there is currently a split of authority regarding the application of Section 109(a)'s eligibility requirements to Chapter 15 debtors. Perhaps highlighting the tension among the various statutory provisions, as described above, each opinion contains some persuasive points. Certainly looking at Sections 109(a) and 103 in isolation, the Second Circuit's plain meaning analysis seems to have appeal. However, its holding is, as the Delaware Bankruptcy Court pointed out, “contrary to Congress's intent.” Susan Power Johnston: Conflict Between Bankruptcy Code ” 109(a) and 1515: Do U.S. Bankruptcy Courts Have Jurisdiction Over Chapter 15 Cases If the Foreign Debtor Has No Assets or Presence in the U.S.?, 17 J. Bankr. L. & Prac. 5, art. 6 (Aug. 2008), at 678.

Moreover, the Second Circuit supports its holding with the canon of statutory construction that “statutory enactments should ' be read so as 'to give effect, if possible to every clause and word of a statute'” and that statutes should be interpreted “such that 'no part will be inoperative or superfluous'” In re Barnet, 737 F.3d at 247 (internal quotation omitted), but its own interpretation renders other statutes “inoperative and superfluous.” Its answer that the venue statute is “purely procedural” rings hollow, not only because the statutory construction canon has no “purely procedural statute” exception, but also because that might not be a fair characterization of a statute that expressly authorizes a filing: “a [C]hapter 15 case may be commenced.”

One might wonder: Is this much ado about nothing? Do entities without assets located in the United States need Chapter 15 relief? The fact that two opinions were issued in rapid succession demonstrates that foreign representatives often need such relief. Bemarmara likely presents the most frequent scenario: Litigation was pending in the United States so application of Section 362's automatic stay was desirable, and the foreign representative contended that it had an intangible asset located in the United States, but the other party to the litigation disagreed. (In an alternative holding, the Bemarmara court agreed with the foreign representative that the intangible asset was located in the United States.)

Other situations include those in which the foreign representative needs discovery to determine whether the foreign debtor fraudulently conveyed or concealed assets in the United States, as well as those in which the foreign representative needs injunctive relief against persons or entities located in the United States regarding non-U.S. assets. See Johnston, 17 J. Bankr. L. & Prac. 5, at 696.

As a practical matter, this split may be an issue that affects only a small minority of foreign debtors. After all, the case law under Section 109(a) (developed in Chapter 11 cases) does not place any requirement on the quantity of assets that must be located in the United States in order to obtain eligibility. See, e.g., In re Global Ocean Carriers Ltd., 251 B.R. 31, 39 (Bankr. D. Del. 2000). Some commentators have suggested that foreign representatives seeking recognition of foreign proceedings in the future may seek to establish assets in the United States prior to filing. See, e.g., Debevoise & Plimpton LLP, Client Update: Second Circuit Limits Availability of Chapter 15 (Dec. 20, 2013), bit.ly/1kzO44G; Steven Wilamowsky & Erin Kate Mautner, Legal Alert: Second Circuit Reverses New York Bankruptcy Court; Determines That Section 109(a) Eligibility Requirements Extend to Chapter 15 Debtors (Dec. 16, 2013), http://bit.ly/1lZLfIs.

It is unclear whether foreign representatives and foreign debtors that follow this advice and are found to have “manufactured” eligibility prior to filing will be met with resistance. While no opinion to date has examined this issue under Section 109, at least one opinion has deemed the moving of assets shortly before filing a Chapter 15 case to be relevant to a determination of the location of a company's center of main interest. See In re Fairfield Sentry Ltd., 714 F.3d 127, 139 (2d Cir. 2013) (noting that the court may consider such factors to determine whether a Chapter 15 debtor's center of main interests was manipulated in bad faith).

Until the case law becomes more settled, foreign representatives will need to consider whether the foreign debtor has assets in the United States in determining whether relief under Chapter 15 will be available to it.

Russell C. Silberglied is a director and L. Katherine Good is an associate at Richards, Layton & Finger, P.A. in Wilmington, DE. Silberglied is a member of this newsletter's Board of Editors. The authors can be reached at [email protected] and [email protected], respectively. The views expressed in this article are those of the authors and not necessarily of RL&F or its clients.

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Does Section 109(a)'s requirement that “only a person that resides or has a domicile, a place of business, or property in the United States ' may be a debtor under this title” apply to foreign debtors in Chapter 15 proceedings? The Second Circuit Court of Appeals and the United States Bankruptcy Court for the District of Delaware addressed this novel issue in December and came to opposite conclusions. In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), the Second Circuit held that Section 109(a)'s eligibility requirements apply in Chapter 15 proceedings, and therefore vacated an order of recognition. Less than one week later, the Delaware Bankruptcy Court in In re Bemarmara Consulting a.s., Case No. 13-13037 (KG) (Bankr. D. Del. Dec. 17, 2013) (Transcript; “Tr.”) issued an oral ruling, holding that Section 109(a)'s requirements do not apply in Chapter 15 proceedings, and granting recognition to a debtor that an objector argued had no assets in the United States.

This article first sets forth the statutory provisions that led to the differing results in Barnet and Bemarmara and then explores the reasoning of the two opinions. It concludes with practical observations about the desirability and availability of Chapter 15 relief for companies without significant assets located in the United States.

Relevant Statutory Provisions

Chapter 15 of the Bankruptcy Code was enacted in 2005. It adopted, nearly verbatim, the Model Law on Cross-Border Insolvency (the Model Law) promulgated by the United Nations Commission on International Trade Law (UNCITRAL), and replaced the prior procedure for ancillary cases of foreign debtors under former Section 304 of the Bankruptcy Code. See In re ABC Learning Centres Ltd., 728 F.3d 301, 305 (3d Cir. 2013). At the same time, Congress amended 11 U.S.C. ' 103(a) to state, in relevant part, that “this chapter appl[ies] in a case under [C]hapter 15.” This gives rise to an argument that Section 109(a)'s eligibility requirements apply in Chapter 15 cases because Section 109 is part of the “this chapter” to which Section 103(a) refers.

However, interpreting Section 109(a)'s eligibility requirements to apply in Chapter 15 cases causes significant tension with other sections of Chapter 15 itself, as well as the venue statute for Chapter 15 cases, 28 U.S.C. ' 1410, which support an interpretation that a Chapter 15 debtor need not have assets, a place of business or domicile in the United States.

First, Section 1502(1) provides a specific and different definition of “debtor” applicable in Chapter 15 proceedings, stating that “for the purposes of this chapter, the term ' (1) 'debtor' means an entity that is the subject of a foreign proceeding.” 11 U.S.C. ' 1502(1). Section 1502(1) does not define a “debtor” as an entity with assets located in or a domicile in the United States, causing an inference that there is no such requirement.

Second, Section 1528 states that “[a]fter recognition of a foreign main proceeding, a case under another chapter of this title may be commenced only if a debtor has assets in the United States.” This implies that a foreign debtor need not have assets in the United States for commencement of a Chapter 15 ancillary proceeding; otherwise, Section 1528 would be redundant, because a case would not proceed to recognition unless the debtor had assets located in the United States, so the “only if” language would be every case.

Third, and perhaps most fundamentally, 28 U.S.C. ' 1410, the venue statute for Chapter 15 proceedings, seems to mandate an opposite conclusion. It provides: “A case under chapter 15 of title 11 may be commenced in the district court of the United States for the district ' (2) if the debtor does not have a place of business or assets in the United States, in which there is pending against the debtor an action or proceeding in Federal or State court.” 28 U.S.C. ' 1410(2). If a debtor must have assets in the United States to be eligible for relief, there would be no set of circumstances where Section 1410(2) could ever be invoked, since it only applies “if the debtor does not have a place of business or assets in the United States.”

Finally, the Model Law, which Chapter 15 adopts, does not contain any requirement similar to Section 109(a). In re Barnet, 737 F.3d at 250-251. There does not appear to be any legislative history suggesting a desire to depart from the Model Law on this point.

The Second Circuit's Decision in Barnet

In Barnet, the Second Circuit reversed the United States Bankruptcy Court for the Southern District of New York and held that Section 109(a)'s eligibility requirements apply in Chapter 15 cases. The opinion focuses on the plain meaning of Sections 109(a) and 103(a), and rejects arguments that the consideration of the other sections, set forth above, compels a different interpretation. The Second Circuit stated that “statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses legislative purposes.” Id. at 246 (internal citation omitted). The Second Circuit reasoned that because Section 103(a) states that Chapter 1 applies in Chapter 15 cases and that Section 109 is within Chapter 1, Section 109(a) must apply in Chapter 15 cases.

The appellees in Barnet argued that under Chapter 15, a foreign representative seeks recognition of a foreign proceeding rather than a foreign “debtor” seeking relief, and that as a result there is no “debtor” before the court that must meet the requirements of Section 109(a). The Second Circuit rejected this argument, noting that “the presence of a debtor is inextricably intertwined with the very nature of a Chapter 15 proceeding, both in terms of how such proceeding is defined and in terms of the relief that can be granted.” Id. at 248.

Next, the Second Circuit rejected the argument that a Chapter 15 debtor need only meet the requirements of Chapter 15's specific definition of “debtor.” The court reasoned that Section 109 is not a definition, but rather an additional requirement of eligibility; therefore, Section 1502's definition of “debtor” should not “block the application” of Section 109 any more than does the general definition of “debtor” set forth in Section 101(13), which is applicable in cases under Chapters 7, 9, 11, 12 or 13. Id. at 249. Further, the court stated that interpreting Section 1502 to “block” Section 109 “violates the 'most basic interpretive canon[]' requiring us to interpret statutes such that 'no part will be inoperative or superfluous.'” Id. (internal citation omitted). (As will be noted below, this reasoning is somewhat ironic because the Second Circuit's interpretation subjects it to the same criticism, making Section 1410(2) inoperative and superfluous.)

Finally, the Second Circuit addressed contextual arguments. It rejected the argument, described earlier in this article, that the necessary implication of Section 1528 was that a foreign main proceeding could be recognized where the debtor had no assets in the United States because it states that only a subset of recognized foreign main proceedings ' those where the debtor has assets located in the United States ' may result in the filing of a Chapter 11 or 7 case. The Second Circuit was unpersuaded, reasoning that “Section 1528, therefore is more restrictive than Section 109″ and “there is nothing contrary or disharmonious about applying Section 109(a) to Chapter 15 and then further requiring that Section 1528 is met before a case under another chapter of Title 11 may be commenced.” Id. at 250. In addition, the Second Circuit rejected the argument, described earlier in this article, that Section 1410(2) compels a different result because it states that a Chapter 15 case “may be commenced” in a district where litigation is pending “if a debtor does not have a place of business or assets in the United States.” The court called Section 1410(2), the venue statute, “purely procedural,” and stated that “given the unambiguous nature of the substantive and restrictive language used in Sections 103 and 109 of Chapter 15 [sic], to allow the venue statute to control the outcome would be to allow the tail to wag the dog.” The opinion does not grapple with when Section 1410(2) ever could be invoked under the holding of Barnet.

DE Bankruptcy Court's Decision in Bemarmara

Just days after the Second Circuit issued its opinion in Barnet, the Delaware Bankruptcy Court was faced with the same issue in In re Bemarmara Consulting a.s. There, the foreign representative of a Czech Republic insolvency proceeding sought recognition of the foreign proceeding in the Bankruptcy Court for the District of Delaware, the district in which litigation was pending against the debtor. After directing the parties to submit supplemental briefing addressing the Barnet decision, the Delaware Bankruptcy Court issued an oral ruling disagreeing with the Second Circuit's decision.

The court reasoned that Section 109(a) relates to the eligibility of “debtors” under the Bankruptcy Code, but in a Chapter 15 case, “it is the Foreign Representative who is petitioning the Court, not the Debtor in the foreign proceeding.” In re Bemarmara Consulting a.s., Tr. at 9. The court further relied on Section 1502(1)'s specific definition of “debtor,” articulating the argument discussed above. In addition, the court noted, “Commentators have reflected on the possibility that it was a scrivener's error and that the intent was that 109(a) not apply,” id., an apparent reference to the Johnston article cited below.

Impact of Barnet and Bemarmara

As a result of Barnet and Bemarmara, there is currently a split of authority regarding the application of Section 109(a)'s eligibility requirements to Chapter 15 debtors. Perhaps highlighting the tension among the various statutory provisions, as described above, each opinion contains some persuasive points. Certainly looking at Sections 109(a) and 103 in isolation, the Second Circuit's plain meaning analysis seems to have appeal. However, its holding is, as the Delaware Bankruptcy Court pointed out, “contrary to Congress's intent.” Susan Power Johnston: Conflict Between Bankruptcy Code ” 109(a) and 1515: Do U.S. Bankruptcy Courts Have Jurisdiction Over Chapter 15 Cases If the Foreign Debtor Has No Assets or Presence in the U.S.?, 17 J. Bankr. L. & Prac. 5, art. 6 (Aug. 2008), at 678.

Moreover, the Second Circuit supports its holding with the canon of statutory construction that “statutory enactments should ' be read so as 'to give effect, if possible to every clause and word of a statute'” and that statutes should be interpreted “such that 'no part will be inoperative or superfluous'” In re Barnet, 737 F.3d at 247 (internal quotation omitted), but its own interpretation renders other statutes “inoperative and superfluous.” Its answer that the venue statute is “purely procedural” rings hollow, not only because the statutory construction canon has no “purely procedural statute” exception, but also because that might not be a fair characterization of a statute that expressly authorizes a filing: “a [C]hapter 15 case may be commenced.”

One might wonder: Is this much ado about nothing? Do entities without assets located in the United States need Chapter 15 relief? The fact that two opinions were issued in rapid succession demonstrates that foreign representatives often need such relief. Bemarmara likely presents the most frequent scenario: Litigation was pending in the United States so application of Section 362's automatic stay was desirable, and the foreign representative contended that it had an intangible asset located in the United States, but the other party to the litigation disagreed. (In an alternative holding, the Bemarmara court agreed with the foreign representative that the intangible asset was located in the United States.)

Other situations include those in which the foreign representative needs discovery to determine whether the foreign debtor fraudulently conveyed or concealed assets in the United States, as well as those in which the foreign representative needs injunctive relief against persons or entities located in the United States regarding non-U.S. assets. See Johnston, 17 J. Bankr. L. & Prac. 5, at 696.

As a practical matter, this split may be an issue that affects only a small minority of foreign debtors. After all, the case law under Section 109(a) (developed in Chapter 11 cases) does not place any requirement on the quantity of assets that must be located in the United States in order to obtain eligibility. See, e.g., In re Global Ocean Carriers Ltd., 251 B.R. 31, 39 (Bankr. D. Del. 2000). Some commentators have suggested that foreign representatives seeking recognition of foreign proceedings in the future may seek to establish assets in the United States prior to filing. See, e.g., Debevoise & Plimpton LLP, Client Update: Second Circuit Limits Availability of Chapter 15 (Dec. 20, 2013), bit.ly/1kzO44G; Steven Wilamowsky & Erin Kate Mautner, Legal Alert: Second Circuit Reverses New York Bankruptcy Court; Determines That Section 109(a) Eligibility Requirements Extend to Chapter 15 Debtors (Dec. 16, 2013), http://bit.ly/1lZLfIs.

It is unclear whether foreign representatives and foreign debtors that follow this advice and are found to have “manufactured” eligibility prior to filing will be met with resistance. While no opinion to date has examined this issue under Section 109, at least one opinion has deemed the moving of assets shortly before filing a Chapter 15 case to be relevant to a determination of the location of a company's center of main interest. See In re Fairfield Sentry Ltd., 714 F.3d 127, 139 (2d Cir. 2013) (noting that the court may consider such factors to determine whether a Chapter 15 debtor's center of main interests was manipulated in bad faith).

Until the case law becomes more settled, foreign representatives will need to consider whether the foreign debtor has assets in the United States in determining whether relief under Chapter 15 will be available to it.

Russell C. Silberglied is a director and L. Katherine Good is an associate at Richards, Layton & Finger, P.A. in Wilmington, DE. Silberglied is a member of this newsletter's Board of Editors. The authors can be reached at [email protected] and [email protected], respectively. The views expressed in this article are those of the authors and not necessarily of RL&F or its clients.

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