The Domesticity Barrier to Recognition of a Foreign Proceeding Under Chapter 15

Therefore, in these circuits, as well as any other bankruptcy court that follows this line of cases, foreign representatives seeking recognition of a foreign proceeding under Chapter 15 must also satisfy Section 109(a) by demonstrating that the debtor has a residence, domicile, place of business or assets in the United States.

The seminal decision, which imposed the requirements of Section 109(a) into the recognition process, was decided in 2013 by the U.S. Court of Appeals for the Second Circuit. In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), the Second Circuit held that Section 109(a) of the Bankruptcy Code applies to cases brought under Chapter 15, meaning that a foreign representative cannot seek recognition or any other relief under Chapter 15 if the foreign debtor does not have a domicile, residence, place of business or property in the U.S. See, 737 F.3d 238 (2d Cir. 2013).

The Second Circuit reasoned that Section 103 of the Bankruptcy Code makes all of Chapter 1 applicable to Chapter 15 and Section 109(a) “creates a requirement that must be met by any debtor.” See, id. at 247. The Second Circuit also declined to accept any distinction between a foreign representative and a debtor in seeking recognition, noting that “[i]t stretches credulity” to argue that references to a foreign representative are not also references to foreign debtor. Id. at 248. Earlier this year, Judge Phyllis Hamilton of the United States District Court for the Northern District of California was faced with the question on appeal of whether the Domesticity requirements under Section 109(a) applied in Chapter 15 and, in the absence of controlling Ninth Circuit authority, adopted the reasoning of In re Barnet. See, In re Forge Grp. Power Pty Ltd., No. 17-CV-02045-PJH, 2018 WL 827913 (N.D. Cal. Feb. 12, 2018).

In contrast, shortly after the In re Barnet decision was issued, Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware expressly rejected the Second Circuit's reasoning in In re Barnet and concluded that Section 109(a) is not applicable in a Chapter 15 proceeding. See, Transcript of Hearing at 8-9, In re Bemarmara Consulting A.S., Case No. 13-13037 (Bankr. D. Del. Dec. 17, 2013) (“The decision of the Second Circuit is not controlling on this Court. And this Court does not agree with the decision of the Second Circuit. And it is the Court's belief that there is a strong likelihood that the Third Circuit, likewise, would not agree with that decision.”).

In so holding, the bankruptcy court relied on several of the arguments dismissed by the Second Circuit, including the argument that Section 109(a), which creates a requirement for debtors “under this title,” did not apply because the foreign representative, rather than the debtor in the foreign proceeding, was petitioning the court for recognition in aid of that foreign proceeding. Id.

In re B.C.I. Finances Pty Limited

In In re B.C.I. Finances, Judge Lane, who was bound to examine eligibility for recognition under both Sections 1517 and 109(a) because of the controlling precedent set forth in In re Barnet, issued an opinion that was both consistent with In re Barnet and still maintained the low Domesticity threshold that foreign representatives must meet in order to satisfy the Section 109(a) Domesticity requirement in the context of a petition for recognition of a foreign proceeding.

In B.C.I. Finances, the debtors were Australian companies that operated primarily as intercompany borrowing and lending entities within a group of closely held companies. See, 583 B.R. 288 (S.D.N.Y. 2018). Following an extended investigation by the Australian Taxation Office, the debtors received significant tax assessments that they were unable to satisfy. Id. at 290. In August 2014, two liquidators were appointed as joint and several liquidators of the debtors in the Australian liquidation proceedings (the Liquidators). Id.

In January 2015, the Liquidators brought a proceeding in the Federal Court of Australia seeking compensation relating to the debtors' tax assessments, and asserting causes of action against the debtors' directors claiming that their actions caused or contributed to the debtors' liabilities in breach of various statutory and fiduciary duties. Id. An Australian court found that most of the defendants, including Andrew and Michael Binetter (the Binetters), had breached their duties as directors of one or more of the debtors and/or were knowingly involved in the breaches. Id. at 291.

At some point during the pendency of the Australian proceedings, the Binetters left Australia and moved to New York. Id. The Liquidators petitioned for recognition of Australian insolvency proceedings as foreign main proceedings in New York in order to gain access to and/or conduct discovery of the Binetters and any debtor assets, documents or records they may have with them in the United States. Id. at 291. One of the debtors, Ligon 268 Pty Limited (Ligon 268), and Andrew Binetter (the Objectors) objected to recognition on the basis that the debtors were not eligible for relief under Chapter 15 because they had not satisfied the Domesticity requirement under Section 109(a). Id.

The Liquidators contended that the $1,250 retainers placed by each debtor into the trust account of the Liquidators' counsel, as well as the debtors' fiduciary duty claims against the Binetters (the Fiduciary Duty Claims) constituted property within the U.S. sufficient to satisfy Section 109(a). Id. at 291, 292. In opposition, the Objectors argued that the attorney retainers did not satisfy Section 109(a) “because the Liquidators improperly manipulated the [d]ebtors' assets by placing funds in the New York account just to comply with the statute” and urged the court not to countenance the foreign representative's supposed efforts to manufacture eligibility under Section 109. Id. at 292. The Objectors also argued that the Fiduciary Duty Claims were not sufficient to meet the requirements of Section 109(a) because the situs of the Fiduciary Duty Claims was in Australia. Id.

In accordance with relevant Second Circuit precedent, the bankruptcy court rejected the Objectors arguments. The court found that the debtors' $1,250 retainers constituted property for the purposes of Section 109(a) eligibility. In rejecting the Objectors' bad faith argument, the court reasoned that the plain meaning of Section 109(a) does not direct that there be any inquiry into the circumstances surrounding the debtor's acquisition of the property. Id. at 295.

The court also conducted a choice of law analysis and concluded that Australian law governed the question of the situs of the Fiduciary Duty Claims. Id. at 297. Applying Australian law, the court found that the fiduciary duty claims were located where the Binetters resided — New York. Id. at 300-301. Thus, the debtors' Fiduciary Duty Claims against the Binetters also constituted property in the United States, which satisfied Section 109(a).

Satisfying Eligibility Requirements under §109(a) in Chapter 15

The B.C.I. Finances decision falls squarely in line with other case law applying the Domesticity requirement of Section 109(a) to determine the propriety of a petition for recognition of a foreign proceeding under Chapter 15. Because Section 109(a) does not specify how much or what kind of property is required for a person to be eligible as a debtor under Title 11, courts that have considered the issue in a Chapter 15 context have held that under the plain meaning of Section 109(a), any amount of property satisfies the threshold for debtor eligibility. See, In re Suntech Power Holdings Co., Ltd., 520 B.R. 399, 413 (Bankr. S.D.N.Y. 2014) (citing In re Octaviar Admin. Pty Ltd., 511 B.R. 361) (holding that a bank account held in the name of the parent of the foreign debtor's bankruptcy professional was owned by foreign debtor because parent company agreed to hold foreign debtor's deposit for foreign debtor's benefit).

Case law also makes clear that the courts need not inquire into the circumstances surrounding the debtor's acquisition of the property in question. See, In re Octaviar at 373 (rejecting the argument that the foreign representatives' act of transferring funds to their counsel's client trust account was an improper or bad faith attempt to “manufacture eligibility” to file for recognition under Chapter 15 because the plain meaning of the text of the statute does not direct any such inquiry). Thus, arguments relating to a foreign debtor or foreign representative's bad faith proffered by parties opposing recognition under Chapter 15 have repeatedly failed.

To date, courts applying Section 109(a) have found the following to constitute property in the United States for purposes of establishing eligibility:

• Attorney retainers deposited for the express purpose of retaining counsel in the United States for Chapter 15 proceedings. See, g., In re Forge Grp. Power Pty Ltd., No. 17-CV-02045-PJH, 2018 WL 827913, at 12; In re B.C.I. Finances Pty Ltd., 583 B.R. at 293; In re Octaviar Admin. Pty Ltd., 511 B.R. 361, 373 (Bankr. S.D.N.Y. 2014) (on remand from In re Barnet).
• Bank accounts controlled by the debtor. See, In re Suntech Power Holdings Co., 520 B.R. at 411-13 (holding that the establishment of a bank account held in the name of the parent of the foreign debtor's bankruptcy professional into which $500,000 was transferred on the day prior to the commencement of its Chapter 15 case was sufficient to render the debtor eligible under Section 109(a)).
• A debtor's claims or causes of action. See, In re Octaviar Admin., at 372 (Bankr. S.D.N.Y. 2014) (finding that the debtor's claims and causes of action constituted property located in the United States and were, in and of themselves, sufficient to satisfy the eligibility requirements of Section 109(a)); see also, In re B.C.I. Finances Pty Ltd., 583 B.R. at 296.
• A debtor's contractual rights in debt instruments. See, In re Berau Capital Res. Pte Ltd., 540 B.R. 80, 84 (Bankr. S.D.N.Y. 2015) (holding that the debtor's intangible property in the form of contractual rights through bond indentures issued under New York law was sufficient to satisfy Section 109(a)'s property requirements).

All of these cases reflect the current majority view that the Domesticity requirement of Section 109(a) requires only de minimis assets to be located in the United States, and does not require a court to look into or consider the circumstances surrounding those assets' presence in the United States.

Conclusion

Regardless of whether Section 109(a) is part of a court's analysis as to whether to recognize a foreign proceeding, the bar has been set so low by courts that have decided the issue that the application of Section 109(a) in the analysis should rarely lead, on its own, to the denial of a petition for recognition of a foreign proceeding. However, Chapter 15 is still a relatively esoteric chapter of the Bankruptcy Code about which most bankruptcy courts have little or no practical experience.

As such, a majority of bankruptcy and appellate courts have not addressed the Section 109(a) Domesticity issue — so questions will likely exist as to most court's beliefs as to the application of Section 109(a) in the context of petition for recognition of a foreign proceeding and its adherence to a low Domesticity requirement. For that reason, if faced with the need to file or oppose a petition for recognition of a foreign proceeding, you should consult a restructuring attorney familiar with the Chapter 15 process in order to obtain as much insight to the process and presiding court as possible.

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Brian L. Shaw is a partner and Christina M. Sanfelippo is an associate in the Financial Restructuring and Bankruptcy Department of Fox Rothschild LLP in Chicago. The authors were previously member and associate with Shaw Fishman Glantz & Towbin LLC, which recently merged with Fox Rothschild. They can be reached at [email protected] and [email protected], respectively.