Article: February 2014 Bankruptcy & Restructuring Update

Second Circuit Holds that Section 109 Eligibility Requirements Apply to Foreign Entities in Chapter 15 Bankruptcy Cases. Recently, the United States Court of Appeals for the Second Circuit held that the eligibility requirements set forth in section 109 of the United States Bankruptcy Code (the “Bankruptcy Code”) apply to foreign debtors in chapter 15 bankruptcy cases, and may preclude the availability of chapter 15 relief even if all the requirements for recognition of a foreign proceeding are satisfied. Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013). The issue was one of first impression within the Second Circuit.

Background. On April 3, 2012, foreign representatives (the “Foreign Representatives”) of Octaviar Administration Pty Ltd (“OA”)—a foreign debtor undergoing liquidation proceedings in Australia—filed a petition for relief under chapter 15 of the Bankruptcy Code. Specifically, the Foreign Representatives sought recognition of the Australian proceeding as a foreign main proceeding pursuant to 11 U.S.C. § 1515. On August 30, 2012, Drawbridge Special Opportunities Fund LP (“Drawbridge”) filed an objection to the petition arguing that OA did not qualify for relief as a debtor under chapter 15 because “only a person that resides or has a domicile, a place of business, or property in the United States … may be a debtor under [the Bankruptcy Code].” See 11 U.S.C. § 109(a).

On September 6, 2012, the United States Bankruptcy Court for the Southern District of New York (Chapman, J.) (the “Bankruptcy Court”) entered an order granting recognition of the Australian proceeding as a foreign main proceeding over Drawbridge’s objection. Noting that chapter 15 contains its own definition of a “debtor,” see 11 U.S.C. § 1502(1) (a “debtor” is “any entity that is the subject of a foreign proceeding”), the Bankruptcy Court held that for purposes of chapter 15, the debtor need only be a debtor in a foreign proceeding; the eligibility requirements set forth in section 109(a) did not apply. A direct appeal to the Second Circuit ensued.

The Second Circuit Decision. Reversing the Bankruptcy Court, the Second Circuit found that a foreign debtor in a chapter 15 case must satisfy the section 109(a) eligibility requirements before a bankruptcy court may grant recognition of a foreign proceeding. In so holding, the Second Circuit observed that pursuant to section 103(a), chapter 1 “of this title … appl[ies] in a case under Chapter 15.” Section 109 is within chapter 1, thus, “by the plain terms of the statute,” section 109 applies to cases under chapter 15. Because the Foreign Representatives made no attempt to establish that OA had assets in the United States in accordance with section 109(a), the Foreign Representatives’ request for recognition of the Australian proceeding should have been denied.

Conclusion. Section 109(a) does not require that a specific quantum of property be located in the United States in order for a debtor to qualify for bankruptcy relief. Indeed, courts have liberally construed the term property in section 109 to encompass, for example, United States bank accounts or funds on retainer with United States law firms. While some courts have held—in the context of chapter 11—that placing property in the United States for the sole purpose of creating bankruptcy jurisdiction presents an issue of bad faith, other courts have found that bad faith is not a basis for denying chapter 15 relief. Thus, even if a debtor were to place property in the United States just prior to filing a chapter 15 petition in order to satisfy the section 109 eligibility requirements, as long as the assets are in the United States as of the petition date, it is unlikely that section 109(a) will act as a significant bar to chapter 15 relief.