Second Circuit Holds That the Bankruptcy Code’s Debtor Eligibility Requirements Apply in a Foreign Proceeding Under Chapter 15
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RestructuringKelley A. CornishDouglas R. DavisAlice Belisle EatonBrian S. HermannAlan W. KornbergElizabeth R. McColmAndrew N. RosenbergJeffrey D. SafersteinStephen J. ShimshakErica G. Weinberger
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RestructuringKelley A. CornishDouglas R. DavisAlice Belisle EatonBrian S. HermannAlan W. KornbergElizabeth R. McColmAndrew N. RosenbergJeffrey D. SafersteinStephen J. ShimshakErica G. Weinberger
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January 3, 2014
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In Drawbridge Special Opportunities Fund LP v.
Barnet (In Re Barnet), 737 F.3d 238 (2d Cir. 2013)
("Barnet"), the United States Court of Appeals for
the Second Circuit held that the eligibility requirements for
debtors set forth in section 109(a) of the Bankruptcy Code apply in
chapter 15 proceedings. Thus, a bankruptcy court cannot recognize a
foreign proceeding under chapter 15 unless the foreign debtor has a
domicile, place of business or property in the United States, just
like any other debtor under the Bankruptcy Code. While bankruptcy
courts generally view "property" expansively for purposes of
section 109, Barnet may limit the ease with which a
foreign representative obtains relief under chapter 15, at least in
the Second Circuit.
Chapter 15
Before turning to Barnet, a word about chapter 15: This
chapter of the Bankruptcy Code incorporates the Model Law on
Cross-Border Insolvency to provide effective mechanisms for dealing
with cases of cross-border insolvency.[1] Congress's stated
objectives for chapter 15 include promoting cooperation between the
United States courts and courts and other competent authorities of
foreign countries involved in cross-border insolvency cases, so
that there is greater legal certainty for trade and investment and
fair and efficient administration of cross-border insolvencies.[2]
A foreign representative of a foreign debtor may seek recognition
of the foreign reorganization or liquidation proceeding by U.S.
bankruptcy courts to obtain the relief set forth in chapter 15,
including the ability to take discovery with court approval.[3] Now
to the Barnet decision.
Background
Octaviar Administration Pty Ltd. ("OA"), an
Australian company, was the subject of a liquidation proceeding in
Australia. In April 2012, OA's court-appointed liquidators filed a
lawsuit against various Australian affiliates of Drawbridge Special
Opportunities Fund LP ("Drawbridge"). The foreign
representatives subsequently petitioned a U.S. bankruptcy court for
an order recognizing the Australian liquidation proceeding as a
foreign main proceeding under section 1515 of the Bankruptcy Code
(the "Recognition Order"). At the oral argument
for the Recognition Order, the foreign representatives stated their
intention to take discovery from the American directors of the
Drawbridge affiliates sued in the Australian liquidation
proceeding. Drawbridge objected to the foreign representatives'
petition but the bankruptcy court ultimately entered the
Recognition Order. The foreign representatives then sought and
obtained a discovery order against Drawbridge.
The bankruptcy court granted a joint application by the parties
for certification of the Recognition Order for direct appeal to the
Second Circuit.[4] In February 2013, the Second Circuit granted the
joint application and issued a stay of discovery.
The Decision
Based on a "straightforward" interpretation of the Bankruptcy
Code, the Second Circuit concluded that section 109(a)[5] applies
in a chapter 15 proceeding.[6] The Second Circuit emphasized that
"where a statute's language is plain, the sole function of the
courts is to enforce it according to its terms."[7] The court noted
that section 103(a) of the Bankruptcy Code provides that chapter 1
"of this title . . . appl[ies] in a case under chapter 15." Because
section 109 is within chapter 1, the Second Circuit reasoned that
"by the plain terms of the statute," section 109 applies to a case
under chapter 15.[8]
The Second Circuit rejected each of the foreign representatives'
arguments to the contrary. First, the foreign representatives
argued that section 109 applies only to a debtor under the
Bankruptcy Code, not a foreign representative seeking recognition
of a foreign proceeding.[9] The Second Circuit dismissed the
attempted distinction, noting that, while recognition is sought by
a foreign representative, the "presence of a debtor" is
"inextricably entwined" with the nature of a chapter 15 proceeding
(both in terms of how it is defined and the relief that may be
granted).[10]
Second, the foreign representatives argued that the definition
of "debtor" contained in section 1502 of the Bankruptcy Code is the
only definition that applies in chapter 15 cases.[11] The Second
Circuit rejected this "preclusive reading" of section 1502, finding
it irreconcilable with the clear mandate of section 103.[12] The
court noted that even if such a reading were appropriate, it would
not render section 109's requirements inapplicable in chapter 15
cases.[13] The court reasoned that section 1502 cannot affect the
definitions contained in chapter 1 of the Bankruptcy Code because
the scope of section 1502 is expressly limited to chapter 15.[14]
Given that the definitions of both "foreign proceeding" and
"foreign representative" are contained in chapter 1 and require a
"debtor," a foreign debtor must satisfy section 109 to meet any
requirements in chapter 15 that rely on these two
definitions.[15]
Third, the foreign representatives argued that application of
section 109(a) to chapter 15 would be inconsistent with section
1528 of the Bankruptcy Code[16] and 28 U.S.C. § 1410.[17] The
Second Circuit dismissed both arguments. The Second Circuit held
that section 1528 is more, not less restrictive, than section
109(a).[18] Accordingly, there is "nothing disharmonious" in
applying section 109(a) to chapter 15, and then requiring that
section 1528 be met before a case under another chapter of title 11
may be commenced.[19] The Second Circuit acknowledged that the
foreign representatives came "closer to the mark" by arguing that
28 U.S.C. § 1410 provides a venue for chapter 15 cases even where
the debtor has no assets of place of business within the United
States.[20] However, the Second Circuit characterized this statute
as "purely procedural" and observed that allowing the venue statute
to control the outcome in this case would "allow the tail to wag
the dog."[21]
Finally, the foreign representatives argued that the purpose of
chapter 15 would be undermined by the application of section
109(a).[22] However, the Second Circuit held that none of the
stated purposes of chapter 15 are dispositive, as "they could all
be accomplished with or without the imposition" of section
109(a).[23] It acknowledged that the Model Law on Cross-Border
Insolvency, on which chapter 15 was based, does not contain an
express requirement such as section 109(a). However, the Second
Circuit reasoned, this omission did not outweigh the express
language of sections 109(a) and 103. The Second Circuit concluded
that Congress "may have intended to limit" chapter 15's relief
because additional relief, such as 28 U.S.C. § 1782(a) - which
provides for discovery for foreign proceedings without any
requirement akin to section 109(a) - was already available outside
of chapter 15.[24]
Conclusion
The extent to which courts outside the Second Circuit will
follow Barnet remains to be seen. While the decision at
first blush seems to raise the jurisdictional bar, obtaining
property in the United States for purposes of section 109 may not
be an insurmountable obstacle for many foreign debtors and foreign
representatives. Cf. In re Yukos Oil Co., 321 BR. 396
(S.D. Tex. 2005) (holding that nominal amount of property held in
United States in the form of attorney retainer satisfied
eligibility requirements of section 109(a)); In re Globo
Comunicacoes E Participacoes S.A., 317 B.R. 235 (S.D.N.Y.
2004) (holding that only nominal amount of property located in
United States required to satisfy section 109(a)); In re
Aerovias Nacionales de Colombia S.A., 303 B.R. 1 (Bankr.
S.D.N.Y. 2003) (same); In re Global Ocean Carriers Ltd.,
251 B.R. 31 (Bankr. D. Del. 2000) (same). In instances where
section 109(a)'s requirements cannot be met, other avenues for
relief may be available, depending upon the foreign
representative's ultimate objectives. For example, foreign
representatives may be able to seek discovery pursuant to 28 U.S.C.
§ 1782(a).
* * *
This memorandum is not intended to provide legal advice, and no
legal or business decision should be based on its content.
Questions concerning issues addressed in this memorandum should be
directed to:
Kelley A. Cornish
212-373-3493
kcornish@paulweiss.com
Douglas R. Davis
212-373-3130
ddavis@paulweiss.com
Alice Belisle Eaton
212-373-3125
aeaton@paulweiss.com
Brian S. Hermann
212-373-3545
bhermann@paulweiss.com
Alan W. Kornberg
212-373-3209
akornberg@paulweiss.com
Elizabeth R. McColm
212-373-3524
emccolm@paulweiss.com
Andrew N. Rosenberg
212-373-3158
arosenberg@paulweiss.com
Jeffrey D. Saferstein
212-373-3347
jsaferstein@paulweiss.com
Stephen J. Shimshak
212-373-3133
sshimshak@paulweiss.com
Associates Erica Weinberger and Ann K. Young contributed to
this client alert.
[1] 11 U.S.C. § 1501.
[2] 11 U.S.C. § 1501(a).
[3] 11 U.S.C. § 1521(a)(4).
[4] The Bankruptcy Court explained that (1) there was no
controlling precedent governing its holding that a debtor "within
the meaning of chapter 15 is not required to have a domicile,
residence, place of business or property within the United States;"
(2) this issue was a matter of public importance, as it would
"dramatically impact the jurisdiction of the United States
bankruptcy courts and the use of Chapter 15 to assist in the
administration of cross-border insolvency cases and the legitimate
investigation of claims and assets in the United States;" and (3)
direct appeal would "materially advance the progress of this
Chapter 15 case." Mem. Op. in Supp. Of Certification of
Direct Appeal to the Court of Appeals for the Second Circuit at
6,9, In re Barnet, No. 12-13443, Dkt. No. 47 (Bankr.
S.D.N.Y. Nov. 28, 2012).
[5] Section 109(a) provides, in relevant part, that "only a person
who resides or has a domicile, a place of business, or property in
the United States . . . may be a debtor under this title. . . ." 11
U.S.C. §109(a).
[6] The Second Circuit noted that the "straightforward nature" of
the statutory interpretation "bears emphasis." 737 F.3d at
247.
[7] Id. at 246 (citation omitted).
[8] Id. at 247.
[9] Id. at 248.
[10] Id.
[11] Id. Section 1502(1) provides, in relevant part,
that "[f]or the purposes of this chapter [15], the term "debtor"
means an entity that is the subject of a foreign proceeding. . .
." 11 U.S.C. § 1502(1).
[12] 737 F.3d at 248.
[13] Id. at 248-49.
[14] Id. at 249.
[15] Id. at 249. The Second Circuit noted that the
foreign representatives' proposed interpretation would render
section 109(a) meaningless, as the "result would be that Section
109(a) would have no application under any circumstances."
Id.
[16] Id. at 250. Section 1528 provides that "[a]fter
recognition of a foreign main proceeding, a case under another
chapter of this title may be commenced only if the debtor has
assets in the United States." 11 U.S.C. § 1528.
[17] Section 1410 provides for the venue of cases ancillary to
foreign proceedings, and states:
A case under chapter 15 of title 11 may be commenced in the
district court of the United States for the district-
(1) in which the debtor has its principal place of business or
principal assets in the United States;
(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 a Federal or State court; or
(3) in a case other than those specified in paragraph (1) or (2),
in which venue will be consistent with the interests of justice and
the convenience of the parties, having regard to the relief sought
by the foreign representative. 28 U.S.C. § 1410.
[18] 737 F.3d at 250.
[19] Id.
[20] Id.
[21] Id.
[22] Id.
[23] Id. at 251.
[24] Id.，河北版权服务中心，知识产权保护案例，通话录音器，版权侵权诉讼，加急发明专利
