Florida Bankruptcy Court Rules that Foreign Debtor Need Not Have U.S. Residence, Assets, or Place of Business to Be Eligible for Chapter 15 Recognition
Courts disagree over whether a foreign bankruptcy case can be recognized under chapter 15 of the Bankruptcy Code if the foreign debtor does not reside or have assets or a place of business in the United States. In 2013, the U.S. Court of Appeals for the Second Circuit staked out its position on this issue in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), ruling that the provision of the Bankruptcy Code requiring U.S. residency, assets, or a place of business applies in chapter 15 cases as well as cases filed under other chapters.
The U.S. Bankruptcy Court for the Middle District of Florida recently weighed in on this controversial issue in In re Talal Qais Abdulmunem al Zawawi, 2021 WL 3890597 (Bankr. M.D. Fla. Aug. 31, 2021). Distancing itself from Barnet as nonbinding precedent and widely criticized, the bankruptcy court ruled that chapter 15 has its own eligibility requirements, and that the eligibility requirements for debtors in cases under other chapters of the Bankruptcy Code do not apply in chapter 15 cases.
Procedures, Recognition, Relief, and Eligibility Under Chapter 15
Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency ("Model Law"), which has been enacted in some form by more than 50 countries.
Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). Chapter 15's stated purpose is "to provide effective mechanisms for dealing with cases of cross-border insolvency" with the objective of, among other things, cooperation between U.S. and non-U.S. courts.
Chapter 15 replaced section 304 of the Bankruptcy Code. Section 304 allowed an accredited representative of a debtor in a foreign bankruptcy proceeding to commence a limited "ancillary" bankruptcy case in the United States for the purpose of enjoining actions against the foreign debtor or its assets located in the United States or, in some cases, repatriating such assets or their proceeds abroad for administration in the debtor's foreign bankruptcy.
The policy behind section 304 was to provide any assistance necessary to ensure the economic and expeditious administration of foreign bankruptcy proceedings. In deciding whether to grant injunctive, turnover, or other appropriate relief under former section 304, a U.S. bankruptcy court had to consider "what will best assure an economical and expeditious administration" of the foreign debtor's estate, consistent with a number of factors, including comity. See 11 U.S.C. § 304(c) (repealed 2005) (listing factors that are now included in section 1507(b) as a condition to the court's decision to grant "additional assistance, consistent with the principles of comity," under chapter 15 or other U.S. law).
Section 1501(a) of the Bankruptcy Code similarly states that the purpose of chapter 15 is to "incorporate the [Model Law] so as to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of," among other things, cooperation between U.S. and foreign courts, greater legal certainty for trade and investment, fair and efficient administration of cross-border cases to protect the interests of all stakeholders, protection and maximization of the value of a debtor's assets, and the rehabilitation of financially troubled businesses.
Section 1508 requires U.S. courts interpreting chapter 15 to "consider its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions."
Under section 1515, the "foreign representative" of a foreign "debtor" may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding."
Section 1502 provides that "for the purposes of [chapter 15] … 'debtor' means an entity that is the subject of a foreign proceeding."
However, section 101 of the Bankruptcy Code also includes a definition of the term "debtor," and section 109 limits the entities that can qualify as a debtor. Section 101(13) provides that "debtor" means "person or municipality concerning which a case under this title has been commenced." Section 109(a) states that, "[n]otwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title." Section 103(a) provides that "this chapter"—i.e., chapter 1, including section 109(a)—"appl[ies] in a case under chapter 15."
The basic requirements for recognition under chapter 15 are outlined in section 1517(a), namely: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the "foreign representative" applying for recognition must be a "person or body"; and (iii) the petition must satisfy the requirements of section 1515, including that it be supported by the documentary evidence specified in section 1515(b).
Section 1506 sets forth a public policy exception to any of the relief otherwise authorized in chapter 15, providing that "[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States."
Section 101(24) defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."
"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the U.S. of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. §§ 1502(4) and 1517(b)(1))—and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. §§ 1502(5) and 1517(b)(2)). A debtor's COMI is presumed to be the location of the debtor's registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c). An establishment is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity."
Dispute Over Eligibility for Chapter 15 Relief
Despite the express language of section 103(a), courts disagree over whether a foreign debtor must satisfy both sections 109(a) and 1502 to be eligible for chapter 15 relief.
In Barnet, the Second Circuit ruled that section 109(a) applies in a chapter 15 case on the basis of a "straightforward" interpretation of the statutory provisions.
The Second Circuit rejected the foreign representatives' argument that section 109(a) does not apply because the Australian company in the case was a "debtor" under the Australian Corporations Act (rather than under the Bankruptcy Code) and the foreign representatives (rather than the debtor) were seeking recognition of the foreign proceeding. According to the court:
[T]he presence of a debtor is inextricably intertwined with the very nature of a Chapter 15 proceeding … [and] [i]t stretches credulity to argue that the ubiquitous references to a debtor in both Chapter 15 and the relevant definitions of Chapter 1 do not refer to a debtor under the title [title 11] that contains both chapters.
Barnet, 737 F.3d at 248. In addition to the statutory definitions of "foreign representative," "foreign main proceeding," "debtor," and "foreign proceeding," the court noted, the automatic and discretionary relief provisions that accompany recognition of a foreign main proceeding (see sections 1520 and 1521) are similarly "directed towards debtors." Barnet, 737 F.3d at 248.
The Second Circuit flatly rejected the foreign representatives' argument that a foreign debtor need satisfy only the chapter 15-specific definition of "debtor" in section 1502(1), and not the section 109 requirements. "This argument also fails," the court wrote, "as we cannot see how such a preclusive reading of Section 1502 is reconcilable with the explicit instruction in Section 103(a) to apply Chapter 1 to Chapter 15." Id. at 249.
According to the Second Circuit, not only a "plain meaning" analysis but also the context and purpose of chapter 15 support the application of section 109(a) to chapter 15. The court explained that Congress amended section 103 to state that chapter 1 applies in cases under chapter 15 at the same time it enacted chapter 15, which strongly supports the conclusion that lawmakers intended section 103(a) to mean what it says—namely, that chapter 1 applies in cases under chapter 15.
The court acknowledged that the strongest support for the foreign representatives' arguments lies in 28 U.S.C. § 1410, which provides a U.S. venue for chapter 15 cases even when "the debtor does not have a place of business or assets in the United States." However, the Second Circuit explained that this venue statute "is purely procedural" and that, "[g]iven the unambiguous nature of the substantive and restrictive language used in Sections 103 and 109 of Chapter 15, to allow the venue statute to control the outcome would be to allow the tail to wag the dog." Id. at 250.
Finally, the Second Circuit found that the purpose of chapter 15 would not be undermined by making section 109(a) applicable in chapter 15 cases. As noted above, section 1501(a) of the Bankruptcy Code provides that the purpose of chapter 15 "is to incorporate the Model Law … so as to provide effective mechanisms for dealing with cases of cross-border insolvency." Although section 109(a), or its equivalent, is not included in the Model Law, the Second Circuit emphasized, the Model Law allows a country enacting it to "modify or leave out some of its provisions." In any case, the court concluded, the omission of a provision similar to section 109(a) from the Model Law does not suffice to outweigh the express language Congress used in adopting sections 103(a) and 109(a). Id. at 251.
The Second Circuit accordingly vacated the recognition order and remanded the case to the bankruptcy court for further proceedings consistent with its ruling.
The Second Circuit did not provide any guidance as to how extensive a foreign debtor's property holdings in the United States must be to qualify for chapter 15 relief. On remand, the bankruptcy court answered that question in In re Octaviar Administration Pty Ltd., 511 B.R. 361 (Bankr. S.D.N.Y. 2014), ruling that, consistent with case law analyzing the scope of section 109 for the purpose of determining who is eligible to commence a case under chapter 11, the requirement of property in the United States should be interpreted broadly. Because the Australian debtor had causes of action governed under U.S. law against parties in the United States and also had an undrawn retainer maintained in the United States, the bankruptcy court held that the requirement for the debtor to have property located in the United States was satisfied.
Other bankruptcy courts within the Second Circuit have similarly concluded that it takes little to satisfy section 109(a) in chapter 15 cases. See, e.g., In re Olinda Star Ltd., 614 B.R. 28 (Bankr. S.D.N.Y. 2020) (small retainer and rights under New York law debt instruments); In re Serviços de Petróleo Constellation, 613 B.R. 497 (Bankr. S.D.N.Y. 2019) (rights under New York law-governed debt and retainer); In re Ascot Fund Ltd., 603 B.R. 271 (Bankr. S.D.N.Y. 2019) (retainer, interest in a New York partnership, and contract rights); In re P.T. Bakrie Telecom TBK, 601 B.R. 707 (Bankr. S.D.N.Y. 2019) (rights under New York law indenture, New York law notes).
Barnet has received a considerable amount of criticism. For example, a leading commentator noted that the decision:
clearly misconstrues the intent of the statute to focus on eligibility of the foreign proceeding, not of the debtor, never mentions the direction of section 1508 to consider the international origin of chapter 15 and does not follow the suggestion of the legislative history of section 1508 to consult the Guide to Enactment … [which] makes clear that "the Model Law was formulated to apply to any proceeding that meets the requirements of article 2, subparagraph (a) [definition of foreign proceeding], independently of the nature of the debtor or its particular status under national law."
Collier on Bankruptcy ¶ 1517.01 (16th ed. 2021) (citing H.R. Rep. No. 109-31, p. 109 (2005); Guide to Enactment and Interpretation of the Model Law, ¶ 47); see also Glosband and Westbrook, "Chapter 15 Recognition in the U.S.: Is a Debtor 'Presence' Required?," 24 Int. Insolv. Rev. 28–56 (2015) (noting that the Second Circuit "confuse[d] the foreign debtor with the foreign insolvency representative" and explaining that section 109(a) does apply in chapter 15 cases, but only in limited circumstances, including: (i) the requirement that a foreign debtor have a presence in the United States when a foreign representative use its power under section 1511 to file a "full" case under another chapter; and (ii) when a foreign debtor files a bankruptcy case in the United States to enforce a foreign discharge).
Several bankruptcy courts outside of the Second Circuit have disagreed with Barnet. For example, in In re Bemarmara Consulting A.S., No. 13-13037(KG) (Bankr. D. Del. Dec. 17, 2013), the U.S. Bankruptcy Court for the District of Delaware ruled that section 109(a) does not apply in chapter 15 because it is the foreign representative, and not the debtor in the foreign proceeding, who petitions the court. Moreover, the court wrote, "there is nothing in [the] definition [of 'debtor'] in Section 1502 which reflects upon a requirement that [a] Debtor have assets." See Transcript of Hearing at 9, l. 11‒18, In re Bemarmara Consulting A.S., No. 13-13037(KG) (Bankr. D. Del. Dec. 17, 2013) [Document No. 39]. "A Debtor," the court noted, "is an entity that is involved in a foreign proceeding."
The U.S. Bankruptcy Court for the Southern District of Florida similarly refused to apply section 109(a) in a chapter 15 case in In re MMX Sudeste Mineracao S.A., No. 17-16113-RAM (Bankr. S.D. Fla. 2017) (Order Granting Recognition, Docket No. 9, June 12, 2017; Transcript of Nov. 1, 2017 Hearing Denying Motion to Dismiss Ch. 15 Case at 5-6, Docket No. 51). An attempted appeal of the recognition order was dismissed for lack of jurisdiction. See Batista v. Alvarenga Mendes (In re MMX Sudeste Mineracao S.A.), No. 17-24038-RNS (S.D. Fla. Apr. 20, 2018).
Apparently, only one court outside of the Second Circuit has relied on the ruling in a published opinion in finding that section 109(a) applies in a chapter 15 case. See In re Forge Grp. Power Pty Ltd., 2018 WL 827913, at *13 (N.D. Cal. Feb. 12, 2018) (vacating a bankruptcy court order denying chapter 15 recognition on the basis of Barnet, but noting that "the debtor eligibility requirements of 11 U.S.C. § 109(a) apply in Chapter 15 cases" and "the requirement of 'property in the United States' is satisfied by a security retainer that remains the property of the debtor until the funds are applied by the attorney for services actually rendered").
It should be noted that chapter 15's predecessor—section 304 of the Bankruptcy Code—did not require a foreign debtor to qualify as a "debtor" under section 109(a) as a condition to relief. See, e.g., Goerg v. Parungao (In re Goerg), 844 F.2d 1562 (11th Cir. 1988); Saleh v. Triton Container Intl., Ltd. (In re Saleh), 175 B.R. 422 (Bankr. S.D. Fla. 1994). In Barnet, the Second Circuit suggested that the enactment of chapter 15 changed this, a view that was rejected by the court in Bemarmara.
Talal Qais Abdulmunem al Zawawi ("debtor") was a debtor in a bankruptcy case filed in a UK court in March 2020. He did not reside in the United States but had indirect ownership interests in several Florida-based companies that owned residential and office buildings in Florida and was listed as a director of each of the companies. Prior to 2020, the debtor also had a 60% ownership interest in a Florida corporation that owned real estate leased to a chain of restaurants. In February 2020, the debtor sold his ownership interest in the corporation to his brother, the only other shareholder, but continued to be listed as a director.
In March 2021, the UK court-appointed trustees of the debtor's bankruptcy estate filed a petition with the U.S. Bankruptcy Court for the Middle District of Florida seeking recognition of the UK bankruptcy case under chapter 15 as a foreign main proceeding for the purpose of investigating the debtor's affairs, recovering U.S.-based assets, and potentially asserting claims against third parties for the benefit of creditors, including the debtor's former spouse, who held a judgment claim for more than £24 million.
The debtor opposed recognition. He conceded that the foreign representatives met all the requirements for recognition set forth in section 1517 but argued, relying on Barnet, that he did not satisfy the definition of "debtor" in section 109(a). The foreign representatives countered that Barnet has been discredited and that the court should instead follow the Eleventh Circuit's rationale in Goerg, even though it involved an ancillary case filed under repealed section 304 of the Bankruptcy Code. Alternatively, the foreign representatives argued that, if section 109(a) did apply, the court should grant recognition because the debtor was a director and beneficial owner of the Florida-based companies, and the foreign representatives' U.S. counsel held a retainer provided on the debtor's behalf and had possession of the debtor's wallet.
The Bankruptcy Court's Ruling
U.S. Bankruptcy Judge Lori V. Vaughan granted the petition for recognition. Section 1517(a), she explained, is "unambiguous" and, subject to the public policy exception stated in section 1506, "'chapter 15 recognition must be ordered when a court finds the requisite criteria are met.'" Al Zawawi, 2021 WL 3890597, at *4 (quoting In re ABC Learning Centres, Ltd., 728 F.3d 301, 308 (3d Cir. 2013)).
According to Judge Vaughan, a "debtor" under chapter 15 is not the same as a "debtor" under chapter 1 of the Bankruptcy Code. "If the § 101 definition included the subject of a foreign proceeding," she wrote, "then this special definition [in section 1502(1)] would be unnecessary—§ 1502(1) would be superfluous." Id.
Judge Vaughan explained that, although section 103 makes chapter 1 applicable in chapter 15, "it does not graft those provisions into chapter 15—meaning the limited definition would not apply when interpreting § 109." Id. at *5. Any other interpretation, she noted, would not give effect to the other provisions of chapter 15 and the purpose of the chapter, which is international uniformity and cooperation in cross-border bankruptcy cases.
Judge Vaughan further explained that several provisions of the Bankruptcy Code indicate that lawmakers did not intend section 109 to apply in chapter 15 cases, including:
(i) Section 1528, which 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" and would be superfluous if section 109 applied to recognition.
(ii) 28 U.S.C. § 1410, governing venue of chapter 15 cases, which provides that "if the debtor does not have a place of business or assets in the United States, [venue is proper in the district] in which there is pending against the debtor an action or proceeding in a Federal or State court … or 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."
(iii) Section 109, which in subsections (b) through (g) specifies the persons or entities that may be debtors in every chapter of the Bankruptcy Code other than chapter 15, and in subsection (h) requires an individual debtor, absent a court waiver or a specified exception, to obtain credit counseling 180 days to a bankruptcy filing—a requirement that could not be satisfied without a waiver in every case because a foreign bankruptcy case has already been filed by or against a foreign debtor.
Id. at **5-6.
Finally, Judge Vaughan noted that Barnet is neither controlling precedent nor persuasive. Moreover, she stated that the Eleventh Circuit would likely disagree with the ruling based upon its previous decision in Goerg, where the court "examined the purposes behind § 304 and concluded that a foreign debtor does not have to qualify as a 'debtor' under the Bankruptcy Code" because "the focus is on making the United States processes available in aid of foreign proceedings, not actual bankruptcy administration, [and] it would make little sense to require … the subject of the foreign proceeding [to] qualify as a 'debtor' under United States bankruptcy law." Id. at *6 (quoting Goerg, 844 F.2d at 1568). Even though section 304 has been repealed, Judge Vaughan wrote, "chapter 15 has a similar purpose and given this similar issue—whether a foreign debtor must qualify as a debtor under the Bankruptcy Code—this court finds Goerg persuasive, and declines to follow [Barnet]." Id.
Even so, Judge Vaughan found that the debtor satisfied the eligibility requirements of section 109(a) because he had interests in the Florida companies, he was listed as a director of those companies, and the foreign representatives had potential claims against third parties with respect to the debtor's transfer of its interest in one of the companies prior to the commencement of his UK bankruptcy case.
The debate continues over chapter 15 eligibility. As applied by many bankruptcy courts, the Second Circuit's approach to the issue in Barnet does not act as a serious impediment to chapter 15 recognition in most cases. This is particularly true where the alleged property in the United States could be a law firm retainer, potential causes of action against a U.S. entity or person, or, possibly, recoverable property situated in the United States. Nonetheless, the conflict in the courts and uncertainty regarding the proper interpretation of the statutory framework is unsettling and should be resolved—ideally by Congress. The debtor in Al Zawawi appealed the bankruptcy court's ruling to the district court. See In re Al Zawawi, No. 21-CV-00894 (M.D. Fla. May 24, 2021). Thus, the Eleventh Circuit may have an opportunity to revisit the issue under the current statute.
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