Texas Bankruptcy Court Adopts Barnet Rule Requiring Foreign Debtor to Have U.S. Assets to Be Eligible for Chapter 15 Relief
As chapter 15 of the Bankruptcy Code enters its third decade of enactment, the volume of chapter 15 cases has increased significantly, and chapter 15 jurisprudence has rapidly matured. Even so, certain important issues are still being ironed out in the courts. One of those is whether, to be eligible for chapter 15 relief, a foreign debtor must satisfy the requirement in the Bankruptcy Code applicable to cases under other chapters that the debtor reside, or have a place of business or property 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. In 2024, the U.S. Court of Appeals for the Eleventh Circuit ruled to the contrary in In re Al Zawawi, 97 F.4th 1244 (11th Cir. 2024), thereby creating a rift in the circuits on the issue.
The Barnet approach has been uniformly embraced by bankruptcy courts in the Second Circuit—where it is binding precedent. Those courts have interpreted the ruling to mean that a foreign debtor must satisfy the Bankruptcy Code's U.S. "presence" requirements for chapter 15 relief, but that the debtor need only have nominal U.S. assets (such as an attorney retainer account) to be eligible as a chapter 15 debtor. This is generally in keeping with both U.S. lawmakers' intent and the underpinnings of the Model Law that comity and access to chapter 15 be relatively easy and consistent with the goal of promoting cooperation and coordination in cross-border bankruptcy cases.
Other than the Eleventh Circuit in Al Zawawi, only a handful of bankruptcy courts in other circuits have weighed in on the issue. One of the latest to do so is the U.S. Bankruptcy Court for the Southern District of Texas, which confronted the issue in the less-common context of an involuntary foreign proceeding instituted by creditors.
In In re Siu-Fung Ceramics Holdings Limited, No. 24-33299, 2026 WL 382424 (Bankr. S.D. Tex. Feb. 10, 2026), the court denied petitions for chapter 15 recognition of Hong Kong bankruptcy and liquidation proceedings commenced against an individual debtor and a group of companies that he owned or controlled. According to the court: (i) the corporate debtors' Hong Kong liquidation proceeding was not eligible for chapter 15 recognition because the attorney retainer upon which such relief was based did not represent property of the debtor (it was instead property of the foreign representatives) and, in any event, was not funded until nine months after the chapter 15 petition date; and (ii) there was insufficient evidence to sustain the burden that potential litigation claims constitute property in the United States. Also, the court held, the individual debtor's Hong Kong bankruptcy case could not be recognized because the debtor's "center of main interests" on the chapter 15 petition date was not in Hong Kong, and he did not even maintain an "establishment" there.
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 (the "Model Law"), which has been enacted in some form by nearly 60 nations or territories.
International "comity" is the bedrock of chapter 15 as well as the Model Law. See H.R. Rep. No. 109–31, at 105 (2005) ("comity is raised to the introductory language [of chapter 15] to make clear that it is the central concept to be addressed"). Comity is "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).
Section 1501(a) of the Bankruptcy Code 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."
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.
Under section 1515 of the Bankruptcy Code, 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." 11 U.S.C. § 109(a) (emphasis added). Section 103(a) provides that "this chapter"—i.e., chapter 1, including section 109(a)—"appl[ies] in a case under chapter 15."
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.
11 U.S.C. § 101(23). 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 United States 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."
Under section 1517(a) of the Bankruptcy Code, the bankruptcy court, after notice and a hearing, "shall" enter a recognition order if the foreign proceeding qualifies as a foreign main or foreign nonmain proceeding and the petition otherwise satisfies the requirements of chapter 15.
Dispute Over Eligibility for Chapter 15 Relief
Despite the express language of section 103(a), courts sometimes disagree over whether a foreign debtor must satisfy both sections 109 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 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) (requiring only that the entity "is the subject of a foreign proceeding"), and not the section 109 requirements (requiring a domicile, place of business, or property in the United States). "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. The Second Circuit explained that 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). The court ruled 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 pending causes of action in U.S. federal and state courts, as well as 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.
Guided by Barnet, other bankruptcy courts within the Second Circuit have similarly concluded that section 109 applies in chapter 15 cases, but that satisfying its U.S. asset requirement is not difficult. See, e.g., In re B.C.I. Finances Pty Limited, 671 B.R. 669 (Bankr. S.D.N.Y. 2025) (rejecting a challenge to the Barnet approach and ruling that an attorney retainer account in a U.S. bank made a foreign debtor eligible for chapter 15 relief); In re Agro Santino, OOD, 653 B.R. 79 (Bankr. S.D.N.Y. 2023) (unused attorney retainers deposited by the debtor in a N.Y. bank account and a $1.5 million counterclaim in pending N.Y. litigation sufficient); 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 sufficient); 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 sufficient); 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 sufficient); In re P.T. Bakrie Telecom TBK, 601 B.R. 707 (Bankr. S.D.N.Y. 2019) (rights under a New York law indenture and New York law-governed notes sufficient); In re B.C.I. Fins. Pty Ltd., 583 B.R. 288 (Bankr. S.D.N.Y. 2018) (B.J. Lane) (attorney retainers deposited by foreign debtors in the United States for the sole purpose of satisfying section 109(a) and obtaining discovery adequate sufficient); In re Berau Cap. Res. Pte Ltd, 540 B.R. 80, 84 (Bankr. S.D.N.Y. 2015) ("the presence of the New York choice of law and forum selection clauses in the indenture [governing U.S. dollar denominated debt] satisfies the section 109(a) 'property in the United States' eligibility requirement").
Prior to the bankruptcy court's ruling in Siu-Fung, only one bankruptcy court outside of the Second Circuit had relied on Barnet 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 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").
However, some courts outside of the Second Circuit, including the Eleventh Circuit, have disagreed with Barnet. In Al Zawawi, the Eleventh Circuit split with the Second Circuit on this issue. Based on Eleventh Circuit precedent interpreting now-repealed section 304 of the Bankruptcy Code, the Eleventh Circuit affirmed a district court ruling 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. A handful of other courts had previously come to the same conclusion, but for different reasons. See, e.g., In re MMX Sudeste Minerção 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), appeal dismissed for lack of jurisdiction, No. 17-24038-RNS (S.D. Fla. Apr. 20, 2018); In re Bemarmara Consulting A.S., No. 13-13037(KG) (Bankr. D. Del. Dec. 17, 2013)).
Most recently, in In re Venus Capital Mgmt. Co., No. 25-10709, 2026 WL 582870 (Bankr. D.R.I. Mar. 2, 2026), a Rhode Island bankruptcy court ruled that the Eleventh Circuit's approach in Al Zawawi is more compelling. According to the court, "[t]hough it might appear that the plain language of § 103 requires the application of § 109, such a reading would render § 1517, § 1528 and [28 U.S.C. § 1410] meaningless." Id. at *6. In addition, the court was persuaded that the Al Zawawi approach is more consistent with lawmakers' intentions. Id. (citing Al Zawawi, 637 B.R. at 669 (quoting H.R. Rep. No. 109-31, pt. 1, at 113 (stating that "[t]he requirements of [§ 1517] … are all that must be fulfilled to attain recognition.'")).
Leading bankruptcy commentators have also been critical of Barnet. See Collier on Bankruptcy ¶ 1501.03[3] (16th ed. 2026) ("While Chapter 1 of the Bankruptcy Code applies in Chapter 15 cases by § 103, the § 109(a) criteria should apply only to cases under Chapters 7, 11, 12 and 13."); id. at ¶ 1517.01 (noting that Barnet "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 [Model Law] 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.") (citations omitted); 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 uses 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).
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).
Siu-Fung
Siu-Fung Seigfried Lee ("Lee") was a major shareholder, director, and chairman of an extensive group (the "SF Group") of ceramic sanitary ware companies based and doing business principally in Hong Kong and in the People's Republic of China. The SF Group also included companies based or incorporated in Bermuda, the British Virgin Islands, and the Cayman Islands. In the United States, the group included Roy USA, Inc. ("Roy USA"), a California company incorporated by Lee in 2014. Lee and his family members held various positions of ownership and control throughout the corporate structure of the SF Group.
In 2000, the SF Group companies were placed into liquidation proceedings (the "SF Group liquidation") by a Hong Kong court (the "HK court"), which appointed provisional liquidators for them.
In 2001, after lenders demanded payment on SF Group debts personally guaranteed by Lee, certain creditors filed bankruptcy petitions against Lee in Hong Kong (the "Lee 2001 bankruptcy"), and the HK court appointed trustees to administer his estate. Lee received a personal discharge in 2005, but the trustees, in accordance with Hong Kong law, continued to collect and distribute the assets of his estate, as well as investigating potential fraudulent transfers of SF Group assets by Lee and his family members.
The SF Group liquidators and the trustees in the Lee 2001 bankruptcy estate have continued in their respective roles (with certain substitutions) since their appointments by the HK court.
The HK court later granted a request by the liquidators and the trustees to obtain discovery regarding alleged insider dealing transactions and widespread fraud perpetrated by Lee and members of his family in an effort to avoid the ramifications of the Lee 2001 bankruptcy and the SF Group liquidation.
In August 2016, Lee moved to California, where he was employed by Roy USA (an alleged affiliated entity of certain entities owned by Lee's family).
Even after Lee relocated to the United States, the trustees of the Lee 2001 bankruptcy and the liquidators of the SF Group continued seeking discovery regarding his assets and affairs, but Lee and his family members remained uncooperative and intransigent despite compliance and sanctions orders issued by the HK court.
In January 2023, the trustees and the liquidators commenced litigation in a California state court to domesticate the HK court's judgments imposing sanctions. In addition, they filed a second involuntary bankruptcy petition in March 2023 against Lee in the HK court (the "Lee 2023 bankruptcy") due to Lee's failure to pay the fines.
In July 2024, the liquidators and the trustees, as foreign representatives for the Lee bankruptcies and the SF Group liquidation (the "FRs"), filed chapter 15 petitions in the U.S. Bankruptcy Court for the Southern District of Texas (the "U.S. bankruptcy court") seeking chapter 15 recognition of the SF Group liquidation and the Lee 2001 and Lee 2023 bankruptcies. Lee responded by moving to dismiss the petitions.
In April 2025—nine months after filing the chapter 15 petitions—one of the FRs arranged a $1,200 wire transfer to his U.S. attorneys to be held as a retainer on behalf of the SF Group. Thereafter, the FRs amended the SF Group chapter 15 petition to state that the retainer satisfied the eligibility requirements in section 109(a) of the Bankruptcy Code.
Although the FRs originally sought chapter 15 recognition of the Lee 2001 bankruptcy, the Lee 2023 bankruptcy, and the SF Group liquidation, they subsequently narrowed their recognition request to the Lee 2001 bankruptcy and the SF Group liquidation.
Following a trial, the U.S. bankruptcy court issued its ruling on the chapter 15 petitions.
The Bankruptcy Court's Ruling
The U.S. bankruptcy court denied the petitions for chapter 15 recognition of the SF Group liquidation and the Lee 2001 bankruptcy.
After explaining the procedures governing chapter 15 recognition, U.S. Bankruptcy Judge Alfredo R. Peréz addressed chapter 15's debtor eligibility requirements. Based on the plain and unambiguous language of sections 103(a) and 109(a) of the Bankruptcy Code, the court agreed with the Second Circuit's reasoning in Barnet that section 109(a) applies in chapter 15 cases.
The court rejected the FRs' argument that nothing within sections 1517(a) and 1515 requires section 109(a) to be satisfied as a condition to chapter 15 recognition because a foreign debtor never becomes a "debtor" in a case "under the [Bankruptcy Code]" merely because a U.S. bankruptcy court grants a petition for recognition. According to Judge Peréz, "[t]o hold section 109(a) inapplicable … would ignore the express mandate of section 103(a) to apply Chapter 1 to Chapter 15." Siu-Fung, 2026 WL 382424, at *15.
Moreover, Judge Peréz emphasized, the term "debtor" under section 1502 is reconcilable with the term "debtor" in section 109(a):
[B]ecause section 1502's definition of "debtor" is limited to "this chapter,"—meaning Chapter 15—"it follows that the definitions of 'foreign proceeding' and 'foreign representative' which both occur within Chapter 1, would not be affected" by "debtor" also having been defined under section 1502(1)…. As before: because both "foreign proceeding" and "foreign representative" require a "debtor," the result is unavoidable that "section 109(a) [ ] must be satisfied in order to meet the requirements contained in Chapter 15 that rely upon those definitions."
Id. at *16 (quoting Barnet, 737 F.3d at 249).
The U.S. bankruptcy court found the contrary reasoning articulated by the Eleventh Circuit in Al Zawawi to be both unconvincing and nonbinding given the Eleventh Circuit's reliance on precedent interpreting not chapter 15, but repealed section 304 of the Bankruptcy Code, which, as noted previously, did not require a foreign debtor to qualify as a "debtor" under section 109(a) as a condition to relief. Id. at **16–17. Moreover, Judge Peréz explained, the Eleventh Circuit agreed with the plain meaning analysis of sections 103(a) and 109(a), and (in a concurring opinion) rejected the idea that there is an irreconcilable conflict between sections 1502 and 109(a), but felt constrained by precedent construing repealed section 304 in issuing its decision.
In addition, the U.S. bankruptcy court noted: (i) lawmakers amended section 103 to state that chapter 1 (including section 109(a)) applies in chapter 15 cases at the same time it enacted chapter 15 in 2005, and could have provided otherwise, yet elected not to do so; (ii) both the Second Circuit (in Barnet) and the Eleventh Circuit (in the Al Zawawi concurrence) concluded that neither section 1528 of the Bankruptcy Code (providing that a foreign representative may commence a case with respect to a foreign debtor after chapter 15 recognition under a different chapter of the Bankruptcy Code) nor 28 U.S.C. § 1410 (providing 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") "are rendered superfluous by virtue of applying section 109(a) to Chapter 15"; and (iii) the application of section 109(a) comports with the purpose of chapter 15 because the low bar to chapter 15 eligibility under section 109(a) (which has been construed to require only nominal U.S. assets) furthers the statutory objectives of cooperation between U.S. and foreign courts, fair and efficient cross-border administration, and maximization of asset values, as set forth in section 1501(a)(1), (3), and (4). Id. at **18–19.
Finally, the U.S. bankruptcy court rejected the argument that, in keeping with the directive in section 1508 of the Bankruptcy Code that courts must consider chapter 15's international provenance and the goal of applying it consistent with the application of similar cross-border bankruptcy laws, section 109(a) should not apply in chapter 15 cases because there is no comparable provision in the Model Law—the statute upon which chapter 15 was based. Judge Peréz agreed with the Second Circuit's reasoning in Barnet that the omission of a provision comparable to section 109(a) in the Model Law "'does not suffice to outweigh the express language Congress used in adopting section 109(a) and 103(a).'" Id. (quoting Barnet, 737 F.3d at 251).
Having concluded that section 109(a) applies in chapter 15, the U.S. bankruptcy court turned to the merits of the chapter 15 recognition petitions.
First, the court found that the SF Group liquidation was a foreign main proceeding based upon the SF Group Hong Kong COMI, and that the FRs qualified as foreign representatives. However, because the SF Group had no "presence" in the United States at the time the FRs filed their chapter 15 petition, the court ruled that the SF Group liquidation could not be recognized under chapter 15.
According to Judge Peréz, the attorney retainer was deposited nine months after the FRs filed the chapter 15 petitions, and the funds were not property of the SF Group debtors, but belonged instead to one of the FRs.
In addition. the U.S. bankruptcy court determined that, even though the Eleventh Circuit in Al Zawawi held that potential causes of action could qualify as "property" under section 109(a), the FRs' fraudulent transfer claims against Lee, his family members, and affiliated entities did not qualify under the circumstances. Judge Peréz explained that: (i) the factual basis for the putative claims was unclear; (ii) the FRs had not actually sued the putative defendants on those claims prior to filing the chapter 15 petitions; (iii) the claims involved assets that were originally located in Hong Kong and China based on conduct that occurred 25 years previously; and (iv) despite nine years of extended discovery, the FRs had failed to convince the HK court that their factual allegation were "conclusively true." Id. at **23–26.
Turning to the Lee 2001 bankruptcy, the U.S. bankruptcy court concluded that section 109(a) was satisfied because Lee, unlike the SF Group debtors, had U.S. assets at the time the chapter 15 petition was filed. However, the court denied the petition for recognition of the Lee 2001 bankruptcy as a foreign main or nonmain proceeding because the FRs failed to demonstrate that Lee, who had lived continuously in the United States since 2016, had either his COMI or even an "establishment"—either personally or through companies he owned or controlled—in Hong Kong on the petition date. Id. at **26–34.
Outlook and Takeaways
The bankruptcy court's ruling in Siu-Fung is notable for a number of reasons. First, it represents an expansion of the Barnet approach to chapter 15 eligibility beyond the Second Circuit and highlights the robust debate among courts on an issue that has already created a circuit split and could be an invitation to U.S. Supreme Court review.
Next, the decision reinforces the idea that the requirements for chapter 15, including whether a foreign debtor has U.S. assets, and either its COMI or an establishment in the foreign jurisdiction where its bankruptcy proceeding is pending, must be determined as of the chapter 15 petition date.
Finally, the decision indicates that U.S. bankruptcy courts are wary of any conduct by a foreign debtor or its foreign representatives designed to manipulate compliance with chapter 15's eligibility requirements.
There are few key takeaways to consider:
- If a retainer is the only property in the United States, it must be funded prior to the commencement of the chapter 15 proceeding.
- Possible or theoretical litigation claims may constitute property in the United States sufficient for section 109(a)'s requirements if there is sufficient evidence of such claims beyond mere speculation (and, for the avoidance of doubt, there is no requirement for pending litigation to meet this standard).
- Unlike corporate debtors, where restructuring activities taking place prior to the commencement of a chapter 15 proceeding (e.g., a liquidator's conduct abroad in marshalling assets, investigating claims, and administering the debtor's estate) are relevant to analyzing COMI, similar activities for individual debtors abroad may not be relevant or considered based on the holding in Siu-Fung.
- Chapter 15 can be an invaluable tool for obtaining discovery regarding a foreign debtor's U.S. assets and potential causes of action.
- Siu-Fung illustrates that the Second Circuit's Barnet requirement that the debtor have property in the United States can present significant challenges in creditor-driven foreign proceedings. Because, unlike debtor-driven foreign proceedings, the foreign representatives cannot just put a small retainer in place in the United States.
