Contributed by Debra McElligott
Section 109(a) of the Bankruptcy Code requires debtors to either reside or have a domicile, place of business, or property in the United States. A split of authority exists whether a foreign debtor seeking recognition of its foreign proceeding under chapter 15 of the Bankruptcy Code must satisfy these requirements. The United States Bankruptcy Court for the Southern District of New York, where foreign debtors are subject to section 109(a), recently considered how these requirements may be met in In re Berau Capital Resources PTE Ltd. In this case, the court held that an indenture governed by New York law constitutes “property in the United States” for the purposes of section 109(a).
Chapter 15 Eligibility: An Overview
Under section 1515 of the Bankruptcy Code, the foreign representative of a debtor in a foreign proceeding must file a petition for recognition with the bankruptcy court to commence a chapter 15 proceeding. Chapter 15 does not require a foreign debtor to have a connection to the United States; rather, section 1502 defines the term “debtor,” for the purposes of chapter 15, as “an entity that is the subject of a foreign proceeding.” Despite this definition, the United States Court of Appeals for the Second Circuit held in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet) that foreign debtors seeking chapter 15 recognition must satisfy one of the requirements of section 109(a) of the Bankruptcy Code. The court based its holding on section 103 of the Bankruptcy Code, which provides that chapter 1 applies in chapter 15.
Just days after the Second Circuit decided Barnet, Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware held in a bench ruling in In re Bemarmara Consulting a.s. that section 109(a) does not apply to debtors seeking recognition under chapter 15. The court reasoned that in chapter 15, the debtor’s foreign representative – not the debtor – files the petition for recognition, and that section 1502 separately defines “debtor” for the purposes of chapter 15. Judge Gross also noted his belief that the Third Circuit would likely disagree with Barnet as well.
At the outset of its opinion, the Berau court noted that Barnet is a “frequent subject of discussion and criticism,” but that no other federal circuit court has yet addressed whether a foreign debtor must meet the requirements of section 109(a). Applying Barnet, the court then considered whether the foreign debtor had met the requirements of section 109(a).
What Constitutes “Property in the United States”?
The debtor in Berau, a company headquartered in Singapore, did not have a place of business in the United States. The company’s foreign representative relied on a retainer held by its New York counsel to satisfy section 109(a), which the bankruptcy court agreed was “property in the United States.” The court also held, however, that “another substantial (and frequently recurring) basis” for eligibility existed: Berau was an obligor under an indenture governed by New York law.
The court cited several Second Circuit cases for the principle that a debtor’s contract rights are intangible property of the debtor. The court turned to New York law to determine the location of the property, as section 1502(8) of the Bankruptcy Code provides that the location of intangible property rights is to be determined by applicable nonbankruptcy law. Relying on a New York State Court of Appeals opinion by then-Chief Judge Cardozo, the bankruptcy court stated that intangible property rights may have more than one location depending on the purpose for which their location is being determined. One such location, which the court found applicable here, may be the place where an obligation was “meant to be discharged.” The notes under Berau’s indenture were to be discharged in New York.
In addition to its reliance on case law, the court also cited to sections of the New York General Obligations Law that allow parties whose contracts do not have a connection to New York to nonetheless designate New York law as governing law and select the state’s courts as forums for dispute resolution. The court noted that these sections “reflect a legislative policy to permit counterparties to establish a contract site in this state,” and that, even if the contract has a different location for other purposes, these statutory provisions are sufficient to fix the location of rights under that contract in New York. Finally, from a policy standpoint, the court emphasized the irony of allowing a creditor to enforce its rights in New York, but not allowing the company’s foreign representative to obtain chapter 15 protection in the same jurisdiction.
Debtors that may otherwise have no connection to the United States and would be ineligible for chapter 15 recognition under Barnet are likely to have debt (or other obligations) under contracts subject to New York law or forum selection. The Berau opinion thus alleviates the effect of Barnet and re-opens the doors to the bankruptcy court for foreign debtors seeking recognition under chapter 15. Although it remains to be seen whether other circuits will weigh in on the issue of chapter 15 eligibility, the Berau opinion demonstrates that courts that follow Barnet may do so with limited success.