Despite recent criticisms of venue selection and cries to limit or curtail various provisions of the Bankruptcy Code, a recent decision from the Bankruptcy Court of the Southern District of New York demonstrates that the bankruptcy courts may continue to broadly interpret the scope of their jurisdictional reach and the powers and authorities granted to them under the Bankruptcy Code. In In re JPA No. 111 Co., Ltd., No. 21-12075 (DSJ) (Bankr. S.D.N.Y. Feb. 1, 2022), the bankruptcy court denied a secured lender’s motion to dismiss the chapter 11 cases of two Japanese companies, arguing, among other things, that the debtors did not have significant ties to the United States to satisfy the eligibility requirements of section 109(a) of the Bankruptcy Code. Instead, the Court found that the companies were permissible debtors entitled to the protections of the Bankruptcy Code because each owned property in the U.S. in the form of reversionary interests in certain retainer deposits held by their bankruptcy counsel notwithstanding the fact that the debtors did not actually fund the deposits and they seemingly had no other ties to the United States.
The cases involved two Japanese special-purpose vehicles: JPA No. 111 Co., Ltd. and JPA No. 49 Co. (the “Debtors”). The Debtors were owed and managed by the same parent entity, JP Lease Products & Services Co. Ltd. (“JPL”), and were created for the purpose of acquiring and leasing aircrafts. The Debtors did not have any employees, were managed by the president and chief executive officer of JPL (which maintained an office in Tokyo), and did not maintain their own independent offices. In addition, the Debtors did not have any regular operations or ordinary-course business in the United States, their airplanes were leased to a foreign carrier (Vietnam Airlines), and those planes had never flown to or been in the United States.
To finance the purchase of their respective aircrafts, each of the Debtors entered into senior and junior financing arrangements. In connection with these financing arrangements, each JPA Entity entered into similar proceeds agreements with their intermediate lessor, JPL, the security agent, and the various lenders. The proceeds agreements prohibited JPL from putting the Debtors into bankruptcy, provided that the security agent would act on behalf of the lenders, and included a payment waterfall for any sale proceeds received. The Debtors also entered in security agreements, which granted the security agent liens on the aircraft and assigned the security agent interests in its rights under the transaction documents, including the various leases (the “Lease Assets”). The security agreements also gave the security agent the right and discretion to dispose of the Lease Assets.
Like many other companies, the Debtors experienced a sharp decline in their cash flows due to the decrease in travel during the COVID-19 pandemic. As a result, defaults occurred under the leases and subleases and the former security agent terminated the leases. On the same day that the former security agent terminated the leases, FitzWalter Capital Partners (Financing Trading) Limited (the “Moving Claimant”) acquired substantial amounts of the Debtors’ debt. The next day, the Moving Claimant succeeded the former agent and became the security agent under the transaction documents. Approximately one week later—and without notice to the Debtors—the Moving Claimant initiated foreclosure proceedings in England against the Debtors’ Lease Assets, but not against the actual airplanes. The English foreclosure proceeding contemplated an aggressive sale schedule—the bid deadline was in one week and the successful bidder was required to close just three days later. When the Debtors learned of the Moving Claimant’s foreclosure plans, they commenced their chapter 11 cases in the Bankruptcy Court of the Southern District of New York, triggering the automatic stay, under section 362 of the Bankruptcy Code, to halt the Moving Claimant’s sale efforts.
The Moving Claimant filed a motion to dismiss the chapter 11 cases, arguing, among other things, that the Debtors did not have any legally meaningful ties to the United States to qualify as debtors under section 109 of the Bankruptcy Code. The Moving Claimant also moved to dismiss the chapter 11 cases as being filed in bad faith to forestall their legitimate and contractually specified foreclosure remedies. The Debtors opposed the motion arguing, among other things, that they satisfied the requirements of section 109 because they held property in the United States in the form of two separate retainer deposits of $250,000 held in U.S. bank accounts, which the Debtors’ bankruptcy counsel opened in order to fund legal services in connection with the chapter 11 cases. Notably, the retainer deposits were funded by JPL (the Debtors’ parent) and not the Debtors themselves; however, any undrawn portions of the retainers remaining at the end of the chapter 11 cases were to be returned to the Debtors. The Debtors were joined in their opposition by JPL and two of the Debtors’ other secured lenders.
Section 109(a) of the Bankruptcy Code
Under section 109(a) of the Bankruptcy Code, only a person that “resides or has a domicile, place of business, or property in the United States, or a municipality” may be a debtor under the Bankruptcy Code.
The Court’s Decision
In denying the Moving Claimant’s motion to dismiss, the bankruptcy court acknowledged that the Debtors had little ties to the U.S., noting that they were Japanese companies, with no officers or employees in the U.S. or anywhere else, no regular operations or ordinary-course business in the U.S., and that the airplanes were leased to a foreign carrier and had never flown to or been in the U.S. Notwithstanding the lack of meaningful ties, however, the bankruptcy court reiterated that the bankruptcy courts in the Southern District of New York have held that bank accounts, including undrawn retainers, in the U.S. can satisfy the “property” requirement of section 109(a). The bankruptcy court reaffirmed that for a foreign corporation to qualify as a debtor under section 109, courts have required “only nominal amounts of property located in the United States” and there is “virtually no formal barriers to having federal courts adjudicate debtors’ bankruptcy proceedings.” In re JPA No. 111 Co., Ltd., No. 21-12075 (DSJ), at *11 (quoting In re Globo Comunicacoes e Participacoes S.A., 317 B.R. 235, 249 (S.D.N.Y. 2004)). Additionally, the court held that section 109’s unqualified use of the word “property” means there was “no statutory requirement as to the property’s minimum value.” In re JPA No. 111 Co., Ltd., No. 21-12075 (DSJ), at *11 (quoting In re Paper I Partners, L.P., 283 B.R. 661, 674 (Bankr. S.D.N.Y. 2002)).
The Moving Claimant focused its opposition on the fact that JPL, and not the Debtors, directly transferred the funds to the retainer accounts, but the bankruptcy court was not persuaded. The court noted that the identity of the payer was not relevant so long as the retainer was paid on behalf of the Debtors (“the existence of funds from which a client is entitled to fund U.S. legal services is sufficient to satisfy Section 109, whoever sent the funds to counsel.”). The bankruptcy court also relied on the fact that any unused funds contained in the retainer accounts were contractually required to be returned to the Debtors.
In further support of its motion, the Moving Claimant argued that the Debtors’ omission of the retainer deposits from their chapter 11 petitions and schedules indicated the absence of any true property interest. The bankruptcy court, however, was not persuaded and easily dismissed this argument as form over substance. The court noted that: (i) the evidentiary record, in the form of wire transfer receipts and confirmations, demonstrated that the Debtors’ had indeed received the retainer funds; (ii) the Moving Claimant did not challenge the veracity of this evidence or the Debtors’ representation that the retainer deposits existed as of the petition date to fund each Debtors’ legal fees; and (iii) the Court could, and likely would, allow the Debtors to amend their schedules.
Accordingly, the Court found that the Debtors satisfied the “property in the U.S.” requirement of section 109(a) and were thus proper debtors under the Bankruptcy Code.
The Moving Claimant also sought to dismiss the chapter 11 cases as bad-faith filings under section 1112(b) of the Bankruptcy Code and argued that the Debtors filed the cases to hinder the foreclosure remedies provided under the transaction documents.1 Although the bankruptcy court acknowledged that many of the factors courts use to assess whether a filing was made in bad faith pointed in favor of dismissal, the court determined that the overall circumstances did not demonstrate a bad-faith effort to improperly delay and frustrate the legitimate expectations of a secured creditor. In doing so, the bankruptcy court appeared to rely heavily on its conclusion that (i) the Debtors were already pursuing a section 363 sale process that was likely to result in payment in full of the secured creditors, including the Moving Claimant (with the possible exception of certain disputed amounts beyond principal and interest), and (ii) the Debtors’ other secured creditors supported the 363 sale process and took the view that the Moving Claimant was engaging in value-destructive, self-serving behavior at the expense of other secured creditors and parties in interest.
Notably, under the transaction documents, JPL had agreed not to file or authorize the Debtors’ chapter 11 filing. The bankruptcy court acknowledged that JPL may have acted in contravention to the transaction documents, but declined to address that question. The aggressive pace at which the Moving Claimant was proceeding also did not likely help its cause—the Moving Claimant purchased the secured debt after the Debtors were already in default, became the security agent a day later, and nine days thereafter began its pursuit of foreclosure remedies.
Ultimately, the JPA court determined that these Debtors were eligible under section 109 to avail themselves of the benefits of the Bankruptcy Code and refused to dismiss their chapter 11 cases, despite the facts that (i) the Debtors had no ties to the U.S., (ii) they did not fund the retainer deposits that were their primary basis for jurisdiction, (iii) their parent may have acted in violation of its transactions documents by authorizing the chapter 11 filings, and (iv) the moving creditor, although perhaps acting aggressively, had a legitimate contractual right to foreclose on the Lease Assets. This ruling demonstrates the bankruptcy courts will continue to take a broad view of, and expansive reach with respect to, their jurisdiction, especially when presented with a plausible path forward that has the supported of creditors and other parties in interest.