In a recent decision, In re B.C.I Fins. Pty Ltd. (In Liquidation), No. 17-11266, 2018 Bankr. LEXIS 1217 (Bankr. S.D.N.Y. Apr. 24, 2018), Judge Sean Lane granted a chapter 15 petition after rejecting a challenge to jurisdiction in the Southern District of New York.  He held that, under Bankruptcy Code section 109(a), jurisdiction was established in the district because the debtors had a retainer payment there and claims against corporate directors for breaching fiduciary duties.

The debtors were intercompany borrowing and lending companies located in Australia.   An Australian tax investigation resulted in significant assessments the debtors couldn’t satisfy.  A government audit also found “fraud and evasion.”  This all led to a liquidation filing in Australia.

The liquidators alleged that corporate directors had breached their fiduciary duties.  A trial judge in Australia agreed, ruling that the directors had caused serious financial losses.  By 2017, two directors, Andrew and Michael Binetter, had moved from Australia to New York City. 

The liquidators then filed a chapter 15 case there and asked Judge Lane to recognize the Australian case as a foreign main proceeding.  The liquidators wanted discovery in the U.S. from Andrew and Michael Binetter.  They didn’t believe Andrew would return to Australia and Michael could not due to health issues.

Andrew Binetter and another party (the “Objecting Parties”) objected to chapter 15 recognition.  In their view, the court lacked jurisdiction over the debtors.  They cited Bankruptcy Code section 109(a), which says that “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.”

But the liquidators asserted that section 109(a) was satisfied because (1) the debtors had property in New York — a $1,250 retainer per debtor in an attorney’s trust account, and (2) the situs of the fiduciary duty claims was New York.  Judge Lane agreed with the liquidators.

In the Second Circuit, section 109(a) must be satisfied in chapter 15 cases.[1]  Prior cases had established that section 109(a) can be satisfied with attorney retainer payments.[2]  The Objecting Parties tried to avoid what Judge Lane called the “weight of authority” by arguing that the debtors used the retainer to “manufacture eligibility under section 109” and that the debtors had engaged in “manipulation and gamesmanship.”[3]  Judge Lane rejected the argument.

The Objecting Parties’ contention concerning the situs of the fiduciary duty claims required a more detailed analysis.  It started with a choice-of-law inquiry.  “The nature or scope of a debtor’s interest in property is determined by ‘local’ or ‘state’ law.”[4]   Judge Lane concluded that New York’s choice-of-law rules should be applied.  And New York’s “greatest interest test” pointed to Australian substantive law to determine the situs of the fiduciary duties claims.

Judge Lane observed, “[t]he Liquidators were appointed by an Australian court, and are governed by Australian law, and Andrew Binetter is an Australian citizen.  Perhaps even more importantly, the Fiduciary Duty Claims arose from acts committed in Australia and exist under Australian law, and any recovery will be distributed to foreign creditors through the Australian proceeding.”[5]

Having concluded the New York’s choice-of-law rules look to Australian substantive law, Judge Lane next concluded that, after hearing expert testimony, under Australian law the situs of the fiduciary duty claims was New York.  The primary reason for this conclusion was that the Binetters reside in New York, and case law in Australia indicated that claims “‘are situated where they are properly recoverable and are properly recoverable where the debtor resides.’” [6]  Thus, for this reason as well, section 109(a) was satisfied, and Judge Lane granted the recognition petition.

[6] Id., *27 (citation omitted).