The Gateway to Chapter 15: An Evolving Issue

by Blank Rome LLP

Chapter 15 of the United States Bankruptcy Code is a relatively recent addition to the American bankruptcy statute and it incorporates the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency into American law. Using Chapter 15, American courts have a set rubric and system to determine when to “recognize” a foreign insolvency/rehabilitation/reorganization proceeding and to protect or implement that proceeding here in the United States. The aim of Chapter 15 is to create a universal and uniform approach to according comity to foreign insolvency proceedings, which are not violative of the essential public policy of the United States.

There is an acceleration in the number of Chapter 15 cases that are being filed, and thus a rapid evolution in the law governing Chapter 15. This takes place in a context where cross-border joint reorganization efforts are becoming more and more interconnected and complex. As of this writing, in the Nortel Networks Corp. liquidation in the Delaware Bankruptcy Court in the United States and the Ontario Superior Court in Canada, the Bankruptcy Court and the Superior Court are presiding over a joint trial in the United States and Canada over the allocation of value to $4.5 billion of patent proceeds, where a unitary record is being generated in front of both Judge Kevin Gross in Delaware and Justice Frank Newbould in Toronto, sitting together—with the courtrooms linked by advanced telephony and video. See J. Santo, Nortel Units Spar Over Patent Sale in $7B Liquidation Fight, Law360 (May 12, 2014). In the Irish Bank Resolution Corporation Limited (f/k/a Anglo Irish Bank) Chapter 15 in Delaware, the Bankruptcy Court just ordered the sale of a $1 billion loan portfolio to Goldman Sachs and Deutsche Bank to more fully implement a main Irish liquidation proceeding—since the disposition of the loan portfolio in question was largely governed by American law, subject to certain reserves. See In re Irish Bank Resolution Corporation Limited, slip op., 2014 WL 1759609 (Bankr. D. Del., February 14, 2014).

Given the usefulness and centrality of the Chapter 15 tool to international restructuring, how to access Chapter 15 bankruptcy is an important issue and has been litigated recently. This note focuses on two importantly different approaches to the gateway to Chapter 15 recognition—foreign debtor eligibility.

The United States Court of Appeals for the Second Circuit in Drawbridge Special Opportunities Fund LP v. Katherine Elizabeth Barnet, Foreign Representative, et al. (In re Katherine Elizabeth Barnet) (“Barnet”), 737 F.3d 238 (2d Cir. 2013), overturned a recognition order issued by the New York Bankruptcy Court in respect of an external administration proceeding for Octaviar Administration Pty Ltd. in Australia. Drawbridge Special Opportunities Fund LP, a stakeholder in Octaviar and litigation target in the Australian proceeding, objected to the recognition order on the grounds that Octaviar did not qualify as a “debtor” for American bankruptcy under Bankruptcy Code section 109(a), a provision of general applicability under the Bankruptcy Code.  Section 109(a) requires a debtor under the Bankruptcy Code to reside or have a domicile or place of business in the United States or to have property in the United States.

The Second Circuit Court of Appeals found that section 109(a) was applicable to Chapter 15 and rejected the foreign representative’s argument that Octaviar was not a debtor under Chapter 11 but under the Australian law, and that she sought relief under Chapter 15, not Octaviar directly. The Court of Appeals found that the presence of Octaviar was “inextricably intertwined” with the nature of the Chapter 15 proceeding and that the operative sections of Chapter 15 that would provide Octaviar with relief in the United States all referred to the “debtor.” Likewise, the Court of Appeals did not find that section 1502 of the Bankruptcy Code, which contains a definition of the term “debtor” for Chapter 15 purposes (“an entity that is the subject of a foreign proceeding”), “blocked” application of section 109(a), but rather complemented the general eligibility guidelines—further defining the concept of “debtor” under the American law, rather than supplanting the section 109 directives as to debtor eligibility. The Court also found language in the bankruptcy venue statute, 28 U.S.C. § 1410, which states that Chapter 15 debtors need not have a place of business or assets in the United States to lay proper venue (venue is also proper wherever the foreign debtor faces an action or proceeding or where the interests of justice require venue to be found), to be “procedural” in nature. It then remanded the case to the New York Bankruptcy Court so that the Bankruptcy Court could determine whether Octaviar was 109 eligible.

Interestingly, the United States Court of Appeals for the Third Circuit in In re ABC Learning, 728 F.3d 301 (3d Cir. 2013), affirmed the Delaware Bankruptcy Court’s recognition of another Australian insolvent in liquidation. In so doing, the Third Circuit emphasized in the strongest terms the commitment that American bankruptcy law makes through Chapter 15 to “a universalism approach to transnational insolvency. It treats the multinational bankruptcy as a single process in the foreign main proceeding, with other courts assisting in that single proceeding.” Id. at 306. This is an approach that is distinguishable from that employed by the Second Circuit in Barnet, where the Barnet court insisted on the primacy of the general Bankruptcy Code (arguably the territorial American) eligibility requirements for a debtor as set forth in section 109 over the plain and specific language of section 1520 of the Bankruptcy Code, which did not tie access to Chapter 15 to American assets, offices, etc. [ft2]

This difference in emphasis can be important. In In re Bemarmara Consulting a.s., slip op. at 8-12, Bankr. Case No. 13-13037 (KG) (Bankr. D. Del., Dec. 23, 2013), Judge Kevin Gross of the Delaware Bankruptcy Court recognized a Czech insolvency proceeding in respect of Bemarmara Consulting, a.s., a Czech entity, and did so, despite a record, which suggested Bemarmara might not have assets, an office, or a domicile in the United States, satisfying section 109. Citing ABC Consulting at length and its requirement that Chapter 15 be construed to effectuate the “universalist” approach to transnational insolvency, Judge Gross stated that he did not believe the Third Circuit would follow Barnet. Focusing on the plain language of Chapter 15, Judge Gross found 109 inapplicable because Bemarmara was not seeking relief directly. Rather, Bemarmara had left the petitioning to its duly appointed foreign representative (as is required under Chapter 15). According to the Delaware Bankruptcy Court, section 109 only governs debtors that seek relief directly under the Bankruptcy Code and foreign debtors under Chapter 15 do not seek such relief directly. Further, the Delaware Bankruptcy Court ruled that section 1502 defines the term “debtor” for all Chapter 15 purposes and more specifically than does section 109, a general and therefore excepted rubric, stating “there was nothing in the definition in Section 1502 which reflects upon a requirement that Debtor have assets.” [FT3]

Delaware and New York are the primarily favored venues for complex rehabilitation, reorganization, and liquidation proceedings under the American bankruptcy system. So it is important to understand the different gateway requirements to Chapter 15 in each jurisdiction, which in turn derive from a subtly different approach to the relationship of Chapter 15 to the rest of the Bankruptcy Code. This can drive planning issues and is important to understand when addressing other points under Chapter 15 that relate to the application of “universalist” transnational insolvency (e.g., the breadth of the application of the stay, the limits that a bankruptcy court faces in implementing a foreign insolvency proceeding’s directives, and imperatives).               

[ft1] Mr. Schaedle, a partner, is a member of the Firm’s Maritime Industry Team and its Financial Services, Business Restructuring and Bankruptcy Practice Group. In his practice, Mr. Schaedle represents all stakeholders in complex Chapter 11 and Chapter 15 matters, including the official committee of unsecured creditors of Marco Polo Seatrade B.V. and its affiliated debtors in that shipping line’s Chapter 11 cases in New York and the foreign representative in the STX Pan Ocean Co., Ltd. Chapter 15, also in New York.

[FT2] It should be emphasized that the section 109 eligibility requirements are not particularly onerous. Minimal levels of property have been found sufficient to satisfy the 109(a) standard. For example, In re Global Ocean Carriers Limited, 251 B.R. 31, 38-40 (Bankr. D. Del. 2000), ruled that professional retainers maintained in escrow accounts constituted “property” for 109(a) purposes, the Delaware court noting that an owned “peppercorn” would be sufficient to satisfy the relevant standard. And in In re Marco Polo Seatrade B.V., et al. Bankr. Case No. 11-13634 (RG) (Bankr. S.D.N.Y.), the New York Bankruptcy Court found that an interest in an OSG pooling agreement account located in New York was sufficient 109 property to prove eligibility for certain Marco Polo debtors. And in In re TMT Procurement Corporation, et al., Bankr. Case No. 13-33763/Civil Action No. 13-2301 (Bankr. S.D. Tex./S.D. Tex.), both the Houston Bankruptcy and District Court found that a retainer paid on behalf of multiple debtors to a financial advisor and held in escrow in the U.S. was sufficient property under 109 to establish eligibility, following Global Ocean. The Marco Polo debtors were Netherlands-based, and TMT entities are based in China and Taiwan—each with the vast bulk of their assets in foreign jurisdictions.

[FT3] Relatedly, the Bemarmara court found that there are no “bad faith” grounds for dismissal under Chapter 15; that recognition is required when the express grounds for recognition under the Bankruptcy Code are met and proven—unless recognition would be manifestly contrary to the public policy of the United States. See also, In re Cozumel Caribe, S.A. de C.V., 508 B.R. 330 (Bankr. S.D.N.Y. 2014) (despite foreign representative taking inconsistent and troubling positions as to creditor’s claim in Mexican “concurso” proceeding and in Chapter 15 case, refusing to deny recognition and foreign representative access to United States courts where Chapter 15 basic requirements met and violations of American public policy not manifest, but noting that initial recognition does not require the New York Bankruptcy Court to accord comity to all orders and requirements of the foreign court or law).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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