II. The Purpose of Chapter 15

Chapter 15 was enacted to incorporate the Model Law and provide an effective and efficient way to manage cross-border insolvency cases.

Five objectives flow from the purpose of enacting Chapter 15, and are codified in 11 U.S.C. § 1501.

The five objectives are:

(1) Foster cooperation and communication by and between courts of the United States and foreign courts in cross-border insolvency cases*(12).

(2) Establish greater legal certainty for trade and investment*(13).

(3) Establish fair and efficient administration of cross-border insolvencies*(14).

(4) Better protect and maximize the value of the debtor's assets*(15).

(5) Promote and facilitate in the rescue of financially troubled businesses, saving jobs and protecting investments*(16).

(6) These objectives will be illustrated and expanded upon later in this article and in the implementing Chapter 15 section.

III. Chapter 15's Key "Terms of Art"

Chapter 15 created a set of terms and phrases to understand and implement its law. These novel terms and phrases are evolving and being refined by case law, but understanding them is essential to implementation of Chapter 15. The unique lexicon in Chapter 15 includes the following:

1. Debtor

One familiar key term is the word "debtor." However, the term "debtor" in Chapter 15 differs from the term "debtor" in every other Chapter of the Bankruptcy Code*(17). In Chapter 15, debtor means "any entity that is the subject of a foreign proceeding"*(18). As the House Report to BAPCPA noted:

"Debtor" is given a special definition for this chapter. This definition does not come from the Model Law, but is necessary to eliminate the need to refer repeatedly to "the same debtor as in the foreign proceeding"*(19).

The definition requires that a court "look outside the United States and recognize that the entity in question is already subject to the authority of a foreign court"*(20). In that respect, the definition of "debtor" adopts "an international perspective"*(21). Moreover, the definition is more narrow and restrictive because a bankruptcy estate is not created upon commencement of a Chapter 15*(22).

Few cases expand upon the definition of debtor in Chapter 15 of the Bankruptcy Code. But the recent decision by the Court of Appeals for the Second Circuit, Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet)*(23), held that the definition of debtor under 11 U.S.C. § 1502(1) does not preclude the application of the eligibility requirements imposed on debtors in other cases under the Bankruptcy Code under 11 U.S.C. § 109(a)*(24).

Section 109(a) of Title 11 provides that "[notwithstanding 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 [the Bankruptcy Code]"*(25). In Barnet, the Court decided that a foreign representative cannot seek recognition or any other relief under Chapter 15 unless the debtor in the foreign proceeding has a domicile, place of business, or other assets in the United States*(26). The Court based its analysis on a plain reading of 11 U.S.C. § 103(a), which was amended by BAPCPA at the same time Chapter 15 was enacted, and provides that Chapter 1 of the Bankruptcy Code, including Section 109, applies to Chapter 15*(27).

Prior to Barnet, courts had uniformly denied the application of 11 U.S.C. § 109(a) to Chapter 15. In In re Toft, the court specifically held that the "eligibility standards in § 109 for filings under various chapters of the Bankruptcy Code did not require that a debtor in a foreign proceeding have a place of business or property in the United States"*(28). In British Am. Ins. Co. v. Fullerton, the court similarly held that "[i]t is not necessary that the debtor have any assets in the United States for there to be a chapter 15 case[,]"*(29) noting that "[s]ometimes the relief sought by the foreign representative is limited to the ability to conduct discovery under section 1521(a)(4)"*(30).

11 U.S.C. § 109 reveals that while certain provisions provide additional restrictions on who can be a debtor under all the other chapters of the Bankruptcy Code, i.e., chapters 7*(31), 9*(32), 11*(33), 12*(34) and 13*(35), it provides no additional guidance regarding eligibility requirements of a debtor in a Chapter 15 case*(36). Further, 11 U.S.C. § 1501 provides that Chapter 15 will apply where assistance is sought by a foreign court or foreign representative for a foreign proceeding - ostensibly eliminating any requirement that the debtor have property or a place of business in the United States*(37).

Eligibility requirements are an emerging issue in Chapter 15 jurisprudence*(38). Less than a week following the Second Circuit's decision in Barnet, the Delaware Bankruptcy Court issued a conflicting ruling in In re Bemarmara Consulting AS.*(39), and granted chapter 15 relief to a debtor that did not satisfy § 109(a)*(40). In Bemarmara, the court held that "the application of § 109(a) in the chapter 15 context was a 'scrivener's error and ... the [legislative] intent was that 109(a) would not apply"*(41). But the same Barnet case continues to educate us, as the foreign representatives responded to the Second Circuit's decision and filed a second petition to recognize its Australian proceeding*(42). This time debtor Octaviar could specifically identify causes of action against entities in the United States, and gave a $10,000 retainer to its United States counsel*(43). The foreign representatives highlighted these factors to show its property in the United States within the meaning of section 109(a) of the Bankruptcy Code*(44). And with these facts, the foreign representatives successfully obtained recognition the second time around*(45).

In a separate case, the bankruptcy court for Southern District of New York held that § 109(a) eligibility requires property in the United States without "an inquiry into the circumstances surrounding the debtor's acquisition of the property"*(46). In SunTech, the foreign administrators took several actions under the appointment order for a holding company of entities primarily located and operating in China, entered by the Grand Court of the Cayman Islands*(47). The administrators' actions included opening a bank account in Cayman Islands one month before filing a Chapter 15 petition. The court found no basis under 11 U.S.C. § 109(a) to investigate how the debtor acquired the property or to require a minimum amount of property in the United States*(48). The court also rejected that the debtor acted in bad faith, and stated: "Interpreting the Bankruptcy Code to prevent an ineligible foreign debtor from establishing eligibility to support needed chapter 15 relief will contravene the purposes of the statute to provide legal certainty, maximize value, protect creditors and other parties in interests and rescue financially troubled businesses"*(49). SunTech shows a very flexible standard for eligibility, and is encouraging to foreign debtors seeking U.S. jurisdiction under Chapter 15.

Furthering the apparent flexible standard, the same district recently found that including a New York choice-of-law and forum-selection clauses in a debt indenture satisfied the "property of the estate" standard*(50). In Berau Capital, the debtor owed more than $450 million under a contract governed by New York law and included a New York choice-of-forum clause. These contractual rights were intangible property of the debtor, which fixed the situs of the contract in New York. This situation "easily satisfied [the § 109(e)] requirements"*(51).