A recent decision by the Second Circuit Court of Appeals in Drawbridge Special Opportunities Fund LP v. Barnet,[1] which found that the bankruptcy court should not have granted chapter 15 recognition to the foreign insolvency proceeding of an Australian company, adds to the growing body of recent case law evidencing that courts will evaluate the relief a foreign representative seeks under the established standards and requirements applicable to cases under other chapters of the Bankruptcy Code. The Second Circuit has provided practitioners with another indication of the probing examination to which courts may subject even the most fundamental relief sought in chapter 15 proceedings.
In Octaviar, the liquidators of Octaviar Administration Pty Ltd. filed a chapter 15 petition for recognition of the company’s Australian liquidation proceeding as a foreign main proceeding. In the liquidation proceeding, the liquidators had investigated various Australian affiliates of Drawbridge Special Opportunities Fund LP, and several months before the chapter 15 petition was filed, commenced a lawsuit in Australia against certain of those affiliates seeking AUD$210 million. Drawbridge objected to the petition for recognition, arguing that Octaviar did not have a domicile, place of business or property in the U.S., as required of a debtor under § 109(a) of the Bankruptcy Code.[2] Drawbridge further argued that the liquidators offered only a suggestion that Octaviar might have assets in the U.S. in the form of claims or causes of action against entities in the U.S., for which they now sought discovery through the chapter 15 proceeding, and as such could not satisfy the statutory requirements to obtain chapter 15 relief.
The bankruptcy court overruled Drawbridge’s objection, entered an order recognizing the Australian proceeding as a foreign main proceeding, and in so doing, concluded that there is no requirement that a foreign debtor be domiciled or have a residence, place of business or property in the U.S. for a foreign proceeding to be recognized under chapter 15.[3] Drawbridge appealed the order and the bankruptcy court subsequently certified it for direct appeal to the Second Circuit to resolve the issue of “whether the Bankruptcy Court erred in finding that a petitioner in a chapter 15 case is not required to demonstrate that a foreign debtor ‘resides, or has a domicile, a place of business, or property in the United States’ as a condition to obtain recognition of a foreign main proceeding under sections 1515 and 1517” of the Bankruptcy Code.[4]
On appeal, the Second Circuit found that by its plain terms, § 109(a) applies in chapter 15 cases, and because the liquidators made no attempt to establish that Octaviar had a domicile, place of business, or property in the U.S., recognition should not have been granted. The court reasoned that § 103(a) makes all of chapter 1 applicable to chapter 15, and § 101(23) defines “foreign proceedings” as those in which “the assets of the debtor are subject to control or supervision by a foreign court.” Therefore, a debtor subject to the foreign proceeding must meet the requirements of § 109(a) before a bankruptcy court can grant recognition of the foreign proceeding.
The court rejected the liquidators’ argument that § 109(a) creates a requirement only for debtors under title 11, whereas Octaviar was a debtor under the Australian Corporations Act. The liquidators argued that because they were seeking recognition of a foreign proceeding rather than recognition of a debtor under title 11, § 109(a) was inapplicable. The court found that the presence of a debtor is “inextricably intertwined with the very nature of a chapter 15 proceeding,” such that “it stretches credulity to argue that the ubiquitous references to a debtor in both chapter 15 and the relevant definitions of chapter 1 do not refer to a debtor under the title that contains both chapters.” The court concluded that both the definitional provisions of chapter 15 and the relief provisions that accompany recognition of a foreign main proceeding support this interpretation.
The liquidators also argued that even if Octaviar was required to qualify as a debtor under title 11, it was only required to be “an entity that is the subject of a foreign proceeding” under the chapter 15-specific definition in § 1502.[5] However, the court found this a preclusive reading irreconcilable with the explicit instruction in § 103(a) to apply chapter 1 to chapter 15. The court concluded that § 1502’s definition of “debtor” supplants § 101’s definition in the context of a chapter 15 case, but does not supplant the requirements for a “debtor under this title” under § 109(a). The liquidators’ proposed interpretation would render § 109(a) meaningless under both chapters 1 and 15, violating the basic interpretive canon that no part of a statute will be inoperative or superfluous.
The court ultimately rejected the liquidators’ argument that the context and purpose of chapter 15 supported their reading, finding that contextual analysis supported application of § 109 to chapter 15. The court first observed that Congress amended § 103 to provide that chapter 1 applies to chapter 15 at the same time that it enacted chapter 15, which strongly supported the conclusion that Congress intended for § 109 to apply to chapter 15. The court also found nothing contradictory or disharmonious about requiring a chapter 15 debtor to satisfy § 109(a) despite § 1528’s provision that “after recognition of a foreign proceeding, a case under another chapter of this title may be commenced only if the debtor has assets in the United States.”
The court concluded that § 1528 is more restrictive than § 109 and simply adds a further requirement before a chapter 15 debtor may commence another case under another Bankruptcy Code chapter. Likewise, although the venue statute under title 28 allowed for venue for chapter 15 cases even when “the debtor does not have a place of business or assets in the United States,”[6] the court found that it is purely procedural, and does not trump the unambiguous substantive and restrictive language used in §§ 103 and 109.
Finally, the court rejected the liquidators’ argument that the purpose of chapter 15 would be undermined by application of § 109(a). The court recognized that the UNCITRAL Model Law on Cross-Border Insolvency does not include a provision akin to § 109, but found that such omission did not outweigh the express language that Congress adopted in §§ 103 and 109. According to the court, Congress may have intended to limit the relief provided by chapter 15 because it knew that discovery in aid of foreign proceedings was available outside of chapter 15.
The Octaviar decision represents another important development in chapter 15 decisional law. While the scope and application of chapter 15 continues to develop, Octaviar teaches practitioners that foreign representatives and their counsel must be prepared to establish that their debtor meets § 109’s threshold requirements for all debtors under the Bankruptcy Code.
[1] Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), No. 13-612, 2013 U.S. App. LEXIS 24585 (2d Cir. Dec. 11, 2013) (hereafter, “Octaviar”).
[2] 11 U.S.C. § 109(a) provides that “[n]otwithstanding 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.”
[3] Order Granting Recognition of a Foreign Main Proceeding, No. 12-13443 (SCC) (Bankr. S.D.N.Y. Sept. 6, 2012); Transcript of Oral Argument, at 29-30, No. 12-13443 (SCC) (Bankr. S.D.N.Y. Sept. 18, 2012).
[4] Memorandum Opinion in Support of Certification of Direct Appeal to the Court of Appeals for the Second Circuit, No. 12-13443 (SCC) (Bankr. S.D.N.Y. Nov. 18, 2012).
[5] 11 U.S.C. § 1502 provides in relevant part that “[f]or purposes of this chapter, the term — (1) ‘debtor’ means an entity that is the subject of a foreign proceeding.”
[6] 28 U.S.C. § 1410
