Second Circuit and Delaware Bankruptcy Court Take Different Views of Whether a Foreign Debtor Must Have Assets in the United States to be Eligible for Recognition Under Chapter 15
Courts in the two circuits, which saw the majority of 2013’s Chapter 15 recognition proceedings, recently addressed—and came to opposite conclusions about—a novel issue: whether an entity is required to have property in the United States to qualify for relief as a debtor under Chapter 15 of the United States Bankruptcy Code. Chapter 15 is the equivalent of a proceeding under Part IV of Canada’s Companies’ Creditors Arrangement Act [CCAA]1 (i.e., the U.S.’s enactment of the UNCITRAL Model Law on Cross Border Insolvencies). Chapter 15 was adopted in 2005; thus, case law is continuing to develop. It is noteworthy that two courts with significant dockets disagreed with one another in rulings issues less than a week apart in December 2013.
The dispute centers on the applicability, or not, of a provision not found within Chapter 15 itself, but in an earlier section of the Bankruptcy Code, which applies to, for example, Chapter 11 cases. Section 109(a) of the Bankruptcy Code contains a requirement that “only a person that resides or has a domicile, a place of business, or property in the United States ... may be a debtor under this title”. In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet) [Barnet],2 the Second Circuit Court of Appeals, whose opinions are binding on the Bankruptcy Courts for the Southern District of New York, held that s. 109(a)’s eligibility requirements apply in Chapter 15 proceedings and therefore vacated an order of recognition. Less than one week later, the Delaware Bankruptcy Court in In re Bemarmara Consulting a.s. (Transcript; “Tr.”) [Bemarmara]3 issued an oral ruling, holding that s. 109(a)’s requirements do not apply in Chapter 15 proceedings and granting recognition to a debtor that, according to an objector, had no assets in the United States.
Given that the majority of Chapter 15 cases, 63 per cent of those that filed in 2013 according to one source, relate to a Canadian foreign proceeding, this issue could impact Canadian cross-border insolvencies and is of interest to any Canadian company considering utilizing Chapter 15.
This article first describes at least four reasons why a company might desire to file a Chapter 15 case, even if it has no assets located in the United States, demonstrating why this issue “matters”. It next sets forth the statutory provisions of the United States Code that led to the differing results in Barnet and Bemarmara and then explores the reasoning of the two opinions. It concludes with practical observations about the availability of Chapter 15 relief for companies without significant assets located in the United States.
Situations Where Chapter 15 Relief Is Desirable Even without Assets Located in the U.S.
One might wonder: is this much ado about nothing? Do entities without assets located in the United States need Chapter 15 relief? The fact that two opinions were issued in rapid succession last December demonstrates that foreign representatives often need such relief. Bemarmara likely presents the most frequent scenario: litigation was pending in the United States so application of the United States’ automatic stay was desirable, and the foreign representative contended that it had an intangible asset located in the United States, but the other party to the litigation disagreed. (In an alternative holding, the Bemarmara court agreed with the foreign representative that the intangible asset was located in the United States.) Vendor contracts regularly contain forum selection clauses, as was the case in Bemarmara, so numerous companies potentially could be subject to litigation in the United States, even if they have no assets located in the United States. The need to stay any such lawsuit undoubtedly will continue to be a key issue in cross-border insolvencies.
An entity without assets located in the United States might also need Chapter 15 relief when its affiliates have sought Chapter 15 relief, particularly when such affiliates have intercompany receivables. Take, for example, two affiliated debtors in a CCAA case: Debtor A, which has assets located in the United States, and Debtor B, which does not. Imagine then that Debtor B holds a significant intercompany receivable payable by Debtor A. Debtor A would be eligible for relief under Chapter 15. Under the ruling in Barnet, Debtor B would not, and suits against it—which perhaps were filed by zealous plaintiffs suing every entity they could find with a similar name and asserting veil piercing and alter ego theories—would not be stayed. Creditors could therefore pursue actions against Debtor B and, if successful, try to satisfy the judgment by asserting a right to the intercompany receivable.
Relief under Chapter 15 might also be beneficial when the foreign representative needs broadbased United States style discovery. For example, it might be seeking to determine whether the foreign debtor, or a party in litigation against the foreign debtor, fraudulently conveyed or concealed assets in the United States. Or, it might believe it has a claim, but needs discovery to determine if there is a good faith basis to assert it. Alternatively, it might desire types of discovery available in the United States but not elsewhere. Pursuant to s. 1521, upon recognition, the court may “provid[e] for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities”.4 In addition, if recognition is granted, “the foreign representative may apply directly to a court in the United States for appropriate relief in that court”.5 Thus, recognition under Chapter 15 can provide an avenue for obtaining discovery in the United States. It should be noted that there are some limits to the tactic of filing a Chapter 15 case to obtain discovery. Some U.S. courts have refused to grant recognition if the discovery sought would violate laws, public policies, or rights of citizens of the United States.6 Further, in Barnet, the Second Circuit noted that “28 U.S.C. § 1782(a) provides for discovery in aid of foreign proceedings without any requirement akin to Section 109(a)”, suggesting that recognition might not be necessary for the foreign representative to take discovery in the United States.7 Section 1782 is not related to insolvency proceedings and is interpreted very broadly.8
Another situation when Chapter 15 relief might be desirable even without assets located in the United States occurs if the foreign representative needs injunctive relief against persons or entities located in the United States regarding non-U.S. assets.9 For example, the foreign representative might need relief from a U.S. court to compel or enjoin certain actions of a U.S. company beyond the jurisdiction of the foreign court. Another example is a desire for an order preventing the destruction of documents needed in the foreign proceeding or the transfer of assets related to the foreign proceeding.
Relevant Statutory Provisions
Chapter 15 of the Bankruptcy Code was enacted in 2005. It adopted, nearly verbatim, the Model Law on Cross-Border Insolvency (the “Model Law”) promulgated by the United Nations Commission on International Trade Law (UNCITRAL) and replaced the prior procedure for ancillary cases of foreign debtors under former s. 304 of the Bankruptcy Code.10 Indeed, Chapter 15 appears to comport more closely to the Model Law than does Part IV.11
At the same time, Congress amended 11 U.S.C. § 103(a) to state, in relevant part, that “this chapter appl[ies] in a case under chapter 15”. In the parlance of the Bankruptcy Code, a “chapter” is the sub-section of the Bankruptcy Code within a grouping of 100. For example, “Chapter 11” simply means ss. 1101–1174 of the Bankruptcy Code. Thus, s. 103(a) is contained in Chapter 1. This gives rise to an argument that s. 109(a)’s eligibility requirements apply in Chapter 15 cases because s. 109 is part of the “this chapter”—Chapter 1—to which s. 103(a) refers.
However, interpreting s. 109(a)’s eligibility requirements to apply in Chapter 15 cases causes significant tension with other sections of Chapter 15 itself as well as the venue statute for Chapter 15 cases, 28 U.S.C. § 1410, which support an interpretation that a Chapter 15 debtor need not have assets, a place of business, or domicile in the United States. First, s. 1502(1) provides a specific and different definition of “debtor” applicable in Chapter 15 proceedings, stating that “for the purposes of this chapter, the term—(1) ‘debtor’ means an entity that is the subject of a foreign proceeding”.12 Section 1502(1) does not define a “debtor” as an entity with assets located in, or a domicile in, the United States, causing an inference that there is no such requirement. Second, s. 1528 states that “[a]fter recognition of a foreign main proceeding, a case under another chapter of this title may be commenced only if a debtor has assets in the United States.” This implies that a foreign debtor need not have assets in the United States for commencement of a Chapter 15 ancillary proceeding; otherwise, s. 1528 would be redundant, because a case would not proceed to recognition unless the debtor had assets located in the United States, so the “only if” language would be every case.
Third, and perhaps most fundamentally, 28 U.S.C. § 1410, the venue statute for Chapter 15 proceedings, seems to mandate an opposite conclusion. It provides: “A case under chapter 15 ... 11 may be commenced in the district court of the United States for the district ... (2) if the debtor does not have a place of business or assets in the United States, in which there is pending against the debtor an action or proceeding in Federal or State court”.13 If a debtor must have assets in the United States to be eligible for relief, there would be no set of circumstances where s. 1410(2) could ever be invoked, since it only applies “if the debtor does not have a place of business or assets in the United States”.
Finally, the Model Law, which Chapter 15 adopts, does not contain any requirement similar to s. 109(a).14 There does not appear to be any legislative history suggesting a desire to depart from the Model Law on this point. In addition, the predecessor to Chapter 15, 11 U.S.C. § 304, did not contain an eligibility requirement. One would have expected that if the United States Congress had intended to depart both from the Model Law and from prior practice under s. 304, there would have been significant legislative history noting the departure and its reasoning.
The Second Circuit’s Decision in Barnet
In Barnet, the Second Circuit reversed the United States Bankruptcy Court for the Southern District of New York and held that s. 109(a)’s eligibility requirements apply in Chapter 15 cases. The opinion focuses on the plain meaning of ss. 109(a) and 103(a) and rejects arguments that the consideration of the other sections, set forth above, compels a different interpretation. The Second Circuit stated that “statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses legislative purposes”.15 The Second Circuit reasoned that because s. 103(a) states that Chapter 1 applies in Chapter 15 cases and that s. 109 is within Chapter 1, s. 109(a) must apply in Chapter 15 cases.
The appellees in Barnet argued that under Chapter 15, a foreign representative seeks recognition of a foreign proceeding rather than it being a foreign “debtor” that seeks relief and, as a result, there is no “debtor” before the court that must meet the requirements of s. 109(a). The Second Circuit rejected this argument, noting that “the presence of a debtor is inextricably intertwined with the very nature of a Chapter 15 proceeding, both in terms of how such proceeding is defined and in terms of the relief that can be granted”.16
Next, the Second Circuit rejected the argument that a Chapter 15 debtor need only meet the requirements of Chapter 15’s specific definition of “debtor”. The court reasoned that s. 109 is not a definition, but rather an additional requirement of eligibility; the definition of debtor is contained in s. 101(13) for cases under, for example, Chapter 11, and that is all that s. 1502’s replacement definition changes. Therefore, the court held that s. 109 overlaid s. 1502 in Chapter 15 cases just as it overlays s. 101(13) in cases under Chapters 7, 9, 11, 12, or 13.17 Further, the court stated that interpreting s. 1502 to “block” s. 109 “violates the ‘most basic interpretive canon […]’ requiring us to interpret statutes such that ‘no part will be inoperative or superfluous’”.18 (As will be noted below, this reasoning is somewhat ironic because the Second Circuit’s interpretation subjects it to the same criticism, making s. 1410(2) inoperative and superfluous.)
Finally, the Second Circuit addressed contextual arguments. It rejected the argument, described earlier in this article, that the necessary implication of s. 1528 was that a foreign main proceeding could be recognized where the debtor had no assets in the United States because it states that only a subset of recognized foreign main proceedings—those where the debtor has assets located in the United States—may result in the filing of a Chapter 11 or 7 case. The Second Circuit was unpersuaded, reasoning that “Section 1528, therefore is more restrictive than Section 109” and “there is nothing contrary or disharmonious about applying Section 109(a) to Chapter 15 and then further requiring that Section 1528 is met before a case under another chapter of Title 11 may be commenced”.19 In addition, the Second Circuit rejected the argument, described earlier in this article, that s. 1410(2) compels a different result because it states that a Chapter 15 case “may be commenced” in a district where litigation is pending “if a debtor does not have a place of business or assets in the United States”. The court called s. 1410(2), the venue statute, “purely procedural”, and stated that “given the unambiguous nature of the substantive and restrictive language used in Sections 103 and 109 of Chapter 15 [sic], to allow the venue statute to control the outcome would be to allow the tail to wag the dog”. The opinion does not grapple with when s. 1410(2) ever could be invoked under the holding of Barnet.
The Delaware Bankruptcy Court’s Decision in Bemarmara
Just days after the Second Circuit issued its opinion in Barnet, the Delaware Bankruptcy Court was faced with the same issue in In re Bemarmara Consulting a.s. There, the foreign representative of a Czech Republic insolvency proceeding sought recognition of the foreign proceeding in the Bankruptcy Court for the District of Delaware, the District in which litigation was pending against the debtor. After directing the parties to submit supplemental briefing addressing the Barnet decision, the Delaware Bankruptcy Court issued an oral ruling disagreeing with the Second Circuit’s decision. The Delaware Bankruptcy Court reasoned that s. 109(a) relates to the eligibility of “debtors” under the Bankruptcy Code, but in a Chapter 15 case, “it is the Foreign Representative who is petitioning the Court, not the Debtor in the foreign proceeding”.20 The court further relied on s. 1502(1)’s specific definition of “debtor”, articulating the argument discussed above. In addition, the court noted, “Commentators have reflected on the possibility that it was a scrivener’s error and that the intent was that s. 109(a) not apply,”21 an apparent reference to the Johnston article cited above.
Impact of Barnet and Bemarmara
As a result of Barnet and Bemarmara, there is currently a split of authority regarding the application of s. 109(a)’s eligibility requirements to Chapter 15 debtors. Perhaps highlighting the tension among the various statutory provisions, as described above, each opinion contains some persuasive points. Certainly looking at ss. 109(a) and 103 in isolation, the Second Circuit’s plain meaning analysis seems to have appeal. However, its holding is, as the Delaware Bankruptcy Court pointed out, “contrary to Congress’s intent”.22 Moreover, the Second Circuit supports its holding with the canon of statutory construction that “statutory enactments should … be read so as ‘to give effect, if possible to every clause and word of a statute’” and that statutes should be interpreted “such that ‘no part will be inoperative or superfluous’”,23 but its own interpretation renders other statutes “inoperative and superfluous”. Its answer that the venue statute is “purely procedural” rings hollow not only because the statutory construction canon has no “purely procedural statute” exception but also because that might not be a fair characterization of a statute that expressly authorizes a filing: “a chapter 15 case may be commenced”.
As a practical matter, this split may be an issue that affects only a small minority of foreign debtors. After all, the case law under s. 109(a) (developed in Chapter 11 cases) does not place any requirement on the quantity of assets that must be located in the United States in order to obtain eligibility.24 Nevertheless, the fact that Barnet and Bemarmara were both decided in December—and the other reasons why this type of relief might be sought as described above— show that this situation arises more than occasionally.
Some commentators have suggested that foreign representatives seeking recognition of foreign proceedings in the future may simply move some small amount of assets into the United States prior to filing.25 It is unclear whether foreign representatives and foreign debtors that follow this advice and are found to have “manufactured” eligibility prior to filing will be met with resistance. While no opinion to date has examined this issue under s. 109, at least one opinion has considered a somewhat analogous issue and deemed the moving of assets shortly before filing a Chapter 15 case to be relevant to a determination of the location of a company’s centre of main interest.26 A foreign representative’s ability to “manufacture” eligibility for a foreign debtor is presently at issue in the Suntech Power Holdings, Ltd. Chapter 15 proceeding in the Bankruptcy Court for the Southern District of New York.
Until the case law becomes more settled, foreign representatives will need to consider whether the foreign debtor has assets in the United States, and if not, in which Circuit within the United States venue might be appropriate, in determining whether relief under Chapter 15 will be available to it.
1R.S.C. 1985, c. C-36.
2 737 F.3d 238 (2d Cir. 2013).
3 Case No. 13-13037 (KG) (Bankr. D. Del. Dec. 17, 2013).
4 11 U.S.C. § 1521(a)(4).
5 11 U.S.C. § 1509(b)(2).
6 See, e.g., In re Toft, 453 B.R. 186 (Bankr. S.D.N.Y. 2011) (refusing to grant recognition where the goal was to obtain discovery in violation of, among other things, U.S. wiretap laws).
7 Supra note 2 at 251.
8 See Intel Corp. v. Advanced Micro Devices, 542 U.S. 241 (2004).
9 Susan Power Johnston, “Conflict Between Bankruptcy Code §§ 109(a) and 1515: Do U.S. Bankruptcy Courts Have Jurisdiction over Chapter 15 Cases If the Foreign Debtor Has No Assets or Presence in the U.S.? (August 2008) 17 J. Bankr. L. & Prac. 5, art. 6, at 696.
10 See In re ABC Learning Centres Ltd., 728 F.3d 301, 305 (3d Cir. 2013).
11 See, generally, Pamela L. J. Huff and Scott A. Bomhof, Cross-Border Insolvencies: Comparing Chapter 15 of US Bankruptcy Code and Part IV of Companies’ Creditors Arrangement Act, American Bankruptcy Institute: Canadian-American Insolvency Symposium 2011 (noting differences between Chapter 15 and Part IV; most of the differences arose due to modifications Canada made in adopting Part IV).
12 11 U.S.C. § 1502(1).
13 28 U.S.C. § 1410(2).
14 Supra note 2 at 250–251.
15 Ibid. at 246 (internal citation omitted).
16 Ibid. at 248.
17 Ibid. at 249.
18 Ibid. (internal citation omitted).
19 Ibid. at 250.
20 In re Bemarmara Consulting a.s., Tr. at 9.
22 Supra note 9 at 678.
23 Supra note 2 at 247 (internal quotation omitted).
24 See, e.g., In re Global Ocean Carriers Ltd., 251 B.R. 31, 39 (Bankr. D. Del. 2000).
25 See, e.g., Debevoise & Plimpton LLP, Client Update: Second Circuit Limits Availability of Chapter 15 (December 20, 2013), <http://www.debevoise.com/ files/Publication/450255e9-004a-454f 9baa0bd135bf6b9d/Presentation/PublicationAttachment/ 0a7de8a5-5dee-424b-8e31-cd55763e2a02/ SECOND%20CIRCUIT%20LIMITS% 20AVAILABILITY%20OF%20CHAPTER%2015.pdf>; Steven Wilamowsky and Erin Kate Mautner, Legal Alert: Second Circuit Reverses New York Bankruptcy Court; Determines That Section 109(a) Eligibility Requirements Extend to Chapter 15 Debtors (December 16, 2013), <http://www.bingham.com/ Alerts/2013/12/Second-Circuit-Reverses-New-YorkBankruptcy-Court>.
26 See In re Fairfield Sentry Ltd., 714 F.3d 127, 139 (2d Cir. 2013) (noting that the court may consider such factors to determine whether a Chapter 15 debtor’s center of main interests was manipulated in bad faith).
This article was written by Russell Silberglied and L. Katherine Good and originally published in the April 2014 Volume 26, Nos. 3 & 4 of the Commercial Insolvency Reporter.