Circuit Split: Eleventh Circuit and Second Circuit Disagree on Eligibility Requirements for Chapter 15 Debtors
Courts disagree over whether a foreign bankruptcy case can be recognized under chapter 15 of the Bankruptcy Code if the foreign debtor does not reside or have assets or a place of business in the United States. In 2013, the U.S. Court of Appeals for the Second Circuit staked out its position on this issue in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), ruling that the provision of the Bankruptcy Code requiring U.S. residency, assets, or a place of business applies in chapter 15 cases as well as cases filed under other chapters.
The U.S. Court of Appeals for the Eleventh Circuit split with the Second Circuit on this controversial issue in In re Al Zawawi, 97 F.4th 1244 (11th Cir. 2024). Distancing itself from Barnet based on Eleventh Circuit precedent predating the enactment of chapter 15, the Eleventh Circuit affirmed a district court ruling that chapter 15 has its own eligibility requirements, and that the eligibility requirements for debtors in cases under other chapters of the Bankruptcy Code do not apply in chapter 15 cases. The resulting circuit split may be an invitation to a petition for rehearing en banc, U.S. Supreme Court review, or congressional action.
Procedures, Recognition, Relief, and Eligibility Under Chapter 15
Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which has been enacted in some form by nearly 60 nations or territories.
Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). Chapter 15's stated purpose is "to provide effective mechanisms for dealing with cases of cross-border insolvency" with the objective of, among other things, cooperation between U.S. and non-U.S. courts.
Chapter 15 replaced section 304 of the Bankruptcy Code. Section 304 allowed an accredited representative of a debtor in a foreign bankruptcy proceeding to commence a limited "ancillary" bankruptcy case in the United States for the purpose of enjoining actions against the foreign debtor or its assets located in the United States or, in some cases, repatriating such assets or their proceeds abroad for administration in the debtor's foreign bankruptcy.
The policy behind section 304 was to provide any assistance necessary to ensure the economic and expeditious administration of foreign bankruptcy proceedings. In deciding whether to grant injunctive, turnover, or other appropriate relief under former section 304, a U.S. bankruptcy court had to consider "what will best assure an economical and expeditious administration" of the foreign debtor's estate, consistent with a number of factors, including comity. See 11 U.S.C. § 304(c) (repealed 2005) (listing factors that are now included in section 1507(b) as a condition to the court's decision to grant "additional assistance, consistent with the principles of comity," under chapter 15 or other U.S. law).
Section 1501(a) of the Bankruptcy Code similarly states that the purpose of chapter 15 is to "incorporate the [Model Law] so as to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of," among other things, cooperation between U.S. and foreign courts, greater legal certainty for trade and investment, fair and efficient administration of cross-border cases to protect the interests of all stakeholders, protection and maximization of the value of a debtor's assets, and the rehabilitation of financially troubled businesses.
Section 1508 requires U.S. courts interpreting chapter 15 to "consider its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions."
Under section 1515, the "foreign representative" of a foreign "debtor" may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding."
Section 1502 provides that "for the purposes of [chapter 15] … 'debtor' means an entity that is the subject of a foreign proceeding."
However, section 101 of the Bankruptcy Code also includes a definition of the term "debtor," and section 109 limits the entities that can qualify as a debtor. Section 101(13) provides that "debtor" means "person or municipality concerning which a case under this title has been commenced." Section 109(a) states 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." Section 103(a) provides that "this chapter"—i.e., chapter 1, including section 109(a)—"appl[ies] in a case under chapter 15."
The basic requirements for recognition under chapter 15 are outlined in section 1517(a), namely: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the "foreign representative" applying for recognition must be a "person or body"; and (iii) the petition must satisfy the requirements of section 1515, including that it be supported by the documentary evidence specified in section 1515(b).
Section 1506 sets forth a public policy exception to any of the relief otherwise authorized in chapter 15, providing that "[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States."
Section 101(24) defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."
"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the United States of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. §§ 1502(4) and 1517(b)(1))—and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. §§ 1502(5) and 1517(b)(2)). A debtor's COMI is presumed to be the location of the debtor's registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c). An establishment is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity."
Dispute Over Eligibility for Chapter 15 Relief
Despite the express language of section 103(a), courts disagree over whether a foreign debtor must satisfy both sections 109 and 1502 to be eligible for chapter 15 relief.
In Barnet, the Second Circuit ruled that section 109(a) applies in a chapter 15 case on the basis of a "straightforward" interpretation of the statutory provisions.
The Second Circuit rejected the foreign representatives' argument that section 109(a) does not apply because the Australian company in the case was a "debtor" under the Australian Corporations Act (rather than under the Bankruptcy Code) and the foreign representatives (rather than the debtor) were seeking recognition of the foreign proceeding. According to the court:
[T]he presence of a debtor is inextricably intertwined with the very nature of a Chapter 15 proceeding … [and] [i]t 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 [title 11] that contains both chapters.
Barnet, 737 F.3d at 248. In addition to the statutory definitions of "foreign representative," "foreign main proceeding," "debtor," and "foreign proceeding," the court noted, the automatic and discretionary relief provisions that accompany recognition of a foreign main proceeding (see sections 1520 and 1521) are similarly "directed towards debtors." Barnet, 737 F.3d at 248.
The Second Circuit flatly rejected the foreign representatives' argument that a foreign debtor need satisfy only the chapter 15-specific definition of "debtor" in section 1502(1), and not the section 109 requirements. "This argument also fails," the court wrote, "as we cannot see how such a preclusive reading of Section 1502 is reconcilable with the explicit instruction in Section 103(a) to apply Chapter 1 to Chapter 15." Id. at 249.
According to the Second Circuit, not only a "plain meaning" analysis but also the context and purpose of chapter 15 support the application of section 109(a) to chapter 15. The court explained that Congress amended section 103 to state that chapter 1 applies in cases under chapter 15 at the same time it enacted chapter 15, which strongly supports the conclusion that lawmakers intended section 103(a) to mean what it says—namely, that chapter 1 applies in cases under chapter 15.
The court acknowledged that the strongest support for the foreign representatives' arguments lies in 28 U.S.C. § 1410, which provides a U.S. venue for chapter 15 cases even when "the debtor does not have a place of business or assets in the United States." However, the Second Circuit explained that this venue statute "is purely procedural" and that, "[g]iven the unambiguous nature of the substantive and restrictive language used in Sections 103 and 109 of Chapter 15, to allow the venue statute to control the outcome would be to allow the tail to wag the dog." Id. at 250.
Finally, the Second Circuit found that the purpose of chapter 15 would not be undermined by making section 109(a) applicable in chapter 15 cases. As noted above, section 1501(a) of the Bankruptcy Code provides that the purpose of chapter 15 "is to incorporate the Model Law … so as to provide effective mechanisms for dealing with cases of cross-border insolvency." Although section 109(a), or its equivalent, is not included in the Model Law, the Second Circuit emphasized, the Model Law allows a country enacting it to "modify or leave out some of its provisions." In any case, the court concluded, the omission of a provision similar to section 109(a) from the Model Law does not suffice to outweigh the express language Congress used in adopting sections 103(a) and 109(a). Id. at 251.
The Second Circuit accordingly vacated the recognition order and remanded the case to the bankruptcy court for further proceedings consistent with its ruling.
The Second Circuit did not provide any guidance as to how extensive a foreign debtor's property holdings in the United States must be to qualify for chapter 15 relief. On remand, the bankruptcy court answered that question in In re Octaviar Administration Pty Ltd., 511 B.R. 361 (Bankr. S.D.N.Y. 2014). It ruled that, consistent with case law analyzing the scope of section 109 for the purpose of determining who is eligible to commence a case under chapter 11, the requirement of property in the United States should be interpreted broadly. Because the Australian debtor had causes of action governed under U.S. law against parties in the United States and also had an undrawn retainer maintained in the United States, the bankruptcy court held that the requirement for the debtor to have property located in the United States was satisfied.
Guided by Barnet, other bankruptcy courts within the Second Circuit have similarly concluded that section 109 applies in chapter 15 cases and that satisfying its U.S. asset requirement is not difficult. See, e.g., In re Agro Santino, OOD, 653 B.R. 79 (Bankr. S.D.N.Y. 2023) (unused attorney retainers deposited by the debtor in a New York bank account and a $1.5 million counterclaim in pending N.Y. litigation); In re Olinda Star Ltd., 614 B.R. 28 (Bankr. S.D.N.Y. 2020) (small retainer and rights under New York law debt instruments); In re Serviços de Petróleo Constellation, 613 B.R. 497 (Bankr. S.D.N.Y. 2019) (rights under New York law-governed debt and retainer); In re Ascot Fund Ltd., 603 B.R. 271 (Bankr. S.D.N.Y. 2019) (retainer, interest in a New York partnership, and contract rights); In re P.T. Bakrie Telecom TBK, 601 B.R. 707 (Bankr. S.D.N.Y. 2019) (rights under a New York law indenture and New York law-governed notes); In re B.C.I. Fins. Pty Ltd., 583 B.R. 288 (Bankr. S.D.N.Y. 2018) (attorney retainers deposited by foreign debtors in the United States for the sole purpose of satisfying section 109(a) and obtaining discovery adequate).
Barnet has received a considerable amount of criticism. For example, a leading commentator noted that the decision:
clearly misconstrues the intent of the statute to focus on eligibility of the foreign proceeding, not of the debtor, never mentions the direction of section 1508 to consider the international origin of chapter 15 and does not follow the suggestion of the legislative history of section 1508 to consult the Guide to Enactment … [which] makes clear that "the Model Law was formulated to apply to any proceeding that meets the requirements of article 2, subparagraph (a) [definition of foreign proceeding], independently of the nature of the debtor or its particular status under national law."
Collier on Bankruptcy ¶ 1517.01 (16th ed. 2024) (citing H.R. Rep. No. 109-31, p. 109 (2005); Guide to Enactment and Interpretation of the Model Law (the "Guide to Enactment"), ¶ 47); see also Glosband and Westbrook, "Chapter 15 Recognition in the U.S.: Is a Debtor 'Presence' Required?," 24 Int. Insolv. Rev. 28–56 (2015) (noting that the Second Circuit "confuse[d] the foreign debtor with the foreign insolvency representative" and explaining that section 109(a) does apply in chapter 15 cases, but only in limited circumstances, including: (i) the requirement that a foreign debtor have a presence in the United States when a foreign representative use its power under section 1511 to file a "full" case under another chapter; and (ii) when a foreign debtor files a bankruptcy case in the United States to enforce a foreign discharge); In re Avanti Commc'ns Grp. PLC, 582 B.R. 603, 612 (Bankr. S.D.N.Y. 2018) (describing Barnet as a "controversial ruling").
Several bankruptcy courts outside of the Second Circuit have disagreed with Barnet. For example, in In re Bemarmara Consulting A.S., No. 13-13037(KG) (Bankr. D. Del. Dec. 17, 2013), the U.S. Bankruptcy Court for the District of Delaware ruled that section 109(a) does not apply in chapter 15 because it is the foreign representative, and not the debtor in the foreign proceeding, who petitions the court. Moreover, the court wrote, "there is nothing in [the] definition [of 'debtor'] in Section 1502 which reflects upon a requirement that [a] Debtor have assets." See Transcript of Hearing at 9, l. 11‒18, In re Bemarmara Consulting A.S., No. 13-13037(KG) (Bankr. D. Del. Dec. 17, 2013) [Document No. 39]. "A Debtor," the court noted, "is an entity that is involved in a foreign proceeding."
A Florida bankruptcy court similarly refused to apply section 109(a) in a chapter 15 case in In re MMX Sudeste Minercao S.A., No. 17-16113-RAM (Bankr. S.D. Fla. 2017) (Order Granting Recognition, Docket No. 9, June 12, 2017; Transcript of Nov. 1, 2017, Hearing Denying Motion to Dismiss Ch. 15 Case at 5-6, Docket No. 51). An attempted appeal of the recognition order was dismissed for lack of jurisdiction. See Batista v. Alvarenga Mendes (In re MMX Sudeste Minercao S.A.), No. 17-24038-RNS (S.D. Fla. Apr. 20, 2018).
Apparently, only one court outside of the Second Circuit has relied on Barnet in a published opinion in finding that section 109(a) applies in a chapter 15 case. See In re Forge Grp. Power Pty Ltd., 2018 WL 827913, at *13 (N.D. Cal. Feb. 12, 2018) (vacating a bankruptcy court order denying chapter 15 recognition on the basis of Barnet, but noting that "the debtor eligibility requirements of 11 U.S.C. § 109(a) apply in Chapter 15 cases" and "the requirement of 'property in the United States' is satisfied by a security retainer that remains the property of the debtor until the funds are applied by the attorney for services actually rendered").
It should be noted that chapter 15's predecessor—section 304 of the Bankruptcy Code—did not require a foreign debtor to qualify as a "debtor" under section 109(a) as a condition to relief. See, e.g., Goerg v. Parungao (In re Goerg), 844 F.2d 1562 (11th Cir. 1988); Saleh v. Triton Container Intl., Ltd. (In re Saleh), 175 B.R. 422 (Bankr. S.D. Fla. 1994).
For example, in Goerg, the Eleventh Circuit considered whether an individual debtor in a German bankruptcy case could qualify as a "debtor" for purposes of granting comity to the German bankruptcy case in an "ancillary proceeding" under section 304. The court of appeals ruled as a matter of first impression that the individual was not required to meet the Bankruptcy Code's definition of "debtor" (then contained in section 101(12)) to be eligible for relief under section 304. In so ruling, the court identified an incongruity between the definition of "debtor" in section 101(12) as a "person or municipality concerning which a case under [the Bankruptcy Code] has been commenced" and the term "foreign proceeding" in section 101(22), which at that time provided that the term meant:
[A] proceeding[,] whether judicial or administrative and whether or not under bankruptcy law, in a foreign country in which the debtor's domicile, residence, principal place of business, or principal assets were located at the commencement of such proceeding, for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge, or effecting a reorganization.
11 U.S.C. § 101(22) (emphasis added) (repealed in 2005 and superseded by 11 U.S.C. § 1502(4), (5)). According to the Eleventh Circuit, "although the inclusion of the term 'debtor' in the definition of 'foreign proceeding' suggests that the subject of the foreign proceeding must qualify as a 'debtor' under United States bankruptcy law, the [Bankruptcy] Code expressly provides that the foreign proceeding need not even be a bankruptcy proceeding, whether under foreign or United States law." Goerg, 844 F.2d at 1566‒67.
After weighing possible solutions to resolve this anomaly, the Eleventh Circuit ruled that a debtor in an ancillary proceeding under section 304 "need only be properly subject" to a "foreign proceeding" and that "'debtor' eligibility under the [Bankruptcy] Code was not a prerequisite to section 304 ancillary assistance." Id. at 1568. This conclusion, the Eleventh Circuit reasoned, was consistent with the purpose of section 304 in "prevent[ing] dismemberment by local creditors of assets located in [the United States] that are involved in a foreign bankruptcy proceeding" and "to help further the efficiency of foreign insolvency proceedings involving worldwide assets." Id. (citation and internal quotation marks omitted). It also explained that "it would make little sense to require that the subject of the foreign proceeding qualify as a 'debtor' under United States bankruptcy law," and that, instead, it "would make eminent sense for Congress to define expansively the class of foreign insolvency proceedings for which ancillary assistance is available." Id.
In Al Zawawi, the Eleventh Circuit revisited this issue in the context of eligibility for chapter 15 relief.
Al Zawawi
Talal Qais Abdulmunem Al Zawawi (the "debtor") was a debtor in a bankruptcy case filed in a UK court in March 2020. He did not reside in the United States but had indirect ownership interests in several Florida-based companies that owned residential and office buildings in Florida and was listed as a director of each of the companies. Prior to 2020, the debtor also had a 60% ownership interest in a Florida corporation that owned real estate leased to a chain of restaurants. In February 2020, the debtor sold his ownership interest in the corporation to his brother, the only other shareholder, but continued to be listed as a director.
In March 2021, the UK court-appointed trustees of the debtor's bankruptcy estate filed a petition with the U.S. Bankruptcy Court for the Middle District of Florida seeking recognition of the UK bankruptcy case under chapter 15 as a foreign main proceeding for the purpose of investigating the debtor's affairs, recovering U.S.-based assets and potentially asserting claims against third parties for the benefit of creditors, including the debtor's former spouse, who held a judgment claim for more than £24 million.
The debtor opposed recognition. He conceded that the foreign representatives met all the requirements for recognition set forth in section 1517, but argued, relying on Barnet, that he did not satisfy the definition of "debtor" in section 109(a). The foreign representatives countered that Barnet has been discredited and that the court should instead follow the Eleventh Circuit's rationale in Goerg, even though it involved an ancillary case filed under repealed section 304 of the Bankruptcy Code. Alternatively, the foreign representatives argued that, if section 109(a) did apply, the court should grant recognition because the debtor was a director and beneficial owner of the Florida-based companies, and the foreign representatives' U.S. counsel held a retainer provided on the debtor's behalf and had possession of the debtor's wallet.
The bankruptcy court granted the petition for recognition. Section 1517(a), it explained, is "unambiguous" and, subject to the public policy exception stated in section 1506, "'chapter 15 recognition must be ordered when a court finds the requisite criteria are met.'" In re
Talas Qais Abdulmunem Al Zawawi, 634 B.R. 11, 18 (Bankr. S.D. Fla. 2021) (quoting In re ABC Learning Centres, Ltd., 728 F.3d 301, 308 (3d Cir. 2013)), aff'd, 637 B.R. 663 (M.D. Fla. 2022), aff'd, 2024 WL 1423871 (11th Cir. Apr. 3, 2024).
According to the bankruptcy court, a "debtor" under chapter 15 is not the same as a "debtor" under chapter 1 of the Bankruptcy Code. "If the § 101 definition included the subject of a foreign proceeding," it wrote, "then this special definition [in section 1502(1)] would be unnecessary—§ 1502(1) would be superfluous." Id.
The bankruptcy court explained that, although section 103 makes chapter 1 applicable in chapter 15, "it does not graft those provisions into chapter 15—meaning the limited definition would not apply when interpreting § 109." Id. at 19. Any other interpretation, it noted, would not give effect to the other provisions of chapter 15 and the purpose of the chapter, which is international uniformity and cooperation in cross-border bankruptcy cases.
The bankruptcy court further explained that several provisions of the Bankruptcy Code indicate that lawmakers did not intend section 109 to apply in chapter 15 cases, including:
(i) Section 1528, which provides that "[a]fter recognition of a foreign main proceeding, a case under another chapter of this title may be commenced only if the debtor has assets in the United States" and would be superfluous if section 109 applied to recognition.
(ii) 28 U.S.C. § 1410, governing venue of chapter 15 cases, which provides that "if the debtor does not have a place of business or assets in the United States, [venue is proper in the district] in which there is pending against the debtor an action or proceeding in a Federal or State court … or in which venue will be consistent with the interests of justice and the convenience of the parties, having regard to the relief sought by the foreign representative."
(iii) Section 109, which in subsections (b) through (g) specifies the persons or entities that may be debtors in every chapter of the Bankruptcy Code other than chapter 15, and in subsection (h) requires an individual debtor, absent a court waiver or a specified exception, to obtain credit counseling 180 days to a bankruptcy filing—a requirement that could not be satisfied without a waiver in every case because a foreign bankruptcy case has already been filed by or against a foreign debtor.
Id. at 19–20.
Finally, the court noted that Barnet is neither controlling precedent nor persuasive. Moreover, it stated that the Eleventh Circuit would likely disagree with the ruling based upon its previous decision in Goerg. Although section 304 has been repealed, the court wrote, "chapter 15 has a similar purpose and given this similar issue—whether a foreign debtor must qualify as a debtor under the Bankruptcy Code—this court finds Goerg persuasive, and declines to follow [Barnet]." Id. at 20.
Even so, the bankruptcy court found that the debtor satisfied the eligibility requirements of section 109(a) because he had interests in the Florida companies, he was listed as a director of those companies, and the foreign representatives had potential claims against third parties with respect to the debtor's transfer of its interest in one of the companies prior to the commencement of his UK bankruptcy case. The debtor appealed the recognition order to the district court.
The district court affirmed the bankruptcy court's decision, ruling that "compliance with Section 109(a) is not a prerequisite to obtaining recognition under Chapter 15."
The district court agreed with the bankruptcy court that section 1517(a) sets forth just three conditions for recognition, "none of which involve an assessment of the foreign debtor's contacts with the United States." See In re Zawawi, 637 B.R. 663, 667 (M.D. Fla. 2022), aff'd, 2024 WL 1423871 (11th Cir. Apr. 3, 2024). It also noted that, although section 101(13) contains a definition of "debtor," chapter 15 "provides its own, alternate definition" of the term, and "[t]hat definition controls and is plainly consistent with the purposes of Chapter 15." Id. at 668 (footnote omitted).
The district court determined that it need not look beyond section 1517 to answer the questions posed in the case before it. Even so, it agreed with the bankruptcy court's analysis that other provisions of the Bankruptcy Code—section 109 itself, as well as section 1528—and the chapter 15 venue provision in 28 U.S.C. § 1410, support the conclusion that chapter 15 recognition is not predicated on section 109(a). In addition, the district court concluded that both the legislative history of chapter 15 and the Guide to Enactment of the Model Law on which chapter 15 was patterned indicate that, provided the requirements for recognition set forth in section 1517(a) have been met, "recognition is not tethered to Section 109(a)." Id. at 669.
Barnet did not alter the district court's conclusion. It noted that courts outside of the Second Circuit have rejected the reasoning in Barnet, and courts in the Second Circuit obligated to follow it "do not require much to satisfy Section 109(b)." Id. at 670.
Finally, the district court concluded that, based on its reasoning in Goerg, the Eleventh Circuit would decline to follow Barnet. "Limiting recognition to proceedings involving foreign debtors that qualify as 'debtors' under the Bankruptcy Code," the district court wrote, "is simply inconsistent with the express language and fundamental purpose of Chapter 15." Id. at 670.
The debtor appealed to the Eleventh Circuit.
The Eleventh Circuit's Ruling
A three-judge panel of the Eleventh Circuit affirmed the district court's ruling in a unanimous decision with two concurrences.
Writing for the unanimous panel, U.S. Circuit Court Judge Barbara Lagoa acknowledged that a plain reading of section 103(a) of the Bankruptcy Code indicates that section 109(a) applies in chapter 15 cases—an interpretation she noted that that the Second Circuit "correctly" characterized as "straightforward" in Barnet. Al Zawawi, 97 F.4th at 1252. However, Judge Lagoa explained, the Eleventh Circuit is bound to follow Goerg's ruling that "Chapter 1's debtor eligibility language does not apply to cases ancillary to a foreign proceeding." Id.
Judge Lagoa noted that the Bankruptcy Code's current definitions of "debtor" and "foreign proceeding" create an "anomaly" similar to that confronted by the court in Goerg because: (i) like repealed section 304, chapter 15 provides ancillary assistance to "foreign proceedings"; and (ii) the definition of "debtor" has remained unchanged since Goerg, and the definition of "foreign proceeding" has "changed only somewhat." As a consequence, the Eleventh Circuit panel reasoned that the rule laid down in Goerg should continue to apply in chapter 15 cases "if the purpose of Chapter 15 sufficiently tracks that of former § 304." Id. at 1253.
Judge Lagoa conceded that there are differences between repealed section 304 and chapter 15. Even so, she explained, despite those differences, "we believe that the former § 304 and Chapter 15 are sufficiently similar in terms of their purposes such that our decision in Goerg controls our analysis in this case." Due to the similar definitions of "foreign proceeding" under both statutory schemes (both of which require a "debtor"), "and wary of slicing our binding precedent too thin," the Eleventh Circuit panel "follow[ed] the logic of Goerg" in ruling that, "based on the definition of 'foreign proceeding' in § 101(12), as informed by the purpose of Chapter 15, debtor eligibility under Chapter 1 is not a prerequisite for the recognition of a foreign proceeding under Chapter 15." Id. at 1255. Accordingly, the Eleventh Circuit panel held that the debtor was properly subject to a "foreign proceeding" and that the debtor's German bankruptcy case satisfied section 1517's requirements for chapter 15 recognition.
Concurring Opinions
Two judges, including Judge Lagoa, filed concurring opinions. Judge Lagoa stated that she agreed with the conclusion reached by the majority. However, she wrote, "if we were writing on a clean slate," she would reverse the bankruptcy court's ruling that section 109(a) does not apply in chapter 15 cases. Judge Lagoa then explained why she was unpersuaded by the foreign representatives' argument supporting the application of Goerg to the present case.
First, Judge Lagoa rejected the contention that because section 1517(a) of the Bankruptcy Code, which states that recognition "shall" be granted upon satisfaction of its requirements, does not refer to section 109(a) as one of those prerequisites, a foreign entity need not be a "debtor" under section 109 to be eligible for chapter 15 relief. According to Judge Lagoa, this argument "overlooks that debtor eligibility is baked into the requirements of section 1517(a)," which expressly and impliedly depends on the existence of a "foreign proceeding" involving "some related 'debtor.'" Id. at 1256 (concurring opinion).
Next, Judge Lagoa found no traction in the argument that section 1502(1)'s definition of "debtor" as "an entity that is the subject of a foreign proceeding" conflicts with section 109(a), which states that bankruptcy eligibility is limited to "a person that resides or has a domicile, a place of business, or property in the United States, or a municipality." According to the foreign representatives, by using the term "entity," section 1502(1) apparently permits estates, trusts, and certain government units to be chapter 15 debtors, whereas section 109(a) expressly excludes such entities from bankruptcy relief. Judge Lagoa rejected this argument, noting that: "as far as this case is concerned," the two provision can "easily be read in harmony: § 1502(1) recognizes that persons can be debtors in Chapter 15 cases, and § 109(a) imposes a residency/property requirement that must be satisfied for a person to qualify as a debtor." Id.
Judge Lagoa was similarly unconvinced by the argument that applying section 109(a) in chapter 15 cases would render a portion of section 1528 of the Bankruptcy Code superfluous because the latter also states that, post-recognition, a chapter 15 debtor must have U.S. assets to file a case under another chapter of the Bankruptcy Code. According to Judge Lagoa, "this argument rests on the faulty assumption that any debtor who satisfies § 109(a) necessarily 'has assets in the United States.'" It is possible, she explained, that an individual debtor might be a U.S. resident without having any U.S. assets or that a municipal debtor might not have any assets at all. Therefore, in cases where a debtor satisfies section 109(a) but not section 1528, if the debtor's foreign proceeding is recognized under chapter 15, "§ 1528's asset requirement certainly has an effect: it prohibits the commencement of a case under any other Chapter of [the Bankruptcy Code]." Id.
Finally, Judge Lagoa rejected the argument that applying section 109(a) in chapter 15 cases would render parts of 28 U.S.C. § 1410 superfluous. As noted previously, that provision governs the venue of chapter 15 cases, stating that a chapter 15 case may be commenced in: (i) the district in which "the debtor has its principal place of business or principal assets" in the United States; (ii) absent principal assets or a principal place of business in the United States, the district in which litigation is pending against the debtor; or (iii) any other district "consistent with the interests of justice and the convenience of the parties, having regard to the relief sought by the foreign representative."
According to the foreign representatives, if every chapter 15 were required to satisfy section 109(a)'s requirement for assets or a principal place of business in the United States, the alternative venue provisions in 28 U.S.C. § 1410 would be "meaningless." This argument, Judge Lagoa explained, "rests on a faulty assumption"—a chapter 15 debtor might satisfy section 109(a) by being a U.S. resident or domiciliary without having a "principal place of business or principal assets" in the United States, thereby bringing into play the alternative venue options in 28 U.S.C § 1410. Id. at 1257.
U.S. Circuit Judge Gerald Bard Tjoflat also filed a concurring opinion in which he agreed that the court was bound to follow Goerg (in which Judge Tjoflat wrote the opinion more than 35 years earlier), but disagreed with the majority's interpretation of the ruling "as abstract positivism." Instead, Judge Tjoflat stated that the court was bound by Goerg because the Bankruptcy Code's current definition of "foreign proceeding" is substantially the same as it was when Goerg was decided, and "the current statute contains additional support for the conclusion that American courts can recognize foreign proceedings regardless of whether the debtor subject to the foreign proceeding is eligible to commence a United States bankruptcy proceeding." Id. at 1258 (concurring opinion). He then examined, among other things, the differences between chapter 15 cases and cases under other chapters of the Bankruptcy Code, chapter 15's origins in the Model Law, and the Eleventh Circuit's decision in Goerg.
According to Judge Tjoflat, recognizing a foreign bankruptcy proceeding under chapter 15 "occurs in a very different context" than granting an order for relief in a case under another chapter. "By the time a petition for recognition arrives on our shores," he wrote, the foreign court has already determined the debtor's eligibility under its own law, and the debtor's assets are already under the control of the foreign proceeding." Id. at 1262. Judge Tjoflat also noted that "[u]nlike the procedures that begin a full bankruptcy case under [the Bankruptcy Code], the procedures for recognizing and assisting a foreign proceeding do not naturally involve consideration of the debtor's eligibility to commence a full case under § 109(a)." Id. at 1267 (citation omitted).
Judge Tjoflat further noted that section 1508 of the Bankruptcy Code expressly directs courts to consider chapter 15's "international origin" in interpreting its provisions "to promote an application … that is consistent with the application of similar statutes adopted by foreign jurisdictions." Notably, he explained, the Model Law upon which chapter 15 is based does not define the term "debtor" because it is not an element of recognition. Instead, the Model Law was created to apply to any proceeding that satisfies the Model Law's definition of foreign proceeding "'independently of the nature of the debtor or its particular status under national law.'" Id. at 1273 (quoting Guide to Enactment at ¶ 55, and discussing Digest of Case Law on the UNCITRAL Model Law on Cross-Border Insolvency (2021) ¶ 43).
Judge Tjoflat also noted that, if section 109(a)'s U.S. asset requirement were applied to chapter 15, a "successfully executed" fraudulent transfer of a debtor's U.S. assets outside of the United States could defeat a petition for chapter 15 recognition, which would be inconsistent with one of chapter 15's primary purposes in promoting "fair and efficient administration of cross-border insolvencies that protects the interests of all creditors," and defy both common sense and lawmakers intent in enacting the chapter. Id. at 1277.
Outlook
With Al Zawawi, the issue has now been joined (with fully developed arguments) by two circuits on the proper standard for a foreign debtor's eligibility for chapter 15 relief, creating a split that could be an invitation to U.S. Supreme Court review or congressional clarification of the statutory requirements.
Thus, the debate continues over chapter 15 eligibility. As applied by many bankruptcy courts, the Second Circuit's approach to the issue in Barnet does not act as a serious impediment to chapter 15 recognition. This is particularly true where the alleged property in the United States could be a law firm retainer, debt document governed by a particular state's law, potential causes of action against a U.S. entity or person, or possibly recoverable property situated in the United States. Nonetheless, the conflict in the courts and uncertainty regarding the proper interpretation of the statutory framework is unsettling.
