On December 11, 2013, the US Court of Appeals for the Second Circuit held, in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), that to seek recognition of a foreign insolvency proceeding under Chapter 15 of the Bankruptcy Code, the debtor eligibility requirements set forth in section 109(a) of the Bankruptcy Code apply. These requirements provide that a person must have a domicile, residence, place of business or hold property in the US to be a debtor under the Bankruptcy Code (737 F.3d 238 (2nd Cir. 2013)).

On October 3, 2008, Octaviar Administration Pty Ltd. (OA), an entity incorporated in Australia, entered into external administration, and on July 31, 2009, an Australian court ordered that it be liquidated. In connection with that proceeding, a lawsuit was filed against various Australian affiliates of Drawbridge Special Opportunities Fund, LP (Drawbridge).

On August 13, 2013, OA's foreign representatives (Foreign Representatives) petitioned the US Bankruptcy Court for the Southern District of New York for an order recognizing the Australian liquidation as a foreign main proceeding under Chapter 15 of the Bankruptcy Code. Automatic protections attach on recognition of a foreign main proceeding, such as the operation of the automatic stay to protect the debtor and its property within the territorial limits of the US and the ability of a trustee to use and sell the debtor's property outside of the ordinary course of business.

The SDNY Bankruptcy Court granted recognition over Drawbridge's objections, holding that a Chapter 15 debtor is not subject to section 109(a) of the Bankruptcy Code, and therefore is not required to have a domicile, residence, place of business or property in the US (none of which was demonstrated by the Foreign Representatives). The Foreign Representatives then sought discovery from Drawbridge and other parties. Drawbridge appealed the recognition order and moved for a stay of discovery pending appeal.

The SDNY Bankruptcy Court denied Drawbridge's motion to stay discovery, but certified the recognition order for direct appeal to the Second Circuit on the basis that:

The question before the Second Circuit was whether section 109(a) of the Bankruptcy Code, which provides 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," applies to a debtor under Chapter 15.

The Second Circuit began with the plain text of the Bankruptcy Code to determine the necessary prerequisites for obtaining a Chapter 15 recognition order. Section 103(a) of the Bankruptcy Code states that Chapter 1 of the Bankruptcy Code applies to all cases under Chapter 15. Because section 109(a) is within Chapter 1, the Court held that the jurisdictional requirement of section 109(a) is applicable to foreign debtors seeking recognition under Chapter 15.

The Foreign Representatives made multiple arguments against the Court's conclusion, including that, among other things:

The Second Circuit rejected all of these arguments. It easily dismissed the Foreign Representatives' first argument, reasoning that because Chapter 15 and the relevant definitions of Chapter 1 are riddled with references to a debtor, which section 1502 of the Bankruptcy Code defines as the subject of a foreign proceeding, the presence of a debtor is "inextricably intertwined with the very nature of a Chapter 15 proceeding." Further, the Second Circuit explained that while foreign representatives, and not debtors, seek recognition, foreign representatives are not independent of the debtors they represent.

Second, the Court could not reconcile the explicit language of section 103(a), which makes Chapter 1 applicable to Chapter 15, with the Foreign Representatives' argument that OA need not qualify as a debtor under section 109. Finding that the definition in section 1502 does not block the application of section 109, the Court noted that those two sections are not parallel, and serve different purposes. Rather, the Court noted, section 1502 is linguistically parallel to section 101 of the Bankruptcy Code because the relevant clauses of both sections start with the phrase "the term 'debtor' means," indicating that section 1502 replaces section 101 within the context of Chapter 15. However, section 1502 does not replace section 109, which adds specific requirements for "debtors under this title," that apply to every case commenced under the Bankruptcy Code.

Third, the Second Circuit found that the context of Chapter 15 supports the application of section 109 to Chapter 15. The Court noted that Congress amended section 103 to make Chapter 1 applicable to Chapter 15 at the same time as it enacted Chapter 15. This strongly indicates that Congress intended section 109, part of Chapter 1, to apply to Chapter 15.

Moreover, the specific sections of the US Code cited by the Foreign Representatives did not convince the Second Circuit that section 109 was inconsistent with Chapter 15. Examining section 1528 of the Bankruptcy Code, the Court noted that section 109 could still be applied to Chapter 15 because section 109, which requires domicile, residence or property in the US to gain foreign recognition of a proceeding under Chapter 15, is broader than section 1528, which only states that a debtor must possess assets in the US to initiate a bankruptcy proceeding under another chapter of the Bankruptcy Code. As the sections are not in conflict, the Court did not find this argument persuasive. The Foreign Representatives' also pointed to section 28 U.S.C. § 1410, which provides a venue for Chapter 15 cases even when the debtor does not have a place of business or assets in the US. The Second Circuit also rejected this argument, determining that this venue statute is "purely procedural" and cannot rebut the plain and unambiguous language of sections 103 and 109.

Finally, while acknowledging that the model statute on which Chapter 15 was based does not include an express requirement equivalent to section 109(a), the Second Circuit reasoned that this omission does not outweigh the express language used in sections 109(a) and 103(a). Further, it concluded that Congress may have intended to limit Chapter 15 relief because it knew that additional relief was already available outside of Chapter 15.

Foreign debtors seeking Chapter 15 recognition in the Second Circuit will now require a domicile, place of business or assets in the US. However, this ruling may not create a material obstacle for many foreign debtors. First, the vast majority of foreign entities file for recognition to protect their US assets, so in these cases this new jurisdictional requirement is automatically satisfied. Second, to the extent that these entities do not have assets in the US, they can remedy this deficiency relatively easily by obtaining a nominal amount of US property, such as a US bank account, right before filing. However, this might be challenged and result in dismissal of the case as filed in bad faith, or on other grounds. Finally, it remains to be seen whether courts in other jurisdictions will follow Barnet. For example, the US Bankruptcy Court for the District of Delaware's recently issued a conflicting decision in In re Bamarama Consulting a.s., creating a split of authority on the issue.