Second Circuit Rules That Foreign Debtor’s Insolvency Proceeding May Not Be Recognized Under Chapter 15 Unless Debtor Has Place Of Business Or Property In The U.S.

The U.S. Court of Appeals for the Second Circuit recently held in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 2013 BL 341634 (2d Cir. Dec. 11, 2013), that section 109(a) of the Bankruptcy Code, which requires a debtor "under this title" to have a domicile, a place of business, or property in the U.S., applies in cases under chapter 15 of the Bankruptcy Code. In Barnet, the Second Circuit vacated a bankruptcy court order granting recognition under chapter 15 to a debtor's Australian liquidation, concluding that the court erred in ruling that section 109(a) does not apply in chapter 15 cases and that it improperly recognized the debtor's Australian liquidation in the absence of any evidence that the debtor had a domicile, a place of business, or property in the U.S.

RECOGNITION OF FOREIGN INSOLVENCY PROCEEDINGS BY U.S. BANKRUPTCY COURTS

Enacted in 2005, chapter 15 of the Bankruptcy Code is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which was designed to provide effective mechanisms for dealing with cross-border insolvency cases. The basic requirements for recognition of a "foreign proceeding" in the U.S. under chapter 15 are outlined in section 1517(a) of the Bankruptcy Code: (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 be supported by the documentary evidence specified in section 1515.

"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 U.S. of both a "main" proceeding—a proceeding pending in the country where the debtor's "center of main interests" is located—and "nonmain" proceedings, which may have been commenced in countries where the debtor merely has an "establishment," i.e., "any place of operations where the debtor carries out a nontransitory economic activity."

WHO MAY BE A DEBTOR UNDER CHAPTER 15?

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