Vol 11 (2014) - Issue 2

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Barnet Raises the Bar for Chapter 15 Recognition in the Second Circuit

In In re Barnet, the United States Court of Appeals for the Second Circuit ('Court of Appeals') imposed a new hurdle for foreign debtors seeking chapter 15 recognition. In addition to the requirements for recognition of a foreign proceeding set out in chapter 15, a foreign debtor must now also show it has a residence, domicile, place of business or assets located in the United States, as required for debtors under the Bankruptcy Code by section 109(a). The Barnet decision, however, should not have a chilling effect on foreign debtors considering chapter 15. First, changing venue may be an option: the United States Bankruptcy Court for the District of Delaware disagreed with the conclusion in Barnet and opined the United States Court of Appeals for the Third Circuit would likely not follow Barnet either. Second, changing venue should not be necessary where foreign debtors can show they have even nominal assets in the United States, since minimum presence in the United States normally suffices to overcome the burden of section 109(a).

1. Background
Octaviar Administration Pty Ltd. ('Octaviar'), an Australian company, was placed into external administration in Australia on 3 October 2008. About a year later, the Supreme Court of Queensland ordered Octaviar be liquidated. On 13 August 2012, Octaviar’s foreign representatives filed a petition for recognition as a foreign main proceeding with the Bankruptcy Court for the Southern District of New York. The foreign representatives stated Octaviar did not transact business, have any operations or creditors in the United States, but they were seeking chapter 15 recognition to investigate potential claims and causes of action against entities located in the United States. The recognition order was entered on 6 September 2012, over the objection of Drawbridge Special Opportunities Fund LP (‘Drawbridge’). Drawbridge appealed.

2. A foreign debtor must have a domicile, place of business, or property in the United States to be eligible for chapter 15 – at least in the Second Circuit
The Court of Appeals considered whether the eligibility requirement of Bankruptcy Code section 109(a) – that a debtor under the Bankruptcy Code have a domicile, a place of business, or property in the United States – applies to a debtor in chapter 15 proceedings.