Vol 11 (2014) - Issue 6

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Chapter 15 Debtors Need Not Avoid New York: The Requirement of Having Property in the US to Obtain Recognition of a Foreign Proceeding is a Small Bump on the Road

In Barnet v Fletcher (In re Barnet), 737 F.3d 238 (2d Cir. 2013), a matter of first impression, the United States Court of Appeals for the Second Circuit ruled that Bankruptcy Code section 109(a) applies to a foreign debtor in chapter 15, which means a foreign debtor must show it has a domicile, a place of business, or property in the United States ('US') to have its foreign proceeding recognised. The decision created significant uncertainty regarding the level of scrutiny imposed by the new requirement, which could have persuaded foreign debtors to avoid New York and commence chapter 15 cases in bankruptcy courts in other Circuits. Luckily, it didn't take long for the implications of the decision to be clarified. In its second attempt to recognition following the decision in Barnet, Octaviar Administration Pty Ltd ('Octaviar') overcame the newly imposed hurdle with (i) claims and causes of action against US entities, and (ii) a retainer held by Octaviar's US counsel, which were sufficient to satisfy the property requirement embedded in Bankruptcy Code section 109(a). The (unsurprisingly) broad interpretation of 'property in the US' may reassure potential foreign debtors that the Second Circuit's additional recognition requirement is by no means an insurmountable obstacle – especially for foreign debtors with pre-existing presence in the US.

1. Background5
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 the liquidation of Octaviar. On 13 August 2012, Octaviar's foreign representatives (the liquidators in the Australian proceeding) filed a petition for recognition (the 'First Petition') as a foreign main proceeding with the United States Bankruptcy Court for the Southern District of New York (the 'Bankruptcy Court'). The foreign representatives stated Octaviar did not transact business or have any operations or creditors in the US, but they were seeking chapter 15 recognition to investigate and prosecute potential claims and causes of action against entities located in the US. The recognition order was entered on 6 September 2012, over the objection of Drawbridge Special Opportunities Fund LP ('Drawbridge'). Drawbridge had an interest in the case as a potential target of claims, given that the foreign representatives had already commenced litigation in Australia against its affiliates to recover assets for the benefit of Octaviar's creditors.