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Corporate Restructuring & Bankruptcy | MONDAY, JUNE 13, 2016 | S9
property rights satisfy the requirements of §109(a). Specifically, in In re Berau, the South- ern District of New York, in a Chapter 15 case, held that an indenture with a foreign entity as obligor, but that contained both a New York choice of law provision and New York forum selection clause, constituted intangible prop- erty in the United States sufficient to satisfy §109(a).11 This case highlights the possibility of using indentures or even other types of con- tracts with U.S. counterparties or governed under U.S. law as a basis for a foreign entity to seek relief under the Bankruptcy Code.12
Uses of Chapter 11 and Chapter 15 by For - eign Debtors. Filing for relief under Chapter 11 may therefore be a viable restructuring tool for foreign entities with very minimal connections to the United States. It may be a particularly useful tool if such entities have creditors in the United States, such as secured credit lenders and bondholders, who must comply with orders entered by a U.S. court. Additionally, choosing to file for bankruptcy in the United States may provide several other advantages to a foreign entity (depending on the applicable laws in that entity’s host country), including the global reach of the automatic stay, the lack of an insolvency requirement, the ability for exist- ing management to remain in place, and the ability to use a prepackaged or prearranged plan of reorganization to quickly and efficient- ly complete a balance sheet restructuring. The availability of U.S. bankruptcy filings for foreign corporations may also be an effective means of convincing recalcitrant parties to negotiate an out of court restructuring, even if a Chapter 11 or Chapter 15 filing is never consummated.
It is important to note, however, that in order for a U.S. bankruptcy case to have a valuable impact for a foreign debtor, the
orders entered by the U.S. bankruptcy court must either (1) be enforceable against the foreign debtor’s creditors and/or (2) be recog- nized in foreign jurisdictions. An order would be enforceable against a foreign debtor’s creditors if those creditors are themselves subject to U.S. jurisdiction, so that such credi- tors would not want to violate an order of a U.S. court, for fear of sanctions and/or other penalties.13 In addition, certain foreign juris- dictions may recognize and give effect to U.S. orders in their jurisdictions.14
Even if a foreign corporation is unable to satisfy the minimal requirements under §109(a), it may still be able to achieve the protection it seeks in the United States by filing a petition un- der Chapter 15.
Even if a foreign corporation is unable to satisfy the minimal requirements under §109(a), it may still be able to achieve the protection it seeks in the United States by filing a petition under Chapter 15. A Chapter 15 case is a judicial proceeding in which a U.S. bankruptcy court formally recognizes a foreign proceeding, which can bind creditors in the United States who may argue that a foreign bankruptcy court had no jurisdiction over them.
There is a split in decisions over whether a debtor’s “foreign representative” must satisfy §109(a) in order to commence a Chapter 15 case. Specifically, the Second Circuit has held
that §109(a)’s eligibility requirements apply to cases filed under both Chapter 11 and Chapter 15, whereas a 2013 ruling by a Delaware bank- ruptcy judge indicates that §109(a) should not apply to Chapter 15 filings.15 Therefore, in certain jurisdictions such as Delaware, filing for Chapter 15 may be a viable alternative for foreign entities seeking the protections afforded under U.S. bankruptcy laws but lack- ing even minimal U.S. connections.
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1. Unless otherwise indicated, all references to Chap- ters and Sections are to those subdivisions of Title 11 of the United States Code (Bankruptcy Code). References to Chapter 11 (entitled “Reorganization”) are to 11 U.S.C. §§1101-1174 and references to Chapter 15 (entitled “An- cillary and Other Cross-Border Cases”) are to 11 U.S.C. §§1501-1532.
2. 580 B.R. 80 (Bankr. S.D.N.Y. 2015 (In re Berau)).
3. A “person” is defined under the Bankruptcy Code to include a/an “individual, partnership, and corporation, but does not include governmental unit” except with certain exceptions. 11 U.S.C. §101(41). A “corporation” is defined under the Bankruptcy Code to include a/an “(i) association having a power or privilege that a pri- vate corporation, but not an individual or a partnership, possesses; (ii) partnership association organized under a law that makes only the capital subscribed respon- sible for the debts of such association; (iii) joint-stock company; (iv) unincorporated company or association; or (v) business trust; but (B) does not include limited partnership.” 11 U.S.C. §101(9). See also In re 4 WHIP, LLC, 332 B.R. 670, 672 (Bankr. D. Conn. 2005) (“In view of the use of the non-exclusive term, ‘includes’, and the ab- sence of specific exclusion, the Court concludes that the Bankruptcy Code’s qualification criteria are sufficiently liberal to permit an inchoate or de facto limited liability company such as 4–Whip to be a debtor, so long as that entity had a bona fide business existence prior to the Petition Date.”).
4. 11 U.S.C. §109(a).
5. In re McTague, 198 B.R. 428, 431-32 (Bankr. W.D.N.Y. 1996). This decision also cautions, however, “[i]f proper- ty has been specifically placed or left in the United States for the sole purpose of creating eligibility that would not otherwise exist, then dismissal might be appropriate on other grounds, such as a bad faith filing.” Id. at 432. See also In re Yukos Oil Co., 321 B.R. 396, 411 (Bankr. S.D. Tex. 2005) (holding that although §109(a) was satisfied, based on a “totality of the circumstances” the Chapter 11 case was dismissed).
6. 251 B.R. 31, 39 (Bankr. D. Del. 2000) (emphasis added). See also In re McTague, 198 B.R. at 431 (holding that $194 in a bank account was sufficient property to satisfy §109(a) of the Bankruptcy Code for an individual debtor); In re Iglesias, 226 B.R. 721 (Bankr. S.D. Fla. 1998) (holding that $522 in the bank account of an individual Argentinian debtor was sufficient).
7. In re Glob. Ocean Carriers Ltd., 251 B.R. at 39.
8. In re Octaviar Admin. Pty Ltd., 511 B.R. 361 (Bankr. S.D.N.Y. 2014).
9. In re Head, 223 B.R. 648, 652 (Bankr. W.D.N.Y. 1998).
10. In re Berau, 540 B.R. at 83; see, e.g., Wallach v. Nowak (In re Sherlock Homes of W.N.Y., Inc.), 246 B.R. 19, 24-25 (Bankr. W.D.N.Y. 2000) (“Contract rights are assets of the estate, even when those contract rights would have had limited or even no value to the debtor itself.”).
11. In re Berau, 540 B.R. at 80, 83.
12. But see Id., 540 B.R. at 84, fn. 5 (“Other types of contracts—such as patents, trademark or intellectual property licensing agreements—entered into by a for- eign debtor that include New York choice of law and foreign selection clauses may satisfy the requirements of N.Y. General Obligation Law §§5-1401 and 5-1402. The Court does not decide whether such contracts satisfy the section 109(a) ‘property in the United States’ eligibil- ity requirement.”).
13. See, e.g., Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 474 B.R. 76, 82 (S.D.N.Y. 2012) (“[A] bank- ruptcy court can enforce the automatic stay extraterrito- rially only against entities over which it has in personam jurisdiction.”).
14. An example of a jurisdiction that has historically given such treatment to certain U.S. bankruptcy orders is Canada. See, e.g., Microbiz Corp. v. Classic Software Sys. Inc. (1996) 45 C.B.R. (3d) 40 (Ont. Ct. J. (Gen. Div.)) (explaining the importance of comity between certain countries to justify recognizing and enforcing U.S. bank- ruptcy proceedings for a New Jersey debtor in Canada, as long as the “substantial connection” test set forth in Morguard Investments v. De Savoye, (1990) 3 S.C.R. 1077, 1990 CanLII 29 (S.C.C.) is satisfied). See also In re McTague, 198 B.R. at 430 (“[I]t is fundamental that those orders can be enforced in a foreign nation only to the ex- tent that the foreign nation grants those orders ‘full faith and credit’ as a matter of comity, treaty or convention.”).
15. See Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238, 247 (2d Cir. 2013) (holding that Bankruptcy Code §109(a) requirements must be satisfied before a bankruptcy court can grant recognition of foreign proceeding); cf. In re Bemarmara Consulting A.S., Case No. 13-13037 (KG), Docket No. 38 (Bankr. D. Del. Dec. 17, 2013) (holding that Bankruptcy Code §109(a) does not apply to foreign representatives filing Chapter 15 petitions).
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