Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?

• Date: 01 March 2015
• Author: Jay Lawrence Westbrook,Daniel M. Glosband
• Published date: 01 March 2015
• DOI: http://doi.org/10.1002/iir.1230

Chapter 15 Recognition in the United States:

Is a Debtor “Presence”Required?

Daniel M. Glosband

1

*

,†

and Jay Lawrence Westbrook

2,†

1

Goodwin Procter LLP, USA

2

Benno C. Schmidt Chair of Business Law, The University of Texas School of Law, USA

Abstract

A recent appellate decision in the USA (In re Barnet) confuses the foreign debtor

with the foreign insolvency representative. Notwithstanding the focus of US bank-

ruptcy law on a foreign proceeding as the object of an ancillary case under Chapter

15, with the foreign representative as its emissary, the decision dismayed the inter-

national insolvency community by ruling that section 109(a) of the Bankruptcy

Code applies to recognition under Chapter 15. The result is to require that the

debtor in a foreign proceeding has some minimum jurisdictional presence in the

USA as a condition of Chapter 15 recognition. Such a presence might include a

domicile, a place of business, or property. While there might be a “backdoor”de-

vice avoiding this result, the decision creates serious confusion and a potential ob-

stacle to full international recognition. Copyright © 2015 INSOL International

and John Wiley & Sons, Ltd

I. Introduction

The United Nations Commission on International Trade Law (UNCITRAL)

Model Law on Cross-Border Insolvency

1

and its US embodiment, Chapter 15 of

*E-mail: JWestbrook@law.utexas.edu; dglosband@

goodwinprocter.com

†

Daniel M. Glosband is a retired partner of Goodwin

ProcterLLP and is Of Counsel to the firm. Jay Lawrence

Westbrook is the Benno C. Schmidt Chair of Business

Law, The University of Texas School of Law. Each

was a head of a delegation to the United Nations Com-

mission on International Trade Law (UNCITRAL) that

produced the Model Law on Cross-Border Insolvency,

which became Chapter 15 of the Bankruptcy Code,

and both worked closely with the Congressional staffs

on the version adopted. The authors wish to thankMi-

chael H. Goldstein and Hon. AllanL. Gropper for their

helpful commentson earlier drafts of this article.

1. UNCITRAL is the United Nations Commission

on International Trade Law. The Model Law and

Guide to Enactment (“Model Law”,“Guide”) can

be found at http://www.uncitral.org/uncitral/en/

uncitral_texts/insolvency/1997Model.html. The Guide

was updated in 2013 but nearly all of the original

text remains, albeit with different paragraph number-

ing. Citations in this article are to the updated Guide

and a “concordance table”is included as an appen-

dix to enable conversion to the original paragraph

numbers. Any relevant differences between the up-

dated Guide and the original Guide will be noted

by references to the “1997 Guide.”

Copyright © 2015 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 24: 28–56 (2015)

Published online 10 February 2015 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/iir.1230

the Bankruptcy Code

2

(the “Code”)

11

are designed to provide assistance to foreign

courts or foreign representatives in connection with foreign insolvency proceedings.

3

As a threshold requirement for obtaining judicial assistance in a country that has

adoptedtheModelLaw,aforeignrepresentativemustobtainanordergranting

recognition of a foreign proceeding.

4

Recognition constitutes a judicial determination

that the foreign proceeding falls within the scope of the Model Law or Chapter 15

and entitles the foreign representative to seek relief from the host country’s courts.

5

Whether the debtor that is the subject of a foreign proceeding has a domicile,

place of business, or property in the United States is not relevant to recognition

of the foreign proceeding. The foreign representative is the sole actor for the for-

eign proceeding in a case under the Model Law or Chapter 15, and the foreign

proceeding is the intended beneficiary of the case. The case is not the equivalent

of a “full”bankruptcy case: “Cases brought under Chapter 15 are intended to

be ancillary to cases brought in a debtor’s home country, unless a full US bank-

ruptcy case is brought under another chapter.”

6

The debtor cannot commence a

Model Law or Chapter 15 case and cannot request or receive relief in such a case;

such rights are granted only to the foreign representative.

7

An order recognizing a

foreign proceeding “shall be entered”if the foreign proceeding and the foreign

representative are within the statutory definitions of those terms and if the foreign

proceeding is either a foreign main proceeding or a foreign nonmain proceeding,

as those terms are defined.

8

Recognition requires the debtor to be “the subject of a

foreign proceeding”, but Chapter 15 requires no determination concerning the at-

tributes or financial circumstances of the debtor. If the debtor desires to obtain

bankruptcy relief in the United States, it must file a full US bankruptcy.

9

Nonetheless, the Second Circuit Court of Appeals in a recent case, In re Barnet,

10

ruled that section 109(a) of the Bankruptcy Code (the “Code”)

11

requires that the

debtor in a foreign insolvency proceeding have a presence in the USA as a precon-

dition to recognition of the proceeding in the USA. Section 109(a) governs the

2. Chapter 15 Ancillary and Other Cross-Border Cases,11

U.S.C.§ § 1501-1532 .

3. Model Law, Article 1(a); 11 U.S.C. § 1501(1)(b).

4. Model Law, Article 15; 11 U.S.C. § 1515.

5. Model Law, Articles 9, 17, 21; 11 U.S.C. § § 1509,

1517, 1521. Limited, urgently needed relief may be

granted between the time of the filing of the applica-

tion for recognition and the decision on recognition.

Model Law, Article 19; 11 U.S.C. § 1519.

6. House Report 109-31, pt. 1, 109th Cong., 1st Sess.

(2005) (“H.R. Rep.”) at 106.

7. Model Law, Articles 2, 15, 19-21, 22; 11 U.S.C. § §

1501, 1515, 1519, 1521, 1522. The debtor can at most

oppose recognition of the foreign proceeding (Federal

Rule of Bankruptcy Procedure 1011) and can be heard

on whether its interests are sufficiently protected in the

context of relief sought by or granted to the foreign repre-

sentative. Model Law, Article 22(1), 11 U.S.C. § 1522(a).

8. Model Law, Articles 2, 17; 11 U.S.C. § § 101(23),

101(24), 1502(4), (5), 1517.

9. The confusion on this point may arise in part be-

cause foreign proceedings sometimes involve a

debtor-in-possession (“DIP”), an approach that be-

came prominent in Chapter 11 proceedings in the

USA but has found favor in some other countries.

10. In re Katherine Elizabeth Barnet (Drawbridge Spe-

cial Opportunities Fund, LP v. Katherine Elizabeth

Barnet, Foreign Representative), 737 F. 3d 238 (2d

Cir. 2013) (“Barnet”). Katherine Elizabeth Barnet and

William John Fletcher are the liquidators of Octaviar

Administration Pty Ltd. and its foreign representatives.

Id. at *241. As to the Barnet decision dismaying the

insolvency community, see, e.g., David J. Moulton, 2d

Circuit Raises a Drawbridge to Chapter 15, Law 360,

December 20, 2013; Did the Second Circuit Alter the Chapter

15 Architecture, Davis Polk Global Distress Signal,

Spring 2014; John Kibler, Barnet Sets Stage for Potential

Chapter 15 Circuit Split, Law 360, February 20, 2014.

11. 11 U.S.C. § § 101, et seq.

Chapter 15: No Debtor “Presence”Required 29

Copyright © 2015 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 24: 28–56 (2015)

DOI: 10.1002/iir