Disagreeing with the country’s foremost authorities on cross-border insolvency, a district judge in Oakland, Calif., adopted the Second Circuit’s controversial rationale and ruled that a foreign debtor must have property in the U.S. to qualify for relief under chapter 15.
However, Chief District Judge Phyllis J. Hamilton held in her Feb. 12 opinion that a security retainer provided to the foreign debtor’s U.S. counsel would satisfy the requirement of having property in the U.S.
In a message to ABI, Prof. Jay L. Westbrook of the University of Texas School of Law said that Judge Hamilton’s “long and careful opinion demonstrates the fallacy of the ‘plain meaning’ mantra that interprets a statute as if it were an ancient text rather than basing its interpretation on its function in a statutory system with a job to do.”
The Facts and the Ruling Below
An Australian company had been in liquidation in Australia since 2014. Upheld on appeal, the Australian court had ruled that a U.S.-based company was an unsecured creditor because its security interest was unperfected.
The U.S. creditor began several lawsuits in the U.S., allegedly in a collateral attack on the Australian judgment. The liquidator for the Australian company filed a chapter 15 petition in San Francisco in January 2017, asking the bankruptcy court to enforce the Australian judgment and enjoin the creditor’s litigation in the U.S.
The bankruptcy judge dismissed the chapter 15 petition, following In re Barnet, 737 F.3d 238 (2d Cir. 2013), where the Second Circuit held that the debtor eligibility requirements in Section 109(a) apply in chapter 15 cases. Disagreeing with courts holding that an attorney’s retainer satisfies Section 109(a), the bankruptcy judge went on to rule that the retainer paid to the Australian liquidator’s attorney was not “property in the traditional sense.”
The liquidator appealed, with support from an amicus brief filed by Prof. Westbrook, retired bankruptcy judges Ralph R. Mabey and Leif M. Clark, and Daniel M. Glosband of Goodwin Proctor LLP of Boston. Judge Mabey is now a law professor at the University of Utah.
The Reversal on Appeal
The Australian liquidator won a partial victory when Judge Hamilton reversed and remanded, ruling that an attorney’s security retainer satisfies the Section 109(a) requirement of property in the U.S., so long as the retainer has not been consumed. However, Judge Hamilton agreed with the Second Circuit by holding that the eligibility requirements of Section 109(a) do apply in chapter 15 cases.
Because the Ninth Circuit has not decided the issue, Judge Hamilton was persuaded by Barnet and rejected an opinion by a bankruptcy judge in Delaware that had held that Barnet was wrongly decided.
Judge Hamilton held that the “plain, unambiguous language” in Sections 103(a) and 109(a) requires foreign debtors to have property in the U.S. if the debtor does not have a residence, domicile or place of business in the U.S.
Section 109 is made applicable in chapter 15 cases by Section 103(a). Section 109(a) says, “Notwithstanding any other provisions of this section, only a person that resides or had a domicile, a place of business, or property in the United States . . . may be a debtor under this title.”
Judge Hamilton acknowledged that the applicability of Section 109 in chapter 15 “is an unsettled question on which bankruptcy courts and commentators disagree.” She cited but rejected the analysis in the Collier treatise, which concluded that Barnet was wrongly decided and “should not be followed outside of the Second Circuit.”
Judge Hamilton did not cite the seminal article by Prof. Westbrook and Daniel Glosband, Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?, 24 International Insolvency Review 28 (2015) (available at Wiley Online Library (wileyonlinelibrary.com)).
Although Judge Hamilton held that Section 109(a) was applicable, she reversed the bankruptcy judge’s conclusion that the attorneys’ retainer was insufficient property in the U.S. She followed out-of-circuit authority to hold that “any amount of property,” even a dime, “satisfies the threshold for debtor eligibility.” She cited four New York bankruptcy court opinions with approval for the proposition that an attorney’s retainer is a sufficient property interest in the U.S.
With regard to the sufficiency of the retainer, Prof. Westbrook said, “The telling point is that the opinion ends with adopting a legal fiction—the lawyer’s fee as ‘property’ in the United States—to satisfy the unnecessary requirement. If it were important to require that the debtor have property in the United States to invoke cooperation with a foreign proceeding, it would be absurd to satisfy the supposed requirement with a meaningless and easily manufactured connection.”
Because the bankruptcy court had not reached the issue, Judge Hamilton remanded the case for the lower court to consider whether the retainer given to the liquidator’s attorneys was a “security retainer” that would suffice as property in the U.S.
She also left the door open for the bankruptcy court to rule on a dispute regarding venue.
Because the bankruptcy court was tasked with more than ministerial functions on remand, it’s likely that neither side has the right to appeal to the Ninth Circuit at this juncture.