A contested chapter 15 petition afforded an opportunity for Bankruptcy Judge Sean H. Lane of Manhattan to opine that the requirements of Section 109(a) are satisfied if a foreign debtor’s claims against a third party are located in the U.S.
Judge Lane wrote his opinion on April 24 to comply with the much-criticized decision in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), where the Second Circuit held that Section 109(a) requires a debtor to reside or have a “domicile, place of business, or property in the U.S.” to be a debtor under chapter 15.
The corporation was in liquidation in Australia. The Australian liquidators were on the cusp of obtaining a $15 million judgment against insiders for breach of fiduciary duty. Some of the insider defendants moved to New York, evidently not intending to return to Australia.
In their chapter 15 petition, the liquidators offered two grounds for satisfying Section 109(a): a $1,250 retainer held by their U.S. attorneys, and the claims against the insiders.
One of the insiders objected to the liquidators’ eligibility for chapter 15 relief. He contended that the corporation had no assets in the U.S. to comply with Section 109(a).
The insider argued that the liquidators manufactured assets in the U.S. in bad faith by sending a meager $1,250 retainer to U.S. counsel. Judge Lane dispensed with the argument by citing five cases handed down after Barnet where bankruptcy courts in New York ruled that retainers held by U.S. counsel satisfy the “property” requirement in Section 109(a).
Arguing about the sufficiency of the retainer was futile unless the insider intends on taking the issue to the Second Circuit.
Deciding that the liquidators were entitled to chapter 15 recognition of Australia as home to the foreign main proceeding, Judge Lane held that the claims against the insiders were located in New York and therefore also satisfied Section 109(a).
The insider contended that the claims were not located in New York. To resolve the issue, Judge Lane confronted choice-of-law questions.
Judge Lane applied New York choice-of-law rules because he found no “overriding federal interest.” In New York, he said, the law of the jurisdiction “with the greatest interest in the litigation” will be applied.
According to Judge Lane, Australia has the greatest interest because the acts giving rise to the fiduciary duty claims occurred in Australia, the claims exist under Australian law, and any recovery will be distributed to foreign creditors through the Australian liquidation.
Deciding that the liquidators’ expert witness on Australian law was more persuasive, Judge Lane concluded that the fiduciary duty claims are located in New York where the defendants reside. He buttressed his conclusion by observing that a debt under Australian law is generally situated where the debtor resides.