Claims in the U.S. Can Make a Foreign Debtor Eligible for Chapter 15

In the Second Circuit, § 109(a) of the Bankruptcy Code applies to cases brought under chapter 15, meaning that a foreign representative cannot seek recognition or any other type of relief under chapter 15 if the foreign debtor does not have a domicile, residence, place of business or property in the U.S.[1]

Many courts have examined what exactly qualifies for § 109(a) and have generally ascribed broad definitions to “place of business” or “property” in the U.S. so that satisfying § 109(a) is relatively easy. For example, a “place of business” does not require a principal place of business.[2] One court even found that a foreign debtor’s employment of a U.S. accountant who merely maintained books and records regarding the debtor in her office was sufficient to satisfy § 109(a).[3] Courts have also stated that there’s a “relatively low bar” to show “property” in the U.S.[4] As one court explained, “109(a) simply uses the word ‘property.’… It doesn’t say that [the] property needs to be significant in amount. It just has to be here.”[5] Unearned retainers, small bank accounts and small receivables have all qualified as “property” in the U.S.[6]

A recent case, B.C.I. Finances, reaffirmed § 109(a)’s broad definition of “property.”[7] The court found that the debtors’ Australian breach-of-fiduciary-duty claims against its former directors who lived in the U.S. constituted property in the U.S. to satisfy § 109(a).[8]

Background

B.C.I. Finances involved three Australian companies controlled and operated by the Binetter family.[9] The companies ended up embroiled in an investigation by Australian tax authorities, which concluded with findings of “fraud or evasion.” The companies ultimately went into liquidation.

The liquidators brought claims in Australia against the Binetters for breaching their fiduciary duties related to the tax liabilities.[10] The liquidators obtained a judgment against the Binetters. Although damages were not specifically determined, one of the Binetters admitted that liability was at least $20 million.[11] During the proceeding, the Binetters began to leave Australia; Andrew and Michael Binetter moved to New York.[12]

The liquidators subsequently sought recognition of the debtors’ Australian liquidation proceedings as foreign main proceedings under chapter 15 in New York.[13] Andrew Binetter and another entity (the objecting parties) objected, arguing that the debtors could not satisfy § 109(a).[14] According to the objecting parties, the situs of the fiduciary duty claims was in Australia, not the U.S.[15]

Analysis

The court rejected the objecting parties’ argument and found that fiduciary duty claims were property in the U.S. for § 109(a) purposes. The court used a three-part analysis to make this finding. First, the court used choice-of-law principles to decide which law to use to determine the location of the claims. As noted by the court, a debtor’s interest in property is determined by local or state law.[16] In addition, absent a significant federal policy to justify federal conflicts rules, bankruptcy courts apply the choice-of-law rules of the forum state.[17] No overriding federal policy was found, so the court applied New York law.[18] Under New York law, “the law of the jurisdiction having the greatest interest in the litigation will be applied.”[19] The court found that Australia had the greatest interest, considering that (1) the liquidators were appointed by an Australian court and are governed by Australian law, (2) Andrew Binetter is an Australian citizen, (3) the fiduciary-duty claims arose from acts committed in Australia and existed under Australian law, and (4) any recovery will be distributed to creditors through the Australian proceeding.[20]

Second, using Australian law, the court found that the situs of the Australian breach-of-fiduciary-duty claims was New York. Competing experts in Australian law testified. The court sided with the liquidators’ expert that explained that a claim for breach of fiduciary duty is a “chose in action,” which are “localised and are situated where they are properly recoverable and are properly recoverable where the debtor resides.”[21] Thus, an Australian court would likely find that the breach-of-fiduciary-duty claim was located in New York.[22]

Third, the court mentioned a general argument that “where a court has both subject matter jurisdiction and personal jurisdiction, the claim subject to the litigation is present in that court.”[23] Although the court did not adopt this argument, the court noted it would also result in a New York situs for the claims, since the Binetters’ resided in New York and the bankruptcy court had jurisdiction over matters impacting the debtors.[24]

Implications

B.C.I. Finances does provide some insight into how a claim can help a foreign debtor “qualify” for chapter 15 relief. Interestingly, while the B.C.I. Finances court only mentioned in dicta the argument that subject-matter and personal jurisdiction establish the location of a claim, other courts have historically relied on this argument in the chapter 15 context.[25] Using this jurisdictional approach is relatively simple and means that one test will apply consistently to every foreign debtor for chapter 15 purposes — i.e., every foreign debtor that has a claim that can be brought in the U.S. has property in the U.S. and can seek chapter 15 relief.

Conversely, the choice-of-law method primarily relied upon by the court is much more complicated and will allow for inconsistent results. Whether a foreign debtor’s cause of action against a U.S. defendant will qualify as “property” in the U.S. will depend on the law of whatever jurisdiction is ultimately applied by the choice-of-law principles of the state in which the foreign debtor sought chapter 15 recognition.