Eleventh Circuit Predicted to Split with the Second Circuit on Foreign Recognition

Bankruptcy Judge Lori V. Vaughan of Orlando, Fla., predicts that the Eleventh Circuit will split with the Second Circuit and hold that a bankruptcy court may grant foreign main recognition under chapter 15 even if the debtor has no residence, domicile, place of business or property in the U.S.

Judge Vaughan was referring to a Second Circuit decision, In re Barnet, 737 F.3d 238 (2d Cir. 2013), where Australian liquidators of a corporation were seeking foreign main recognition under Section 1517. The bankruptcy court granted recognition even though the debtor had no residence, domicile, place of business or property in the U.S., a seeming requirement under Section 109(a).

On direct appeal, the Second Circuit reversed, based on the plain language of Section 103, which makes Section 109 applicable in chapter 15 cases.

Believing that Barnet was wrongly decided, Prof. Jay L. Westbrook told ABI that Judge Vaughan wrote an “excellent opinion, reflecting the fact that chapter 15 is fundamentally different in focus and procedure and its unique definition of ‘debtor’ should obviously prevail over the general one.”

Prof. Westbrook is the country’s leading authority on cross-border insolvency and occupies the Benno C. Schmidt Chair of Business Law at the University of Texas School of Law. He was an author of a scholarly article debunking Barnet line by line. See Glosband and Westbrook, “Chapter 15 Recognition in the U.S.: Is a Debtor ‘Presence’ Required?,” Int. Insolv. Rev., Vol. 24: 28–56 (2015).

The Individual Debtor in Judge Vaughan’s Case

The debtor was an individual in the case before Judge Vaughan. He had been adjudicated bankrupt in the High Court of Justice of England and Wales. The joint liquidators filed a chapter 15 petition and sought recognition of the proceedings in the U.K. as the foreign main proceeding.

The standards for recognition are contained in Section 1517(a), which provides that the court “shall” grant recognition if:

(1) such foreign proceeding for which recognition is sought is a foreign main proceeding or foreign nonmain proceeding within the meaning of section 1502;

(2) the foreign representative applying for recognition is a person or body; and

(3) the petition meets the requirements of section 1515.

The debtor conceded that the liquidators satisfied all three requirements for recognition under Section 1517. Still, the debtor argued that the court should not grant recognition because he did not fit the description of a debtor in Section 109. That section says:

[O]nly a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.

The debtor claimed that he did not have a residence or domicile in the U.S. and no longer had any business or property in the U.S. Relying on Barnet, the debtor called on Judge Vaughan to deny recognition.

Judge Vaughan declined the invitation. For a host of reasons, she concluded that “the Eleventh Circuit would likely disagree with the Barnet holding.”

Section 109(a) Yields to More Specific Provisions

Judge Vaughan’s August 31 opinion leaves the reader with the impression that Section 109(a) was thoughtlessly drafted and inconsistent with other, more specific provisions in chapter 15 regarding recognition.

Because the facts met all three requirements of Section 1517(a), Judge Vaughan said that the “plain language” of the section “requires this Court to recognize the U.K. bankruptcy.”

“For the purposes of this chapter [15],” Section 1502(1) defines a “debtor” to mean “an entity that is the subject of a foreign proceeding.” Judge Vaughan therefore concluded that Section 109(a) does not apply in chapter 15 cases. Were it otherwise, Section 1502(1) would have no meaning.

Judge Vaughan also took guidance from 28 U.S.C. § 1410(3), which places venue of chapter 15 cases where there is a lawsuit against a debtor who has no business or assets in the U.S.

Judge Vaughan alluded to subsections (b) through (g) of Section 109, which specifies who may be debtors under chapters 7, 9, 11, 12 and 13. Chapter 15 is “[n]otably absent,” she said.

Section 109(h) requires individuals to have taken a course in credit counseling. Because a foreign debtor would always have been declared bankrupt in another country, Judge Vaughan said that the “plain language” of Section 109(h) “would always require a waiver by the Court or an exception to apply.”

“[A]s a whole,” Judge Vaughan held that “the plain language” of Section 109 “demonstrates it should not apply to recognition of foreign debtors under chapter 15.”

Barnet Won’t Be Followed

To conclude her opinion, Judge Vaughan considered whether the Eleventh Circuit would follow Barnet. She cited In re Goerg, 844 F.2d 1562 (11th Cir. 1988), where the Eleventh Circuit held under former Section 304 that a foreign representative could conduct ancillary proceedings regarding a foreign debtor that did not qualify as a debtor under Section 109. Section 304 was the predecessor to chapter 15.

Because Section 109 was on the books when Goerg was written, Judge Vaughan concluded that the Eleventh Circuit would continue to follow Goerg and would reject Barnet.

Even if Barnet were the standard, Judge Vaughan held that the debtor met the requirements of Section 109(a), because he was an indirect owner of corporations that owned property in the district. Further, the foreign representatives held claims that would qualify as property in the U.S.

Judge Vaughan granted recognition as a foreign main proceeding.

Observation

The ink was barely dry on Barnet before it was emasculated by the bankruptcy courts. Even though she was reversed in Barnet, the bankruptcy judge granted recognition on remand, finding that the retainer given to U.S. counsel for the foreign representatives and claims in the U.S. satisfied Section 109(a). In re Octaviar Administration Pty Ltd, 511 B.R. 361 (Bankr. S.D.N.Y. June 19, 2014). Other courts have used the same rationale to grant recognition.

The article by Prof. Westbrook and Mr. Glosband, supra, picks apart every flaw in Barnet. Fundamentally, they explain why the Second Circuit “confuse[d] the foreign debtor with the foreign insolvency representative.” Id. at 28. In detail, they explain why the Second Circuit “either reject[ed] or ignore[d] the meaning, plain or otherwise, of other sections of title 11 that establish that the debtor subject to the foreign proceeding is not a debtor under title 11 and that the foreign proceeding, not the debtor, must be eligible for recognition.” Id. at 44.

The two commentators say that Section 109(a) does apply in chapter 15 cases, but they explain the limited circumstances where it governs. For instance, the foreign debtor must have a presence in the U.S. when foreign representatives use their power under Section 1511 to file a “full” case under Sections 301, 302 or 303. Section 109(a) also applies when a foreign debtor files a bankruptcy case in the U.S. to enforce a foreign discharge.

“Conversely,” Prof. Westbrook and Mr. Glosband said, “the reason that section 109(a) does not apply to recognition is that the debtor in the foreign proceeding will not, by virtue of chapter 15 recognition of the foreign proceeding, become ‘a debtor under this title.’”

The two commentators faulted the Second Circuit for failing to “explain why the plain meaning of section 109(a) trumps the plain meaning of section 1502.” “For the purposes of this chapter,” Section 1502(1) says that the term “‘debtor’ means the entity that is the subject of a foreign proceeding.”

Prof. Westbrook and Mr. Glosband meticulously explain why “section 1502(1) supplants section 101(13) within and without Chapter 15; the phraseology ‘for purposes of’ does not permit the application of dual definitions.”

Whenever a court or counsel faces a question similar to the issue confronting Judge Vaughan, we recommend extensive reliance on the article by Prof. Westbrook and Mr. Glosband.