Affirming Bankruptcy Judge Lori V. Vaughan, a district judge in 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.
In his February 28 opinion, District Judge Gregory A. Presnell held that Section 1517(a) contains the only requirements for recognition in chapter 15, and that those requirements do not include presence in the U.S.
The Foreign Debtor
The debtor was a citizen and resident of Oman. He was divorced in the U.K., where the court awarded £24 million to his former wife. When he refused to pay, the debtor was adjudged bankrupt in the U.K.
The joint trustees in the U.K. filed a chapter 15 petition in Orlando, seeking foreign main recognition. The U.K. trustees wanted discovery regarding Florida corporations that the debtor allegedly owned and that allegedly held $94 million of real property in Florida.
The debtor conceded that the liquidators satisfied all three requirements for recognition under Section 1517. Still, the debtor opposed recognition by arguing he did not fit the description of a debtor in Section 109(a). Section 109 is made applicable in chapter 15 cases by Section 103.
Section 109(a) 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 based his Section 109 argument on 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.
Predicting that the Eleventh Circuit would split with Barnet, Bankruptcy Judge Vaughan granted foreign main recognition. See Al Zawawi, 634 B.R. 11 (Bankr. M.D. Fla. Aug. 31, 2021). To read ABI’s report, click here.
The debtor appealed but lost.
Section 1517(a) Controls
District Judge Presnell based his ruling on the standards for recognition 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 had conceded that Section 1517(a) was satisfied but argued that Section 109(a) was an additional requirement.
Judge Presnell held “that compliance with Section 109(a) is not a prerequisite to obtaining recognition under Chapter 15.” He had several reasons for his conclusion.
First, Judge Presnell said that Section 1517(a) has only three conditions for recognition, “none of which involve an assessment of the foreign debtor’s contacts with the United States . . . . Section 1517 unambiguously provides the sole requirements for recognition.”
Second, Judge Presnell said that “Chapter 15 provides its own, alternate definition for ‘debtor’” in Section 1502(1). That section says that “debtor” in chapter 15 means “an entity that is the subject of a foreign proceeding” and says nothing about the debtor’s connections with the U.S.
Third, Judge Presnell found comfort in Section 1528. After recognition, the section says that a case may be commenced in another chapter “only if the debtor has assets in the U.S,” implying that assets in the U.S. only matter if the foreign representative intends on filing a separate case under chapters 7 or 11.
Fourth, Judge Presnell referred to the venue provisions for chapter 15 found in 27 U.S.C § 1410. If the debtor has neither a principal place of business nor principal assets nor is a defendant in a lawsuit in the U.S., venue will lie in the district that “will be consistent with the interests of justice and the convenience of the parties, having regard to the relief sought by the foreign representative.”
Judge Presnell interpreted Section 1410 to mean that “Congress thus expressly contemplated the prospect that a foreign debtor might not satisfy the qualifications required of a traditional debtor under Section 109(a).”
Fifth, Judge Presnell recited legislative history, where the House Report said, “The requirements of [Section 1517] . . . are all that must be fulfilled to attain recognition.” H.R. Rep. No. 109–31, pt. 1, at 113.
Judge Presnell cited courts in California, Florida and Delaware for having declined to follow Barnet. Even courts bound to follow Barnet, he said, find that Section 109(a) is satisfied if the foreign representative has a retainer lodged with a law firm in the district where the petition was filed.
Like Judge Vaughan, Judge Presnell interpreted Eleventh Circuit authority as being contrary to Barnet. See In re Goerg, 844 F.2d 1562 (11th Cir. 1988).
In Goerg, 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 ancillary proceedings were the predecessor to chapter 15.
Judge Presnell affirmed the bankruptcy court’s grant of foreign main recognition, saying that “if presented with today’s question, the Eleventh Circuit would decline to follow Barnet.”
Scholarly Commentary
Learning about the decision, Prof. Jay L. Westbrook responded by saying, “Right on!”
The professor told ABI, “The key is that the foreign representative is the party in interest who seeks 15 relief, not the ‘debtor.’”
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 co-authored a scholarly article criticizing 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).
Affirming Bankruptcy Judge Lori V. Vaughan, a district judge in 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.
In his February 28 opinion, District Judge Gregory A. Presnell held that Section 1517(a) contains the only requirements for recognition in chapter 15, and that those requirements do not include presence in the U.S.