On Feb. 1, 2022, Hon. David S. Jones of the U.S. Bankruptcy Court for the Southern District of New York denied a motion to dismiss the chapter 11 cases of JPA No. 111 Co. Ltd. and JPA No. 49 Co. Ltd. (together, the “debtors”), each a Japanese single-purpose entity — finding that the debtors’ reversionary interest in unused retainer funds held by the debtors’ chapter 11 counsel established sufficient “ties” to the U.S. for purposes of chapter 11 eligibility under § 109 of the Bankruptcy Code [1]. As discussed below, the ruling provides key guidance for foreign debtors preparing to file for chapter 11 protection.
The Aircraft and Financings
The debtors are Japanese special-purpose vehicles that each acquired and owned one Airbus A350 aircraft, which were subsequently leased by the debtors to Vietnam Airlines. The debtors did not have any employees or offices independent of their parent company, JP Lease Products & Services Co. Ltd. (JPL), a Japanese company, which manages each debtor.
To finance their acquisition of each aircraft, each debtor entered into a complex set of financing arrangements that required each debtor to lease the aircraft to intermediate sublessors, provided for a “security agent” to act on behalf of the lenders, and contained a payment priority waterfall. To secure their obligations, the debtors granted mortgages on the aircraft and assigned the security agent interests in the debtors’ rights under the transaction documents, including the leases (the “lease assets”). The security agent was provided enforcement rights in the event of a default, including the right to “dispose of” such property “at the times, in the manner, and on the terms it thinks fit.”
The Chapter 11 Cases
Following a series of rent deferrals and amendment negotiations, on Dec. 10, 2021, FitzWalter Capital Partners (Financial Trading) Ltd., the “security agent” under the financing documents, appointed an agent to pursue its foreclosure remedies in England, including an expedited sale of the lease assets pursuant to procedures that contemplated a bid deadline of Dec. 17 and a closing date of Dec. 20.
On Dec. 17, 2021, the debtors filed chapter 11 petitions in the SDNY Bankruptcy Court — thereby commencing the chapter 11 cases. The debtors represented that they intended to use bankruptcy protection to market and sell their aircraft and the lease assets, and argued that such a sale would yield a greater recovery for, and benefit to, all parties in interest, as compared to FitzWalter’s enforcement sale.
On Jan. 2, 2022, FitzWalter filed a motion to dismiss the chapter 11 cases. The motion alleged, among other things, that the debtors were not eligible to file the chapter 11 cases because they lacked assets in, and ties to, the U.S., and that the cases were filed in bad faith. FitzWalter further asserted that the lease assets were not property of the estates because they were assigned to FitzWalter, as security agent, and the debtors only held a contingent reversionary interest following the satisfaction of all outstanding secured obligations.
The Ruling
On Jan. 26, 2022, the SDNY Bankruptcy Court denied FitzWalter’s motion. First, the court held that the debtors were eligible to file for chapter 11 protection. The court recognized that the debtors had few ties to the U.S., but the court opined that there is no minimum value requirement to maintaining property in the U.S. for jurisdictional purposes. As such, the court held that the debtors’ residual interest in certain unused retainer funds held by the debtors’ bankruptcy counsel, Togut, Segal & Segal LLP, satisfied the “property In the United States” provision of § 109 of the Bankruptcy Code. In so finding, the court rejected FitzWalter’s argument that the retainer did not belong to the debtors because it was paid by JPL, as the debtors (not JPL) maintained the residual interest in the funds.
Second, the court rejected FitzWalter’s argument that “cause” existed to dismiss the chapter 11 cases because the cases were filed in bad faith. Among other things, a case is filed in bad faith if it is clear that there is no reasonable likelihood that the debtor intended to reorganize and no reasonable probability that it would emerge from the bankruptcy proceeding. Courts in the Second Circuit refer to the factors from In re C-TC 9th Ave. Partnership, 113 F.3d 1304 (2d Cir. 1997), to aid in determining whether a chapter 11 case was filed in bad faith.
After analyzing each of C-TC factors, the court looked to the totality of the circumstances and found that the chapter 11 cases were not filed in bad faith even though certain C-TC factors were satisfied. As the court explained, “Whatever th[is] one-by-one tally of factors reveals, the totality of the record ... gives an overwhelming impression of a good-faith effort to use bankruptcy remedies to achieve a superior outcome for all parties in interest — with the possible exception of FitzWalter,” which might “lose profit it could otherwise achieve if its own foreclosure process” was allowed to proceed where it could obtain “lower-cost ownership of [the debtors’] valuable assets” for its own benefit.
Conclusion
The court upheld the debtors’ eligibility to file for chapter 11 protection based on their residual interest in an attorney retainer deposit held in the U.S. — thereby affirming that assets of minimal value may be sufficient to qualify as a chapter 11 debtor for purposes of § 109 of the Bankruptcy Code. The court also affirmed that whether a filing was undertaken in bad faith considers the “totality of the circumstances,” as opposed to a mechanical application of the C-TC factors. In doing so, the court reinforced U.S. bankruptcy proceedings as a collective forum to resolve disputes and maximize the value of assets in a controlled and transparent manner.
[1] In re JPA No. 111 Co. Ltd., No. 21-12075 (DJS), 2022 WL 298428 (Bankr. S.D.N.Y. Feb. 1, 2022). The authors served as counsel to the debtors in the chapter 11 cases.