Courts are at odds over whether a foreign bankruptcy case can be recognized under chapter 15 of the Bankruptcy Code if the foreign debtor does not reside, have assets, or a place of business in the United States. In 2013, the U.S. Court of Appeals for the Second Circuit established its stance on this issue in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), ruling that the provision of the Bankruptcy Code requiring U.S. residency, assets, or a place of business applies in chapter 15 cases as well as cases filed under other chapters.
The U.S. Court of Appeals for the Eleventh Circuit diverged from the Second Circuit on this controversial matter in In re Al Zawawi, distancing itself from Barnet based on Eleventh Circuit precedent predating the enactment of chapter 15. The Eleventh Circuit affirmed a district court ruling that chapter 15 has its own eligibility requirements, separate from those for debtors in cases under other chapters of the Bankruptcy Code. This circuit split may lead to a petition for rehearing en banc, U.S. Supreme Court review, or congressional action.
Chapter 15 was introduced in 2005 to govern cross-border bankruptcy and insolvency proceedings, modeled after the 1997 UNCITRAL Model Law on Cross-Border Insolvency. The key principle behind both chapter 15 and the Model Law is international comity, allowing recognition of foreign bankruptcy proceedings within the United States with regard to the rights of all stakeholders. Chapter 15 replaced section 304 of the Bankruptcy Code, providing efficient mechanisms for dealing with cross-border insolvency cases.
The debate over eligibility for chapter 15 relief revolves around the interpretation of sections 109 and 1502 of the Bankruptcy Code. While the Second Circuit in Barnet held that section 109(a) applies in chapter 15 cases, the Eleventh Circuit in Al Zawawi disagreed, emphasizing that chapter 15 has its own distinct eligibility requirements. The Eleventh Circuit’s ruling was influenced by its prior decision in Goerg, which determined that debtor eligibility under Chapter 1 is not a prerequisite for recognition of a foreign proceeding under chapter 15.
In Al Zawawi, the debtor’s UK bankruptcy case was seeking recognition under chapter 15 in the U.S. to investigate his affairs, recover U.S.-based assets, and potentially assert claims against third parties for the benefit of creditors. Despite not residing in the U.S., the debtor had indirect ownership interests in Florida-based companies and assets in the country. The bankruptcy court granted the petition for recognition, finding that the debtor’s assets and interests in U.S.-based entities satisfied the requirements for chapter 15 recognition.
The district court affirmed the bankruptcy court’s decision, emphasizing that compliance with section 109(a) is not a prerequisite for obtaining recognition under chapter 15. The court noted that chapter 15 provides its own definition of “debtor” and that debtor eligibility under chapter 1 does not apply to chapter 15 cases. The Eleventh Circuit panel, in a unanimous decision with two concurring opinions, upheld the district court’s ruling, citing the precedent set in Goerg and emphasizing the distinction between debtor eligibility in chapter 1 and chapter 15 cases.
The debate over eligibility for chapter 15 relief continues to present challenges and uncertainties in the bankruptcy landscape. While the Second Circuit’s interpretation in Barnet sets one standard, the Eleventh Circuit’s approach in Al Zawawi offers a different perspective. As the issue remains unresolved and a circuit split persists, further legal proceedings or legislative actions may be necessary to clarify the statutory requirements and ensure consistency in cross-border insolvency cases.
