Must Foreign Debtors Have U.S. Property to be Eligible for Relief Under Chapter 15?

Pratt's Journal of Bankruptcy Law

The authors discuss a recent decision that they say represents an important appellate step in aligning Chapter 15 policy with its clear statutory requirements: that a foreign debtor under Chapter 15 need not have a property-based nexus with the United States to enable its representative to pursue a foreign collective remedy in the United States, pursue voidable transactions and consolidation theories and otherwise optimize the impact of an international insolvency proceeding.

Chapter 15 of the U.S. Bankruptcy Code provides a streamlined process for recognition (a form of comity) of a foreign insolvency proceeding. However, courts are divided as to whether a foreign debtor must satisfy the general definition of “debtor” as that term is used in Section 109(a) of the Bankruptcy Code, which requires a debtor seeking bankruptcy relief to reside or have a domicile, a place of business, or property in the United States.

The U.S. District Court for the Middle District of Florida (the “Florida District Court”), in Talas Qais Abulmunem Al Zawawi v. Diss, et al., recently ruled that Section 109(a) does not apply in Chapter 15 cases. The court relied on a straightforward interpretation of Section 1517(a)’s mandatory criteria, finding that Chapter 15 “provides the sole requirements for recognition” and that recognition is not premised upon a foreign debtor meeting Section 109(a) requirements for eligibility.

The Florida District Court’s opinion conflicts with an opinion rendered in 2013 by the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) in Drawbridge Special Opportunities Fund L.P. v. Barnet (In re Barnet), which held that Section 109(a) is applicable in Chapter 15. Al Zawawi is the latest in a string of judicial opinions and scholarly articles disagreeing with the Second Circuit’s decision in Barnet.

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“Must Foreign Debtors Have U.S. Property to be Eligible for Relief Under Chapter 15?” by Rick Antonoff and Evan Jason Zucker was published in the September 2022 edition of Pratt's Journal of Bankruptcy Law (Vol. 8, No. 6), an A.S. Pratt Publication, LexisNexis. Reprinted with permission.

This article was first published in the March 2022 edition of Mainbrace, Blank Rome’s quarterly maritime newsletter.