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.
On February 28, 2022, the U.S. District Court for the Middle District of Florida (the “Florida District Court”) ruled that section 109(a) does not apply in chapter 15 cases. Talas Qais Abulmunem Al Zawawi v. Diss, et al. (In re Talas Qais Abdulmunem Al Zawawi), Case No. 21-894-GAP (M.D. Fla. Feb. 28, 2022). 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 the case Drawbridge Special Opportunities Fund L.P. v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir 2013), 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. See In re Bemarmara Consulting a.s., Case No. 13-13037 (Bankr. D. Del. Dec. 17, 2013); Daniel M. Glosband and Jay Lawrence Westbrook, Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?, 24 Int’l Insolv. Rev. 28 (2015). See also, Douglas G. Baird, Revisions to Chapter 15 of the Bankruptcy Code, at 4–7 (letter from National Bankruptcy Conference to Congress proposing Bankruptcy Code revision to clarify that section 109(a) does not apply in chapter 15 cases).
The Al Zawawi Case
Al Zawawi is a citizen of Oman and resides in Oman. In March 2020, as a result of Al Zawawi’s failure to satisfy a U.K. judgment, a U.K. court adjudged Al Zawawi bankrupt and appointed joint trustees (bankruptcy professionals entirely independent of and adverse to Al Zawawi) to investigate, collect, and distribute Al Zawawi’s assets.
Al Zawawi had no domicile, residence, or place of business and, arguably, no property in the United States prior to the commencement of the U.K. insolvency proceeding. His only interests relating to the United States were indirect ownership of several companies that, in turn, owned property in Florida. Al Zawawi was listed as a director of each company. Additionally, prior to 2020, Al Zawawi had a 60-percent ownership interest in a Florida corporation. In February 2020, Al Zawawi sold his interest in the corporation to his brother—the only other shareholder—but continued to be listed as a director.
On March 24, 2021, the joint trustees sought recognition of the U.K. proceeding in the U.S. Bankruptcy Court for the Middle District of Florida in order to investigate Al Zawawi’s financial affairs, determine whether his assets were used to acquire other assets in the United States, and potentially assert claims against third parties, including fraudulent transfer claims. Relying primarily on Barnet, Al Zawawi opposed recognition on the grounds that he did not have property in the United States. The joint trustees argued that Barnet was wrongly decided. The bankruptcy court, over Al Zawawi’s objection, found that: a) there is no requirement of having property in the United States for recognition of a foreign proceeding under chapter 15, and b) even if there was, Al Zawawi had property within the United States. Al Zawawi appealed to the Florida District Court.
The Eligibility Dispute
The Barnet Position: The Plain Language of the Bankruptcy Code Dictates that Section 109(a) Applies in Chapter 15 Cases
In requiring a debtor to have U.S. property in chapter 15 cases, the Second Circuit in Barnet interpreted sections 109(a) and 103(a) (part of chapter 1 of the Bankruptcy Code). Section 103(a) provides “. . . this chapter, sections 307, 362(o), 555 through 557, and 559 through 562 apply in a case under chapter 15.” Because section 109 is within chapter 1, the Second Circuit reasoned that “by the plain terms of the statute,” section 109 applies to a case under chapter 15.
The Second Circuit found that while section 1502 provides a separate definition for “debtor,” that definition does not replace the definition of “debtor” in section 109—doing so, it held, is not “reconcilable with the explicit instruction in Section 103(a) to apply Chapter 1 to Chapter 15.” In re Barnet, 737 F.3d at 249. And even if section 1502 did replace section 109(a) in defining a foreign debtor for the purposes of chapter 15, it would not render section 109 inapplicable in chapter 15 cases because the scope of section 1502 is expressly limited to “this chapter” (i.e., chapter 15) and thus does not affect the definitions contained within chapter 1. For example, the definitions of “foreign proceeding” and “foreign representative,” which are both found in chapter 1 and not in chapter 15, would not be affected by applying the section 109(a) definition of “debtor” in chapter 15.
Finally, Barnet rejected the argument that applying section 109(a) to chapter 15 would be inconsistent with the venue provision for chapter 15 cases. Under 28 U.S.C. § 1410, a chapter 15 case may be commenced in a venue where “the debtor does not have a place of business or assets in the United States.” 28 U.S.C. § 1410(2). The Second Circuit found this statute to be purely procedural in nature stating that “given the unambiguous nature of the substantive and restrictive language used in Sections 103 and 109 of Chapter 15 [sic], to allow the venue statute to control the outcome would be to allow the tail to wag the dog.” In re Barnet, 737 F.3d at 250.
The Al Zawawi Position: The Textual Language of, and Purpose of, Chapter 15 Confirms Recognition is Not Predicated on Section 109(a)
Like Barnet, the Florida District Court focused on the plain language of the Bankruptcy Code. Unlike Barnet, the Florida District Court found that requiring property in the United States for recognition misconstrues chapter 15. Specifically, that section 1517 unambiguously provides the sole requirements for recognition. Any references to a “debtor” in chapter 15 must apply the alternative definition of a “debtor” found in section 1502(1). The Florida District Court found that the legislative history for chapter 15 supports this position. See H.R. Rep. No. 109–31, pt. 1, at 107, reprinted in 2005 U.S.C.C.A.N. 88, 170 (2005) (noting that the term “debtor” takes on a “special definition” in Chapter 15—provided in Section 1502—and such “[wa]s necessary to eliminate the need to refer repeatedly to ‘the same debtor as in the foreign proceeding’”).
Further, the Florida District Court adopted the bankruptcy court’s reasoning that other statutory provisions confirm that Congress did not intend section 109 to apply to chapter 15. For example, it found that, if section 109 applied, section 1528 of the Bankruptcy Code would be rendered duplicative and superfluous because it provides that after recognition a case under another chapter of the Bankruptcy Code may be commenced “only if the debtor has assets in the United States.” Thus, to give effect to the plain language of section 1528 of the Bankruptcy Code, the Florida District Court found that there is no property requirement at the recognition phase of a chapter 15 case; property in the United States is only required, after recognition, if a chapter 11 or chapter 7 case is commenced.
Similarly, the Florida District Court found that the venue statute governing chapter 15 cases specifically provides venue for cases when the foreign debtor lacks “a place of business or assets in the United States.” See 28 U.S.C. § 1410 (2),(3). Unlike Barnet, the Florida District Court’s interpretation of section 1410 makes no distinction between “procedural” and “substantive” statutes (a distinction not made in the U.S. Code itself). Rather, the Florida District Court noted that section 1410 conflicts with the language of section 109 of the Bankruptcy Code, further supporting the idea that the generally drawn section 109(a) was not meant to be an eligibility requirement for recognition.
Finally, the Florida District Court found that the Eleventh Circuit would likely disagree with Barnet. The Eleventh Circuit in a decision examining the predecessor statute to chapter 15, former section 304 of the Bankruptcy Code, construed that statute not in isolation but in the context and purpose of what the statute was seeking to accomplish. In re Goerg, 844 F.2d 1562 (11th Cir. 1988). Ultimately, the Eleventh Circuit held that “[b]ecause the focus is on making United States processes available in aid of foreign proceedings, not actual bankruptcy administration, it would make little sense to require that the subject of the foreign proceeding qualify as a ‘debtor’ under United States bankruptcy law.” Id.
Al Zawawi is not the only case to reject the Second Circuit’s holding in Barnet. Indeed, bankruptcy courts in the District of Delaware and the Southern District of Florida have also declined to follow Barnet. Bankruptcy courts in the Second Circuit have managed to align the Barnet ruling with specific case requirements and the policy behind by chapter 15 by permitting nominal U.S.-based property rights (retainers for 15 professionals, deemed situs for books and records under bond indentures, deemed provenance for intangibles and causes of action) to establish the 109 nexus.
Al Zawawi 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.