In December 2013, the Court of Appeals for the Second Circuit held that section 109 of the Bankruptcy Code was applicable to Chapter 15 cases.  In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), the Court engaged in a statutory analysis and determined that Chapter 1 of the Bankruptcy Code applies to Chapter 15 cases and, therefore, Chapter 15 debtors must now meet the property threshold requirements of section 109.  Prior to this ruling, in order to obtain recognition of a foreign proceeding, a debtor only had to meet the requirements set forth in sections 1515 and 1517 of the Bankruptcy Code.  After Barnet, at least in the Second Circuit, a debtor seeking to obtain recognition of a foreign proceeding must also show that it has a residence or domicile, a place of business, or property in the United States.  Barnet seemed to erect an impediment to foreign debtors seeking to avail themselves of the protections afforded by Chapter 15.  The true impact of Barnet, however, is determined by establishing how much property the debtor must have in the United States before commencing a Chapter 15 proceeding.  The emerging consensus is, not much.

In June 2014, Judge Chapman in the Southern District of New York applied Barnet but held that claims and causes of action or an undrawn retainer for legal services were “property” sufficient to satisfy the requirements of section 109 of the Bankruptcy Code.  In In re Octaviar Administration Pty Ltd, 511 B.R. 361 (Bankr. S.D.N.Y. 2014), the debtor was seeking recognition of an Australian proceeding and a defendant involved in litigation against the debtor objected to recognition on several grounds—including that the debtor could not comply with section 109 of the Bankruptcy Code and, therefore, was not entitled to recognition of its foreign proceeding.  The Court disagreed and held that causes of action filed by the debtor prior to commencing its Chapter 15 proceeding qualified as “property in the United States”.  In addition, the Court ruled that the situs of the causes of action was the United States because the complaints were against U.S. entities, under U.S. law, and involved allegations that funds were illegally transferred to the U.S.  The debtor in Octaviar also had an undrawn retainer for the benefit of  its U.S. attorneys which, the Court held, was enough to satisfy section 109.  The defendant objected on the basis that the retainer account was nothing more than an artificial maneuver to satisfy section 109.  The Court declined to consider the amount of the property or the circumstances surrounding the debtor’s acquisition of the property for the purposes of section 109.  Thus, Octaviar limits the impact of Barnet because it demonstrates that little property is necessary to satisfy the requirements of section 109 and it reiterates that the way the property is obtained is not relevant.

Recently, Judge Bernstein in the Southern District of New York bolstered Octaviar and further limited the impact of Barnet by holding that funds held in escrow in an account which were not in the debtor’s name were still sufficient to satisfy section 109.  In re Suntech Power Holdings Co., 520 B.R. 399 (Bankr. S.D.N.Y. 2014).[1]  The debtor in Suntech was a multi-national group of corporations engaged in the solar energy business with its principal place of business in China.  The debtor defaulted on its New York law-governed notes and was embroiled in billion-dollar litigation in California with Solyndra.  It negotiated with its lenders and agreed on a restructuring including a scheme of arrangement in the Cayman Islands and a Chapter 15 filing in the U.S.  The Joint Provisional Liquidators were facing a deadline to commence the Chapter 15 proceeding but the debtor did not have any property in the U.S.  They attempted to open a bank account but there was not enough time for a bank to complete its due diligence.  Instead, the debtor, on the eve of filing, transferred money to Kurtzman Carson Consultants LLC (“KCC”), as its agent, for the sole purpose of having property in the U.S.  Despite the fact that the bank accounts were not escrow accounts, the debtor did establish terms similar to an escrow account with KCC.  Solyndra objected to the recognition of the foreign proceeding on several grounds—including that the debtor did not meet the requirements of section 109(a) of the Bankruptcy Code.  The Court applied New York law to determine that KCC’s parent held title to the accounts as agent for the debtor and, therefore, the accounts were the debtor’s property.  As such, the Court ruled that the debtor had sufficient property to qualify as a debtor under section 109(a) of the Bankruptcy Code.  Solyndra further argued that the last minute transfer of money to KCC to establish eligibility was improper, but the Court disagreed and held that it would contravene the purposes of Chapter 15 (providing legal certainty, maximizing value, protecting creditors and rescuing financially troubled businesses) to prevent an foreign debtor with no property in the U.S. from establishing eligibility to seek the protections and relief available under Chapter 15.  The Suntech opinion further chips away at the severity of the Barnetdecision—allowing a foreign debtor with no property in the U.S. to become eligible to file a Chapter 15 case, even on the eve of bankruptcy, with a simple transfer of funds into an agent’s U.S. bank account.

[1] In the coming weeks, we will analyze the venue and COMI holdings discussed in this case.  For purposes of this discussion, only the facts relevant to section 109 of the Bankruptcy Code are discussed.