Examining The Relationship Between Chapter 15 And Section 109(a) of the United States Bankruptcy Code: Why Applying Section 109(a) Is Problematic

Friday, April 19th, 2019 at 1:56 pm by Mary Han

Mt. Gox, formerly one of the world’s leading digital currency exchanges headquartered in Japan, shut its website in 2014 after asserting that it lost approximately 860,000 bitcoins due to an unidentified hacker’s attack. At that time, this amount was worth more than $500 million. Although it subsequently reported that it found 200,000 bitcoins, the company was clearly in financial distress. Indeed, Mt. Gox filed for Chapter 15 bankruptcy proceeding in March 2014, to prevent U.S. customers from seizing its U.S. assets. Mt. Gox also filed a similar proceeding in Canada. Although the case is still going on in Japan, all relevant parties involved in the Mt.Gox crisis—the bitcoin exchange itself, its’ creditors, and different courts—would not have been able to streamline this cross-border issue without use of Chapter 15.

Just like Mt. Gox, businesses have begun to operate across borders in today’s modern world through the exponential growth of technology capabilities. Successful companies constantly look for different opportunities to expand their business—meaning that companies are no longer confined to one country. Although companies may be able to enjoy the benefits of globalization, it also comes with serious risks. One of the biggest problems that international companies face is what happens when it goes bankrupt. If the debtor company’s insolvency becomes public knowledge, the debtor will be vulnerable in various jurisdictions where the companies’ assets and creditors are located in. In terms of efficiency, it would be highly undesirable to have multiple lawsuits in different countries at once. In order to carry out these proceedings in a seamless manner, Chapter 15 of the Bankruptcy Code was adopted in 2005 as part of the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” (“BAPCPA”) Specifically, Chapter 15 provides effective procedures for dealing with cases of cross-border insolvency. In fact, a Chapter 15 proceeding “is the exclusive remedy for a foreign representative seeking injunctive relief against litigation in U.S. courts that would interfere with a foreign bankruptcy proceeding.” The scope is limited to assisting foreign bankruptcy proceedings, and there are several requirements the entity has to meet in order to successfully make a Chapter 15 claim.

First, a Chapter 15 case must be filed in a U.S. Bankruptcy Court by a foreign representative requesting the recognition of a foreign proceeding.  A “foreign proceeding” is defined as a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose or reorganization of liquidation.  Without a foreign insolvency proceeding, a debtor with assets in the U.S. would have to file a bankruptcy case without filing a Chapter 15 case.  The basic requirements for such recognition of a foreign proceeding are: (i) the proceeding must be “a foreign main proceeding or foreign non-main proceeding,” (ii) the foreign representative applying for recognition must be “a person or body… authorized in a foreign proceeding to administer the reorganization or liquidation of the debtor’s assets or affairs or to act as a representative of the foreign proceeding,” and (iii) the petition must be supported by the documentary evidence specified in section 1515.

One problem for those who seek relief under Chapter 15 is that courts are split on whether the abovementioned requirements are enough. This debate is based on which definition of the term ‘debtor’ should be applied—specifically, the applicability of Section 109(a) of the Bankruptcy Code on Chapter 15 proceedings. Section 109(a) of Title 11 limits eligibility in terms of who can seek relief under the U.S. Bankruptcy Code.

On one hand, Section 103(a) of Title 11, which discusses applicability of chapters, notes that “except as provided in section 1161 of this title, chapters 1,3, and 5 of this title apply in a case under chapter 7, 11, 12, or 13 of this title, and this chapter … apply in a case under chapter 15.” Furthermore, Section 109(a) of the Bankruptcy Code provides that, “[n]otwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.”

On the other hand, unlike other chapters in the Bankruptcy Code such as Chapter 7, 8, 11 and 13, Chapter 15 contains its own definition of “debtor.” Section 1502 specifically notes that “for the purpose of this chapter, the term— (1) ‘debtor’ means an entity that is the subject of a foreign proceeding.”  This definition does not come from the Model Law, but it is necessary to eliminate the need to refer repeatedly to “the same debtor as in the foreign proceeding.”

Courts in the Second Circuit are the main ones that apply the additional requirement set forth in Section 109(a). See In re Barnet, 737 F.3d 238 (2d Cir. 2013). On the other hand, the Bankruptcy Court for the District of Delaware expressly disagreed with the Second Court’s decision, holding that Section 109(a) is not applicable in a Chapter 15 proceeding. See In re Bemarmara Consulting A.S., Case No. 13-13037 (Bankr. D. Del. Dec. 17, 2013). This is an important discussion, since failing to meet Section 109(a), also called as the Domesticity requirement, may result in an unsuccessful recognition. If required, foreign representatives seeking recognition of a foreign proceeding must demonstrate that the debtor has a residence, domicile, place of business, or assets in the United States.

In re Barnet decision’s reasoning has resulted in a heated debate among judges and scholars. Although In re Barnet’s court based its determination on a textual analysis of the Bankruptcy Code by referring to Section 103, this decision only interprets the Code without looking at the reason behind the initial enactment of Chapter 15. Indeed, if Section 109(a) continues to be applied to every Chapter 15 proceedings, foreign debtors will undoubtedly face difficulties in obtaining relief in the United States. Furthermore, a foreign representative may be required to identify assets in the United States before filing Chapter 15 recognition application, which is an additional step required for the debtor.

As explained throughout this post, having a consistent, unified guideline is needed. By deferring to the foreign proceeding that already has begun and limiting the scope of the U.S. bankruptcy court in a Chapter 15 proceeding, nations can cooperate with each other and not excessively interfere in a foreign country’s affairs. The current way to handle cross-border insolvency cases do not provide an adequate level of support, because different jurisdictions have offered opposing ideas on the recognition of a foreign proceeding. As noted before, this recognition is the crucial initial step to efficiently carry out insolvency proceedings. The timing of this is significant, since the debtor needs to appropriately file and receive relief before creditors gets their hands on the assets of the debtor. In order to truly follow the universalism approach in the Model Law and provide enough support for international debtors, courts across the United States need to have a single answer in hand—that Section 109(a) does not apply to Chapter 15 proceedings.

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