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Delaware Bankruptcy Court and Second Circuit Take Different Views of Whether a Debtor with No Assets Located in the United States Is Eligible for Chapter 15 Relief

December 19, 2013

Within one week, the Second Circuit Court of Appeals issued an opinion on an issue of first impression (at the Circuit level) in chapter 15 cases, and the Delaware Bankruptcy Court issued an oral ruling, disagreeing with the Second Circuit’s opinion.  The issue is whether a debtor must have assets located in the United States to qualify for chapter 15 relief.

The Second Circuit’s opinion is Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), No. 13-612, 2013 WL 6482499 (2d Cir. Dec. 11, 2013).  It holds that the eligibility requirements set forth in section 109(a) of the Bankruptcy Code (titled “Who may be a debtor”) apply to recognition proceedings under chapter 15 of the Code.  The Delaware ruling, issued by Judge Gross, is In re Bemarmara Consulting a.s., Case No. 13-13037 (KG) (Bankr. D. Del. Dec. 17, 2013).  It held that the requirements of section 109(a) do not apply to a foreign representative seeking recognition of a foreign proceeding and therefore whether the debtor has assets located in the United States is irrelevant to entitlement to chapter 15 relief.

Just days after Barnet was issued, the Delaware Bankruptcy Court was faced, for the first time, with the same issue in Bemarmara.  In Bemarmara, the foreign representative in a Czech Republic insolvency proceeding sought recognition of that proceeding under chapter 15.  A plaintiff in litigation against Bemarmara Consulting in the Delaware District Court objected to recognition of the Czech proceeding, arguing that the debtor did not have assets located in the United States and was therefore not eligible to be a debtor in chapter 15.  The Delaware Bankruptcy Court, noting that the Second Circuit’s ruling was not controlling on it, rejected arguments that section 109(a) required a chapter 15 debtor to have assets in the United States.  The Delaware Bankruptcy Court reasoned that section 109(a) provides requirements for debtors, but that in chapter 15, the foreign representative, not the debtor, petitioned the Court for relief.  The Delaware Bankruptcy Court also relied upon section 1502’s separate definition of “debtor” for the purposes of chapter 15.  In addition, the Court noted that commentators have reflected on the possibility that the potential application of section 109(a) was a “scrivener’s error and that the intent was that 109(a) would not apply.”

One issue that was briefed but not addressed by the ruling in Bemarmara is whether the Barnet opinion creates tension with a different statute, 28 U.S.C. § 1410(2).  That statute states that a chapter 15 case “may be commenced” in the District Court where litigation against the foreign debtor is pending “if the debtor does not have a place of business or assets in the United States” (emphasis supplied).  Barnet found that tension to be immaterial, characterizing section 1410 as “merely procedural.”  Bermarmara rested its opinion on other grounds.

As a result of the Barnet and Bemarmara decisions, there is currently a split of authority regarding whether section 109(a)’s requirement for a debtor to have a domicile, place of business or assets in the United States applies in chapter 15 recognition proceedings.  It should be noted, however, that transcript rulings, such as Bemarmara, are not binding on the Delaware Bankruptcy Court.