On June 19, 2014, the US Bankruptcy Court for the Southern District of New York, in In re Octaviar Administration Pty Ltd., granted recognition of a foreign insolvency proceeding under Chapter 15 of the Bankruptcy Code, finding that claims and causes of action against US entities and an undrawn retainer with US counsel constituted "property in the United States" for purposes of satisfying section 109(a)'s debtor eligibility requirements (No. 14-10438, (Bankr. S.D.N.Y. June 19, 2014)).

Octaviar Administration Pty Ltd. (Octaviar) is an Australian company that operated the bank accounts, employed staff and acted as the treasury for the Octaviar Group. In October 2008, Octaviar entered into voluntary administration in Australia. In September 2009, the Australian court appointed Barnett and Fletcher (Foreign Representatives) to liquidate the company.

The Foreign Representatives filed an action in Australia to recover about $200,000,000 from various Australian affiliates of Octaviar's former lender, Drawbridge Special Opportunities Fund, LP (Drawbridge). On August 13, 2012 the Foreign Representatives petitioned the SDNY Bankruptcy Court for an order recognizing the Australian liquidation as a foreign main proceeding under Chapter 15 of the Bankruptcy Code, with the primary goal of obtaining discovery and pursuing possible claims in the US against Drawbridge and its affiliates.

On September 6, 2012, the SDNY Bankruptcy Court granted recognition over Drawbridge's objections, holding that a Chapter 15 debtor is not subject to the requirements of section 109(a) of the Bankruptcy Code, and therefore is not required to have a domicile, residence, place of business or property in the US (none of which were demonstrated by the Foreign Representatives). The Foreign Representatives then sought discovery from Drawbridge and other parties. Drawbridge appealed the recognition order and moved for a stay of discovery pending appeal. The SDNY Bankruptcy Court denied Drawbridge's motion to stay discovery, but certified the recognition order for direct appeal to the US Court of Appeals for the Second Circuit.

On December 11, 2013, the Second Circuit held, as a matter of first impression, that the debtor eligibility requirements set out in section 109 of the Bankruptcy Code apply to foreign debtors seeking recognition under Chapter 15 of the Bankruptcy Code. The Second Circuit reversed the SDNY Bankruptcy Court and remanded the case for further proceedings (see Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013) and Legal Update, In re Barnet: Second Circuit Applies Debtor Eligibility Requirements to Chapter 15 Cases).

Instead of further pursuing recognition of the first Chapter 15 petition, on February 27, 2014, the Foreign Representatives filed a new Chapter 15 petition seeking recognition of the Australian proceeding as a foreign main proceeding. Drawbridge again objected to the Chapter 15 petition, arguing that:

The SDNY Bankruptcy Court applied the Second Circuit's ruling and again recognized the Australian proceeding as a foreign main proceeding. It held that Octaviar satisfied the debtor eligibility requirements of section 109(a) of the Bankruptcy Code because it had "property in the United States" consisting of:

First, the SDNY Bankruptcy Court noted that it is well established that claims and causes of action, though intangible, constitute "property." The Court rejected Drawbridge's argument that because the claims were only "potential future causes of action," as of the filing of the original petition, they could not constitute "property." In any case, by the time of the second Chapter 15 petition, complaints against the Drawbridge entities had already been filed in federal and state court. Therefore, the Court held that they were no longer hypothetical claims and satisfied the property requirement of section 109(a).

Second, the SDNY Bankruptcy Court rejected Drawbridge's "abuse of process" claim, and refused to subject the Foreign Representatives to a "procedural Catch-22," which would result if the second petition for recognition was denied on the basis that the first petition allegedly did not satisfy the section 109(a) property requirement. The Court disagreed with Drawbridge that the Foreign Representatives' actions were "gamesmanship" and instead characterized them as an effort to "bring claims against a defendant attempting at all costs to avoid meeting such claims on the merits."

Next, the SDNY Bankruptcy Court rejected Drawbridge's argument that, even if the claims and causes of action constituted property, that property should be deemed located in Australia, where Octaviar, as the plaintiff, is domiciled. The Court noted that the location of intangibles is a matter of justice, convenience and common sense. These factors indicated that the claims were located in the US, as they were asserted under US law, involved defendants located in the US and alleged that funds were wrongfully transferred by US entities to the US. Because the US courts had both subject matter and personal jurisdiction, the Court held that the claims were present in the US.

While the SDNY Bankruptcy Court already determined that Octaviar's claims and causes of action satisfied the US property requirement of section 109(a), it went on to conclude that the undrawn retainer held by the Foreign Representatives' US counsel also satisfied this requirement. The Court rejected Drawbridge's argument that payment of the retainer was "an improper or bad faith attempt to manufacture eligibility" to file for recognition under Chapter 15. Instead, the Court relied on a line of authority holding that prepetition deposits or retainers held in US accounts can constitute property sufficient to satisfy the debtor eligibility requirements of section 109(a). The Court also noted that section 109(a) is silent regarding the amount of property a debtor is required to have and does not require an inquiry into the circumstances surrounding the debtor's acquisition of the property. Therefore, imposing a requirement that property in the US be "substantial" would "subvert the intent of Congress and the plain meaning of the statute."

Finally, the SDNY Bankruptcy Court held that the policy and purposes of Chapter 15 would be undermined if the Foreign Representatives were deprived of an opportunity to bring causes of action on behalf of Octaviar for the benefit of its creditors. Instead, the Court found that the policy underlying Chapter 15 strongly supports recognition of the Australian proceeding. The Court stated that granting recognition in this case facilitates and promotes cooperation between courts in the US and Australia and will foster the fair, efficient and timely administration of the Octaviar insolvency. Further, recognition of the Australian proceeding would not prejudice Drawbridge or abridge its rights to assert all available defenses it has in the federal and state court actions. The Court also noted concerns that the recognition provisions of Chapter 15 should not be used by a defendant who is seeking to evade legitimate foreign creditors. Chapter 15 relief in this case was necessary precisely because Drawbridge apparently was not subject to, and refused to consent to, jurisdiction in Australia.

The SDNY Bankruptcy Court's application of the Second Circuit's 2013 decision in In re Barnet may indicate that the decision did not create a material obstacle for foreign debtors seeking Chapter 15 relief in the Second Circuit, as many commentators had feared. The Octaviar decision shows that courts have flexibility in interpreting the eligibility requirements for foreign debtors and that a minimal amount of US property can satisfy the jurisdictional requirements of section 109(a) of the Bankruptcy Code.

For more information on Chapter 15, see Practice Note, Chapter 15 Overview: US Bankruptcy Cases Ancillary to Foreign Proceedings.