New York Law Provisions of an Indenture Provide Eligibility for Chapter 15 Filing by Foreign Debtor
Client Alerts | November 5, 2015
The United States Bankruptcy Court for the Southern District of New York held last week that a foreign corporation that had issued debt pursuant to an indenture with a New York choice of law and New York forum selection clause and had commenced an insolvency proceeding in its home jurisdiction may file for chapter 15 bankruptcy relief in the United States.
This decision appears to be the first to specifically address this issue, and it has broad implications for the viability of United States bankruptcy court proceedings for foreign entities whose only connection to the United States is the use of U.S. capital markets. In addition, it leaves open the possibility that other New York law governed agreements such as bank loans or even commercial contracts could be used as the basis for United States Bankruptcy filing eligibility.
Chapter 15 of the Bankruptcy Code permits foreign debtors to obtain the protection of the United States bankruptcy courts in support of a foreign insolvency proceeding. Among many benefits to such protection is the ability a chapter 15 debtor has to bind United States creditors or entities to the terms of the foreign proceeding and to stay U.S. non-bankruptcy proceedings. For a petitioner to be eligible for chapter 15 protection however, among other things, the entity must be an eligible debtor. In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), the Second Circuit held that section 109(a) of the Bankruptcy Code applies to chapter 15 cases and that all its requirements, including the requirement that the entity “resides or has a domicile, a place of business, or property in the United States” must be met for a foreign entity to be a chapter 15 debtor.
In In re Berau Capital Resources Pte Ltd, No. 15-11804 (Bankr. S.D.N.Y. October 28, 2015) (mem.), Judge Martin Glenn was faced with a foreign debtor that admittedly was not domiciled in, and did not have a place of business in, the United States. The Berau debtor filed an insolvency proceeding in Singapore, where the company has its headquarters, and the foreign representative filed for chapter 15 relief in the Southern District of New York. Interestingly, the foreign representative sought to use an attorney retainer held by the foreign representative’s New York counsel as the basis for eligibility. Judge Glenn found that the retainer was a sufficient basis for eligibility, citing to In re Octaviar Admin. Pty Ltd, 511 B.R. 361, 372-74 (Bankr. S.D.N.Y. 2014). Nonetheless, Judge Glenn determined sua sponte to go beyond the retainer as a basis for chapter 15 eligibility and found that the choice of New York law in the debtor’s bond indentures created and constituted property rights in New York and thus “property in the United States” sufficient to meet the requirements of section 109(a) of the Bankruptcy Code.
The facts of the Berau case were not unusual. The Berau debtor was an obligor on over $450 million of U.S. dollar denominated debt under an indenture that had an express choice of New York as the governing law and that included a New York choice of forum clause. Under the indenture, Berau also appointed an authorized agent for service of process in New York, and specified numerous acts that had to be performed by the indenture trustee in New York City, e.g., authentication of notes, maintenance of a registry, defeasance, etc., which are typical for bonds of this kind.In re Berau, at 3.
In explaining his emphasis on the choice of law and forum selection clauses as a basis for chapter 15 eligibility, Judge Glenn pointed out that it avoided the possible irony that would result “if a foreign debtor’s creditors could sue to enforce the debt in New York, but in the event of a foreign insolvency proceeding, the foreign representative could not file and obtain protection under chapter 15 from a New York bankruptcy court.” Id. Since the New York Courts could, if asked, hear suits under the indenture, there was a New York property interest sufficient for chapter 15 eligibility.
By going beyond the retainer argument and focusing on the New York provisions of the indenture, Berau has also provided a path to chapter 15 eligibility that is clear and unambiguous Moreover, as the Court noted, a New York law indenture would be a “substantial (and frequently recurring) basis for chapter 15 eligibility,” In re Berau, at 2, and “[d]ollar denominated debt subject to New York governing law and New York forum selection are quite common in international finance. They are highly desirable attributes for global trade and investment, providing certainty, predictability and respected courts in the event of disputes.” In re Berau, at 3.
While Berau is a lower court decision (and unlikely to be appealed), we expect it to have considerable impact as foreign entities with New York law indentures can freely make use of its ruling in seeking access to the United States Bankruptcy Courts in New York. And as large as is the universe of foreign entities that have accessed the capital markets via New York law and forum indentures, Berau has left open the possibility that other New York law governed agreements could be used as the basis for chapter 15 eligibility. In fact, the reasoning in Berau need not be limited to chapter 15 filings and can be easily extended to confer minimal eligibility as a debtor under section 109(a) for filings under other chapters of the Bankruptcy Code. The limits of that extension will be something future courts will have to decide.
 Using an attorney retainer, like opening last minute bank accounts, is not an uncommon ploy used by prospective chapter 15 debtors and has met with frequent, although not complete, success. Cf., e.g., Tr. Hr’g June 24, 2013, at 234: 14-18 in In re TMT Procurement Corp., et al., Case No. 13-33763 (Bankr. S.D. Tex.) (Court reserved the issue of whether such minimal and manufactured contacts as an unused retainer were grounds for dismissal as a bad faith filing.). See, also, In re Head, 223 B.R. 648, 652 (Bankr. W.D.N.Y. 1998) (“to make the record clear, if these debtors were to continue to assert eligibility by virtue of having acquired U.S. mailing addresses and opening small bank accounts in the U.S., then this court would directly hold that one cannot so manufacture eligibility…”); Bank of Am. N.T. & S.A. v. World of English, N.V., 23 B.R. 1015, 1022 (D.C. Ga. 1982) (debtors satisfied “property” element of §109, “there being no evidence that the bank account was transferred from Japan to California merely to create jurisdiction for a future bankruptcy proceeding involving debtors…”); cf. In re McTague, 198 B.R. 428, 432 (Bankr. W.D.N.Y. 1996) (“if property has been specifically placed or left in the United States for the sole purpose of creating eligibility that would not otherwise exist, then dismissal might be appropriate…”).