In December 2013, the Second Circuit reversed an order of the United States Bankruptcy Court for the Southern District of New York that granted recognition under Bankruptcy Code chapter 15 to the Australian liquidation of Octaviar Administration PTY, Ltd. (“Octaviar”)1. There was no dispute that Octaviar satisfied the recognition requirements of section 1517, but the Circuit ruled that section 109(a) of the Bankruptcy Code applied as an additional requirement for chapter 15 recognition (contrary to the bankruptcy court’s ruling on the issue); that section 109(a) required a debtor to have domicile, a place of business or property in the United States for its foreign proceeding to be recognized under chapter 15; and that Octaviar’s foreign representatives had not proved these requirements.
On June 19, 2014 the bankruptcy court issued an order granting the Octaviar foreign representatives’ second petition for recognition, this time finding that Octaviar in fact had two kinds of “property in the United States” within the meaning of section 109(a): causes of action against U.S. defendants and retainer funds held in a U.S. account by its counsel2. Whether the Second Circuit was right to apply section 109(a) is debatable, but the bankruptcy court decision confirms that application of section 109(a) creates only a minor impediment to recognition.3
History
Octaviar was part of a conglomerate that entered into voluntary administration in Australia in October 2008. In September 2009, the Australian court appointed two liquidators to wind up the company and they filed litigation in Australia against affiliates of Octaviar’s former lender, Drawbridge Special Opportunities Fund LP (“Drawbridge”) for nearly US$200 million.
To obtain discovery and pursue possible claims in the United States against Drawbridge and its affiliates, the liquidators, as foreign representatives, filed a petition on August 13, 2012 with the U.S. bankruptcy court seeking chapter 15 recognition of Octaviar’s Australian liquidation as a foreign main proceeding. Drawbridge opposed recognition, asserting, inter alia, that the Octaviar liquidation was not eligible for chapter 15 because Octaviar had no domicile, place of business, or property in the United States as required by section 109(a). Drawbridge did not challenge the satisfaction of the requirements for recognition of a foreign main proceeding as set forth in section 15174. The bankruptcy court denied the objection, granted recognition and authorized the foreign representatives to begin discovery.
Drawbridge appealed and the foreign representatives agreed to a joint request for direct review by the Second Circuit to consider whether the section 109(a) requirement that a debtor either “resides, or has a domicile, place of business, or property in the United States” applies to a petition for recognition of a foreign proceeding. The Second Circuit reversed the bankruptcy court, vacated the recognition order, and remanded the case for further proceedings. Based on a “plain meaning” interpretation of sections 103(a)5 and 109(a), the Second Circuit held that the eligibility requirements of section 109(a) are applicable in chapter 156. Because the foreign representatives “made no attempt” to establish that Octaviar had a place of business or property in the United States, recognition was improperly granted.7
Claims and Retainer Account Are Property: Recognition Granted
Applying the Second Circuit’s ruling, the bankruptcy court undertook a section 109(a) analysis and again recognized the Australian liquidation as a foreign main proceeding. The court focused on two separate categories of “property within the United States”: (i) Octaviar’s causes of action against Drawbridge and other U.S. entities and (ii) cash deposits in a client trust account maintained by its U.S. counsel. The bankruptcy court held that both categories satisfied the requirements of section 109(a).
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Claims and causes of action are property.
The bankruptcy court acknowledged that the foreign representatives made clear in both their first and second chapter 15 petitions that they sought recognition to pursue causes of action against entities in the United States. Citing well-established precedent that causes of action constitute “property of the estate” under bankruptcy law, the court held that these claims were in fact “property” that satisfied the requirements of section 109(a).8
Drawbridge objected to the second petition, asserting that because at the time of the first petition the causes of action were “potential future causes of action,” they could not constitute “property.” Even if they did, the claims should be deemed to be located in Australia, Octaviar’s domicile, and would not be property “in the United States,” as required by section 109(a). The bankruptcy court rejected both arguments.
By the time of the hearing on the second petition, complaints against the Drawbridge entities had already been filed in the Southern District of New York and in the New York Supreme Court. Therefore the claims were not hypothetical future causes of action and constituted property sufficient to satisfy the requirements of...
