A Foreign Debtor’s Retainer Constitutes Property under § 109(a) of the Bankruptcy Code

By: Rasha El Mouatassim Bih

St. John’s Law Student

American Bankruptcy Institute Law ReviewStaff

          The United States Court of Appeals for the Second Circuit has held that the debtor-eligibility requirement set forth in § 109(a)[1]of title 11 of the United States Code (the “Bankruptcy Code”) applies to Chapter 15 cases.[2]In In re B.C.I Finances Pty Limited, a New York bankruptcy court granted recognition to an Australian liquidation proceedings under Chapter 15 after finding that the debtors satisfied the debtor eligibility requirement because they had property in the United States in the form of retainers in a bank account.[3]The Debtors were Australian companies that were intercompany borrowing and lending entities within a group of companies controlled by several directors (the “Directors”), all who were members of the Binetter family.[4]No longer operating, the Debtors were placed into liquidation and two joint liquidators (the “Liquidators”) were appointed in Australia.[5]The Debtors placed retainers of $1,250 in the trust account of the Liquidators’ counsel, who deposited these funds in a New York account.[6]In a suit filed by the Liquidators against the Directors in Australia, the court found that the Directors breached various statutory and fiduciary duties by causing or contributing to the liabilities.[7]However, before the Australian proceedings concluded, several of the Directors moved to New York.[8]

          The Liquidators petitioned for the recognition of the Debtors’ Australian liquidation proceedings as foreign main proceedings under Chapter 15.[9]The Directors challenged the petition on the grounds that the Liquidators were not eligible for relief under Chapter 15 because the Debtors were not eligible to be debtors under § 109(a) of the Bankruptcy Code.[10]The court ultimately held that the Debtors satisfied the requirements of § 109(a) because the Debtors’ funds held in a New York retainer account, as well as the Liquidators’ fiduciary claims[11]against the Directors, was property of the Debtors in the United States, satisfying the eligibility requirements of § 109(a).[12]

          The Second Circuit has held that § 109(a) of the Bankruptcy Code, which requires that only a person who “resides or has a domicile . . . or property in the United States . . . may be a debtor under this title,” applies in Chapter 15 cases.[13]It is established practice that a debtor’s funds held in a retainer account in possession of counsel to a foreign representative is considered property in the United States satisfying § 109.[14]Like the court in In re Octaviar Admin. Pty Ltd.[15], the court in In re B.C.I. used the plain meaning of § 109(a) in finding that there was no requirement that the property be “substantial.”[16]Further, like the Octaviar court, theB.C.I court also rejected the Directors’ argument that the retainer was a bad faith attempt to “manufacture eligibility.”[17]In rejecting the bad faith argument, the court reasoned that the eligibility of the property is critical for the debtor’s Chapter 15 relief and preventing a debtor from establishing this eligibility would undermine such purposes of the statute as protecting creditors.[18] 

          In addition, the court found that the claims against the Directors were property that satisfied § 109(a).[19]Despite the lack of law addressing the situs of the breach of fiduciary claims, which were governed by Australian law, the court found, as posited by the Liquidators’ expert, that a breach of fiduciary duty claim under Australian law is generally situated where the debtor resides because Australian jurisprudence holds that a debt, which is also a chose in action, is similarly situated to enforce recovery.[20]Ultimately, the court found sufficient clarity under Australian law to hold that the fiduciary duty claims were located in New York where the Directors reside.[21]

          The B.C.I.decision reinforces the principle that retainers, despite the amount in the U.S., satisfy § 109(a) of the Bankruptcy Code. As the court in B.C.I.reasoned, preventing a foreign debtor from seeking Chapter 15 relief by heightening the property component of § 109(a) undercut the object of the statute.[22]  In addition, intangible property, such as claims, may satisfy the property component of section 109(a).

[1]See 11 U.S.C. § 109(a) (2012) (“[O]nly a person that resides or has a domicile, a place of business, or property in the United States . . . may be a debtor under this title.”). Id.

[2]See In re B.C.I. Finances Pty Ltd., 583 B.R. 288, 294 (Bankr. S.D.N.Y. 2018) (citing In re Barnet, 737 F.3d 238 (2ndCir. 2013)).

[3]See id. at 290.

[4]See id. at 291.

[5]See id.

[6]See id. at 291-92.

[7]Seeid.at 291.

[8]See id.

[9]See id.

[10]See id.at 293.

[11]See id. Using New York state conflict-of-law rules, which, in this case, supports the use of Australian substantive law in adjudicating the fiduciary duty claims, the court held that the fiduciary duty claims were located in New York and constituted property under § 109(a). Id.

[12]See id.

[13]11 U.S.C. § 109(a).

[14]See In re B.C.I., 583 B.R. at 293-94.

[15]See In re Octaviar Admin. Pty Ltd., 511 B.R. 361, 372 (Bankr. S.D.N.Y. 2014).

[16]In re B.C.I., 583 B.R. at 294 (citingIn re Octaviar Admin. Pty Ltd., 511 B.R. 361, 373 (Bankr. S.D.N.Y. 2014)).

[17]Id. at 295.

[18]Id. at 295 (“Preventing a ‘foreign debtor from establishing eligibility to support needed chapter 15 relief will contravene the purposes of the statute to provide legal certainty, maximize value, protect creditors and other parties in interests and rescue financially troubled businesses.”). Id.(quoting In re Suntech Power Holdings Co., Ltd., 520 B.R. 399, 413 (Bankr. S.D.N.Y. 2014) (citations omitted)). 

[19]In re B.C.I., 583 B.R. at 296-97 (citing In reCinque Terre Fin. Grp. Ltd., 2017 WL 4843738, at *13 (Bankr. S.D.N.Y. Oct. 24, 2017)). 

[20]See id. at 300. The debtor’s expert noted that “two Australian cases have condisdered the situs of a chose in action (though not specifically a claim for breach of fiduciary duty) and both decisions affirmed a decision of the English High Court of Justice in Jabbour v. Custodian of Absentee’s Property of Israel [1954] 1 All ER 145 (Jabbour).” Id.(citing Meagher Decl. ¶ 16-17) (citations omitted).

[21]See In re B.C.I., 583 B.R. at 300.

[22]Id. at 295 (citing In re Suntech, 520 B.R. at 413).