Indenture Governed by New York Law Satisfies Property Requirement for Chapter 15 Case

By: Edward Cho-O’Leary

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff Member       

           In the Second Circuit, which includes New York, a debtor must satisfy the debtor-eligibility requirement set forth in section 109(a) of title 11 of the United States Code (the “Bankruptcy Code”) before its foreign proceeding may be recognized under Chapter 15 of the Bankruptcy Code[1]. Section 109(a) states that “only 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.”[2]

           In In re PT Bakrie Telecom TBK, a New York bankruptcy court held, inter alia, that an indenture subject to New York governing law and containing a New York forum selection clause was sufficient to satisfy the property component of Section 109(a) of the Bankruptcy Code[3]. PT Bakrie Telecom TBK (“BTEL”), an Indonesian telecommunications company, had issued $380,000,000 in senior notes to refinance its existing debt and provide for capital expenditures.[4] BTEL ultimately defaulted on scheduled interest payments resulting in three of the purchasers of over 25% of the outstanding notes issued (the “Objecting Noteholders”) commencing litigation in New York in September 2014.[5] On October 23, 2014, another BTEL creditor filed suspension of debt payment application in the Central Jakarta Commercial Court: the Penundaan Kewajiban Pembayaran Utang (the “PKPU Proceeding”).[6] At the conclusion of the PKPU Proceeding, the Jakarta court confirmed a restructuring plan similar to a plan under Chapter11 of the Bankruptcy Code.[7] Thereafter, BTEL filed a Chapter 15 petition with the United States Bankruptcy Court for the Southern District of New York for recognition of the PKPU Proceeding.[8]  In response, the Objecting Noteholders filed a motion for summary judgment asking the bankruptcy court to deny the petition, asserting, inter alia, that BTEL did not satisfy the domestic property requirement necessary for recognition of a foreign proceeding.[9] The bankruptcy court declined to grant the motion to dismiss.[10]

           The United States Court of Appeals for the Second Circuit has held that a debtor must satisfy the debtor eligibility requirement of Section 109(a) before its foreign insolvency or reorganization proceeding may be recognized in the United States.[11] A debtor can satisfy section 109(a)’s eligibility requirement by showing that it has property in the United States. Courts have found that the amount of property can be nominal and can be in the form of an intangible asset, such as “a retainer account in the possession of the foreign representative’s counsel, deposits in a New York bank account, [or] … causes of action with a situs in New York owned by the foreign debtor”; this is sufficient to satisfy the property requirement of Section 109(a).[12]

           Here, the bankruptcy court concluded that BTEL satisfied the property requirement because  (1) the indenture and related notes were subject to New York governing law and (2) the indenture contained a New York forum selection clause that was “substantially similar to the domestic property in Berau.”[13]  Similarly, in In re Berau Capital Res. PTE Ltd., although the debtor had neither a place of business nor any tangible assets in the United States, it was an obligor on a $450,000,000 debt indenture that was expressly governed by New York law.[14] The Berau court found that the New York debt indenture provided a “substantial basis” to satisfy the property requirement because “[c]ontracts create property rights for the parties to the contract” and therefore represented “intangible property of the debtor.”[15] The bankruptcy court rejected the Objecting Noteholders’ argument that the Bakrie case was distinguishable from Berau because the debtor had disregarded and repudiated its obligations governed by New York law.[16] The court rejected this argument as a request to “read a subjective equitable requirement into Section 109’s property requirement.”[17]

           The bankruptcy court’s decision in BTEL reinforces the broad scope of property under section 109(a).  It is likely a debtor will satisfy the property requirement if the debtor has intangible property, such as contract rights, in the United States. Looking forward, indentures governed by U.S. state law might be an attractive method to have a foreign insolvency proceeding recognized under Chapter 15.

[1] In re PT Bakrie Telecom TBK, 601 B.R. 707, 714 (Bankr. S.D.N.Y. 2019).

[2] 11 U.S.C. § 109 (2010).

[3] In re PT Bakrie Telecom TBK, 601 B.R. at 715.

[4] Id. at 710.

[5] Id. at 711.

[6] Id. (stating that a PKPU application is “a court-enforced suspension of payments process in Indonesia that is designed to provide a debtor a definite period of time to restructure its debt and reorganize its affairs pursuant to a composition plan with its creditors.”).

[7] Id.

[8] See id.

[9] See id. at 713–4.

[10] Id.

[11] Id. (citing Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238, 250–51 (2d Cir. 2013)).

[12] See In re PT Bakrie Telecom TBK, 601 B.R. at 714–15.

[13] See id. at 715.

[14] See id.

[15] Id. (citing In re Berau Capital Res. PTE Ltd., 540 B.R. 80, 83 (Bankr. S.D.N.Y. 2015)).

[16] See id.

[17] In re PT Bakrie Telecom TBK, 601 B.R. at 716.