To file bankruptcy in the U.S., a debtor must reside in, have a domicile or a place of business in, or have property in the United States. 11 U.S.C. § 109(a). In cross border chapter 15 cases, courts have considered whether a representative of a foreign debtor must satisfy that jurisdictional test.

In 2013, the Second Circuit said the test must be satisfied. See Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013). But earlier this month, the Eleventh Circuit said it didn’t based on case precedent in the Circuit. See Al Zawawi v. Diss (In re Al Zawawi), No. 22-110224, 2024 U.S. App. LEXIS 7955 (11th Cir. Apr. 3, 2024).

In a chapter 15 case, a foreign representative of a debtor in an insolvency case in another country files a petition in the U.S. for recognition of the foreign case. The chapter 15 case is ancillary to the foreign case and not a full plenary U.S. bankruptcy case.

The chapter 15 case will allow the foreign representative to seek assistance from the U.S. court for matters related to the main proceeding in the other country. For instance, the foreign representative might need access to a U.S. court to take a deposition or obtain documents for a lawsuit.

But assume the foreign debtor doesn’t reside in, have a domicile or place of business in, or have property in the U.S.: can the foreign representative file chapter 15 to obtain discovery to use in the foreign proceeding?

Bankruptcy Code section 103(a) states that all sections of chapter 1 apply “in a case under chapter 15.” Thus, by its plain terms, section 109(a) applies to chapter 15.

In Barnet, the Second Circuit said a foreign representative cannot obtain U.S. jurisdiction in a chapter 15 case without satisfying section 109(a).

The straightforward nature of our statutory interpretation bears emphasis. Section 103(a) makes all of Chapter 1 applicable to Chapter 15. Section 109(a) – within Chapter 1 – creates a requirement that must be met by any debtor. Chapter 15 governs recognition of foreign proceedings, which are defined as proceedings in which “the assets and affairs of the debtor are subject to control or supervision by a foreign court.” 11 U.S.C. § 101(23). The debtor that is the subject of the foreign proceeding, therefore, must meet the requirements of Section 109(a) before a bankruptcy court may grant recognition of the foreign proceeding.

In re Barnet, 737 F.3d at 247.

Almost 10 years after Barnet, the issue reached the Eleventh Circuit in Al Zawawi. In that case, the debtor and his wife resided in the United Kingdom when she filed for and obtained a divorce decree. She later filed an involuntary bankruptcy case against her ex-husband. Joint trustees were appointed in the U.K., and they filed a chapter 15 petition in the Middle District of Florida.

But the debtor argued that the elements of section 109(a) weren’t satisfied. The bankruptcy court, the district court on appeal, and the Eleventh Circuit in a further appeal, all ruled that section 109(a) doesn’t apply in chapter 15 cases.[i]

In large part, the decision hinged on Eleventh Circuit precedent dating before the enactment of chapter 15. In re Goerg, 844 F.2d 1562 (11th Cir. 1988). Interestingly, the Eleventh Circuit agreed with the Second Circuit that Bankruptcy Code section 103 indicates that section 109(a) applies to chapter 15 cases.

Even so, the Eleventh Circuit observed that it is “differently situated from the Second Circuit in that we are bound by prior precedent that states that Chapter 1’s debtor eligibility language does not apply to cases ancillary to a foreign proceeding.” 2024 U.S. App. LEXIS 7955, *13.

The Goerg case addressed the section of the Bankruptcy Code that was in effect for foreign proceedings before chapter 15 was enacted, section 304. The rule in the Eleventh Circuit was that as long as a debtor was subject to a “foreign proceeding,” debtor eligibility was “‘not a prerequisite to section 304 ancillary assistance.’” Id. at *17.

In Al Zawawi, the Eleventh Circuit concluded that:

we follow the logic of Goerg and hold that, based on the definition of “foreign proceeding,” in § 101(12), as informed by the purpose of Chapter 15, debtor eligibility under Chapter 1 is not a prerequisite for the recognition of a foreign proceeding under Chapter 15. With § 109(a) therefore out of the picture, no dispute remains.

Id. at *21. Therefore, the debtor in Al Zawawi was subject to jurisdiction in the U.S. absent satisfaction of section 109(a), and the trustees could proceed with the case in the US.

The circuit split might be less significant than it appears because there’s a simple workaround to the Second Circuit’s holding in Barnet: to obtain jurisdiction in the Second Circuit, a foreign representative can send a retainer payment to a law firm there. That will create a property interest under section 109(a) sufficient to enable a foreign representative to have jurisdiction for a chapter 15 case.

Perhaps one day the Supreme Court will be heard on the issue. But in the meantime, foreign representatives will have access to U.S. bankruptcy courts, even in the Second Circuit when a debtor has no presence or property in the U.S. (as long as a retainer payment is sent to a law firm before the chapter 15 case is filed).

[1] In the alternative, the bankruptcy court ruled that jurisdiction was satisfied because the former husband had property interests in the U.S. But the district court decision didn’t reach that issue, and thus Eleventh Circuit’s decision didn’t address it either.