In the Eleventh Circuit (In re Al Zawawi), section 109(a)’s debtor eligibility requirements do not apply to chapter 15 cases, reinforcing a split between the Second and Eleventh Circuits.

TAKEAWAYS

• The Eleventh Circuit held that section 109(a)’s debtor eligibility requirements do not apply in chapter 15 cases. Consequently, a company in a foreign bankruptcy proceeding does not have to prove that it has a domicile, place of business or property in the United States to have the foreign proceeding recognized.
• The Eleventh Circuit’s decision stands in contrast to Second Circuit precedent, which holds that a foreign debtor must satisfy section 109(a) to have its foreign proceeding recognized under chapter 15 of the Bankruptcy Code.
• The circuit split may ultimately have little practical effect, as companies that lack any presence or property in the United States are less likely to need chapter 15 recognition.

Chapter 15 of the Bankruptcy Code codifies the United Nations Commission On International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, which was designed to facilitate cross-border cooperation and coordination between courts dealing with parallel proceedings. A chapter 15 case is an ancillary case filed in the United States to serve as a companion to a foreign insolvency proceeding and is initiated by requesting a U.S. bankruptcy court to recognize that foreign proceeding.

The Bankruptcy Code establishes several requirements for commencing a case that are unique to the chapter 15 cross-border context. Section 1517 of the Bankruptcy Code provides that “an order recognizing a foreign proceeding shall be entered if” the petitioner proves, among other things, that (a) a foreign insolvency proceeding exists, (b) the petitioner is the “foreign representative” of that proceeding, and (c) the petition meets the requirements of Section 1515 of the Bankruptcy Code.

What is less clear is whether the eligibility requirements set forth in section 109(a) of the Bankruptcy Code, which applies to bankruptcy cases generally, apply in a chapter 15 case. Section 109(a) provides, in relevant part, 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” the Bankruptcy Code.

The Second Circuit’s Decision
In In re Barnet, 737 F.3d 238 (2d Cir. 2013), the Second Circuit held that a plain language statutory analysis compelled the conclusion that section 109(a) applies in the chapter 15 context and that petitioners seeking recognition of a foreign proceeding thus must prove that the foreign debtor has a domicile, place of business or property in the United States to qualify for chapter 15 recognition. The Second Circuit emphasized that section 103(a) of the Bankruptcy Code provides that “[c]hapter 1 ‘of th[e Bankruptcy Code] … appl[ies] in a case under chapter 15.’” Because “[s]ection 109, of course, is within [c]hapter 1 of [the Bankruptcy Code]” it was clear to the Second Circuit that Congress intended section 109 to apply to chapter 15 cases.

The Eleventh Circuit’s Decision
The Eleventh Circuit reached a contrary result in In re Al Zawawi, 97 F.4th 1244 (11th Cir. 2024) holding that section 109(a) does not apply to chapter 15 cases. There, the joint trustees appointed in a UK proceeding concerning Talal Quais Abdumunem Al Zawawi sought recognition in the United States on the belief that Al Zawawi owned interests in companies based in Florida and Texas or had transferred his interest in a Texas company. Al Zawawi objected to recognition, asserting that the trustees were mistaken and that he did not in fact own any assets in the United States.

The parties also disputed whether Al Zawawi had to meet section 109’s debtor eligibility requirements. The bankruptcy court concluded that section 109(a) was inapplicable to chapter 15 cases, but if it had been, Al Zawawi would have met section 109’s requirements because of his interests in the Florida entities and the foreign representatives’ potential claims with respect to the transfer of Al Zawawi’s interest in the Texas entity. The bankruptcy court, thus, recognized the UK proceeding.

On appeal, the Eleventh Circuit held that section 109(a) does not apply to chapter 15 cases and a foreign debtor thus need not have assets in the United States to obtain recognition. In reaching that conclusion, the Eleventh Circuit found that it was bound by Eleventh Circuit precedent reaching the same result under section 304 of the Bankruptcy Code, which was the predecessor to chapter 15, even though the plain text of the Bankruptcy Code, as the Second Circuit has held, provides a contrary answer.

In In re Goerg, 844 F.2d 1562 (11th Cir. 1988), the Eleventh Circuit concluded that section 109(a) did not apply to ancillary insolvency proceedings under section 304 of the Bankruptcy Code by relying heavily on the purpose of the statute to “help[] further the efficiency of foreign insolvency proceedings involving worldwide assets.” Finding the language of the relevant provisions of Section 304 to be sufficiently similar to the operative provisions of chapter 15, the Al Zawawi Court concluded that it was required to follow Goerg in holding that section 109(a) does not apply to chapter 15 cases.

The panel’s decision in Al Zawawi was accompanied by two conflicting concurrences. In the first, Judge Lagoa asserted that if the panel was not bound by Georg, she would follow the Second Circuit’s logic, interpreting Chapter 15 under the plain-text reading of Section 103(a) to incorporate Section 109(a)’s eligibility requirements. By contrast, Judge Tjoflat, who wrote the Goerg decision, reaffirmed the purposive justification for the holding in Goerg, asserting that chapter 15’s purpose of facilitating efficient resolution of foreign insolvency proceedings counsels against incorporating the requirements of section 109(a) into foreign ancillary proceedings.

Conclusion
The Al Zawawi decision may or may not be the final word on the interplay between section 109(a) and chapter 15 in the Eleventh Circuit. On April 24, 2024, Al Zawawi filed a petition for rehearing en banc. Rehearing en banc occurs when a majority of active-service, non-disqualified, circuit court judges order it. As of this writing, the Eleventh Circuit has neither denied the application nor ordered a response to the petition.

(This is another in our series of client alerts related to international and cross-border insolvency issues.)

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