Alert June 30, 2014

Second Octaviar Chapter 15 Petition Clears Hurdle Set by Second Circuit


In December 2013, the Second Circuit ruled that recognition of a foreign proceeding under chapter 15 of the Bankruptcy Code required proof that the debtor in the foreign proceeding also met the eligibility standards to be a debtor in a case under other chapters of the Bankruptcy Code. While this was a surprising and questionable decision, satisfying the new requirement turned out to be relatively easy.

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


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).

  1. 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 section 109(a). To assert that the claims were not in the United States, Drawbridge relied on Judge Burton Lifland’s ruling in the Fairfield Sentry case that causes of action, as intangible assets, are located where the plaintiff is domiciled rather than the defendant. The court rejected this argument as well, finding that Drawbridge misconstrued Judge Lifland’s ruling: “Judge Lifland made clear…that the situs of intangibles depends upon a ‘common sense appraisal of the requirements of justice and convenience’ in the particular circumstance of the case.”9 Here, where the claims arose under U.S. law against U.S. defendants and included allegations that funds were unlawfully transferred to U.S. entities, the court held that such causes of action were property “in the United States” and thus satisfied the requirements of section 109(a).10
  2. An undrawn retainer held by U.S. counsel is property.

    Drawbridge also objected that the transfer of funds into the client trust account maintained by the foreign representatives’ U.S. counsel was an improper, manufactured attempt to meet the eligibility requirements of 109(a). But this argument could not withstand the weight of precedent holding that cash deposits or retainers held in U.S. accounts comprised “property” sufficient to satisfy the debtor eligibility requirements of section 109(a).11 The court relied on the Second Circuit’s emphasis on a “plain meaning” approach to the Bankruptcy Code as further support for its ruling that the property inquiry is limited: “Section 109(a) says, simply, that the debtor must have property; it says nothing about the amount of such property nor does it direct that there be any inquiry into the circumstances surrounding the debtor’s acquisition of the property.”12


For courts within the Second Circuit, and elsewhere if the Second Circuit position prevails, the requirement to satisfy section 109(a) should be a small bump in the road to an order recognizing a foreign proceeding. While the focus of recognition should be on the eligibility of the foreign proceeding and the foreign representative, as specified by section 1517, the additional requirement that the debtor in the foreign proceeding have residence, domicile, property or a place of business in the United States can be satisfied with little more than the “dollar, dime or peppercorn” advocated by the Octaviar foreign representatives.13


1 Drawbridge Special Opportunities Fund LP v. Katherine Elizabeth Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013).

2 In re Octaviar Administration Pty Ltd (Debtor in a Foreign Proceeding), 2014 WL 2805264 (Bankr. S.D.N.Y. June 19, 2014) (“Octaviar II”).

3 As noted in Collier, “The ruling in Barnet clearly misconstrues the intent of the statute to focus on eligibility of the foreign proceeding, not of the debtor, never mentions the direction of section 1508 to consider the international origin of chapter 15 and does not follow the suggestion of the legislative history of section 1508 to consult the Guide to Enactment. The Guide to Enactment makes clear that ‘the Model Law was formulated to apply to any proceeding that meets the requirements of article 2, subparagraph (a) [definition of foreign proceeding], independently of the nature of the debtor or its particular status under national law.’ A bankruptcy court for the District of Delaware (In re Bemarmara Consulting A.S., Case No. 13-13037 (Bankr. D. Del. Dec. 17, 2013)) disagreed with Barnet, rejected its position, refused to apply section 109(a) to the recognition of a foreign proceeding and predicted that the Third Circuit would agree.” Collier on Bankruptcy, 16th Edition, ¶ 1517.01 (footnotes omitted). Goodwin Procter partner Dan Glosband is author of the chapter 15 sections of Collier.

4 Section 1517 (11 U.S.C. § 1517) provides: “(a) Subject to section 1506, after notice and a hearing, an order recognizing a foreign proceeding shall be entered if—
(1) such foreign proceeding for which recognition is sought is a foreign main proceeding or foreign nonmain proceeding within the meaning of section 1502;
(2) the foreign representative applying for recognition is a person or body; and
(3) the petition meets the requirements of section 1515.
(b) Such foreign proceeding shall be recognized—
(1) as a foreign main proceeding if it is pending in the country where the debtor has the center of its main interests; …”

5 Section 103(a) provides that, other than for an irrelevant exception, chapter 1 of title 11 “applies in a case under chapter 15.” 11 U.S.C. § 103(a). Thus, because chapter 1 includes section 109(a), the court of appeals concluded that it must apply in chapter 15. 737 F.3d at 247.

6 In contrast, paragraph 29 of the Guide to Enactment instructs that “when the specified requirements concerning the nature of the foreign proceeding… and the foreign representative are met, and the evidence required by article 15 has been provided, the court should recognize the foreign proceeding without further requirement.”

7 The foreign representatives assert that this finding was erroneous because they alleged, in their first petition for recognition and in their brief to the Second Circuit, that Octaviar had property in the United States. In re Octaviar Administration Pty Ltd (Debtor in a Foreign Proceeding), Case No. 14-10438, (Bankr. S.D.N.Y.), Doc. 2, footnote 2.

8 Octaviar II at *6.

9 In re Fairfield Sentry Ltd., 484 B.R. 615, 624 (Bankr. S.D.N.Y. 2013) (internal citations omitted) (After claim prices rose, the Fairfield Sentry liquidator attempted to escape from a contract to sell its claim against Bernard L. Madoff Investment Securities, LLC even though the BVI court overseeing the liquidation ruled that the liquidator was bound by the contract. In the circumstances, Judge Lifland ruled that the BVI court held the paramount interest in the sale of the claim and the claim should be deemed located outside of the United States).

10 Octaviar II at *7.

11 Octaviar II at *8, citing In re Cenargo Int’l PLC, 294 B.R. 571, 603 (Bankr. S.D.N.Y. 2003); In re Yukos Oil Co., 321 B.R. 396, 401-403 (Bankr. S.D. Tex. 2005); In re Global Ocean Carriers Ltd., 251 B.R. 31, 39 (Bankr. D. Del. 2000).

12 Octaviar II at *9.

13 In re Octaviar Administration Pty Ltd (Debtor in a Foreign Proceeding), Case No. 14-10438, (Bankr. S.D.N.Y.), Doc. 6, par. 10 (quoting In re McTague, 198 B.R. 428 (Bankr. W.D.N.Y. 1996)).