Section 109(a) of the Bankruptcy Code provides 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.” On February 1, 2022, Judge David S. Jones of the U.S. Bankruptcy Court for the Southern District of New York (the "Court") issued an important reminder of just how expansive the term “property” is—and, by result, just how accessible the protections offered by U.S. bankruptcy courts are for foreign companies.1 The Decision centered on two Japanese special purpose vehicles (the "Debtors") who sought to utilize the protections afforded by the Bankruptcy Code’s automatic stay to fend off foreign foreclosure proceedings initiated by the majority lender and security agent (the "Agent") acting on behalf of all secured lenders. Even though the Debtors’ only connection to the United States was a retainer paid to their U.S. bankruptcy counsel by a parent company (the "Parent"), the Court allowed the Debtors to file in the United States. The Decision is particularly relevant to foreign shipping companies, which often find themselves considering similar issues if they seek to utilize chapter 11.
Background
The Debtors were formed under Japanese law for the purpose of acquiring and leasing two Airbus A350 aircraft to a foreign carrier. The Debtors’ assets included lease payment and other contractual rights associated with their ownership of two airplanes (the "Lease Assets") as well the airplanes, which never entered the United States. The Debtors are wholly owned and controlled by the Parent, a Japanese company with an office in Tokyo. The Debtors had no offices or employees in the United States and conducted no regular operations or ordinary-course business in the United States.
Following an event of default under the Debtors’ credit facilities, the Agent commenced contractually authorized foreclosure remedies in England against the Lease Assets. After learning of the foreclosure, on December 17, 2021, the Debtors filed for chapter 11 relief in the United States to stay the foreclosure proceedings, which they asserted would deflate the price of their assets and ultimately harm the Debtors, their creditors, and equity holders alike. The Debtors are seeking to market and sell their assets under bankruptcy court supervision, which they expect to yield a greater recovery for all parties. In connection with the Debtors’ bankruptcy filing, the Parent transferred retainer deposits totaling $500,000 to accounts established by U.S. counsel for the purpose of funding legal services in connection with the bankruptcy proceedings. Pursuant to the terms of such transfers, any unused funds contained in the accounts must be returned to Debtors.
The Agent moved to dismiss the bankruptcy case, arguing, among other things, that the Court lacked jurisdiction given the Debtors’ lack of legally meaningful ties to the United States. The Agent asserted that the retainer accounts did not satisfy section 109(a) because a debtor does not have a property interest in an account funded directly by a parent company.
The Decision
The Court began by reviewing relevant Second Circuit authority, which has held that section 109(a) requires “only nominal amounts of property to be located in the United States.”2 As the Court noted, section 109(a) uses the word “property” without any minimum value requirement, and thus courts have agreed that “there is no statutory requirement as to the property’s minimum value.”3 Likewise, courts have found that section 109(a) does not “direct that there be any inquiry into the circumstances surrounding the debtor’s acquisition of the property.”4 Consistent with these findings, the Court noted that the funds held in the United States to pay for legal services satisfied section 109(a).5
Accordingly, the Court concluded that “each Debtor satisfies the eligibility requirements of section 109 because each owns ‘property’ in the United States in the form of an interest in a retainer deposit held in the bank account of Debtors’ counsel.”6 Notably, the Court found “it is of no moment” that the Parent was technically responsible for transferring the escrowed funds.7 Instead, the Court determined it was sufficient that record evidence showed that (i) Debtors’ bankruptcy counsel had received the funds for purposes of paying for legal services to be rendered to Debtors and (ii) the Debtors were entitled to the return of any unused funds at the end of their counsel’s representation.8
Takeaway
This decision is a useful reminder of the general accessibility of U.S. bankruptcy courts for foreign entities. As long as a company has property located in the United States—regardless of quantity or how such property was acquired—it may qualify as a debtor under the Bankruptcy Code. It is possible, however, that the Court’s ruling would have been different if the Parent recouped any remaining escrowed funds after the Debtors’ bankruptcy cases concluded. As such, entities should be careful to ensure that contractual language associated with purported transfers of property to subsidiaries and the like are sufficient to vest property interests therein.
1 In re JPA No. 111 Co., Ltd., Case No. 21-12075¸ Dkt. No. 97, Memorandum of Decision and Order Resolving Motion to Dismiss (S.D.N.Y. Bankr. Feb. 1, 2022) (hereinafter the “Decision”).
2 In re Globo Comunicacoes e Participacoes S.A., 317 B.R. 235, 249 (S.D.N.Y. 2004).
3 In re Paper I Partners, L.P., 283 B.R. 661, 674 (Bankr. S.D.N.Y. 2002).
4 In re Octaviar Admin. Pty Ltd., 511 B.R. 361, 373 (Bankr. S.D.N.Y. 2014).
5 In re Serviços de Petróleo Constellation S.A., 600 B.R. 237, 268 (Bankr. S.D.N.Y. 2019).
6 Decision at 3.
7 Id. at 12.
8 Id.
