Southern District of New York

In a recent decision, the United States Bankruptcy Court for the Southern District of New York found that a relatively small retainer placed in the trust account of the foreign liquidators’ U.S. counsel constituted “property” sufficient to satisfy the requirements of section 109(a) of the Bankruptcy Code in a chapter 15 proceeding.[1] The decision elucidates the parameters of the “property” requirement of section 109, which the Second Circuit has applied even in the chapter 15 context.[2]

In August 2014, B.C.I. Finances Pty Limited, Binqld Finances Pty Limited, E.G.L. Development (Canberra) Pty Limited, and Ligon 268 Pty Limited (the “Debtors”), a group of companies controlled and operated by the Binetter family, were placed into Australian liquidation proceedings after allegations of fraud and tax evasion arose.[3] John Sheahan and Ian Russell Lock were appointed as joint liquidators (the “Liquidators”).[4] Following their appointment, the Liquidators brought suit against the Debtors’ corporate directors, including Andrew and Michael Binetter, in Australia, alleging that the corporate directors had breached their fiduciary duties, and that their breaches caused “significant losses” to the Debtors.[5] The trial judge in Australia ultimately ruled in the Liquidators’ favor, but did not come to a determination on the issue of damages.[6]

In 2017, the Liquidators sought chapter 15 recognition of the Australian liquidation proceedings in order to conduct discovery of Andrew and Michael Binetter, who had moved to New York City during the pendency of the trial in Australia.[7] Andrew Binetter, along with another party (together, the “Objecting Parties”), opposed the Liquidators’ chapter 15 petition.

The Objecting Parties claimed that the Debtors were ineligible for chapter 15 relief because they did not have sufficient “property” in the United States to satisfy section 109(a) of the Bankruptcy Code. 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.”[8] The Second Circuit has held that this requirement must also be satisfied in the context of chapter 15 proceedings.[9] However, the Second Circuit did not specify a threshold for the amount of “property” sufficient to satisfy this requirement in the chapter 15 context.

In response, the Liquidators argued that (1) a $1,250 retainer placed in the trust account of the Liquidators’ counsel (the “Retainer”) and (2) the Debtors’ fiduciary duty claims against Andrew and Michael Binetter (the “Fiduciary Duty Claims”) constituted “property in the United States” sufficient for section 109(a) eligibility.[10]

The Bankruptcy Court held that the Retainer and the Fiduciary Duty Claims each independently satisfied the section 109(a) requirement.[11] Before concluding that even a $1,250 retainer may satisfy section 109(a), the Court noted that “it is well established that ‘[a] debtor’s funds held in a retainer account in the possession of counsel to a foreign representative constitute property of the debtor in the United States and satisfy the eligibility requirements of section 109.’”[12] Furthermore, the court emphasized that the “property” requirement in section 109(a) is satisfied even by a “minimal amount of property” in the United States.[13] The court then rejected the Objecting Parties’ argument that the Debtors’ deposit was made in order to “manufacture eligibility under Section 109.”[14]

The court next addressed whether the Fiduciary Duty Claims were located in the United States, since it was undisputed that the Fiduciary Duty Claims were property of the Debtors. Using a multi-step analysis, the court first applied New York’s “greatest interest test,” holding that the situs of the Fiduciary Duty Claims should be determined according to Australian law.[15] Then, after considering expert testimony on the issue, the court determined that, under Australian law, claims “are situated where they are properly recoverable and are properly recoverable where the debtor resides.”[16] Therefore, the court concluded that, because the Binetters lived in New York, the situs of the Fiduciary Duty Claims was New York and qualified as “property in the United States.”

Although the Barnet decision imposed an additional eligibility requirement for foreign representatives seeking chapter 15 protections,[17] the Bankruptcy Courts have consistently lowered the barrier, ensuring that foreign representatives are afforded easy access to the protections offered in chapter 15. With this low barrier, even a de minimis amount of funds deposited in a trust account for the purpose of retaining counsel may satisfy the eligibility requirement. In addition, claims that situated in the United States under applicable laws may also satisfy the requirement.

-Hillary McDonnell assisted with the preparation of this post.

 

[1] In re B.C.I. Finances Pty Limited, 583 B.R. 288 (Bankr. S.D.N.Y. 2018).

[2] See Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013).

[3] Id. at 290.

[4] Id.

[5] Id. at 291.

[6] Id.

[7] Id.

[8] Id. at 292; 11 U.S.C. § 109(a).

[9] See Barnet, 737 F.3d at 247; see also In re Forge Grp. Power Pty Ltd., No. 17-CV-02045-PJH, 2018 WL 827913, at *9 (N.D. Cal. Feb. 12, 2018) (adopting the Second Circuit’s reasoning to hold that Section 109(a) applies to chapter 15 proceedings). But see Transcript of Hearing at 8-9, In re Bemarmara Consulting A.S., No. 13-13037 (KG) (Bankr. D. Del. Dec. 17, 2013) (holding that section 109(a) does not apply to chapter 15 proceedings).

[10] B.C.I. Finances, 583 B.R. at 291.

[11] Id. at 290.

[12] Id. at 293 (quoting In re Poymanov, 571 B.R. 24, 29 (Bankr. S.D.N.Y. 2017)).

[13] Id. at 294.

[14] Id. at 295.

[15] Id. at 297.

[16] Id. at 300.

[17] Barnet, 737 F.3d at 251 (holding that a debtor within a foreign proceeding seeking recognition under chapter 15 must satisfy the section 109(a) requirement of residing or having a domicile, place of business, or property in the United States).

On December 21, the Bankruptcy Court for the Southern District of New York recognized and agreed to enforce the unopposed foreign restructuring plan of oil exploration company C.G.G. S.A. (“C.G.G.,” or the “Company”) under Chapter 15 of the Bankruptcy Code.  C.G.G.’s restructuring marks one of the few times a U.S. bankruptcy court has been asked to enforce a French court-sanctioned bankruptcy plan.

C.G.G.’s French Bankruptcy

C.G.G. is a nearly 90-year-old French company specializing in geophysical services.  Its business comes predominantly from the Oil and Gas Exploration and Production (“E&P”) industry.  Like other companies in E&P, as oil and gas prices dropped, C.G.G.’s revenues dropped precipitously, from more than $3.4 billion in 2012 to $1.2 billion in 2016.  C.G.G. simultaneously faced nearly $3 billion in funded indebtedness. C.G.G. initially divested non-core assets and reduced its headcount to save money, but soon determined that those measures were insufficient, and that restructuring was necessary.  The Company initiated restructuring in France in February 2017.  Negotiations with stakeholders eventually resulted in a June 2017 Lock-Up agreement, through which the company’s shareholders agreed not to sell their shares. Negotiations also led to a restructuring support agreement that would swap nearly $2 billion in debt for most of the reorganized Company’s equity.

C.G.G. simultaneously commenced insolvency proceedings in French court through a sauvegarde, or Safeguard proceeding, which halted debt payments, acceleration, and enforcement of securities against the company.  C.G.G. then filed a Chapter 15 petition in the Southern District on June 14. Some of C.G.G.’s subsidiary companies also filed under Chapter 11.  In July 2017, the New York court recognized the French case as a “foreign main proceeding” – occurring in the country of the debtors’ “center of main interests,” as described in section 1520 of the Code, rather than a “nonmain proceeding,” taking place in a country where the debtor only has an “establishment.”

C.G.G. passed the restructuring agreement, called the Safeguard plan, with more than 90% of voting creditors approving.  The French court accepted the plan via a “Sanctioning Order” on December 1.

On December 6, C.G.G., through its Foreign Representative, filed a new motion in the Southern District, requesting the court (a) give full force and effect to the Sanctioning order; (b) permanently enjoin actions against the Safeguard Plan within the U.S.; (c) declare securities given to the creditors under the plan (the “Safeguard Securities”) exempt from Section 1145 registration; (d) authorize C.G.G.’s Foreign Representative to seek entry of a final decree to close the Chapter 15 case under Rule 5009(c); and (e) waive the 14-day stay of effectiveness for the order.

The Order

Bankruptcy Judge Martin Glenn granted the motion on all counts. The court first determined that the Sanctioning Order (the “Order”) fell within “any appropriate relief,” as required under section 1521(a)(7). The court cited the creditors’ overwhelmingly support for the Safeguard Plan and reasoned that the plan’s effectiveness, and the concurrent Chapter 11 cases, was conditioned on the court’s acceptance of the Order.

The court then found that, as required under Section 1522, the interests of creditors and all interested parties in the case were “sufficiently protected.”  The court reasoned that, without the court’s approval of the Order, the Plan might not be fully implemented. Further, the French court had already fully determined, after a hearing with interested parties, that the Safeguard plan gave sufficient protection.  The court also agreed to permanently enjoin actions against the Safeguarding Plan.

The court also determined the Safeguard Securities were exempt from federal and state registration requirements.  It found that section 1145, which allows exemptions from Securities laws, can be applied to Chapter 15 cases through sections 1507 and 1521 as long as the securities (a) were offered or sold under a plan; (b) were securities of the debtor or an affiliate in a joint plan; and (c) were sold in exchange for a claim against the debtor or affiliate, as per section 1145(a)(1).  The court found that all three requirements were satisfied.

Last, the court found that, upon its order becoming final, section 350(a)’s requirements for closing a case were satisfied, and thus the case could be closed following the procedures of rule 5009(c). The court also waived the 14-day stay of effectiveness, in order to allow the restructuring to begin immediately.

Conclusion

The Southern District has frequently recognized and enforced foreign court orders in approval of a foreign debtor’s restructuring plan – including recent plans from Hong Kong, Australia, Canada, the Caymans, and South Africa.  But as Judge Glenn remarks in his opinion, French Safeguard plans have rarely been brought to U.S. bankruptcy courts for recognition and enforcement.  The ruling suggests that French plans that are widely approved by creditors will receive a stamp of approval from the Southern District.  It suggests moreover that the court will defer to the findings of French courts that have fully heard all parties to the restructuring on issues like section 1522 sufficient protection.