In the face of financial distress, or a creditor exercising its remedies against a company’s assets, there are significant benefits to filing a Chapter 11 case under the U.S. Bankruptcy Code regardless of where in the world the debtor company is headquartered or conducts its business. Among these benefits are the worldwide reach of the automatic stay under 11 U.S.C. Section 362(a), the ability of management to remain in control of the debtor company during the pendency of the bankruptcy case, and the lack of an insolvency requirement. Accordingly, the eligibility requirements to become a debtor under the Bankruptcy Code are of great interest for distressed foreign companies.

A recent decision of the U.S. Bankruptcy Court for the Southern District of New York reiterates just how minimal the ties to the United States need to be for foreign debtors. In In re JPA No. 111, No. 21-12075, 2022 Bankr. LEXIS 259 (Bankr. S.D.N.Y. Feb. 1, 2022), the bankruptcy court denied a motion to dismiss two bankruptcy cases filed by Japanese single-purpose entities, finding that a reversionary interest in retainers deposited with the debtors’ U.S. bankruptcy counsel satisfied the requirement that the debtors have “property” in the United States.

Facts

JPA No. 111 Co., Ltd. and JPA No. 49 Co., Ltd. (collectively, the debtors) are Japanese special purpose entities owned and managed by a Japanese parent company, JP Lease Products & Services Co. Ltd. (JPL). While JPL maintains an office in Tokyo, Japan, neither debtor has any of its own offices nor any employees. Each debtor owned a single aircraft, which they each leased to the same Vietnamese airline. Neither of the debtors’ aircraft were ever flown to the United States. The debtors are financed through a complex set of financing, lease and mortgage transactions. The mortgages for each aircraft are governed by New York law, and contain a New York forum selection clause, while certain security agreements related to the debtors’ financing are governed by English law.

Due to the COVID-19 pandemic, the cash flow of each debtor declined significantly, and one of their secured creditors began seeking foreclosure remedies against certain of the debtors’ lease assets—although not against the aircraft themselves. In late 2021, after discovering the attempted foreclosure, the debtors sought bankruptcy protection in the United States by filing their respective Chapter 11 petitions in the U.S. Bankruptcy Court for the Southern District of New York. In connection with the bankruptcy cases, JPL—which itself did not file for bankruptcy—deposited a $250,000 retainer for each debtor into a bank account held by the debtors’ U.S. bankruptcy counsel for the purpose of funding the debtors’ legal fees.

In response to the debtors’ bankruptcy filing, the secured creditor that had been pursuing foreclosure remedies moved to dismiss the bankruptcy cases, arguing, among other things, that the debtors lacked the requisite ties to the U.S. to maintain Chapter 11 bankruptcy cases. Specifically, the secured creditor reasoned that the debtors lacked any meaningful ties to the United States, and therefore were not eligible to be debtors under Section 109(a) of the Bankruptcy Code.

The Court’s Analysis

Pursuant to Section 109(a) of the Bankruptcy Code, “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.” The court acknowledged that the Debtors here have “few” ties to the United States, but found that they nevertheless satisfy the requirements of Section 109(a), and therefore may be debtors under the Bankruptcy Code.

As an initial matter, it was undisputed that the debtors are not domiciled and do not have a place of business in the United States. Accordingly, the debtors’ eligibility could only be based on their “property” in the United States. The court recognized that prior case law holds that only “nominal amounts of property” located in the United States are required to satisfy the Section 109(a) property requirement.

The secured creditor argued that the funds in the debtors’ lawyers’ bank account were insufficient to satisfy the Section 109(a) property requirement because the debtors had only a reversionary interest in the funds, which was not disclosed to the court, and the funds were initially deposited by the debtors’ parent and not the debtors themselves. The court disagreed. Although the debtors had failed to include their reversionary interest in the retainers in their schedules of assets, the court found that the debtors had presented sufficient evidence of those interests, and could amend their schedules to include them. Additionally, the court found that the “existence of funds from which a client is entitled to fund U.S. legal services” was enough to satisfy section 109(a)’s requirement that the debtors have property located in the United States.

The court further found that it was inconsequential that the debtors’ parent had originally deposited the retainers with the debtors’ counsel, as opposed to the debtors themselves. The court noted that it was undisputed that the debtors were entitled to any amount of the retainers that went unused during the representation, and that it was therefore not relevant who paid the retainer.

Finally, the court addressed the debtors’ additional argument that they possessed a separate qualifying property interest in the U.S.: the right to have certain of their rights decided under New York law pursuant to choice of law provisions contained in the debtors’ aircraft mortgages. The court acknowledged that this separate property right could be sufficient to satisfy Section 109(a)’s requirements, but declined to rule on this issue, given the court’s ruling on the retainers.

Conclusion

The court’s decision in this case confirms that section 109(a)’s requirements for eligibility to be a debtor under the U.S. Bankruptcy Code can be satisfied by only the barest legal title to assets situated in the United States. Here, the existence of funds that the debtors’ parent deposited with a third-party specifically to fund a U.S. bankruptcy case was sufficient “property in the United States” to allow two Japanese debtors, which had never conducted business in the United States, to become debtors under the Bankruptcy Code. Any distressed foreign company that wants to avail itself of the benefits of the Bankruptcy Code can use the facts of this case as a clear roadmap for doing so. So long as a prospective debtor or one of its affiliates has cash to deposit with a U.S. law firm to fund its bankruptcy case, the company will likely be found to have satisfied the eligibility requirements of Section 109(a).

Catherine B. Heitzenrater practices in the areas of bankruptcy, corporate reorganization, creditors’ rights, commercial finance and secured transactions. She represents Chapter 11 debtors-in-possession, Chapter 11 trustees, Chapter 7 trustees, liquidating trustees, creditors’ committees, insurance companies and secured creditors in all aspects of a bankruptcy case.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.