In Barnet the Second Circuit departs from precedent and sets the stage for potential circuit split

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In Drawbridge Special Opportunities Fund LP v Barnet, the US Court of Appeals for the Second Circuit held that foreign entities seeking recognition under chapter 15 of the Bankruptcy Code must, in addition to satisfying the requirements for recognition set forth in that chapter, have a residence, domicile, place of business or assets in the US pursuant to section 109(a) of the Bankruptcy Code.

The Second Circuit reversed the bankruptcy court that had granted recognition under chapter 15 to an Australian company that had not introduced any evidence of assets or operations in the US. In granting recognition, the bankruptcy court had followed a long line of jurisprudence stretching back to former section 304 of the Bankruptcy Code — the precursor to chapter 15. By holding that a foreign debtor must comply with section 109, the Second Circuit has added an additional obstacle to chapter 15 recognition and made it more difficult for foreign companies to benefit from the US legal system. Moreover, within a week of the Barnet decision, and fully briefed on its holding, the Bankruptcy Court for the District of Delaware issued a conflicting opinion in In re Bemarmara Consulting a.s. Thus, the Second Circuit has set the stage for a potential circuit split.

Chapter 15 of the Bankruptcy Code largely incorporates the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law to provide an effective method for administering cross-border insolvencies. Congress’s stated objectives for chapter 15 include: (i) promoting co-operation between the US courts, foreign courts and other competent authorities of foreign countries involved in cross-border insolvency cases; (ii) providing greater legal certainty for trade and investment; (iii) the fair and efficient administration of cross-border insolvencies; (iv) protecting and maximising foreign debtors’ assets; and (v) rescuing troubled companies to preserve investment and employment. Chapter 15 applies when a foreign representative seeks recognition of a foreign insolvency proceeding by a US bankruptcy court. An important form of relief provided by chapter 15 is the ability to engage in court-sanctioned discovery….

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