Chapter 15 of the United States Bankruptcy Code, enacted in 2005, was intended to govern all aspects of cross-border bankruptcy and insolvency proceedings. The framers of Chapter 15 were desirous of providing a practical and uniform legal framework for cross-border insolvency cases involving multiple countries and replaced § 304 of the Bankruptcy Code by adopting the Model Law on Cross-Border Insolvency (“Model Law”) promulgated by the United Nations Commission on International Trade Law (“UNCITRAL) to achieve these objectives. [1]
The objectives of Chapter 15, and the adoption of the Model Law upon which it is based, are expressly set out in § 1501 and are defined as being (1) to promote cooperation between the United States courts and parties of interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases; (2) to establish greater legal certainty for trade and investment; (3) to provide for the fair and efficient administration of cross-border insolvencies that protects the interest of all creditors and other interested entities, including the debtor’s assets and (5) to facilitate the rescue of financially troubled business, thereby protecting investment and preserving employment.[2] 11 U.S.C. § 1501.
In the recent controversial case of In Re Al Zawawi, 97 F.4th 1244 (2024) (“Zawawi”), the Eleventh Circuit made significant progress in promoting a uniform and coordinated legal regime for cross-border insolvency cases. The central issue before the Court of Appeals was whether 11 U.S.C § 109(a) applies to Chapter 15 of the Bankruptcy Code and imposes a prerequisite for the recognition of a foreign proceeding.[3] The vexing issue being that on the plain reading of Chapter 1 of the Bankruptcy Code, § 109(a) provides, in relevant part, 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” the Bankruptcy Code. The point of tension focused on the narrow definition of “debtor” as contained in Chapter 1, § 109(a) of the Bankruptcy Code versus the more expansive definition of “foreign proceedings” under Chapter 15. The anomaly being that the plain text of § 109(a) would apply and control a debtor’s eligibility to pursue the cross-border bankruptcy remedies and insolvency proceedings contained in Chapter 15. [4] In breaking the tie, the Eleventh Circuit affirmed prior precedent created by In re Goerg, 944 F.2d 1562 (11th Cir. 1988) (“Goerg”) where the Court found that Chapter 15 has its own eligibility requirements, and that the eligibility requirements for debtors in cases under other Chapters of the Bankruptcy Code i.e. § 109(a), do not apply in Chapter 15 cases. Significantly, the Court of Appeals followed the same purposive approach to statutory interpretation as adopted in Georg and as set out in §1501, of Chapter 15 and pronounced that Chapter 1’s debtor eligibility language does not apply to cases ancillary to a foreign proceeding under Chapter 15.
As background, the appellant, Talal Qais Abdulmunem Al Zawawi (“Mr. Al Zawawi”), was an Omani citizen who owned shares in QAPA Investing Corporation NV, an entity incorporated in Curacao that wholly owned several entities in Florida that collectively owned tens of millions of dollars’ worth of real estate in Florida.[5] In 2017, after living in the United Kingdom (the “U.K.”) with his family for two years, Mr. Al Zawawi’s wife, Leila Hammoud (“Ms. Hammoud”), petitioned to dissolve the marriage.[6] During the divorce proceedings, Mr. Al Zawawi filed a net worth statement indicating that he owned assets in the United States.[7] Later, in 2019, the U.K. Court issued a worldwide freezing order against Mr. Al Zawawi after Ms. Hammoud obtained a divorce decree in her favor for over 24 million euros.[8] Approximately a year later, Ms. Hammoud petitioned the U.K. court to place Mr. Al Zawawi in involuntary bankruptcy.[9] In 2020, Mr. Al Zawawi was adjudged bankrupt and was appointed joint trustees.[10] The following year, the Foreign Representatives filed a Chapter 15 Petition for Recognition of a Foreign Proceeding in the U.S. Bankruptcy Court for the Middle District of Florida. [11] Mr. Al Zawawi opposed recognition. Although he conceded that the foreign representative satisfied all the requirements for recognition set forth in § 1517, he argued, relying on Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet) 737 F.3d 238 (2d Cir. 2013) (“Barnet”), that he did not meet the definition of “debtor” as contained in § 109(a) of Chapter 1 of the Bankruptcy Code. [12] The Foreign Representatives countered that the Court should disregard Barnet and instead follow the Eleventh Circuit’s findings in Goerg even though it related to an ancillary case filed under repealed § 304 of the Bankruptcy Code.
The Eleventh Circuit reviewed the matter de novo and initially addressed the “anomaly” presented by the plain text of §103(a), which comments that “this chapter, §§ 307, 362(o), 555 through 557, and 559 through 562 apply in cases under Chapter 15.” [13] Further, “this chapter, as used above in § 103(a) of Chapter 1 of Title 11, refers to Chapter 1 and §109(a), as a part of Chapter 1, applies to cases under Chapter 15”. [14] However, the Eleventh Circuit remained loyal to its prior decision in Goerg, which predated the enactment of Chapter 15, and rejected the debtor eligibility requirement under Chapter 1 as a prerequisite to ancillary assistance under the statutory predecessor to Chapter 15.
For the first time, in Goerg, the Eleventh Circuit assessed whether section 304 of the Bankruptcy Code, 11 U.S.C. §§ 101-1330, opened the United States bankruptcy courts to proceedings ancillary to foreign insolvency proceedings where the entity that is the subject of the foreign proceeding qualifies for insolvency administration under foreign law, but does not fall within the Bankruptcy Code’s definition of “debtor.” [15] The Court reversed the earlier decisions, saying both the bankruptcy court and district court incorrectly answered the question in the negative and misconstrued the eligibility requirements needed for relief under section 304.[16] Further, in reaching its decision, the Eleventh Circuit panel scrutinized the legislative purpose behind section 304 and concluded that the ultimate objective is to “prevent dismemberment by local creditors” of assets in this country involved in a foreign insolvency proceeding and to help further the efficiency of foreign insolvency proceedings involving worldwide assets.[17] Moreover, the Court reasoned that, given the purpose of the statute to “help further the efficiency of foreign insolvency proceedings involving worldwide assets,” and “in light of the comity concerns that induced Congress to enact” the ancillary proceedings statute, “it would make eminent sense
for Congress to define expansively the class of foreign insolvency proceedings for which ancillary assistance is available.” [18] Furthermore, the Court also stated that it would not make sense to require that the subject of the foreign proceeding meet the criteria of a “debtor” under United States bankruptcy law because the focus is on making the United States processes available in aid of foreign proceedings, not actual bankruptcy administration.[19] Ultimately, the Court settled that ” ‘debtor’ eligibility under the Bankruptcy Code” was not “a prerequisite to section 304 ancillary assistance.”[20]
The Eleventh Circuit in Zawawi revisited these issues in the context of eligibility for Chapter 15 relief, and followed the prior precedent created by the Goerg decision supporting the main purpose of Chapter 15 is to ensure effective mechanisms for managing cross-border insolvency cases.[21] The Court conceded that Section 109(a) would significantly impede the class of persons and entities that could constitute a “debtor,” which would contradict one of the exclusive purposes of Chapter 15. For these reasons, the Eleventh Circuit determined that under its precedent, 109(a) does not apply to Chapter 15 cases and does not establish a prerequisite for recognizing a foreign proceeding under §1517. Thus, a foreign debtor need not have assets in the United States to obtain recognition.
The Court in Zawawi has reaffirmed and bolstered the underlying purpose of Chapter 15 to foster and promote cooperation between US Courts and foreign Courts, including as between their respective appointed representatives, by clarifying and reiterating the proper standard for analysis of a foreign debtor’s eligibility for Chapter 15 relief. In doing so, cross-border bankruptcy and insolvency proceedings in the US court system is more accessible to international appointed representatives of debtors and creditors.
[1] Legislation based on or influenced by the Model Law has been adopted in 93 States in a total of 126 jurisdictions. See https://uncitral.un.org/en/texts/arbitration/modellaw/commercial_arbitration/status. See also https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-15-bankruptcy-basics
[2] Id.
[3] In re Al Zawawi, 97 F.4th 1244 (11th Cir. 2024) at *1250
[4] See https://www.pillsburylaw.com/en/news-and-insights/foreign-debtor-chapter15-109a.html
[5] 97 F.4th at 1248
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] The Court in Barnet ruled that the provision of the Bankruptcy Code requiring US residency, assets, or a place of business applies in Chapter 15 cases as well as cases filed under other chapters.
[13] Id. at 1251
[14] Id.
[15] In re Goerg, 844 F.2d 1562 (11th Cir. 1988)
[16] Id. at 1563
[17] Id. at 1568
[18] Id. at 156.
[19] Id.
[20] 97 F.4th at 1253.
[21] Id. at 1255
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