The Eleventh Circuit Court of Appeals recently affirmed a decision on appeal from the United States District Court for the Middle District of Florida (which also affirmed the bankruptcy court’s decision), with notable implications for Chapter 15 cases.[1] The central question at issue was whether 11 U.S.C. § 109(a), which governs who may be a debtor under title 11, applies to cases brought under Chapter 15 of the Bankruptcy Code. Despite the Bankruptcy Code’s plain text stating that section 109(a) (as well as all of Chapter 1) applies to Chapter 15 cases, the Eleventh Circuit found itself bound by precedent in In re Goerg, 844 F. 2d 1561 (11th Cir. 1985), wherein the Eleventh Circuit held that the Bankruptcy Code’s debtor eligibility language does not apply to cases ancillary to a foreign proceeding. Thus, the Eleventh Circuit held that the debtor eligibility requirements in section 109(a) do not apply to Chapter 15 cases and affirmed the lower courts’ decisions.
Chapter 15 Generally
Chapter 15 of the Bankruptcy Code is designed to help the U.S. recognize foreign insolvency proceedings and increase international cooperation among insolvency courts to effectively address cross-border insolvency issues. Chapter 15 was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) in 2005 and repealed its predecessor, section 304 of the Bankruptcy Code. Chapter 15 codifies the Model Law on Cross-Border Insolvency in substantially the same way it was written by the United Nations Commission on International Trade Law. It provides for recognition of a foreign insolvency proceeding before a U.S. bankruptcy court can provide automatic, provisional, or permissive relief.
Factual Background
In 2015, the appellant, Talal Qais Abdulmunem Al Zawawi and his wife, Leila Hammoud, moved to the United Kingdom with their children. In 2017, Hammoud petitioned for dissolution of marriage. In March 2019, Hammoud obtained a divorce decree and a judgment in her favor for £24,075,000 from a U.K. court. In April 2019, the U.K. court issued a worldwide freezing order against Al Zawawi, enjoining him from disposing any of his assets until the judgment was paid in full. Roughly one year later, Hammoud petitioned the U.K. court to place Al Zawawi in involuntary bankruptcy, alleging that he had failed to make payments on the March 2019 judgment. On June 29, 2020, Al Zawawi was adjudged bankrupt, and the court appointed Colin Diss, Hannah Davie, and Michael Leeds as joint trustees (the “Foreign Representatives”).
On March 24, 2021, 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, which, if granted, would subject Al Zawawi’s U.S. assets to the automatic stay and open the door to discovery and other relief relating to those assets. The Foreign Representatives argued that the requirements of section 1517 were met and therefore an order granting recognition was warranted. Al Zawawi did not dispute whether the petition satisfied section 1517. He argued, however, that the case should be dismissed on the basis that he was not eligible to be a debtor under section 109(a) because he did not reside or have a domicile, place of business, or any property in the U.S.
The bankruptcy court granted recognition, determining that section 109(a) does not apply to Chapter 15 cases and that, even if section 109(a) did apply, Al Zawawi had property interests in the U.S. Al Zawawi appealed the bankruptcy court’s decision, and the district court affirmed without addressing the alternative finding that Al Zawawi nonetheless had property in the U.S. Al Zawawi again appealed, this time to the Eleventh Circuit Court of Appeals.
Eleventh Circuit’s In re Goerg Decision Binds It to Interpretation Differing from Plain Text
The Eleventh Circuit first addresses the central issue by confronting the plain text of section 103(a), which states that “this chapter, sections 307, 362(o), 555 through 557, and 559 through 562 apply in a case under chapter 15.”[2] “This chapter,” as used in section 103(a), refers to Chapter 1 of the Bankruptcy Code, which includes section 109(a) and the eligibility requirements listed therein. However, unlike other circuits that have held the above plain language settles this issue, the Eleventh Circuit is bound by prior precedent wherein it held otherwise: In re Goerg.
In In re Goerg, the Eleventh Circuit dealt with the question of whether a hypothetical debtor in a case brought under Chapter 15’s predecessor—section 304, titled “Cases ancillary to foreign proceedings”—must fall within Chapter 1’s definition of a “debtor.” The court ultimately said no. In coming to that decision, the Eleventh Circuit had to wrestle with the Bankruptcy Code’s anomalous definitions of “debtor” and “foreign proceeding,” wherein a debtor was defined as a person with a bankruptcy case under title 11, and a foreign proceeding was defined as a proceeding concerning such a debtor but need not even be a bankruptcy proceeding. To resolve the anomaly, the Goerg court adopted the view the term “debtor,” as used in the section 304 context, incorporates the definition of “debtor” used by the foreign proceeding forum. Using this view, the bankruptcy court could entertain the section 304 petition so long as the debtor qualified for relief under applicable foreign law and the foreign proceeding was for the purpose of liquidating an estate; adjusting debts by composition, extension, or discharge; or effecting a reorganization—the definition of “foreign proceeding” under the Bankruptcy Code. In choosing this option, the court relied on section 304’s purpose to prevent piecemeal litigation as to a debtor’s assets in the U.S. and to generally help further the efficiency of foreign insolvency proceedings involving worldwide assets. In light of that understanding, the Eleventh Circuit in Goerg held that the debtor in an ancillary assistance case under section 304 need only be subject to a foreign proceeding (as defined in the Bankruptcy Code) and that debtor eligibility under the Bankruptcy Code was not a prerequisite to section 304 ancillary assistance.
Ultimately, since the Bankruptcy Code’s current definitions of “debtor” and “foreign proceeding” still present a similar anomaly for Chapter 15 as they did for section 304, Goerg counseled the Al Zawawi court to consider the purpose of Chapter 15 (as it did with section 304) in holding that debtor eligibility under Chapter 1 is not a prerequisite for the recognition of a foreign proceeding under Chapter 15. While there are differences between the former section 304 and its successor Chapter 15 (e.g., section 304 did not entitle debtors to the automatic stay), the purposes of section 304 and Chapter 15 are the same. Both aim to provide effective mechanisms for dealing with cases of cross-border insolvency. Based on that purpose, the Eleventh Circuit in Goerg determined that a debtor in a case ancillary to a foreign proceeding need only be properly subject, under applicable foreign law, to a “foreign proceeding” as defined by the Bankruptcy Code. In In re Al Zawawi, the Eleventh Circuit followed that logic and held that based on the current definition of “foreign proceeding” in section 101(23), debtor eligibility under section 109(a) is not required to grant recognition of a foreign proceeding under Chapter 15. Al Zawawi was properly subject to a “foreign proceeding,” and the requirements for recognition under section 1517 were met; thus, the bankruptcy court’s order granting recognition was affirmed.
Takeaway
The Eleventh Circuit’s decision in In re Al Zawawi opens the door for bankruptcy courts in Alabama, Florida, and Georgia to recognize foreign proceedings so long as the debtor is properly subject to a foreign proceeding, which may lead to an influx of similar cases. The decision[3] may also set the stage for the Supreme Court to weigh in, given the circuit split with the Second Circuit and the juxtaposition of the court’s reasoning with the plain text of the Bankruptcy Code.
