From Far to Far: The Bankruptcy Court’s Expanded Definition of “Property” Under Section 109(a)

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Despite recent criticism of venue selection and calls to limit or restrict various provisions of the Bankruptcy Code, a recent ruling by the bankruptcy court for the Southern District of New York shows that bankruptcy courts can continue to interpret the extent of their jurisdictional reach and the powers and powers conferred on them by the Bankruptcy Code. In In re JPA No. 111 Co., Ltd., No. 21-12075 (DSJ) (Bankr. SDNY Feb. 1, 2022), the bankruptcy court denied a secured lender’s motion to dismiss the Chapter 11 cases of two Japanese companies, arguing, among other things, that the debtors did not have to have significant ties to the United States to meet the eligibility criteria of Section 109(a) of the Bankruptcy Code. Instead, the Court found that the companies were authorized debtors entitled to Bankruptcy Code protections because each owned property in the United States in the form of reversionary interests in certain security deposits held by their bankruptcy attorney, notwithstanding that the debtors did not actually fund the filings and they apparently had no other connection to the United States.

Background

The cases involved two Japanese special purpose vehicles: JPA No. 111 Co., Ltd. and JPA No. 49 Co. (the “Debtors”). The Debtors were owned and managed by the same parent entity, JP Lease Products & Services Co. Ltd. (“JPL”), and were created for the purpose of acquiring and leasing aircraft. The Debtors had no employees, were headed by the chairman and CEO of JPL (which had an office in Tokyo), and had no independent offices. Moreover, the Debtors had no regular operations or current activities in the United States, their planes were leased from a foreign carrier (Vietnam Airlines) and these planes had never flown or been in the United States.

In order to finance the purchase of their respective aircraft, each of the Debtors entered into senior and junior financing agreements. As part of these financing agreements, each JPA Entity has entered into similar product agreements with its intermediary lessor, JPL, the security agent and the various lenders. The proceeds agreements prohibited JPL from putting debtors into bankruptcy, provided the security agent acted on behalf of the lenders, and provided for a payment cascade for any sale proceeds received. The Debtors also entered into security agreements, which granted the security officer liens on the aircraft and assigned to the security officer interests in its rights under the transaction documents, including the various leases ( the “Lease Assets”). The collateral agreements also gave the security agent the right and discretion to dispose of the leased assets.

Like many other businesses, Debtors has experienced a sharp drop in cash flow due to reduced travel during the COVID-19 pandemic. As a result, defaults arose under the leases and sub-leases and the former security officer terminated the leases. On the same day that the former security agent terminated the leases, FitzWalter Capital Partners (Financing Trading) Limited (the “mover claimant”) acquired substantial amounts of the debtors’ debt. The next day, the Mover took over from the former agent and became the security agent under the transaction documents. About a week later, and without notice to the debtors, the removal claimant commenced foreclosure proceedings in England against the debtors’ lease assets, but not against the planes themselves. English foreclosure proceedings provided for an aggressive auction schedule – the deadline for submission was one week and the successful bidder was expected to close only three days later. When the debtors became aware of plaintiff’s foreclosure plans in motion, they commenced their Chapter 11 cases in the bankruptcy court for the Southern District of New York, triggering the automatic stay, under Section 362 of the Bankruptcy Code, to stop plaintiff’s selling efforts in motion.

The Mover filed a motion to dismiss the Chapter 11 cases, arguing, among other things, that the Debtors had no legally significant connection with the United States to qualify as debtors under Section 109 of the Bankruptcy Code. . The mobile plaintiff also requested that the Chapter 11 cases be dismissed as being filed in bad faith to prevent their legitimate and contractually specified foreclosure remedies. The debtors opposed the motion arguing, among other things, that they met the requirements of Section 109 because they held property in the United States in the form of two separate security deposits of $250,000. held in U.S. bank accounts, which the Debtors’ bankruptcy attorney opened in order to fund legal services related to the Chapter 11 cases. not by the debtors themselves; however, any undrawn portions of the installments remaining at the end of the Chapter 11 cases were to be returned to debtors. The debtors were joined in their opposition by JPL and two of the debtors’ other secured lenders.

Section 109(a) of the Bankruptcy Code

Under Section 109(a) of the Bankruptcy Code, only a person who “resides or has a domicile, establishment or property in the United States or in a municipality” can be a debtor under the Bankruptcy Code.

The Court’s decision

In denying the mover plaintiff’s motion to dismiss, the bankruptcy court acknowledged that the debtors had few ties to the United States, noting that they were Japanese companies, with no officers or employees in the United States or elsewhere, without regular operations or current affairs. in the United States, and that the planes were leased from a foreign carrier and had never flown or been in the United States. Despite the absence of significant connections, the bankruptcy court reiterated that the bankruptcy courts for the Southern District of New York had ruled that bank accounts, including undrawn money orders, in the United States can satisfy the requirement of “property” of section 109(a). The bankruptcy court reaffirmed that in order for a foreign corporation to be considered a debtor under Section 109, the courts required “only nominal amounts of property situated in the United States” and that it did not There are “virtually no formal barriers to federal courts adjudicating debtors’ bankruptcy proceedings. .” In re JPA No. 111 Co., Ltd.no. 21-12075 (DSJ), at *11 (citing In re Globo Communicacoes e Participacoes SA, 317 BR 235, 249 (SDNY 2004)). Additionally, the court held that the unqualified use of the word “property” in section 109 means that there was “no legal requirement as to the minimum value of the property”. In re JPA No. 111 Co., Ltd.no. 21-12075 (DSJ), at *11 (citing In re Paper I Partners, LP283 BR 661, 674 (Bankr. SDNY 2002)).

The Mover focused its objection on the fact that JPL, not the Debtors, directly transferred the funds to the deposit accounts, but the bankruptcy court was not persuaded. The court noted that the identity of the payor was irrelevant so long as the deposit was paid on behalf of the debtors (“the existence of funds from which a client is entitled to finance U.S. legal services is sufficient to comply with Article 109, the one who sent the funds to the lawyer.”). The bankruptcy court also relied on the fact that any unused funds in the holdback accounts were contractually to be returned to the debtors.

In support of its petition, the petitioner argued that the debtors’ omission of security deposits from their Chapter 11 petitions and schedules indicated the absence of any genuine proprietary interest. The bankruptcy court, however, was unconvinced and easily dismissed this argument on the grounds that form prevailed over substance. The court noted that: (i) the evidentiary record, in the form of receipts and wire transfer confirmations, demonstrated that the debtors had in fact received the deposit funds; (ii) the Mover has not challenged the veracity of such evidence or the Debtors’ statement that the security deposits existed at the date of the request to finance each Debtor’s legal expenses; and (iii) the Court could, and probably will, allow the Debtors to amend their schedules.

Accordingly, the Court found that the debtors met the “US property” requirement of Section 109(a) and were therefore bona fide debtors under the Bankruptcy Code.

The Mover also sought to dismiss the Chapter 11 cases as bad faith filings under Bankruptcy Code Section 1112(b) and argued that the debtors filed the cases to frustrate claims in foreclosure provided for in the transaction documents.1 Although the bankruptcy court recognized that many of the factors used by courts to determine whether a filing was made in bad faith militated in favor of dismissal, the court determined that the general circumstances did not demonstrate a bad faith effort. to unduly delay and frustrate the legitimate expectations of a secured creditor. In doing so, the bankruptcy court appeared to rely heavily on its conclusion that (i) the debtors were already pursuing a sale process under Section 363 that could result in the payment in full of secured creditors, including the mover claimant (with the possibility of excluding certain disputed amounts beyond principal and interest), and (ii) the other secured creditors of the Debtors supported 363’s sale process and found that the mover plaintiff was engaging value-destroying and self-serving behavior to the detriment of other secured creditors and assigns.

Notably, under the transaction documents, JPL had agreed not to file or authorize the filing of Chapter 11 accounts receivable. The bankruptcy court acknowledged that JPL may have acted in violation of the transaction documents, but declined to answer that question. The aggressive pace at which the mover claimant was proceeding probably did not help his case either – the mover claimant purchased the secured debt after the debtors were already in default, became the security guard a day later and, nine days later began his pursuit of foreclosure remedies.

Conclusion

Ultimately, the APP The court determined that these debtors were eligible under Section 109 to avail themselves of the benefits of the Bankruptcy Code and declined to dismiss their Chapter 11 cases, despite the facts that (i) the debtors had no connection with the United States, (ii) they did not fund the security deposits that formed their main basis of competence, (iii) their parent company may have acted in violation of its transaction documents by allowing the security deposits under Chapter 11, and (iv) the moving creditor, although perhaps acting aggressively, had a legitimate contractual right to seize the leased assets. This decision demonstrates that bankruptcy courts will continue to take a broad view and broad scope when it comes to their jurisdiction, especially when presented with a plausible avenue that has the support of creditors and other interested parties.

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