On April 3, 2024, the Eleventh Circuit Court of Appeals (comprised of Federal Courts in Alabama, Florida and Georgia), affirmed the decision of the District Court for the Middle District of Florida in Al Zawawi v. Diss (In re Al Zawawi). The Court held that eligibility requirements for a “debtor” contained in section 109(a) of the Bankruptcy Code do not apply to foreign recognition proceedings under chapter 15 of the Bankruptcy Code.

Section 109(a) of the Bankruptcy Code limits the scope of who may be a debtor, stating that “only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.” The Eleventh Circuit held that its previous decision in In re Goerg[1] required the Court to hold that section 109(a) does not apply to chapter 15 cases and does not establish a prerequisite for the recognition of foreign proceedings under chapter 15.

Under the Eleventh Circuit’s Al Zawawi ruling, a duly qualified representative of a foreign debtor that is properly subject to a foreign proceeding is entitled to seek and obtain chapter 15 recognition even if such foreign debtor has no property in the United States or otherwise does not qualify to be a debtor under section 109(a) of the Bankruptcy Code. The Eleventh Circuit’s decision in Al Zawawi conflicts with the Second Circuit precedent of In re Barnet[2], potentially setting the stage for a U.S. Supreme Court challenge.

Background

Talal Qais Abdulmunem Al Zawawi (“Al Zawawi”), a citizen of Oman, owns shares in QAPA Investing Corporation NV (“QAPA”). QAPA, an entity incorporated in Curacao, wholly owns several Florida entities, one of which owns approximately $94 million in real estate in the area of Winter Park, Florida. In 2017, Al Zawawi’s wife, Leila Hammoud, petitioned for a dissolution of their marriage in the U.K.

In March 2019, Ms. Hammoud was awarded a judgement in her favor by a court of competent jurisdiction in the United Kingdom for £24,075,000 pursuant to which the court issued a worldwide freezing order against Al Zawawi enjoining him from disposing of any of his assets until the judgement was paid in full. In 2020, Ms. Hammoud petitioned the U.K. Court to place Al Zawawi in involuntary insolvency proceedings, alleging that he had failed to make payments toward her divorce judgement. In June 2020, Al Zawawi was adjudged insolvent, and Foreign Representatives were appointed in connection with his case.

In March 2021, the Foreign Representatives filed a chapter 15 petition in the U.S. Bankruptcy Court for the Middle District of Florida. Al Zawawi objected to the petition on the grounds that because he did not reside or have a domicile, place of business, or property in the United States he did not meet the requirements for being a debtor under section 109(a), and therefore could not be the subject of a chapter 15 case. The Bankruptcy Court granted the petition for recognition under chapter 15, ruling that section 109(a) does not apply to chapter 15 cases. Al Zawawi appealed the Bankruptcy Court’s order to the District Court, which affirmed.

In re Goerg

In its 1988 decision of In re Goerg, the Eleventh Circuit examined the purposes behind section 304 of the Bankruptcy Code, the statutory predecessor to chapter 15, and concluded that a foreign debtor does not have to qualify as a 'debtor' under the Bankruptcy Code. The Court held that "the focus is on making the United States processes available in aid of foreign proceedings, not actual bankruptcy administration, [and] it would make little sense to require that the subject of the foreign proceeding qualify as a 'debtor' under United States bankruptcy law."

The Court recognized the tension created by the use of the term “debtor” within the definition of “foreign proceeding.” The Court, therefore, chose to interpret the term “debtor” as used in section 304 to incorporate the definition of “debtor” used by the forum in which the foreign proceeding is pending. Under this view, the bankruptcy court has jurisdiction to entertain the petition provided that the debtor qualifies for relief under applicable foreign law.

The Eleventh Circuit Decision

In affirming the District Court’s ruling in Al Zawawi, the Eleventh Circuit concluded that the precedent set by Goerg continues to apply and is binding on Al Zawawi’s case. Just as the Court held with respect to section 304 proceedings, the definition of debtor in section 109(a) does not apply to chapter 15 cases and therefore would not establish a prerequisite for the recognition of a foreign proceeding under section 1517. The Court noted that the plain reading of section 103(a) suggests that the entire chapter 1 of the Bankruptcy Code, including the definition of “debtor” in section 109(a), applies to chapter 15 cases, which was how the Second Circuit ruled. This however, creates a tension with the use of the term “debtor” in section 1517’s expansive definition of “foreign proceeding,” which provides that a foreign proceeding need not even be a bankruptcy proceeding either under foreign or U.S. law. As required by the reasoning in Goerg, the Eleventh Circuit referred to the “purpose” clause of chapter 15, and noted that it is to “provide effective mechanisms for dealing with cases of cross-border insolvency.” The Court reasoned that it would make little sense to require that the subject of a foreign proceeding qualify as a debtor under U.S. bankruptcy law. Thus, the Court would interpret the use of the term debtor in the definition of foreign proceeding as referring to a debtor properly subject only to applicable foreign law in a foreign proceeding. Accordingly, because Al Zawawi was properly subject to a foreign proceeding, all the requirements for chapter 15 recognition were met, requiring the Court to affirm the District Court. The Court also noted that the Court was compelled to rule this way because of the precedent from Goerg, notwithstanding the fact that the plain reading of section 103(a) would indicate that section 109(a) does apply to chapter 15 cases.

The Concurrences

Judges Lagoa and Tjoflat wrote special concurrences to the decision.

Judge Lagoa wrote a special concurrence, in which she agreed that Goerg compels the result reached by the majority opinion. However, Judge Lagoa noted that if Goerg had not existed, she would have reversed the bankruptcy court’s determination, asserting that the main arguments the Foreign Representatives made supporting the application of Goerg are not supported by the text of the Bankruptcy Code. Judge Lagoa asserts that, as a result of the drafting of chapter 15, the requirement of debtor eligibility is “baked into the requirements” for chapter 15 relief, and the Foreign Representatives fail to make convincing arguments that to interpret otherwise would create irreconcilable differences with other sections of chapter 15 and its venue statue.

Judge Tjoflat, who authored the majority opinion in Goerg, wrote a lengthy concurrence to disagree with the majority opinion’s characterization of the logic in Goerg as “abstract purposivism.” Rather, Judge Tjoflat argues that the result is compelled because the current definition of a foreign proceeding is substantially the same as the one interpreted in Goerg. Additionally, Judge Tjoflat uses a detailed analysis of the history of the Bankruptcy Code, chapter 15 and Goerg, to argue that the current chapter 15 statutory scheme allows U.S. courts to recognize foreign proceedings regardless of whether the debtor in question is eligible to commence a U.S. bankruptcy proceeding.

Conclusion

This ruling solidifies a Circuit Court split between the Eleventh Circuit and the Second Circuit and possibly lays the groundwork for a challenge in the U.S. Supreme Court. In In re Barnet, the Second Circuit considered precisely the same question and determined that section 109(a) did apply in chapter 15 cases.

The Al Zawawi decision presents one Circuit’s emphasis on the purpose of chapter 15 in promoting cross-border cooperation. It also broadens the possibility that chapter 15 could be used as a valuable tool in the administration of foreign insolvency proceedings in any jurisdiction regardless of whether the U.S. court has jurisdiction over the party that is the subject of such proceeding or if there are assets in the U.S. that are at issue.

It remains to be seen whether the approach of the Second Circuit or the Eleventh Circuit with respect to relief in a chapter 15 case will prevail. However, a foreign representative who may need assistance with the investigation and recovery of concealed assets in a proceeding where there appear to be no assets in the United States may be well served to consider filing a chapter 15 case in the Eleventh Circuit. In addition, the same consideration would apply if the goal of a foreign representative was to use the U.S courts for assistance with discovery in order to determine whether a potential cause of action is available, when it is clear that the debtor has no assets in the U.S. Additionally, foreign representatives who are seeking to have a foreign court decision recognized and respected by a U.S. court by pleading comity, or who are seeking to obtain standing in order to appear or to be substituted or added as a plaintiff or defendant in a pending U.S. case, may also prefer the more lenient rule of chapter 15 eligibility in the Eleventh Circuit. Such considerations would likely increase the likelihood of forum shopping when a foreign representative is considering where to commence a chapter 15 case.