Chapter 15 Inapplicable Unless "Foreign Representative" Seeks Enforcement of Foreign Insolvency Court’s Order
Chapter 15 of the Bankruptcy Code offers an effective mechanism for U.S. courts to provide assistance to non-U.S. courts presiding over the insolvency proceedings of foreign debtors with assets located in the U.S. An important feature of chapter 15 is "comity," the deference that U.S. courts give to the decisions of foreign courts under appropriate circumstances. A ruling recently handed down by the U.S. Court of Appeals for the Second Circuit illustrates that, although comity is an integral part of chapter 15, this chapter is far from the only context in which it applies. In Trikona Advisers Ltd. v. Chugh, 846 F.3d 22 (2d Cir. 2017), the court affirmed a district court ruling giving collateral estoppel effect to the findings of a foreign insolvency court, even though no chapter 15 petition had been filed in the U.S. on behalf of the foreign debtor seeking recognition of its Cayman Islands winding-up proceeding. According to the Second Circuit, because the party seeking such relief was not a "foreign representative" under chapter 15, the provisions of chapter 15 simply did not apply, but the district court nonetheless did not err in granting comity to the foreign insolvency court’s factual findings.
U.S. courts apply general principles of international comity in determining whether to recognize and enforce foreign judgments or to defer to the pronouncements or laws of foreign nations. See Timberlane Lumber Co. v. Bank of Am., N.T. & S.A., 549 F.2d 597 (9th Cir. 1976) (articulating a multifactor balancing test to determine whether to abstain from asserting jurisdiction on comity grounds); see also, e.g., In re Vitamin C Antitrust Litig. (Animal Sci. Prods., Inc. v. Hebei Welcome Pharm. Co.), 837 F.3d 175 (2d Cir. 2016) (deferring to the Chinese government’s statement filed in U.S. district court and reversing an order denying a motion to dismiss an antitrust complaint on the ground of international comity).
Comity is "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895); accord Shen v. Leo A. Daly Co., 222 F.3d 472, 476 (8th Cir. 2000) (previously litigated claims should not be retried if the reviewing court finds that the foreign court provided a full and fair trial of the issues in a court of competent jurisdiction, the foreign forum ensured the impartial administration of justice, the foreign forum ensured that the trial was conducted without prejudice or fraud, the foreign court had proper jurisdiction over the parties, and the foreign judgment does not violate public policy) (citing Hilton, 159 U.S. at 163).
The Role of Comity in Cross-Border Bankruptcy Cases
Comity has long been an important consideration in cross-border bankruptcy cases. In the U.S., such cases are governed by chapter 15 of the Bankruptcy Code (discussed in more detail below), which is patterned on the UNCITRAL Model Law on Cross-Border Insolvency, a framework of legal principles that has been adopted in 41 nations or territories.
Prior to the enactment of chapter 15 in 2005, section 304 of the Bankruptcy Code governed proceedings commenced by the accredited representatives of foreign debtors in the U.S. that were "ancillary" to bankruptcy or insolvency cases filed abroad. See 11 U.S.C. § 304 (repealed 2005). Ancillary proceedings were typically commenced under section 304 for the limited purpose of protecting a foreign debtor’s U.S. assets from creditor collection efforts by means of injunctive relief granted by a U.S. bankruptcy court and, in some cases, for the purpose of repatriating such assets or their proceeds abroad for administration in the debtor’s foreign bankruptcy case. In deciding whether to grant injunctive, turnover, or other appropriate relief under former section 304, a U.S. bankruptcy court was required to consider "what will best assure an economical and expeditious administration" of the foreign debtor’s estate, consistent with a number of factors, including comity. Id.
Procedures and Relief Under Chapter 15
Comity continues to play an important role in cross-border bankruptcy cases. Under chapter 15, the "foreign representative" of a non-U.S. debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." A "foreign representative" is defined in section 101(24) of the Bankruptcy Code as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding."
"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as "a collective judicial or administrative proceeding in a foreign country . . . under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation."
Section 1509(b)(3) provides that, if a U.S. bankruptcy court recognizes a foreign proceeding under chapter 15, "a court in the United States shall grant comity or cooperation to the foreign representative." If the bankruptcy court denies a petition for recognition, the court may, under section 1509(d), "issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation from courts in the United States."
Section 1509(f) provides that the failure of a foreign representative "to commence a case or to obtain recognition under [chapter 15] does not affect any right the foreign representative may have to sue in a court of the United States to collect or recover a claim which is the property of the debtor." Finally, section 1524 provides that, upon recognition of a foreign proceeding under chapter 15, the foreign representative "may intervene in any proceedings in a State or Federal court in the United States in which the debtor is a party."
While chapter 15 gives a foreign representative considerable access to other U.S. courts after a U.S. bankruptcy court recognizes a foreign proceeding, neither chapter 15 nor any other provision of the Bankruptcy Code discusses the circumstances under which foreign parties other than a "foreign representative" in a "foreign proceeding" can seek to enforce the rulings of foreign courts in U.S. courts under principles of international comity. This was the focus of the Second Circuit’s ruling in Trikona.
Trikona Advisors, Ltd. ("TAL") was a Cayman Islands-based investment advisory company owned by companies controlled by Aashish Kalra (collectively, "Kalra") and Rakshitt Chugh (collectively, "Chugh"). In December 2011, Kalra sued Chugh in a U.S. district court in Connecticut, alleging, among other things, that Chugh had breached fiduciary duties by causing TAL to engage in certain transactions which resulted in its collapse. TAL was substituted as plaintiff after Chugh was removed from its board of directors.
Two months afterward, Chugh caused TAL to file a winding-up petition in the Grand Court of the Cayman Islands. Kalra opposed the petition on the basis of substantially the same allegations contained in the complaint filed in the Connecticut litigation. After a trial, the Cayman Islands court granted the winding-up petition. In doing so, the court rejected each of Kalra’s objections—interposed as affirmative defenses—concluding that there was "no merit whatsoever in the allegations made against . . . Chugh." This ruling was affirmed on appeal by the Court of Appeal of the Cayman Islands and the Judicial Committee of the Privy Council in London.
After the ruling of the Cayman Islands court, Chugh moved for summary judgment in the Connecticut litigation on the ground of collateral estoppel. Chugh argued that, in ruling on the winding-up petition, the Cayman Islands court made findings of fact in its favor on all allegations regarding TAL’s collapse and that TAL, as Kalra’s successor in interest, was collaterally stopped from relitigating those issues. The U.S. district court ruled in favor of Chugh.
The Second Circuit’s Ruling
On appeal to the Second Circuit, TAL argued, among other things, that: (i) the district court was precluded by chapter 15 from applying collateral estoppel to the findings of fact from the Cayman Islands winding-up proceeding; and (ii) the district court erred in granting comity to the judgment of the Cayman Islands court because doing so was contrary to U.S. national policy.
According to TAL, because no application for recognition of the Cayman Islands winding-up proceeding under chapter 15 was ever filed, the judgment of the Cayman Islands court could not be recognized in the Connecticut district court. The Second Circuit rejected this argument, ruling that "the requirements of Chapter 15 do not apply here." It explained that, in the case before it, no party to the district court litigation was a "foreign representative" in a "foreign proceeding," as those terms are defined in the Bankruptcy Code. In addition, the Second Circuit emphasized, no party was seeking the assistance of a foreign country, the case did not involve a proceeding under the Bankruptcy Code pending concurrently with a foreign bankruptcy proceeding, and foreign creditors were not seeking to commence an action under the Bankruptcy Code. According to the Second Circuit, "Chapter 15 does not apply when a court in the United States simply gives preclusive effect to factual findings from an otherwise unrelated foreign liquidation proceeding."
In reaching this conclusion, the Second Circuit distinguished an unpublished ruling issued by a Connecticut state court in separate litigation involving some of the same parties. The state court held that the plaintiff could enforce an order of the Cayman Islands court awarding attorneys’ fees in connection with TAL’s winding-up proceeding only in a chapter 15 case. According to the Second Circuit, even if the ruling was correct as a matter of law, the plaintiffs in the related case had requested "the direct assistance of a court within the United States in enforcing an order issued in connection with a foreign liquidation proceeding[,] . . . a scenario that arguably falls within the scope of Chapter 15." Here, by contrast, the court wrote, Chugh argued that "the findings of fact made in the wind-up proceeding should be given preclusive effect," rather than seeking the assistance of the Connecticut district court in enforcing any judgment of the Cayman Islands court.
The Second Circuit also rejected TAL’s argument that the district court should not have granted comity to the judgment of the Cayman Islands court as a matter of U.S. "national policy." Noting that other U.S. courts have granted comity to Cayman Islands court judgments, the Second Circuit wrote that TAL "provides no argument, in law or policy, for its contention that comity would be inappropriate here."
Having concluded that the district court properly ruled that the findings of the Cayman Islands court satisfied the requirements for collateral estoppel, the Second Circuit affirmed the ruling below.
Trikona’s significance is twofold. First, the ruling indicates that, although international comity is an integral feature of chapter 15, the doctrine applies in many other contexts besides chapter 15 and, for that matter, many other contexts besides cross-border bankruptcy proceedings. Comity is invoked frequently by U.S. and foreign courts as a vehicle for enforcing judgments in the absence of treaties, conventions, or statutes that expressly provide for such recognition. Chapter 15 was an issue in Trikona only because the litigant involved sought a U.S. court’s recognition of, and deference to, the findings of a non-U.S. insolvency court. Because the litigant was not a "foreign representative" seeking recognition of a "foreign proceeding" and enforcement of a foreign insolvency court’s order, chapter 15 simply did not apply.
Second, the decision is important because it provides guidance regarding the role of—and limitations on—comity in chapter 15 cases. A foreign representative may file a chapter 15 case on behalf of a foreign debtor in the U.S. as a means of gaining access to U.S. courts for the purpose of attempting to enforce a judgment of a foreign court presiding over the debtor’s insolvency proceedings. However, the foreign representative need not do so in all cases. It may sue in a U.S. court to collect or recover a claim that is the property of the debtor without filing a chapter 15 petition.
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