New York District Court Rules That Chapter 15 Recognition Is Not Prerequisite to Enforcement of Foreign Bankruptcy Judgment Under Principles of Comity
U.S. courts have a long-standing tradition of recognizing or enforcing the laws and court rulings of other nations as an exercise of international "comity." Since chapter 15 of the Bankruptcy Code was enacted in 2005, it has been generally understood that recognition of a foreign bankruptcy proceeding under chapter 15 is a prerequisite to the enforcement by a U.S. court of an order or judgment entered in such a foreign bankruptcy proceeding under the doctrine of comity. A ruling recently handed down by the U.S. District Court for the Southern District of New York directly challenges that principle. In EMA Garp Fund v. Banro Corp., 2019 WL 773988 (S.D.N.Y. Feb. 21, 2019), the court dismissed litigation against a Canadian company and its former CEO, finding that, under principles of comity, the lawsuit was barred by orders approving the company’s Canadian bankruptcy proceeding and releasing all claims against the defendants. The district court did so despite the absence of any order issued by a U.S. bankruptcy court recognizing the Canadian bankruptcy proceeding under chapter 15.
"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). International comity has been interpreted to include two distinct doctrines: (i) "legislative," or "prescriptive," comity; and (ii) "adjudicative comity." Maxwell Comm’n Corp. v. Societe Generale (In re Maxwell Comm’n Corp.), 93 F.3d 1036, 1047 (2d Cir. 1996).
The former "shorten[s] the reach of a statute"—one nation will normally "refrain from prescribing laws that govern activities connected with another state when the exercise of such jurisdiction is unreasonable." Official Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(C) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(C)), 575 B.R. 229, 237 (Bankr. S.D.N.Y. 2017).
"Adjudicative comity," or "comity among courts," is an act of deference whereby the court of one nation declines to exercise jurisdiction in a case that is properly adjudicated in a foreign court. Because a foreign nation’s interest in the equitable and orderly distribution of a foreign debtor’s assets is an interest deserving respect and deference, U.S. courts generally defer to foreign bankruptcy proceedings and decline to adjudicate creditor claims that are the subject of such proceedings. See Canada Southern Railway Co. v. Gebhard, 109 U.S. 527, 548 (1883) ("the true spirit of international comity requires that [foreign schemes of arrangement], legalized at home, should be recognized in other countries"); accord In re Int’l Banking Corp. B.S.C., 439 B.R. 614, 624 (Bankr. S.D.N.Y. 2010) (citing cases).
Prior to 2005, as an exercise of comity, U.S. courts regularly enforced stays of creditor collection efforts against a foreign debtor or its U.S. assets issued in connection with foreign bankruptcy proceedings. See, e.g., Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187 (3d Cir. 1994) (deferring to Mexican bankruptcy proceeding); Badalament, Inc. v. Mel-O-Ripe Banana Brands, Ltd., 265 B.R. 732 (E.D. Mich. 2001) (deferring to Canadian bankruptcy proceeding); Lindner Fund, Inc. v. Polly Peck Int’l PLC, 143 B.R. 807 (S.D.N.Y. 1992) (citing cases and dismissing litigation brought in U.S. against U.K. company that was debtor in U.K. insolvency proceedings); Cornfeld v. Investors Overseas Services, Ltd., 471 F. Supp. 1255 (S.D.N.Y. 1979) (deferring to Canadian bankruptcy proceeding), aff’d, 614 F.2d 1286 (2d Cir. 1979).
In many such cases, U.S. courts recognized and enforced the stays of foreign courts in granting relief in an "ancillary proceeding" brought by the representative of a foreign debtor under section 304 of the Bankruptcy Code—the repealed precursor to chapter 15 of the Bankruptcy Code. Section 304 expressly authorized a U.S. bankruptcy court to enjoin the commencement or continuation of any action against a foreign debtor with respect to property involved in a foreign bankruptcy case. See, e.g., JP Morgan Chase Bank v. Altos Hornos de Mexico S.A. de C.V., 412 F.3d 418 (2d Cir. 2005); Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452 (2d Cir. 1985); Hoffman v. Joint Official Liquidators (In re Nat’l Warranty Ins. Risk Retention Grp.), 306 B.R. 614 (B.A.P. 8th Cir.), aff’d, 384 F.3d 959 (8th Cir. 2004).
However, an ancillary proceeding under section 304 was "not the exclusive remedy for foreign debtors opposing actions by local creditors against assets located in the United States." Hembach v. Quikpak Corp., 1998 WL 54737, *4 (E.D. Pa. Jan. 8, 1998). The foreign representative could request that the U.S. court recognize foreign bankruptcy proceedings as a matter of international comity, without seeking relief under section 304. See Interpool, Limited v. Certain Freights of the M/VS Venture Star, Mosman Star, Fjord Star, Lakes Star, Lily Star, 878 F.2d 111 (3d Cir. 1989); Remington Rand Corporation–Delaware v. Business Sys. Inc., 830 F.2d 1260, 1267–68 (3d Cir. 1987) (section 304 "expresse[d] Congressional recognition of an American policy favoring comity for foreign bankruptcy proceedings . . . [and was] not the exclusive source of comity"); In re Enercons Virginia, Inc., 812 F.2d 1469, 1471–72 (4th Cir. 1987); see generally Collier on Bankruptcy ¶ 1509.02 (16th ed. 2019) ("Thus, foreign representatives could, theoretically at least, try their luck in a variety of courts, with failure in one not precluding a second try in another.").
Chapter 15 Alters the Landscape
The enactment of chapter 15 in 2005 changed the requirements for seeking recognition and enforcement in the U.S. of foreign bankruptcy court orders or laws impacting a foreign debtor or its U.S. assets.
Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." A "foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, 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.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the U.S. of both a "foreign main proceeding"—a case pending in the country where the debtor’s center of main interest (COMI) is located (see 11 U.S.C. § 1502(4))—and "foreign nonmain proceedings" pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)).
Upon recognition of a foreign main proceeding, section 1520(a) provides that certain provisions of the Bankruptcy Code automatically come into force, including section 362, which imposes an automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets. If the bankruptcy court recognizes a foreign proceeding as either a main or nonmain proceeding, section 1521(a) authorizes the court to grant a broad range of provisional and other relief designed to preserve the foreign debtor’s assets or otherwise provide assistance to the court or other entity presiding over the debtor’s foreign main proceeding.
Section 1509(b) provides that, if a U.S. bankruptcy court recognizes a foreign proceeding, the foreign representative may apply directly to another U.S. court for appropriate relief and a U.S. court "shall grant comity or cooperation to the foreign representative." Section 1509(c) accordingly specifies that a foreign representative’s request for comity or cooperation from another U.S. court "shall be accompanied by a certified copy of an order granting recognition" under chapter 15.
This provision reflects lawmakers’ intention that chapter 15 be the "exclusive door to ancillary assistance to foreign proceedings," with the goal of controlling such cases in a single court. Collier on Bankruptcy ¶ 1509.03 (16th ed. 2018) (quoting H.R. Rep. No. 109-31(I), 110 (2005) ("Parties would be free to avoid the requirements of [chapter 15] and the expert scrutiny of the bankruptcy court by applying directly to a state or Federal court unfamiliar with the statutory requirements. . . . This section concentrates the recognition and deference process in one United States court, ensures against abuse, and empowers a court that will be fully informed of the current status of all foreign proceedings involving the debtor.").
If a U.S. bankruptcy court denies a petition for recognition of a foreign proceeding, section 1509(d) authorizes the court to "issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation" from other U.S. courts. However, a foreign representative’s failure to commence a chapter 15 case or to obtain recognition does not prevent the foreign representative from suing in a U.S. court "to collect or recover a claim which is the property of the debtor." 11 U.S.C. § 1509(f).
Therefore, unlike practice before the enactment of chapter 15, the vast majority of courts have held that a foreign representative must comply with the requirements of chapter 15 to obtain the various forms of relief or assistance contemplated by the chapter, including a stay or dismissal of U.S. court proceedings against a foreign debtor or its assets. See Halo Creative Design Ltd. v. Comptoir Des Indes Inc., 2018 WL 4742066 (N.D. Ill. Oct. 2, 2018); Oak Point Partners, Inc. v. Lessing, 2013 WL 1703382 (N.D. Cal. Apr. 19, 2013); Orchard Enter. NY, Inc. v. Megabop Records Ltd., 2011 WL 832881 (S.D.N.Y. Mar. 4, 2011); Econ. Premier Assurance Co. v. CPI Plastics Grp., Ltd., 2010 WL 11561369 (W.D. Ark. June 7, 2010); Reserve Int’l Liquidity Fund, Ltd. v. Caxton Int’l Ltd., 2010 WL 1779282 (S.D.N.Y. Apr. 29, 2010); Andrus v. Digital Fairway Corp., 2009 WL 1849981 (N.D. Tex. June 26, 2009); U.S. v. J.A. Jones Const. Grp., LLC, 333 B.R. 637 (E.D.N.Y. 2005); Iida v. Kitahara (In re Iida), 377 B.R. 243 (B.A.P. 9th Cir. 2007); In re Loy, 380 B.R. 154 (Bankr. E.D. Va. 2007); see also Giant Screen Sports LLC v. Sky High Entm’t, 2007 WL 627607 (N.D. Ill. Feb. 27, 2007) (granting a stay where the debtor’s foreign proceeding was recognized under chapter 15); Loy, 380 B.R. at 166-67 (because the filing of a notice of lis pendens does not require the comity or cooperation of a U.S. court, a foreign representative need not first obtain recognition of a foreign proceeding in accordance with section 1509(f)). But see Bickerton v. Bozel S.A. (In re Bozel S.A.), 434 B.R. 86 (Bankr. S.D.N.Y. 2010) (without mentioning section 1509(b), allowing a liquidator appointed in the British Virgin Islands ("BVI") liquidation proceedings of a BVI company to seek relief in the chapter 11 case of its subsidiary).
However, if there is no foreign representative or other party seeking the assistance of a U.S. court in enforcing an order entered in a non-U.S. bankruptcy proceeding, chapter 15 recognition may not be necessary. For example, in Trikona Advisers Ltd. v. Chugh, 846 F.3d 22 (2d Cir. 2017), the U.S. Court of Appeals for the Second Circuit 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.
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 the debtor’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." By contrast, the court wrote, in the case before it the party seeking relief 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.
EMA Garp Fund
In 2017, Banro Corp. ("Banro"), a Canadian company, commenced a reorganization proceeding in the Ontario Supreme Court of Justice under Canada’s Companies’ Creditors Arrangement Act (the "CCCA"). Banro’s creditors overwhelmingly approved a reorganization plan for Banro, and the Canadian court issued an order confirming the plan on March 27, 2018. The plan entailed a debt-for-equity swap that extinguished Banro’s existing equity. It also released all claims against Banro’s officers and directors. Banro’s restructuring proceeding concluded on May 3, 2018.
On March 5, 2018—one day prior to the bar date established by the Canadian court—certain Banro shareholders (the "plaintiffs"), who were aware of, but declined to participate in, the Canadian restructuring proceeding, sued Banro and its former CEO (collectively, the "defendants") in the U.S. District Court for the Southern District of New York, seeking compensatory damages for violations of U.S. securities laws. The defendants moved to dismiss the complaint on the basis of international comity.
The District Court’s Ruling
The district court granted the motion to dismiss the complaint. In dismissing the claims against Banro, the court examined the factors indicating "procedural fairness" that many courts applied prior to 2005 in assessing whether a U.S. court should defer to foreign bankruptcy proceeding under principles of comity (citing Allstate Life Insur. Co. v. Linger Group Ltd., 994 F.2d 996 (2d Cir. 1993)). The court concluded that: (i) Banro’s Canadian restructuring proceeding was procedurally fair (and that the plaintiffs "could have and should have pursued their claims" in such proceeding); (ii) the proceeding was a "parallel proceeding" even though it was no longer pending; (iii) the provisions of Banro’s confirmed reorganization plan applied to the plaintiffs even though they elected not to participate in the case; (iv) the equities favored the defendants because the plaintiffs "engaged in forum shopping by electing to file an action in this Court in lieu of filing a claim in the Banro CCAA Proceeding"; and (v) dismissing the complaint would not violate U.S. law or public policy because deference to the Canadian proceeding was necessary to prevent the plaintiffs from circumventing the Canadian proceeding.
Notably, the district court wrote that "the fact that Defendants did not file a recognition proceeding in [a] U.S. court" was "irrelevant" to its comity determination (citing Allstate, 994 F.2d at 999; Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709, 714 (2d Cir. 1987)). According to the district court, the defendants "were under no obligation to file anything in U.S. courts in order to earn [comity] for the Canadian courts" (citing Hilton, 159 U.S. at 164).
The district court also dismissed the claims against Banro’s former CEO on the basis of comity. The court explained that the releases in Banro’s restructuring plan were an integral part of the plan and essential to its approval by creditors. Permitting the claims to proceed against the former CEO, the district court emphasized, "would directly contravene the CCAA reorganization plan, which released those claims, and thus interfere with the purpose of granting comity in the first place." It also noted that the courts in Allstate and Oui Financing LLC v. Dellar, 2013 WL 5568732 (S.D.N.Y. Oct. 9, 2013), dismissed claims against individual defendants on the basis of comity to a foreign bankruptcy proceeding.
The district court’s ruling in EMA Garp Fund cuts against the grain on the question of whether chapter 15 recognition is a prerequisite for relief from U.S. courts on the basis of comity in cases involving a foreign bankruptcy proceeding. As noted, the vast majority of courts considering the question have ruled to the contrary.
Interestingly, with one exception, the cases relied upon by the district court in EMA Garp Fund were either decided prior to the enactment of chapter 15 or involved a chapter 15 case. The exception is Oui Financing, in which the district court dismissed litigation on the basis of comity brought by a lender against a company that was a debtor in a French bankruptcy proceeding as well as the borrower’s president. Like the court in EMA Garp Fund, the Oui Financing court engaged in the "procedural fairness" examination conducted by courts in this context prior to 2005.
It is also notable that the court in EMA Garp Fund does not discuss: (i) any of the plethora of court rulings requiring chapter 15 recognition as a prerequisite to comity, especially Halo Creative, which was handed down only five months previously and also involved a Canadian bankruptcy proceeding; (ii) the Second Circuit’s ruling in Trikona, which arguably supports the EMA Garp Fund court’s rationale and was cited by the defendants in their court submissions; and (iii) whether the third-party release of Banro’s former CEO should be enforced as a matter of comity even though it might not be enforceable under U.S. law.
The EMA Garp Fund court appears to have been persuaded by the defendants’ argument that chapter 15 serves a "limited purpose" and is necessary only when a court presiding over a foreign restructuring proceeding needs assistance from a U.S. court to administer the foreign debtor’s assets in the U.S. The defendants pointed out that, notwithstanding the fact that Banro’s common stock was traded on the New York Stock Exchange, Banro had no significant property in the U.S. Hence, they argued, Banro did not need any assistance from a U.S. bankruptcy court and accordingly asserted that chapter 15 recognition of its CCCA proceeding was neither necessary nor required. Given the outcome, the court in EMA Garp Fund appears to have embraced the notion that chapter 15 is not the exclusive "venue" for comity in cross-border restructurings where the foreign debtor has no significant assets in the U.S.
A version of this article was published in the June 2019 edition of the Bankruptcy Strategist. It has been reprinted here by permission.
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