N.Y. District Court Rules that Chapter 15 Recognition Not Required to Enforce Foreign Bankruptcy Injunction
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." It has been generally understood that recognition of a foreign bankruptcy proceeding under chapter 15 is a prerequisite to a U.S. court enforcing, under the doctrine of comity, an order or judgment entered in a foreign bankruptcy proceeding or a provision in foreign bankruptcy law applicable to a debtor in such a proceeding.
A ruling recently handed down by the U.S. District Court for the Southern District of New York directly challenges this principle, which has existed since chapter 15 was enacted in 2005. In Moyal v. Munsterland Gruppe GmbH & Co., 2021 WL 1963899 (S.D.N.Y. May 17, 2021), the court dismissed litigation against a German company, finding that, under principles of comity, the lawsuit was stayed by operation of German law when the company filed for bankruptcy in Germany. The district court did so despite the absence of any order issued by a U.S. bankruptcy court recognizing the German 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. Société Générale (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 UK company that was debtor in UK 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 ("Collier") ¶ 1509.02 (16th ed. 2021) ("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.").
Prior to the enactment of chapter 15, many courts examined whether a foreign proceeding was "procedurally fair" and did not violate U.S. law or public policy in assessing whether a U.S. court should defer to the proceeding under principles of comity. See, e.g., JP Morgan Chase Bank v. Altos Hornos de Mexico, S.A. de C.V., 412 F.3d 418, 428 (2d Cir. 2005); In re Artimm, S.r.L., 335 B.R. 149, 161 (Bankr. C.D. Cal. 2005).
Chapter 15 Alters the Landscape
The enactment of chapter 15 in 2005 changed the requirements for seeking recognition and enforcement in the United States of foreign bankruptcy court orders or laws impacting a foreign debtor or its U.S. assets.
Under section 1515 of the Bankruptcy Code, a "foreign representative" 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.
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 United States of both a "foreign main proceeding"—a case pending in the country where the debtor's center of main interests ("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 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.
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). Indeed, section 1509's "requirement of prior permission by way of recognition by a bankruptcy court deals only with acts by a foreign representative who needs the assistance of a court in the United States. Nothing in the statute requires prior judicial permission for acts that do not implicate matters of comity or cooperation by courts." In re Iida, 377 B.R. 243, 258 (B.A.P. 9th Cir. 2007).
These provisions reflects lawmakers' intention that chapter 15 be the "exclusive door to ancillary assistance to foreign [restructuring or insolvency] proceedings," with the goal of controlling such cases in a single court. Collier at ¶ 1509.03 (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.").
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).
However, a handful of U.S. courts have determined that chapter 15 recognition is not necessary to enforce foreign bankruptcy or insolvency court orders. For example, in 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 Canadian court 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.
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. 2019 WL 773988, at *5 (citing Allstate Life Ins. Co. v. Linger Group Ltd., 994 F.2d 996, 999 (2d Cir. 1993); 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." Id. (citing Hilton, 159 U.S. at 164); see also Oui Financing v. Dellar, 2013 WL 5568732 (S.D.N.Y. Oct. 9, 2013) (enforcing as a matter of comity a stay entered in a French safeguard proceeding with no mention of chapter 15); 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).
As noted, if there is no foreign representative seeking the assistance of a U.S. court in enforcing an order entered in a non-U.S. bankruptcy proceeding, chapter 15 recognition is not necessary. See generally Collier at ¶ 1509.02 (noting that "courts regularly rule that chapter 15 recognition is not a prerequisite to grant comity to foreign proceedings on the request of a party other than a foreign representative"). 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 United States 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. Accord Barclays Bank PLC v. Kemsley, 44 Misc. 3d 773 (N.Y. Sup. 2014) (chapter 15 recognition was not necessary to enforce, at the request of an individual debtor, a discharge order in a UK bankruptcy proceeding, even though a U.S. bankruptcy court previously denied the UK bankruptcy trustee's petition for chapter 15 recognition of the bankruptcy, because chapter 15's plain language applies only to a "foreign representative" such as a trustee).
In February 2019, David Moyal ("Moyal") sued Münster, Germany-based Münsterland Gruppe GmBH & Co. KG ("MGKG") in N.Y. state court for breach of a distribution agreement. After the litigation was removed to federal district court, MGKG agreed to the entry of a default judgment because it lacked the resources to defend the U.S. action as well as anticipated litigation to enforce the judgment in Germany. However, MGKG reserved the right to contest the amount of the damages.
In March 2021, MGKG and its general partner filed a bankruptcy proceeding in a German court, which appointed an insolvency administrator for the debtors. The filing triggered an automatic stay of all litigation against MGKG under German law.
MGKG then filed a motion to dismiss or stay the U.S. district court litigation due to the pending German bankruptcy proceeding. Moyal opposed the motion, arguing that, among other things: (i) MGKG's attorney lacked the authority to file the motion because he was stripped of any such authority upon the company's bankruptcy filing; (ii) MGKG's insolvency administrator should have filed a chapter 15 petition for the purpose of seeking injunctive relief on the company's behalf; and (iii) Moyal did not receive "formal notice" of the Germany bankruptcy proceeding.
The District Court's Ruling
The district court dismissed the litigation based upon principles of comity. In so ruling, Magistrate Judge Stewart D. Aaron applied the "procedural fairness" analysis commonly used by U.S. courts prior to the enactment of chapter 15 in 2005. For support, he cited several pre-chapter 15 decisions addressing comity.
Judge Aaron found that German insolvency laws "comport with due process and fairly treat claims of [U.S.] creditors" (quoting Victrix, 825 F.2d at 714) because: (i) the German court shared the U.S. policy of equal distribution of assets; (ii) German law mandated the issuance of a stay; and (iii) German law "makes no distinction between, and gives no preference to, claims by foreign or German creditors based on their nationality." In addition, Judge Aaron rejected Moyal's arguments that he received inadequate notice of the German bankruptcy proceeding and that MGKG's counsel lacked the authority to file the motion. According to the judge, the facts belied Moyal's inadequate notice claim, and MGKG's attorney was still counsel of record at the time he filed the motion.
Notably, in a footnote, Judge Aaron wrote that "[Moyal's] suggestion that the insolvency [administrator] should have commenced a proceeding in U.S. bankruptcy court under Chapter 15 of the Bankruptcy Code to seek a stay of this action in the District Court is absurd and would fly in the face of comity principles." Moyal, 2021 WL 1963899, at *3 n.1 (citing Collier at ¶ 1509.02 ("[C]ourts regularly rule that chapter 15 recognition is not a prerequisite to grant comity to foreign proceedings on the request of a party other than a foreign representative.").
The district court's ruling in Moyal 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 in keeping with the plain language and purpose of chapter 15.
Interestingly, the cases relied upon by the district court in Moyal in concluding that chapter 15 recognition was unnecessary were decided prior to the enactment of chapter 15. By contrast, the court does not discuss any of the plethora of post-enactment court rulings requiring chapter 15 recognition as a prerequisite to comity. Instead, Judge Aaron reasoned that recognition was unnecessary because no "foreign representative" was seeking relief in connection with a foreign bankruptcy case.
The problem with this rationale is that MGKG was a debtor in a foreign bankruptcy proceeding and the relief sought—dismissal or an injunction—was in furtherance of German law and the German bankruptcy. Like its attorney, who the court permitted to withdraw as counsel because he lost the authority to represent the company as of the date it filed for bankruptcy, MGKG lacked the authority to continue prosecuting the U.S. litigation notwithstanding the fact that MGKG filed the motion to dismiss or stay after the German proceeding was commenced. The German court vested sole authority to represent MGKG in the insolvency administrator after MGKG's bankruptcy filing. Accordingly, any relief as a form of assistance to the German bankruptcy proceeding should have been sought by the insolvency administrator, who was MGKG's "foreign representative" within the meaning of section 101(24) of the Bankruptcy Code and the only person with authority to represent the debtor in the United States.
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