Kumtor Gold Challenges the Practical Application of the Automatic Stay's Global Reach
Although the automatic stay contained in section 362 of the Bankruptcy Code theoretically extends worldwide, enforcing it against international creditors, particularly sovereigns, can present practical problems in its application. The chapter 11 cases of Kumtor Gold Company CJSC and Kumtor Operating Company CJSC (collectively, "Kumtor") pending before Judge Lisa Beckerman in the U.S. Bankruptcy Court for the Southern District of New York (Case No. 21-11051) have been testing the practical application of the automatic stay's global reach since the commencement of the cases in late May 2021. Kumtor's bankruptcy is riddled with international and sovereign creditor issues and showcases difficulties that may arise for Western companies when their investments enmesh with unstable governmental regimes.
The Automatic Stay
Section 362(a) of the Bankruptcy Code prevents creditors from taking actions to collect on their claims or, among other things, to gain possession of "property of the estate." By operation of section 541, the automatic stay thus applies to the debtor's asset "wherever located and by whomever held." One purpose of the automatic stay is to allow the debtor to centralize all disputes regarding the bankruptcy estate's property so that the debtor can reorganize under the supervision of a single court. See SEC v. Brennan, 230 F.3d 65, 70 (2d Cir. 2000) ("[T]he automatic stay provision is intended to allow the bankruptcy court to centralize all disputes concerning property of the debtor's estate so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas.").
A debt collection moratorium or stay applying in all countries is not a notion exclusive to U.S. law. Insolvency laws in many countries provide for a moratorium against collection actions outside of an insolvency proceeding, and in many countries this moratorium extends internationally. For example, for all nations belonging to the European Union, the moratorium imposed under the law of the member nation where the insolvency proceeding is opened applies throughout the European Union, as well as in all other countries. See Council Regulation 1346/2000 on Insolvency Proceedings, as amended, 2000 O.J. (L.160/1) 1, art. 17.
However, the extraterritorial jurisdiction of the U.S. courts for the purposes of the automat stay is in personam rather than in rem. This means that, although a creditor that seizes non-U.S. property of a debtor in a U.S. bankruptcy case violates the automatic stay, whether or not a U.S. bankruptcy court can do anything about it is a function of that creditor's susceptibility to U.S. process. See Sinatra v. Gucci (In re Gucci), 309 B.R. 679, 683-84 (S.D.N.Y. 2004) (citing Collier on Bankruptcy ¶ 3.01, at 3-32 to 3-33 (15th ed. rev. 2003)); see also David P. Stromes, Note: The Extraterritorial Reach of the Bankruptcy Code's Automatic Stay: Theory vs. Practice, 33 Brooklyn J. Int'l L. 277, 284 (2007) ("[I]f foreign creditors violate the automatic stay, U.S. bankruptcy courts cannot protect the debtor's assets unless the courts can exercise in personam jurisdiction over the violating entities."). If there is no personal jurisdiction against the violating entity, the court is unlikely to be able to protect the estate's non-U.S. assets.
However, if the foreign country where a U.S. debtor's assets are located has enacted the UNCITRAL Model Law on Cross-Border Insolvency ("Model Law"), which has been adopted in some form by more than 50 countries (including the United States, in chapter 15 of the Bankruptcy Code), the U.S. debtor or its bankruptcy trustee could seek to enforce the automatic stay extraterritorially by obtaining recognition of the stay by a foreign court in an appropriate proceeding.
On May 31, 2021, Kumtor filed for chapter 11 protection in the Southern District of New York after a former Soviet satellite, the Kyrgyz Republic ("Republic"), seized Kumtor's gold mine in the country ("Kumtor Mine") to secure repayment of $3 billion in alleged claims for environmental damages as a result of mine operations and approximately $350 million in alleged tax claims.
Kumtor is wholly owned by Canadian gold mining company Centerra Gold Inc. ("Centerra"). Kumtor mines gold doré—a semi-pure alloy of gold and silver—which is then purchased by Kyrgyzaltyn JSC ("Kyrgyzaltyn"), a state-owned corporation incorporated under the laws of, and wholly owned and controlled by, the Republic. Kyrgyzaltyn then refines and sells the gold outside of the Republic. Kyrgyzaltyn is Centerra's largest shareholder, owning approximately 26% of Centerra's issued and outstanding common shares. The Republic has certain approval rights over the operations of the mine, including, among other things, approval of the structure and management of the mine's environmental operations. In 2020, Kumtor's shares in the Republic's gross domestic product and aggregate industrial output were 12.5% and 23.3%, respectively. See Kumtor Gold Company official website, "Contribution to the Economy" (last visited Oct. 6, 2021).
Kumtor's business relationship with the Republic began in 1992, shortly after the collapse of the Soviet Union, when Centerra's predecessor entered into a project development agreement with the Republic giving Centerra the exclusive right to evaluate and develop gold deposits in the area that would become the Kumtor Mine. According to Kumtor, its relationship with the Republic had been historically difficult and grew more acrimonious over time. Over the years, the Republic made several efforts to pressure and coerce Centerra into making concessions with respect to previously negotiated agreements, including by issuing an arrest order for the company's former CEO, commencing criminal cases against certain of Kumtor's managers, and asserting claims against Kumtor in Kyrgyz courts for alleged violations of environmental laws. Kumtor maintains that these actions were aimed at nationalizing the company.
In the fall of 2020, the Republic experienced a political crisis, after which a nationalist candidate for president was installed and the Republic took steps toward what the U.K. and Canadian governments characterized as a "probable nationalization" of the mine. In March 2021, four citizens of the Republic filed a lawsuit against Kumtor seeking financial sanctions for alleged environmental damage from mining operations. In addition, the Republic imposed certain tax penalties against the company.
Simultaneously, the Republic began passing legislation aimed at Kumtor's operations. In February 2021, Kyrgyzstan's Parliament formed a new State Commission tasked with reviewing "the effectiveness of the Kumtor Mine's activities." The State Commission proposed new legislation in April 2021 that would amend Kyrgyz laws implementing certain agreements among Kumtor, Centerra, Kyrgyzaltyn, and the Republic.
In early May 2021, the Republic enacted a law giving it the power to temporarily take control of the mine and appoint "external management" to address purported violations of occupational health, environmental, or industrial safety laws. The temporary management law criminalized opposition to the law, thereby exposing Kumtor's officers, directors, and legal representatives to criminal liability for taking any action to protect Kumtor's assets.
The Republic appointed a Kyrgyz national as the temporary manager of Kumtor on May 17, 2021, and effectively seized full operational control of the mine. The appointment came immediately after Kumtor and Centerra commenced contractually authorized international arbitration in Sweden seeking to resolve the Republic's alleged environmental and tax claims.
Kumtor filed for chapter 11 in New York at the end of May 2021 in an effort to protect its assets. At the time of the filing, Kumtor asserted that it was solvent, with $1.1 billion in assets and no bank debt.
After the chapter 11 filing, the Republic obtained an injunction from a Kyrgyz court suspending the corporate resolutions that authorized the chapter 11 filing, barring Kumtor from continuing with its U.S. bankruptcy cases and prohibiting certain Kumtor directors and attorneys from representing the company in U.S. courts. Kumtor responded by filing an adversary proceeding in the U.S. bankruptcy court seeking emergency injunctive relief preventing the Republic from seeking relief in another court to dismiss the chapter 11 cases and sanctions for violations of the automatic stay.
After a July 19, 2021, hearing, Judge Beckerman entered an order the following day finding the Republic in contempt for violating the automatic stay and ordered it to pay Kumtor's attorneys' fees as a sanction. However, the court declined to issue an injunction. It concluded that, although the standards for injunctive relief were met, the Republic had not been properly served because its U.S. counsel refused to accept service on the Republic's behalf (despite filing a notice of appearance in the bankruptcy court) and Kumtor's U.S. counsel had difficulty effectuating proper service in Kyrgyzstan, as Kumtor could not retain an attorney in the Republic due to the threat of prosecution under the temporary management law.
Judge Beckerman acknowledged the public policy concern in allowing the Republic to access U.S. courts, including the bankruptcy court, to object to relief and to seek certain other relief with respect to Kumtor's chapter 11 cases, while simultaneously "disregarding in some ways … [the U.S.] process." Nevertheless, Judge Beckerman ruled that she was limited by the Bankruptcy Code and applicable procedural rules in the relief she could grant.
Also on July 19, 2021, the Republic filed a motion in the bankruptcy court to dismiss Kumtor's chapter 11 cases as having been filed without the requisite authority.
On August 8, 2021, the Republic appealed Judge Beckerman's July 20, 2021, order to the district court, claiming (as it had before the bankruptcy court) that the court lacked jurisdiction over the Republic because it is immune from suit under the U.S. Foreign Sovereign Immunities Act ("FSIA"), which provides that, with certain exceptions, foreign states are immune from the jurisdiction of U.S. courts. Judge Beckerman had rejected this argument, finding that section 106 of the Bankruptcy Code provides for governmental units' (including foreign states') waiver of sovereign immunity with respect to certain sections of the statute, including sections 105 (giving bankruptcy courts the power to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]" and 362 (the automatic stay).
In its filings with the district court, the Republic maintained that FSIA prevails in any conflict with the Bankruptcy Code and, moreover, that its conduct since the bankruptcy petition date qualified as a valid exercise of its police powers excepted from the automatic stay pursuant to section 362(b)(4). The Republic also argued that it was entitled to seek relief in its own courts under its own laws governing the authority of Kumtor to file for bankruptcy.
In late August 2021, Kumtor filed another motion seeking the imposition of sanctions on the Republic for continuing violations of the automatic stay by, among other things, continuing to prosecute the Kyrgyz proceedings to nullify Kumtor's corporate resolutions authorizing the chapter 11 filing, extending the mandate of the temporary manager of the mine, taking steps to renounce all of Kumtor's contracts with the Republic, and laying the groundwork to parlay disputed tax and environmental liability claims into a controlling share of the company.
Judge Beckerman denied the sanctions motion on September 15, 2021. Although sympathetic to Kumtor's efforts to protect its assets in the Republic and characterizing as "obstreperous" the Republic's continued efforts to evade service of process in Kyrgyzstan, she found that the Republic's actions did not violate the automatic stay.
On September 15, 2021, the Republic filed a motion seeking a direct appeal of Judge Beckerman's July 20, 2021, contempt order to the U.S. Court of Appeals for the Second Circuit.
The district court denied the Republic's motion for leave to appeal to the Second Circuit on October 20, 2021. Among other things, U.S. District Judge Alvin K. Hellerstein ruled that, although the questions of how section 106 of the Bankruptcy Code interacts with FSIA, "including whether a bankruptcy court may enforce an automatic stay against a foreign sovereign asserting immunity and whether that court can sanction such a foreign sovereign, are interesting, and may even be ones upon which there is substantial disagreement, none is a controlling question of only law, nor one that will materially advance the litigation." See In re Kumtor Gold Co. CJSC, 21 Civ. 6578 (AKH) (S.D.N.Y. Oct. 20, 2021). He further noted that the Republic remains free to advance its foreign sovereign immunity claim in support of its pending motion to dismiss Kumtor's chapter 11 cases. The parties are gearing up to litigate that motion in mid-November 2021.
OutlookKumtor Gold serves as a cautionary tale for foreign investors in developing countries, where a change in political regime can bring drastic changes to business dealings between the parties. The outcome of Kumtor's battle with the Republic is uncertain. Kumtor claims that its property has been wrongfully expropriated and that, although the Kyrgyz constitution allows the government to take private property in exchange for just compensation, the Republic has manufactured specious claims to wrongfully convert private property without compensation. The Republic argues that it is rightfully acting to protect the health and safety of its populace and preserve the environment, and that it is taking back an asset in the control of a corrupt foreign investor. It remains to be seen whether the Second Circuit will have an opportunity to weigh in on these questions.
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