International Bankruptcy and Insolvency Blog

Adversary Proceeding Required for Avoidance of Post-Petition Transfers by Foreign Representative

2010-01-05T10:43:00.000-08:00

The court in In re Loy, 2008 WL 906503 (Bkrtcy.E.D.Va.) was presented with the issue of whether chapter 15 authorizes a foreign representative to utilize the provisions of section 549 (a) in the context of a motion to sell free and clear of liens.

In this case, the Debtor transferred certain U.S. real estate to himself and wife as tenants by the entiretires after the order was entered in the creditor's petition in the English Insolvency Proceeding but before the U.S. bankruptcy court recognized the English proceeding as a "foreign main proceeding" under chapter 15. After the recognition under chapter 15, the English foreign representative filed a motion to sell the transferred U.S. real property pursuant to section 363 free and clear of all liens and claims.

As part of the motion to sell, the foreign representative alleged that the transfer of the real estate was void ab initio on various grounds, including that the Debtor did not have authority to transfer the real estate as it was part of the estate of the previously filed English insolvency case. The foreign representative further asserted that neither a case under title 11 nor an adversary proceeding were necessary to achieve the relief sought.

The court viewed the foreign representative's position as asserting either that the English bankruptcy law has extra-territorial effect even before the filing of the petition for recognition under chapter 15 or that 11 U.S.C. section 549 (a) allows the avoidance of transfers of property of the estate that occurred after the commencement of the English case as opposed to the commencement of the chapter 15 proceeding. The Debtor and his wife objected to the motion to sell.

The court noted that section 549 avoidance power is not one of the powers that are expressly excluded from a recognized foreign representative pursuant to 11 U.S.C. section 1521. But the court held that the foreign representative is not able to sell the property pursuant to section 363 in the absence of the avoidance of the deed of the property from the Debtor to himself and his wife as tenants by the entireties. Virginia law provides that property held as tenants by the entirety is not subject to claims of individual creditors of either.

The court held that the foreign representative was not able to avoid the transfer within the context of a motion to sell as the bankruptcy rules require an adversary proceeding to avoid and recover any unauthorized post-petition transfer under section 549. The court also held that to the extent that the foreign representative sought the avoidance of the transfers based on the application of English insolvency law, that Bankruptcy Rule 7001 required the filing of an adversary proceeding as the foreign representative sought declaratory relief or the recovery of property.

The court noted that the issue of whether a foreign representative may rely on the law of the jurisdiction of the foreign main proceeding as to the avoidance of transfer of U.S. property and the procedural mechanism therefore were apparently issues of first impression.

The "Consumer" Exception to Chapter 15

2009-10-11T10:38:00.000-07:00

In the recent case of In re Steadman, 410 B.R. 397 (Bkrtcy.D.N.J. 2009), the court held that the "consumer" exception to applicability of chapter 15 applied and therefore denied the U.K. foreign trustee's petition for recognition of a foreign representative under chapter 15. In this case, the debtor had transferred substantial inherited sums of money from the U.K. to his wife in New Jersey. Subsequently, the debtor filed for insolvency relief in the U.K. The U.K. receiver discovered the transfer of the inheritance and a trustee was appointed who sought to obtain recognition as a foreign representative under chapter 15.

Section 1501 (c)(2) provides that chapter 15 does not apply to an individual within the section 109 (e) debt limitations who is a U.S. citizen or an alien lawfully admitted for permanent residence in the U.S. The issue before the court was whether this exception applied to the debtor who held a permanent resident card with an expiration date for which the debtor applied to be removed. The court stated that although the foreign representative generally bears the burden of proof as to the criteria of recognition proceeding, the debtor beared the burden of proof to establish that chapter 15 is not applicable as section 1501 (c)(2) is an exception to the rule.

The Court found that the debtor met the section 109 (e) debt limitations and further found that based on the legislative history, the intent of the Model Law, and other policy considerations, the debtor was in "the class of person intended by Congress to be excepted from chapter 15" as he made clear his intent to remain in the United States and had a family, a job, and owned a home in the United States. The Court rejected the trustee’s argument that the debtor’s status was not “permanent” and was merely “conditional” using the Immigration and Nationality Act (“INA”) as a source of the term “permanent.” The Court held that the INA’s statutory definition of “permanent” includes one that “may be subject to change.”

BVI Insolvency Proceeding Recognized as Foreign Main Proceedings

2009-07-05T15:06:00.001-07:00

Recently the Bankruptcy Court in In re Grand Prix Associates, Inc., et al., 2009 WL 1410519 (Bankr. D.N.J. 2009) recognized the British Virgin Islands insolvency proceedings as "foreign main proceedings" under chapter 15. The foreign insolvency proceedings were pending in the Eastern Caribbean Supreme Court, High Court of Justice, BVI. The principal debtors invested in private equity limited partnership and partially funded the investments in exchange for a registered floating charge under BVI law against the assets of the principal debtors.

The Court looked to the following factors listed in In re Sphinx, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006) in making it recognition determination: the location of the debtor's headquarters, the location of those who actually manage the debtor (which may be the headquarters of a holding company), the location of the debtor's primary assets, the location of the majority of the debtor's creditors or of a majority of the creditors who would be affected, and the jurisdiction whose law would apply to most disputes.

Based on the application of these factors, the Court found that BVI is where the foreign debtors have their CoMI. The Court found that the foreign debtors have there only place of business in the BVI, the books and records are located in the BVI, the foreign debtors were organized in the BVI, etc. In addition the Court found that previously objecting parties were in support of recognition as a foreign main proceeding.

The Court noted that the Guide to Enactment of the UNICITRAL Model Law on Cross-Border Insolvency, upon which chapter 15 was based, allows the courts to expedite the evidentiary process but neither prevent the court nor an interested party from questioning the presumption that the foreign debtor's registered office is presumed to be the CoMI. The Court suggested that the court's decision in In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122 (Bankr. S.D.N.Y.2007) was a departure from In re Sphinx where the court enumerated useful factors in making the CoMI determination but also found that the court should defer to the creditors' acquiescence in or support of a proposed CoMI. The Bear Stearns court stated that the chapter 15 petition process should not become a "rubber stamp exercise" even when no objection is filed.

Adversary Proceeding Dismissed on Basis of Comity with Netherlands Bankruptcy Proceeding

2009-06-27T10:55:00.000-07:00

The Bankruptcy Court of the Southern District of Texas dismissed under principles of comity an adversary proceeding against an defendant who claimed to be a purchaser of equipment in a Netherlands bankruptcy proceeding in the case of Viking Offshore (USA), Inc. v. Viking Offshore (USA), Inc., et al. (In re Viking Offshore (USA), Inc.), 405 B.R. 434 (S.D. Tex. 2008). The court held that although it had subject matter and personal jurisdiction with respect to the injunctive matters asserted against the foreign defendant, principles of comity necessitated the dismissal of the adversary proceeding and that the debtor should seek to assert its rights to the property by way of an appeal in the Netherlands bankruptcy case.

The bankruptcy court found that it had "related to" subject matter jurisdiction of the adversary proceeding as the outcome could alter the debtor's rights, liabilities, options or freedom of action or could influence the administration of the bankruptcy estate. In re TXNB Internal Case, 483 F.3d 292 (5th Cir.2007). The bankruptcy court also held that it had the exclusive jurisdiction of all property of the debtor, wherever located - even extraterritorially. 28 U.S.C. section 1334 (e). The court also found that the defendant's contacts with the United States were sufficient to support the exercise of personal jurisdiction. The Court noted that an injunction, as it is an in personam action, may be enforced against entities only over which the court has personal jurisdiction and that due process in the exercise of personal jurisdiction requires certain "minimum contacts" per International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945).

The court next turned to issues of permissive abstention, the doctrine of forum non conveniens and comity. The court noted that although the permissive abstention statute of 28 U.S.C. section 1334 (c)(1) does not apply by its plain meaning to the adversary proceeding as the Netherlands bankruptcy proceeding was one under foreign law and not under state law, the Fifth Circuit Court of Appealsheld in the case of Baumgart v. Fairchild Aircraft Corp., 981 F.2d 824 (5th Cir. 1993) that the doctrines of comity and forum non conveniens may apply under 28 U.S.C. section 1334 (c)(1) with respect to foreign proceedings. Under the doctrine of forum non conveniens, a court may decline jurisdiction and dismiss a case even if the case if properly before it, if the case can be more conveniently tried in another forum. 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 (1895). The Court noted that U.S. courts have applied the doctrine of comity to give effect to judgments rendered in foreign courts with a system of procedures compatible with the requirements of due process of law. The Court also observed that U.S. courts have dismissed proceedings in circumstances in which a foreign bankruptcy proceeding is pending and equity demands that all claims against the debtor's assets be addressed in a single proceeding.

The Court found that although the Netherlands bankruptcy statutes appeared to require notice to creditors at the commencement of the case, that it did not appear to require direct notice to entities asserting an interest in property in which the Netherlands debtor asserts an interest. The Court found that the debtor did have the opportunity to seek review of the Netherlands bankruptcy court's ruling and to assert that the purported conveyance was without notice and deprived the debtor of due process of law and therefore dismissed the adversary proceeding under principles of comity.

Israeli Insolvency Proceeding Denied Recognition as Foreign Main or Nonmain Proceeding

2009-06-21T13:41:00.000-07:00

The District Court of the Southern District of Texas upheld the Bankruptcy Court's decision refusing to recognize of the foreign bankruptcy pending in Israel in the case of In re Lavie, ___ B.R. ___, 2009 WL 890387 (S.D. Tex. 2009).

In 1997 involuntary bankruptcy proceedings were initiated in Israel against Yuval Ran and Zuriel Lavie was appointed temporary receiver and later in 1999, the trustee of Ran's bankruptcy estate. In 1997 Ran moved to Houston, Texas. In 2006, the Israeli trustee Lavie filed a petition seeking recognition of the Israeli bankruptcy proceeding as a foreign main or foreign nonmain proceeding under chapter 15 of the U.S. bankruptcy code. The bankruptcy court denied Lavie's petition and the appeal therefrom was remanded to the bankruptcy court for further findings. On remand, the bankruptcy court declined to recognize the Israeli bankruptcy proceeding as either a foreign main or foreign nonmain proceeding. Lavie further appealed the bankruptcy court's decision.

The court reviewed that chapter 15 of the bankruptcy code was designed to optimize disposition of international insolvencies by facilitating appropriate access to the U.S. bankruptcy courts by a representative of an insolvency proceeding pending in a foreign country. Under section 304 of the bankruptcy code, which was chapter 15's predecessor, relief to foreign representatives was generally based on subjective factors and comity. In contrast, under chapter 15 the courts are given objective statutory guidelines as to whether to "recognize" the foreign proceeding.

A foreign proceedings can be a main proceeding, a non-main proceeding, or a foreign proceeding that is neither main nor non-main. A foreign proceeding must be recognized as main or non-main in order to be recognized and for chapter 15 relief to be granted. A foreign main proceeding is a foreign proceeding pending in the country where the debtor has the center of its main interest ("COMI"). The habitual residence of an individual person is presumed to be his COMI, but this presumption can be rebutted. Other factors recognized by the court in In re Loy were the location of the debtor's primary assets, the location of the majority of the debtor's creditors, and the jurisdiction whose law would apply to most disputes. In re Loy, 380 B.R. 154, 162 (Bankr. E.D. Va.2007). The court noted that European courts generally find that an individual's COMI is his habitual or permanent residence. A foreign court's determination that its jurisdiction is the debtor's COMI does not bind a U.S. court, but chapter 15 requires the U.S. court to make an independent finding at the time of the filing of the petition for recognition rather than at the time the foreign insolvency proceedings were initiated in the foreign court.

A foreign nonmain proceeding is a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment 11 U.S.C. section 1502(5). An establishment is defined as "any place of operations where the debtor carries out a nontransitory economic activity." The existence of an establishment is a factual question with no presumption in its favor. The court held that although chapter 15 does not explicitly detail the relevant time period for the determination of whether there is an "establishment, " the use of the present tense in section 1502(2) implies that the determination should be made as of the time of the filing of the petition for recognition by the foreign representative under chapter 15.

The District Court upheld the Bankruptcy Court's denial of of recognition of the Israeli bankruptcy proceedings as a foreign main proceeding. The District Court also found that the pending Israeli insolvency proceeding not a foreign nonmain proceeding. The Court rejected the argument that the pending Israeli insolvency proceeding in and of itself was such an economic activity as to constitute an establishment necessary for a foreign nonmain proceeding. The Court held that the Israeli insolvency trustee's activities were as the agent of the bankruptcy estate and not as the agent of Ran.

The Court noted that although the recognition was denied, this did not affect any right the foreign trustee may have to sue in the U.S. to collect on his claim.

11th Circuit Upholds Forum Non Conveniens Dismissal

2009-05-16T16:14:00.000-07:00

The United States Court of Appeals for the 11th Judicial Circuit recently affirmed the lower court's order dismissal of suits by European plaintiffs against an American aircraft company in the case on the basis of forum non conveniens in the case of Kings, et al. v. Cessna Aircraft Co., 562 F.3d 1374 (11th Cir. 2009). The action arose out of a plan crash in Milan, Italy between a German and a Scandinavian aircraft. The lower court dismissed the suits of the European plaintiffs but not that of the American plaintiff (the suits were consolidated for administrative purposes only) on the basis of forum non conveniens.

The Court of Appeals noted that dismissal of the suits of the European plaintiffs on the basis of forum non conveniens is a final, appealable order. The Court noted though that it did not have jurisdiction to review the denial of the defendant's motion to dismiss as to the American plaintiff on the basis of forum non conveniens as it is not a final order. Furthermore, the Court did not find a basis to exercise "pendent appellate jurisdiction" as to the order of denial of dismissal of the American plaintiff. Pendent appellate jurisdiction is present when a nonappealable decision is "inextricably intertwined" with an appealable decision or when review of nonappealable decision is necessary to ensure meaningful review of the appealable decision.

Citing Leon v. Million Air., Inc. 251 F.3d 1305, (11th Cir. 2001), the Court stated that the following three factors must be demonstrated for the dismissal of a case on grounds of forum non conveniens: 1. an adequate alternative forum is available (burden of proof on the defendant), 2. the public and private factors weigh in favor of dismissal, and 3. the plaintiff can reinstate their suit in the alternative forum without undue convenience or prejudice. The Court listed the private and public interest factors to be considered as set forth by the U.S. Supreme Court in Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947).

The Court found that the first factor was met as Italy is available as an adequate alternative forum. The Court noted that the defendant was willing to submit to jurisdiction in Italy and was amenable to process in Italy. The Court also found that Italian courts have addressed similar cases and that Italian law provides the rule of decisions.

The Court also found that the public and private factors weighed in favor of dismissal. The Court stated that although a United States citizens, resident, or corporation is entitled to a presumption in favor of his choice of forum, a foreign plaintiff's choice of forum receives less deference. The Court noted that the lesser deference give to the European plaintiffs' choice of forum was consistent with treaty obligations of the United States, such as Treaties of Friendship, Commerce, and Navigation," which accord "no less favorable" access to U.S. court than an American national to redress injuries caused by American actor. The Court also found other relevant private factors present supporting finding of forum non convenience including the ease of access to sources of proof, availability of compulsory process for attendance, and other practicable problems making the trial easy, expeditious and inexpensive.

The Court stated that the district court found that the public interest factors also weighed in favor of dismissal of the European plaintiffs' case. Public interest factors included Italy's strong interest in hearing the case as the event occurred in Italy, the heavy administrative burdens placed on the court in evaluating liability and damages as to each European plaintiff, and the need to apply Italian law to the numerous issues in the case.

The Court modified the dismissal order so as to require the defendant to submit to the jurisdiction of the Italian courts, to waive the statute of limitations, and to allow for the reinstatement of the case in the event that the Italian courts reject jurisdiction to entertain the case.

NY Southern District Upholds Judge Lifland's Bear Stearns Decision Denying Main and Nonmain Recognition

2008-06-14T12:51:00.001-07:00

On May 27, 2008, the District Court of the Southern District of New York issued its opinion upholding Judge Lifland’s decision in the Bankruptcy Court denying recognition of certain Bear Stearns hedge funds' Cayman Island foreign liquidation proceedings either as “foreign main proceedings” or as “foreign nonmain proceedings” under Chapter 15. In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 2008 WL 2198272 (S.D.N.Y. May 27, 2008)(Sweet, J.). The appeal was opposed only by the Amici Curiae. The court noted the issue involved appeared to be of “transcendent importance to the investment community and perhaps to society at large.”

The Bear Stearns hedge funds’ winding–up petitions in the Cayman Islands were precipitated by the funds’ losses in May, 2007 due to the U.S. sub-prime mortgage crisis. The Cayman Court appointed provisional liquidators who acted as the ”foreign representatives.“ The foreign representatives filed petitions in the Bankruptcy Court of the Southern District of New York under Chapter 15 of the Bankruptcy Code seeking recognition of the Cayman Island proceedings as “foreign main proceedings” or as “foreign nonmain proceedings.” Pursuant to section 1519 of the Bankruptcy Code, the foreign representatives sought to a of stay execution and litigation against the funds’ assets as well to the authority to adminster the funds’ assets. In September, 2007, the Bankruptcy Court issued its decision denying the foreign representatives’ petition for recognition as “foreign main proceedings” finding that the funds’ center of main interests (“COMI”) as defined in Chapter 15 was actually in the United States as the funds’ investment manager, back-offices, and book and records were located in the United States. The Bankruptcy Court also denied recognition as “foreign nonmain proceedings” as the funds did not establish that they had an “establishment” in the Cayman Islands as defined in Chapter 15.

The foreign representatives argued on appeal that the Bankruptcy Court failed to “accede to the principals of comity and cooperation.” They also argued that the lower court erroneously interpreted the COMI presumption and that the facts failed to support the court’s denial of main and nonmain recognition. The District Court affirmed the Bankruptcy Court's decision. The District Court held that the Bankruptcy Court correctly held that principles of comity do not figure in the recognition analysis. The Court stated that arguments based on comity and cooperation cannot overcome the plain language of Chapter 15. The Court noted that the legislative intent of Congress was to deny the recognition of foreign proceedings unless the debtor has a COMI or at least an establishment in the country of the foreign proceedings. The District Court also upheld the lower court’s interpretation of the COMI presumption and its findings of fact denying main and nonmain recognition.

Jefferson County and City of Vallejo Consider Chapter 9 Municipal Bankruptcy

2008-05-16T16:40:00.000-07:00

It was reported this week that Jefferson County, Alabama reached a two week extension with its Wall Street bankers to avoid a default on its outstanding debt of $4.6 billion. Jefferson County is reported to be one of the most indebted municipalities in the United States due to its expensive overhaul of its sewage system. It has been reported that the county could face chapter 9 municipal bankruptcy.

Earlier this month it was reported that the City Council of Vallejo California voted to file for chapter 9 municipal bankruptcy due to unaffordable labor contracts and unfunded pension liabilities. Its reported that the Chapter 9 bankruptcy filing is expected any day. Vallejo was once a prosperous city of 117,000 and is facing police, fire and staffing costs in excess its ability to pay. Today's Daily Business Review reports that the case has become a national bellwether [sic] for financially shaky local governments considering the pitfalls of filing Chapter er9 municipal bankruptcy."

The city reportedly faces a $16 million deficit for the upcoming fiscal year due to a decrease in tax revenues as property values have fallen. Vallejo has a population of 117,000 people.

An example of a recent municipal chapter 9 bankruptcy case was that filed in December, 2001 by the City of Desert Hot Springs California in the Bankruptcy Court of the Central District of California. The city of about 17,000 people was $8 million in debt including $6 million owed on a Fair Housing Act lawsuit. Another notable municipal bankruptcy was that of Bridgeport, Connecticut in 1991. The largest municipal bankruptcy filed to date was that of Orange County, California which filed for chapter 9 bankruptcy in 1994. In 1975 New York City teetered on the edge of filed for bankruptcy and appealed to the federal government for a bailout. In the end, New York City with assistance from Washington, including the creation of the Municipal Assistance Corporation, was able to avoid bankruptcy.

The Daily Business Review also reports that "San Diego, the nation's eight largest city, has been on the brink of a financial abyss for several years."

The first municipal bankruptcy legislation was enacted in 1934 during the Great Depression. A revised Municipal Bankruptcy Act was enacted in 1937 which has been amended several times. Under chapter 9 bankruptcy, the municipality is protected from its creditor while it negotiates a plan to adjust its debts. There is no provision in chapter 9 for the liquidation of the assets of a municipality.

A "municipality" that may file for relief under chapter 9 is defined in the bankruptcy code as a "political subdivision or public agency or instrumentality of a State." This definition is broad enough to include cities, counties, townships, school districts, public improvement districts, bridge authorities, highway authorities, and gas authorities. In order to be eligible to file for chapter 9 the municipality must be "insolvent" as defined in the bankruptcy code. An interesting distinction in chapter 9 is that the clerk of the court does not assign the case to a particular judge. Instead the chief judge of the circuit's court of appeals designates the bankruptcy judge to conduct the case. The Bankruptcy Code allows objections to the chapter 9 petition and the court may dismiss the petition if it determines it was not filed in good faith.

The bankruptcy court's powers over the operations and revenue of the municipality are limited under the bankruptcy code. These restrictions avoid the possibility that the court may substitute its control over the governmental affairs for that of the elected officials.

Foreign Exchange Rate for Allowance of Claims

2007-12-23T15:48:00.001-08:00

In the case of In re MacKay, ___ B.R. ___, 2007 WL 4248638 (Bkrtcy.M.D.Pa.)(Thomas, J.), the court was faced with the issue of the appropriate date on which to measure the exchange rate from Canadian dollars into United States dollars in the determination of a creditor's claim. The chapter 7 trustee argued that the appropriate exchange rate is that of the date of the filing of the bankruptcy petition. The trustee's argument was based on section 502(b) which provides in pertinent part "...the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition..."

The court agreed with the chapter 7 trustee that it must determine the amount of a claim as of the petition date, but held that section 502(b) does not answer the underlying question as to the appropriate date to determine the exchange rate. The court looked to the Restatement of the Law 2nd, Conflicts of Laws, section 144 "Time for Converting Foreign Currency into Local Currency" and its Comment G for guidance. Comment G provides that "in enforcing a foreign nation judgment expressed in a foreign currency, a court of a state of the United States will convert the foreign currency into dollars as of the date of its own judgment." Based on the Uniform Foreign Money Judgment Recognition Act as adopted in Pennsylanvia, the court found the appropriate date to be the date the Canadian judgment was recorded and indexed in the appropriate County recording office in Pennsylvania.

Bankruptcy Court SD NY: Bears Stearns Funds' Foreign Proceedings Denied Recognition as Either Main or Nonmain Proceedings

2007-09-01T19:46:00.001-07:00

On August 30, 2007, the Bankruptcy Court for the Southern District of New York issued its decision in the Chapter 15 cases of Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., Case No. 07-12383 (Bankr.S.D.N.Y. August 30, 2007)(Lifland, J.) and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd., Case No. 07-12384 (Bankr.S.D.N.Y. August 30, 2007)(Lifland, J.). In these cases, the joint provisional liquidators (the "JPLs") filed petitions pursuant to Section 1515 seeking recognition of the liquidation proceedings of the funds in the Grand Court of the Cayman Islands (the "Foreign Proceedings") as "foreign main proceedings" or in the alternative seeking recognition as "foreign nonmain proceeding". 11 U.S.C. Section 1517. The court declined to recognize the Foreign Proceedings as either main or nonmain proceedings.

As previously reviewed, the funds filed insolvency petitions in the Grand Court of the Cayman Islands on July 31, 2007 and pled that they were insolvent and unable to pay their debts as they fell due. They requested that they be "wound up" by the court under the provisions of the Cayman Island's Companies Law. The court appointed the JPLs with various powers, including to take control of the funds' assets and books and records. The funds are both Cayman Islands exempted limited liability companies with registered offices in the Cayman Islands.

In its opinion, the court offered an overview of various aspects of new Chapter 15 which was enacted as part of BAPCPA in 2005. The court noted that Chapter 15 implemented the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law. Section 1501(a) of Chapter 15 sets forth that its purpose is to, inter alia, incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for the cooperation between U.S. and foreign courts in dealing with cross-border insolvency cases.

The court reviewed that a case under Chapter 15 is commenced by a foreign representative filing a petition for recognition of a foreign proceeding as a foreign main or foreign nonmain proceeding under Section 1515. The petition for recognition must be accompanied by evidentiary documents. There are substantial eligibility distinctions and consequences between a main and nonmain proceedings. A foreign main proceeding is defined as a “foreign proceeding pending in the country where the debtor has the center of its main interests” (“COMI”). 11 U.S.C. Section 1502(4). A foreign nonmain proceeding means any other proceeding “pending in a country where the debtor has an establishment.” 11 U.S.C. Section 1502(5). “Establishment” is defined as “any place of operations where the debtor carries out a nontransitory economic activity.” 11 U.S.C. Section 1502(2). Section 1516(c) provides that “[i]n the absence of evidence to the contrary, the debtor's registered office ... is presumed to be the center of the debtor's main interests.” 11 U.S.C. Section 1516(c).

The court went on to explain that if the foreign proceeding is in the country of the registered office and if there is evidence that the COMI might be elsewhere, then the foreign representative must prove that the COMI is in the same country as the registered office. The Bankruptcy Code does not state the type of evidence required to rebut the presumption that the COMI is the debtor's place of registration or incorporation. Various factors could be relevant to this determination, including the location of the debtor's headquarters, the location of those who actually manage the debtor, the location of the debtor's primary assets, the location of the majority of the debtor's creditors or of a majority of the creditors who would be affected by the case, and the jurisdiction whose law would apply to most disputes. In re SPhinX, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006), aff'd, 2007 WL 1965597 (S.D.N.Y. July 3, 2007). Chapter 15 also directs courts to obtain guidance from the application of similar statutes by foreign jurisdictions. 11 U.S.C. Section 1508. One of the sources that a United States court may look to as persuasive is the Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency (“Guide”) that was promulgated in connection with the approval of the Model Law. The House Judiciary Committee, in enacting Chapter 15, specifically indicated that the Guide "should be consulted for guidance as to the meaning and purpose of its provisions.” The Guide explains that the use of the COMI concept was modeled on the use of that concept in the European Union Convention on Insolvency Proceedings (“EU Convention”) that was already in the application of similar statutes adopted by foreign jurisdictions.” 11 U.S.C. Section 1508. In the regulation adopting the EU Convention, the COMI concept is elaborated upon as “the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.” This generally equates with the concept of a “principal place of business” in United States law. See In re Tri-Continental Exchange Ltd., 349 B.R. 627, 633 (Bankr. E.D. Cal. 2006). As noted by the European Court of Justice, the COMI presumption may be overcome particularly in the case of a "letterbox" company not carrying out any business in the territory of the Member State in which its registered office is situated.

The bankruptcy court denied recognition of the Bear Stearns funds' Foreign Proceedings as foreign main proceedings. The bankruptcy court found that the presumption that the COMI is the place of the funds' registered offices in the Cayman Islands was rebutted by evidence to the contrary. The court noted that the funds' own pleadings provide the evidence to establish that the funds' COMI is in the United States and not the Cayman Islands. The court found that the funds' real seat and COMI is the United States, specifically New York where their principal interests, assets, and management are located. The court rejected the funds' contentions that because no objections were filed and that because the funds' registered offices are in the Cayman Islands, that the court should recognize the Foreign Proceedings as main proceedings. The court found that the only substantial connection with the Cayman Islands is that the funds are registered there and found the connection to approximate that of a "letterbox". The court found that there are no employees or managers in the Cayman Islands, the investment manager for the funds is located in New York, the administrator that runs the backoffice operations of the funds is in the United States along with the funds’ books and records and prior to the commencement of the Foreign Proceedings, all of the Funds’ liquid assets were located in United States. The court found that although two of the three investors in one of the funds is registered Cayman Islands companies, both are Bear Stearns entities which appear to have the same minimum Cayman Islands profile as do the funds. The sole investor in the other fund is a U.K. entity. The investor registries are maintained and located in the Republic of Ireland, accounts receivables are located throughout Europe and the United States, counterparties to master repurchase and swap agreements are based both inside and outside the U.S. but none are claimed to be in the Cayman Islands. Furthermore, there apparently exists the possibility that prepetition transaction conducted in the U.S. may be avoidable under U.S. law.

The court furthermore declined to recognize the Foreign Proceedings as foreign nonmain proceeding. The court stated that to accord nonmain status, the requirements of Section 1502(5) must be met and specifically there must be in the Cayman Islands an "establishment", which is defined as "any place of operations where the debtor carries out a nontransitory economic activity." The court indicated that this sets a rather high bar especially in view of the Cayman Island's statutory prohibition against "exempted companies", such as the funds, from engaging in business in the Cayman Islands except in furtherance of their business otherwise carried on outside of the Cayman Islands. The court found no pertinent "nontransitory economic activity" conducted in the Cayman Islands by the funds.

The court also noted that the funds' reliance on the discretionary and flexibility of caselaw under pre-BAPCPA Section 304 was misplaced as the Section 304 jurisprudence is not of assistance in determining the issues relating to recognition under Chapter 15. The court stated that Section 304 gave the U.S. courts the authority to open ancillary proceedings and to grant various broad forms of relief to the foreign representative, but Chapter 15 imposes a rigid procedural structure for recognition of foreign proceedings as main or nonmain. While much of the jurisprudence developed under Section 304 is preserved in the context of new Section 1507 ("Additional Assistance"), Section 304 did not have a "recognition" requirement as a first step.

The court noted that nonrecognition of the Foreign Proceedings did not leave the funds without the ability to obtain relief from U.S. courts. The court noted that while Section 304 was repealed, Section 303 was not. Section 303(b)(4), which does not require that the foreign proceeding be recognized, provides that an involuntary case may be commenced under Chapter 7 or 11 by the foreign representative. The court also noted that Section 1509(f) provides that the failure to obtain recognition does not affect any right the foreign representative may have to sue in a U.S. court to recover on a claim.

The court ordered its previous preliminary injunction of August 9, 2007 to remain in effect for a period of time in order to give the parties an opportunity to file a petition under Chapters 7 or 11.

Section 548 Given Extraterritorial Application

2007-08-17T14:19:00.001-07:00

The case of In re French, 440 F.3d 145 (4th Cir. 2006) presented the question of whether a U.S. Bankruptcy Court can avoid a constructively fraudulent transfer of foreign real estate between U.S. residents. The court held that the presumption against extraterritoriality, assuming it applied, did not prevent the application of the fraudulent transfer statute and that the doctrine of international comity did not require application of Bahamian bankruptcy law rather than the U.S. Bankruptcy Code.

In this case, the Chapter 7 trustee filed an adversary proceeding to avoid the transfer of the Bahamian real property by the debtor to her children. The trustee alleged that the debtor and the transferees had engaged in a constructively fraudulent transfer because the debtor had been insolvent at the time of the transfer and received less than a reasonably equivalent value in exchange. See 11 USC section 548(a)(1)(B). The transferees filed a motion to dismiss and argued that the section 548 should not apply to foreign property based on the presumption against extraterritoriality and that considerations of international comity counseled the application of Bahamian rather than U.S. bankruptcy law.

The court noted that it is a principle of American law that legislation of Congress is meant to apply only within the territorial jurisdictio of the U.S. unless a contrary intent appear. The court stated that although the parties had assumed that the application of section 548 to the transfer here is extraterritorial, the court needed to consider whether the presumption against extraterritorial application applies at all. The court noted that the U.S., courts only apply this presumption against extraterritoriality when a party seeks to enforce a statute beyond the territorial boundaries of the United States. EEOC v. Arabian Am. Oil Co., 499 U.S. 244 (1991). The presumption has no bearing when the conduct which Congress seeks to regulate occurs largely within the U.S., ie. when regulated conduct is domestic rather than extraterritorial. Envtl. Def. Fund, Inc. v. Massey, 986 F.2d 528, 531 (D.C.Cir.1993).

The court stated that although it had never defined when conduct is extraterritorial for purposes of the presumption, it has recognized that a similar inquiry-defining “foreign conduct”-is particularly challenging in cases (like this one) that involve a “mixture of foreign and domestic elements.” Dee-K Enters., Inc. v. Heveafil Sdn. Bhd., 299 F.3d 281, 286 (4th Cir.2002).The court concluded that a flexible test taking into account all component events of the transfer is appropriate to determine whether an allegedly fraudulent transfer occurred
extraterritorially. The court noted that the perpetrator and most of the victims of the fraudulent transfer were located in the U.S and the effects of this transfer were felt most strongly in the U.S. and not in the Bahamas. The court also found significant that domestic facts and conduct established both of the elements of the section 548 constructively fraudulent transfer, ie. the insolvency of the debtor and the receipt of less than a reasonably equivalent value. The court found the recordation of the deed in the Bahamas as insignificant as a foreign fact or conduct. The court though did recognize as important the fact that the real property was located in the Bahamas as the law has long recognized the powerful interest that states and nations have in the real property within their boundaries and that the strength of that interest explains why the law of the situs generally applies to real property.

But the court held that it need not resolve the "slippery question" of whether there was extraterritorial application as even if it were assumed that the application of the Bankruptcy Code would be extraterritorial, the presumption against extraterritoriality does not prevent its application to the transfer herein.
The court concluded that the presumption must give way when Congress exercises its undeniable authority to enforce its laws beyond the territorial boundaries of the United States as it did with section 548.

The transferees next argued that even if the presumption against extraterritoriality does not prevent extension of section 548 to the transaction, that the court should refrain from applying the statute under the doctrine of international comity, particularly as this is a dispute concerning real property which should be governed by the law of the situs. The court reviewed what the Supreme Court has referred to as the factors as to the application of the doctrine of international comity and concluded that these factors did not require the court to refrain from applying the U.S. Bankruptcy Code in favor of Bahamian bankruptcy law.

Bear Stearns Hedge Funds File Cayman Insolvency Proceedings and U.S. Chapter 15 Cases

2007-08-16T22:19:00.001-07:00

On July 31, 2007, two Bear Stearn's hedge funds filed insolvency petitions in the Grand Court of the Cayman Islands. The two funds, which were limited liability companies organized and incorporated in the Cayman Islands, were the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. ("High-Grade Fund") and the Bear Sterns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. ("Enhanced Fund"). In their petitions to the court, they pled that they were insolvent and unable to pay their debts as they fell due. They requested that they be "wound up" by the court under the provisions of the Cayman Island's Companies Law. The court appointed Joint Provisional Liquidators ("JPLs") with various powers, including to take control of the funds' assets and books and records. Some commentators have expressed concern that the proceedings of the Cayman Court will prove less transparent than would a proceeding in a U.S. Court and that the Cayman Judges have a track record highly favorable to incumbent management.

The hedge funds were open-ended investment companies and intended to invest in various investments, including asset-backed securities, synthetic asset-backed securities, mortgage-backed securities, derivatives, options, swaps, and futures. Bear Stearns Asset Management, Inc. ("BSAM") was the investment manager of the funds. Following volatility in the U.S. subprime lending market in early 2007, the funds began to suffer a significant devaluation of their asset portfolios which led to margin calls from many of its trading counterparties which the funds were unable to meet. This led to default notices by these counterparties and their exercise of rights to seize and/or sell assets that were subject of repurchase agreement or over which they held security agreements. Subsequent events led to further downward pressures and deterioration.

On July 17, 2007, the funds were reported to have sent a letter to their investors advising them of the "increasingly difficult market conditions." On July 25, 2007, the JPLs of the High-Grade Fund and Enhanced Fund filed Chapter 15 petitions pursuant to section 1504 and 1515 commencing Chapter 15 cases in the U.S. Bankruptcy Court for the Southern District of New York in cases 07-12383 and 07-12384 respectively. These Chapter 15 cases were ancillary to the Cayman Island's proceedings and sought recognition of the Cayman proceedings as a "foreign main proceeding" pursuant to section 1502(4). The effect of the Chapter 15 cases will be based on whether the Cayman foreign proceedings are each determined to be a "foreign main proceeding" or a "foreign nonmain proceeding." This is based on a determination by the court whether the debtor's "center of main interests" ("COMI") is in the jurisdiction where the foreign proceeding was commenced. There is a presumption that a debtor's COMI is its place of incorporation, but this presumption can be rebutted.

Chapter 15 is the U.S. adoption of the model law on cross-border bankruptcies proposed by the United Nations Commission on International Trade Law. The law generally mandates the cooperation of the U.S. bankruptcy courts with those of foreign jurisdictions.

The funds both filed motions for a temporary restraining orders and preliminary injunctions staying execution and litigation against the funds and further sought to entrust the funds assets to the JPLs. The funds pled to the court that the relief sought would avoid piecemeal distribution of its assets and provide "breathing-room" necessary to conduct an orderly review and wind-up of the funds' affairs so that their creditors would receive equitable treatment.

Section 541(a) Has Extraterritorial Effect

2007-08-16T22:15:00.000-07:00

In the case of In re Rajapakse, 346 B.R. 233 (Bkrtcy.N.D.Gla.2005)(Massey, J.), the Chapter 7 Trustee sought an order directing the pro se chapter 7 Debtor to turn over certain property located outside of the U.S. The Debtor claimed that the property was not property of the estate and was outside the Court's jurisdiction. The Court granted the Trustee's motion and directed the Debtor to turn over and account for all the foreign assets.

Section 541 provides that the commencement of a case creates an estate comprised of property listed in Section 541(a) with certain exceptions, "wherever located and by whomever held." 11 USC 541 (a). The court noted that the phrase "wherever located and by whomever held" is extremely broad and could be interpreted to cover property owned outside of the U.S. The court pointed out though that Section 541 does not expressly state that it applies outside of the U.S.

The court discussed that Congress has the power to enact a statute that applies beyond the territorial borders of the U.S, but that there is a presumption that Acts of Congress do not ordinarily apply outside the borders of the U.S. If a statute does not expressly state that is applies outside of the U.S., a court must determine whether Congress intended the statue to have extraterritorial effect. E.E.O.C. v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991).

The court concluded that while Section 541 is ambiguous regarding its possible extraterritorial effect, its legislative history is not. The court noted that the House Report accompanying a 1952 amendment to Section 541 makes its clear that a trustee in bankruptcy is vested with the title of the bankrupt in property within or without the U.S. The court noted that Collier on Bankruptcy confirms this interpretation that Section 70a of the Act was amended in 1952 to make it clear that a trustee in bankruptcy is vested with the title to property within or without the U.S. by the addition of the words "wherever located." Collier on Bankruptcy, Vol. $A, para 70.03, p. 35 (14th Ed. 1978). The court noted that other courts addressing this issue have reached the same conclusion. See, e.g. H.K. and Shanghai Banking Corp. v. Simon, 153 F.3d 991, 996 (9th Cir.1998), GMAM Investment Funds Trust I v. Blobo Comunicacoes E. Participacoes S.S, 317 B.R. 235 (S.DN.Y.2004), Deak & Co. v. Soedjono, 63 B.R. 422, 427 (Bankr.S.D.N.Y.1986), Nakash v. Zur, 190 B.R. 763, 768 (Bankr.S.D.N.Y.1996), In re Yukos Oil Co. 321 B.R. 396, 406 (Bankr.S.D.Tex.2005).

Lack of Specific Personal Jurisdiction over Candian Creditor

2007-08-16T22:13:00.000-07:00

On May 16, 2007, the court issued its decision in the case of In re Thermoview Industries, Inc., ___ B.R. ___, 2007 WL 1447855 (Bkrtcy.W.D.Ky.)(Lloyd, J.), in which the Chapter 11 Trustee brought a preference action against a Canadian corporation. The court held that it lacked specific personal jurisdiction over the the Canadian creditor and dismissed the adversary proceeding.

The Canadian corporation had it principal place of business in Canada. It did not do business in the U.S. and it was not registered to do business in the U.S. The Debtors purchased items from the Creditor FOB the plant in Canada. The Trustee attempted to serve the Canadian Creditor by mail and further measures in compliance with the Hague Convention's requirements. The Trustee contended that the fact that the Debtor's purchased products FOB the creditor's Canadian plan was sufficient to confer specific personal jurisdiction. The Trustee did not contend that there was "continuous and systemmatic" contacts with the forum as is required for general personal jurisdiction.

The court noted that in order to establish the existence of specific jurisdiction, a three part test must be met: 1. the defendant must purposely avail himself of the privilege of acting in the forum state or cause a consequence in the forum state, 2. the cause of action must arise from the defendant's activities there, and 3. the acts of the defendant or consequences must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable. Southern Machines Co., Inc. v. Mohasco Industries, Inc., 401 F.2d 374, 381 (6th Cir. 1968). All three elements must be met to invoke personal jurisdiction. LAK, Inc. v. Deercreek Enterprices, 885 F.2d, 1293, 1303 (6th Cir.1989).

As to meeting element number one, the court noted the Sixth Circuit Court of Appeal's preference for the "stream of commerce plus" approach in analyzing whether a defendant purposely avails itself of the privilege of acting in the forum state. Under this theory, the placement of a product into the stream of commerce, without more, is not an act of the defendant purposely directed toward the forum State.

The creditor sought dismissal of the complain based on lack of personal jurisdiction and insufficient service of process. The court noted that the record before the court showed that creditor was not registered to do business in the U.S. and that it in fact did not do business in the U.S. The court found merit in the creditor's arguments and dismissed the preference adversary proceeding.

Foreign Creditor May Be Sanctioned for Violating Court Injunction

2007-08-10T13:45:00.001-07:00

The issue before the court in the pre-BAPCPA case of In re Simon, 153 F.3d 991 (9th Cir.1998), cert. denied 525 U.S. 114 (US 1999) was whether a foreign creditor is subject to U.S. bankruptcy court sanction for pursuing foreign collection of a debt discharged in a U.S. bankruptcy case in which the foreign creditor participated. The court concluded that the bankruptcy court may sanction the foreign creditor for violating a court injunction.

The Debtor William N. Simon filed for chapter 7 relief in the U.S. and obtained his discharge of debt. Pursuant to section 524, the discharge order operates as an injunction against the collection of certain debt against the debtor. Simon scheduled Hong Kong and Shanghai Banking Corp., Ltd. ("HSBC") as a creditor in his case and HSBC filed a proof of claim in the bankruptcy case. HSBC filed a complaint seeking declaratory relief from the bankruptcy court that the bankruptcy discharge injunction was not effective outside of the U.S.

The court found that Congress has the unquestioned authority to enforce its laws beyond the territorial boundaries of the U.S., but whether Congress has exercised that authority in a particular case is a matter of statutory construction. Unless a contrary intent appears, there is a presumption that the legislation of Congress is meant to apply only within the territorial jurisdiction of the U.S.

The court concluded that as to actions against the bankruptcy estate, Congress clearly intended extraterritorial application of the Bankruptcy Code. The bankruptcy court obtains exclusive in rem jurisdiction over all of the property of the estate including property located outside of the territorial jurisdiction of the U.S. The court concluded that Congress intended extraterritorial application of the Bankruptcy Code as its applies to property of the estate. The court further noted that as a matter of general principle, protection of in rem or quasi in rem jurisdiction is a sufficient basis for a court to restrain another court's proceedings and that this rationale extends to foreign proceedings.

The court noted that the more difficult question was whether a bankruptcy court may enjoin a foreign collection action against the debtor personally or as to non-estate assets if the creditor was not a party to the U.S. bankruptcy proceedings. But the court was not required to reach this question as HSBC fully participated in Simon's U.S. bankruptcy case and thereby surrendered to U.S. jurisdiction. In this instance, the presumption against the extraterritorial effect of a statute would not apply. Therefore, Simon's chapter 7 discharge injunction enjoins HSBC, but not the courts in Hong Kong. If HSBC chooses to commence collection proceedings in Hong Kong against Simon, it does so at the risk of U.S. bankruptcy court sanction.

The court rejected HSBC's argument that it only submitted itself to limited bankruptcy court jurisdiction as the proof of claim it submitted in Simon's case was for a different debt than the one it sought to pursue in Hong Kong. The court noted that HSBC failed to assert its position in the bankruptcy court by requesting abstention, to move to lift the automatic stay, to move for adequate protection, or to file an objection to discharge of Simon's debts.

The court noted that it did not decide whether discharge injunction of section 524 itself applies extraterritorially in all cases either as to non-estate assets or as to the debtor's personal liability.

The court also rejected HSBC's arguement that international comity requires the court to vacate the bankruptcy court's injunction forbidding debt collection against Simon for pre-petition debt. The court noted that the international comity concerns underlying Maxwell Communications Corp., 93 F.3d 1036, 1050 (2d Cir. 1996) were not present in this case.

The court noted that the Bankruptcy Code does not codify either the "territorial theory" or the "universalist philosphy" but provides for a flexible approach to international insolvencies dependent upon the circumstances of the particular case. Under the territorial theory or "grab" rule, courts in each national jurisdiction are responsible for seizing and controlling assets within their geographic reach. The universalist philosophy contemplates one plenary transnational proceeding governing the administration of assets world-wide. The court noted in this pre-BAPCPA case, that if the Bankruptcy Code contains any philosophy it is of deference to the country where the primary insolvency proceeding is located and flexible cooperation in administration of assets. e.g. Sections 304 and 305.

In summary, the court held that the lower court's order did not involve an improper extrterritorial application of the discharge injunction as to estate property becaus section 541 expressly includes all of the debtor's property regardless of geographic location. The discharge injunction was also validly applied to HSBC as to Simon's non-estate property because HSBC participated in Simon's bankruptcy case and thereby subjected itself to the otherwise valid orders of the bankruptcy court. Finally, international comity did not compel a contrary result because there was no conflicting proceeding in a foreign nation.

11th Circuit Upholds SD Florida Bankr Decision Allowing 304 Case for Italian Debtor

2007-08-01T06:00:00.001-07:00

On June 29, 2007, the 11th Circuit Court of Appeal in an unpublished decision in In re Rosacometta, S.R.L., 244 Fed.Appx. 286 (11th Cir. 2007) upheld the decision of the Bankruptcy Court of the Southern District of Florida. The bankruptcy court had allowed an ancillary petition under section 304 (pre-BAPCPA) and enjoined the creditor from collecting on a writ of garnishment in the state court against the Italian company that had filed for bankruptcy relief in Italy. The 11th Circuit rejected the creditor's arguments that the bankruptcy court had acted outside of its jurisdiction, that it had erred in granting comity to a foreign proceeding, and that it had failed to give full faith and credit to a state court decision refusing to dissolve the writ of garnishment. The 11th Circuit held that the bankruptcy court did not abuse its discretion in weighing the section 304(c) factors and granting section 304(b) relief. The 11th Circuit held that prejudice to the creditor was just one of the five factors for the court to consider per section 304(c) and is not even the "ultimate" factor. The 11th Circuit found that the other factors set forth in section 304(c), including comity, weighed in favor of granting the relief. The 11th Circuit further held that the bankruptcy court is granted broad powers under section 304(b) to grant relief to a foreign debtor.

The bankruptcy court had previously issued its decision dated December 19, 2005 in In re Rosacometta, SrL, 336 B.R. 557 (Bankr.S.D.Fla.2005)(Mark C.J.). In this case, the Italian trustee of an Italian corporation that was a debtor in a bankruptcy case in Italy filed an ancillary case under section 304 (pre-BAPCPA) seeking to enjoin all creditor collection activity in the United States nunc pro tunc to the date of the filing of the bankruptcy in Italy. At issue were certain funds owed to the the debtor in the U.S. that a U.S. creditor was attempting to garnish. The court recognized the effect of the Italian automatic stay and found the creditor action in violation of the stay was void, including the attempted garnishment.

This case came before the court under section 304 as a case ancillary to a foreign bankruptcy proceeding. The case was allowed to proceed under 304 as there was a foreign proceeding and the petitioner was the foreign representative. 11 U.S.C. 304(a). The court explained that section 304 enables United States courts to aid foreign bankruptcy proceedings and to accommodate the extraterritorial effect of these proceeding within the U.S. The primary purpose of section 304 is to prevent piecemeal distribution of a foreign debtor's assets in the U.S. by means of legal proceedings in U.S. courts and to afford the foreign court an opportunity to assess where and when claims should be liquidated in order to conserve resources and to maximize distributions to creditors.

The court found that the creditor was not a secured creditor as the writ of garnishment was served after the commencement of the Italian bankruptcy and was therefore void as in violation of the Italian automatic stay. The court found that recognition of the Italian automatic stay was "other appropriate relief" under section 304(b)(3) and consistent with the overall purpose of section 304 and the specific criteria of 304(c). The court held that the claimed funds should be returned to Italy where the creditor may pursue its claim.

The bankruptcy court found the reasoning of Artimm , 278 B.R. 832, 840 (Bankr.C.D.Cal.2002) as persuasive and found that the Italian automatic stay applied extra territorially. The Artimm court concluded that the Italian automatic stay has worldwide effect as Italian law provides for a stay of all creditor collection activities and claims worldwide jurisdiction over the property of the debtor. Id. at 840. The Artimm court also found that provisions of Italian law indicate movement in Itlian law towards handling international insolvencies under the "universal" approach, which advocates treating an international bankruptcy as a single case in which assets and creditor are treated equally wherever they may be located. Id. at 841.

The bankruptcy court stated that many courts have noted that comity is the ultimate factor in determining whether section 304 relief is appropriate. The Supreme Court described comity as "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 tis own citizens..." Hilton v. Guyot, 159 U.S. 113 (1895). Comity is extended to a foreign court if that court is a court of competent jurisdiction and if the laws and public policy of the forum state and the rights of its residents will not be violated. Cunard S.S. Co., Ltd. v. Salen Reefer Services AB, 773 F.2d at 452 (2d Cir.1985). Comity should not be withheld unless its extension would be inimical to the interest of the United States. Cunard, 773 F.2d at 457. The interest of the United States in granting comity is to ensure that “the assets of a debtor are dispersed in an equitable, orderly, and systematic manner, rather than in a haphazard, erratic, or piecemeal fashion.” Cunard, 773 F.2d at 458. United States courts, therefore, have “consistently recognized the interest of foreign courts in liquidating or winding up the affairs of their own domestic business entities.” Id. at 458. Moreover, “every person who deals with a foreign corporation impliedly subjects himself to such laws of the foreign government, affecting the powers and obligations of the corporation with which he voluntarily contracts, as the known and established policy of that government authorizes.” Id. Therefore, U.S. creditors of a bankrupt foreign corporation may be required to assert their claims against the foreign debtor before a foreign court. Cunard, 773 F.2d at 458-59.

The Florida bankruptcy court found that extending comity to the Italian bankruptcy case and the laws of Italy was appropriate as the bankruptcy in Italy was proceeding under the aegis of a court of competent jurisdiction in accordance with the laws and policies of Italy. It further found that extending comity would result n an orderly and fair distribution to all creditors on a worldwide basis. Furthermore, the laws governing the Italian bankruptcy case comported with U.S. standards of procedural fairness and are not inimical to the law or policy of the U.S. The court noted that at least two U.S. court have previously extended comity to Italian bankruptcy proceedings.

Furthermore, the bankruptcy court found that the statutory factors of 304(c) were met, including the just treatment of all holders of claims against or interest in the estate, protection of claim holders in the U.S. against prejudice and inconvenience in processing of claim in the foreign proceeding, prevention of preferential or fraudulent dispositions of property of the estate, and distribution of proceeds of the estate are substantially in accordance with the order prescribed in the bankruptcy code.

Foreign Creditor May Be Sanctioned for Violating U.S. Bankruptcy Court Injunction

2007-07-31T14:19:00.000-07:00

The issue before the court in the pre-BAPCPA case of In re Simon, 153 F.3d 991 (9th Cir.1998), cert. denied 525 U.S. 114 (US 1999) was whether a foreign creditor is subject to U.S. bankruptcy court sanction for pursuing foreign collection of a debt discharged in a U.S. bankruptcy case in which the foreign creditor participated. The court concluded that the bankruptcy court may sanction the foreign creditor for violating a court injunction.

The Debtor William N. Simon filed for chapter 7 relief in the U.S. and obtained his discharge of debt. Pursuant to section 524, the discharge order operates as an injunction against the collection of certain debt against the debtor. Simon scheduled Hong Kong and Shanghai Banking Corp., Ltd. ("HSBC") as a creditor in his case and HSBC filed a proof of claim in the bankruptcy case. HSBC filed a complaint seeking declaratory relief from the bankruptcy court that the bankruptcy discharge injunction was not effective outside of the U.S.

The court found that Congress has the unquestioned authority to enforce its laws beyond the territorial boundaries of the U.S., but whether Congress has exercised that authority in a particular case is a matter of statutory construction. Unless a contrary intent appears, there is a presumption that the legislation of Congress is meant to apply only within the territorial jurisdiction of the U.S.

The court concluded that as to actions against the bankruptcy estate, Congress clearly intended extraterritorial application of the Bankruptcy Code. The bankruptcy court obtains exclusive in rem jurisdiction over all of the property of the estate including property located outside of the territorial jurisdiction of the U.S. The court concluded that Congress intended extraterritorial application of the Bankruptcy Code as its applies to property of the estate. The court further noted that as a matter of general principle, protection of in rem or quasi in rem jurisdiction is a sufficient basis for a court to restrain another court's proceedings and that this rationale extends to foreign proceedings.

The court noted that the more difficult question was whether a bankruptcy court may enjoin a foreign collection action against the debtor personally or as to non-estate assets if the creditor was not a party to the U.S. bankruptcy proceedings. But the court was not required to reach this question as HSBC fully participated in Simon's U.S. bankruptcy case and thereby surrendered to U.S. jurisdiction. In this instance, the presumption against the extraterritorial effect of a statute would not apply. Therefore, Simon's chapter 7 discharge injunction enjoins HSBC, but not the courts in Hong Kong. If HSBC chooses to commence collection proceedings in Hong Kong against Simon, it does so at the risk of U.S. bankruptcy court sanction.

The court rejected HSBC's argument that it only submitted itself to limited bankruptcy court jurisdiction as the proof of claim it submitted in Simon's case was for a different debt than the one it sought to pursue in Hong Kong. The court noted that HSBC failed to assert its position in the bankruptcy court by requesting abstention, to move to lift the automatic stay, to move for adequate protection, or to file an objection to discharge of Simon's debts.

The court noted that it did not decide whether discharge injunction of section 524 itself applies extraterritorially in all cases either as to non-estate assets or as to the debtor's personal liability.

The court also rejected HSBC's arguement that international comity requires the court to vacate the bankruptcy court's injunction forbidding debt collection against Simon for pre-petition debt. The court noted that the international comity concerns underlying Maxwell Communications Corp., 93 F.3d 1036, 1050 (2d Cir. 1996) were not present in this case.

The court noted that the Bankruptcy Code does not codify either the "territorial theory" or the "universalist philosphy" but provides for a flexible approach to international insolvencies dependent upon the circumstances of the particular case. Under the territorial theory or "grab" rule, courts in each national jurisdiction are responsible for seizing and controlling assets within their geographic reach. The universalist philosophy contemplates one plenary transnational proceeding governing the administration of assets world-wide. The court noted in this pre-BAPCPA case, that if the Bankruptcy Code contains any philosophy it is of deference to the country where the primary insolvency proceeding is located and flexible cooperation in administration of assets. e.g. Sections 304 and 305.

In summary, the court held that the lower court's order did not involve an improper extrterritorial application of the discharge injunction as to estate property becaus section 541 expressly includes all of the debtor's property regardless of geographic location. The discharge injunction was also validly applied to HSBC as to Simon's non-estate property because HSBC participated in Simon's bankruptcy case and thereby subjected itself to the otherwise valid orders of the bankruptcy court. Finally, international comity did not compel a contrary result because there was no conflicting proceeding in a foreign nation.