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BANKRUPTCY
In matter of first impression, Fifth Circuit upholds denial of recognition of foreign bankruptcy proceeding under Chapter 15 of the U.S. Bankruptcy Code because debtor has lived in U.S. for more than 10 years and has no more business activity in foreign country
Zuriel IBR is an Israeli bankruptcy receiver (IBR) in the matter of Yuval Ran, the alleged debtor (AD). AD had been a prominent Israeli businessman who was a director or shareholder in almost 100 Israeli companies. His financial troubles, however, began in the late 1990s. The most significant one relates to a public company, Credit Lines Supplementary Financial Services Ltd. (Credit Lines). Credit Lines is the subject of an Israeli liquidation proceeding, and the IBR has asserted substantial claims against AD. In 1997, an involuntary bankruptcy proceeding began against AD in the District Court of Tel‑Aviv‑Jaffa. AD, however, had left Israel and had moved to Houston, Texas, and has done no business in Israel since his departure.
In 2006, IBR filed a petition under Chapter 15 of the U.S. Bankruptcy Code (USBC) in the U.S. Bankruptcy Court in Texas. It sought recognition of the Israeli bankruptcy proceeding as a foreign main or non‑main proceeding, for the purpose of receiving certain protections under the USBC. The district court denied the petition for recognition. IBR appealed. The U.S. Court of Appeals for the Fifth Circuit, however, upholds the ruling below.
“The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) [Pub.L. 109‑8, 119 Stat. 23, enacted April 20, 2005] enacted Chapter 15 of the [USC], ‘so as to provide effective mechanisms for dealing with cases of cross‑border insolvency.’ 11 U.S.C. § 1501(a). It replaced former § 304 of the [USBC] and ‘incorporate[s] the Model Law on Cross‑Border Insolvency’ (MLCBI) drafted by, the U.N. Commission on International Trade Law (UNCITRAL), which in turn, is based upon the European Union Convention on Insolvency Proceedings (the ‘EUCIP’). See 11 U.S.C. § 1501(a) et seq. …”
“The statutory intent to conform American law with international law is explicit in the text of [USBC] § 1501(a). It is also expressed in § 1508, which states that ‘[i]n interpreting this chapter, the court shall consider its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions,’ see also House Report on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, H.R. Rep. No. 109‑31, pt. I, at 105 (2005). reprinted in 2005 U.S.C.C.A.N. 88, 169 (‘[Chapter 15] incorporates the Model Law on Cross‑Border Insolvency to encourage cooperation between the United States and foreign countries with respect to international national insolvency cases …”
“A non‑exhaustive list of relief available to a foreign proceeding’s representative in a Chapter 15 case includes: (1) an automatic stay of actions against the debtor under USBC §362; (2) the ability to operate the debtor’s business; (3) examination of witnesses; and (4) the entrusting of the administration of the debtor’s U.S. assets to the foreign representative. See generally 11 U.S.C. § 1520(a)(1)‑(3); see also id. § 1519(a)(1)‑(3). In order for a foreign proceeding to gain recognition within the framework of Chapter 15, the following prerequisites must be met: (1) such foreign proceeding for which recognition is sought is a foreign main proceeding or foreign non‑main proceeding within the meaning of § 1502; (2) the foreign representative applying for recognition is a person or body; and (3) the petition meets the requirements of § 1515. 11 U.S.C. § 1517(a) …”
“This statutory mandate is subject to a narrow ¼ exception which permits a court to refuse recognition ‘if the action would be manifestly contrary to the public policy of the United States.’ 11 U.S.C. § 1506. But, the exception is intended to be invoked only under exceptional circumstances concerning matters of fundamental importance for the United States. … Nevertheless, recognition under § 1517 of the USBC is not a ‘rubber stamp exercise.’ … Even in the absence of an objection, courts must undertake their own jurisdictional analysis and grant or deny recognition under Chapter 15 as the facts of each case warrant.” [Slip op. 4‑6]
An important issue before the Court is whether the Israeli proceeding is a foreign main or non‑main proceeding. A foreign main proceeding is “a foreign proceeding pending in the country where the debtor has the center of its main interest [COMI].” 11 U.S.C. § 1502(4). Chapter 15 clarifies that, in general, the debtor’s registered office or habitual residence is presumed to be the COMI.
“Thus, to determine where AD’s presumptive COMI lies, we must determine the location of his habitual residence and then determine if any evidence to the contrary was presented by IBR to rebut the presumption that AD’s habitual residence is his COMI. If so, our inquiry does not end and we must consider all evidence to determine the location of AD’s COMI.”
“The USBC does not define ‘habitual residence,’ but it has been analyzed recently by foreign courts as virtually identical to the more commonly used, at least in the United States, concept of domicile. Under our law, domicile is established by physical presence in a location coupled with an intent to remain there indefinitely. Texas v. Florida, 306 U.S. 398 (1939). One acquires a ‘domicile of origin’ at birth, and that domicile continues until a new one (a ‘domicile of choice’) is acquired. … To defeat the presumption of continuing domicile and establish a new domicile, an individual must demonstrate residence in a new state and an intention to remain in that state indefinitely. …”
“Similarly, according to foreign courts, the existence of a habitual residence largely depends on whether the debtor intends to stay in the location permanently. See, e.g., Pinna v. Caisse d’ Allocations Familiales de la Savoie, [1986] E.C.R. 1 (ECJ 1986). Other factors pertinent to a finding of an individual’s habitual residence include: (1) the length of time spent in the location; (2) the occupational or familial ties to the area; and (3) the location of the individual’s regular activities, jobs, assets, investments, clubs, unions, and institutions of which he is a member. …” [Slip op. 7‑8]
In this case, AD’s habitual residence has been in Houston, Texas for nearly a decade. His immediately family are U.S. citizens, and AD himself is a U.S. permanent resident. He is employed in Houston and maintains his finances exclusively in the U.S. Thus, AD’s presumptive COMI is in the U. S.
When there is a dispute as to the debtor’s COMI, neither USBC Chapter 15 nor the MLCBI include the factors for such a determination. In SPhinX, Ltd., 351 B.R. 103, 120 n.22 (Bankr. S.D.N.Y. 2006), aff’d, 371 B.R. 10 (S.D.N.Y. 2007), however, the Court provided a list of non‑exhaustive factors, including: (1) the location of the debtor’s headquarters, (2) the location of those who actually manage the debtor, (3) the location of the debtor’s primary assets, (4) the location of the majority of the debtor’s creditors/affected creditors, and (5) the jurisdiction whose law would apply. In the case of an individual debtor, the factors may be somewhat different. They may also take into account: (1) the location of the debtor’s primary assets, (2) the location of the majority of the debtor’s creditors, and (3) the jurisdiction whose law would apply to most disputes.
IBR put on evidence suggesting that AD’s COMI is in Israel. These linkages include [1] that AD’s creditors are in Israel, [2] that the principal assets involved in the bankruptcy proceeding are in Israel, and [3] that AD’s bankruptcy proceeding is pending in Israel. IBR’s evidence, however, is not enough to prove by a preponderance of the evidence that Israel is the location of AD’s COMI. IBR additionally argued that a U.S. court should determine the COMI with reference to the debtor’s “operational history” since the debtor’s COMI had been in Israel during the relevant time.
“We disagree. [...] An analysis of the proper COMI time frame starts with, as it must, the text of § 1502 of the USBC. … In the bankruptcy context, the analysis must end with the text if the language is clear and does not lead to an absurd result. … While §1502 does not expressly discuss a temporal framework for determining COMI, the grammatical tense in which it is written provides guidance to the court. Every operative verb is written in the present or present progressive tense.
“More specifically, [USBC] § 1502(4) defines foreign main proceeding as a ‘foreign proceeding pending in the country where the debtor has the center of its main interests.’ Congress’s choice to use the present tense requires courts to view the COMI determination in the present, i.e. at the time the petition for recognition was filed. If Congress had, in fact, intended bankruptcy courts to view the COMI determination through a lookback period or on a specific past date, it could have easily said so. …”
“Moreover, examining a debtor’s COMI at the time the petition for recognition is filed fulfills Congress’s purpose for implementing Chapter 15. As noted above, Chapter 15 was implemented by Congress in an attempt to harmonize transnational insolvency proceedings. If we were to assess COMI by focusing upon AD’s operational history, there would be an increased likelihood of conflicting COMI determinations, as courts may tend to attach greater importance to activities in their own countries, or may simply weigh the evidence differently which may lead to the possibility of competing main proceedings, thus defeating the purpose of using the COMI construct.” [Slip op. 12‑13]
The Court thus affirms the denial of the recognition of the Israeli proceeding as a foreign main proceeding. The next question is whether it qualifies as a foreign non‑main proceeding. While such recognition may provide the same relief, it is not automatic but determined in the bankruptcy court’s discretion. No U.S. court has yet decided whether an individual’s bankruptcy proceeding pending in another country and related debts alone are sufficient to constitute an establishment under Chapter 15, § 1502. “A foreign non‑main 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. § 1502(5) (emphasis added). Section 1502(2) defines an establishment as ‘any place of operations where the debtor carries out a nontransitory economic activity.’ Id. § 1502(2) … In contrast to COMI, ‘[t]he existence of an establishment is essentially a factual question, with no presumption in its favor.’ … As one court noted, ‘the bar is rather high’ to prove that a debtor has an establishment in a particular location. …”
“Similar to a determination of AD’s COMI, the relevant time period to determine whether AD has an establishment in Israel is at the time IBR filed his petition for recognition. Our conclusion is again supported by a plain language reading of Chapter 15, which notes that a foreign nonmain proceeding can exist where a debtor ‘has an establishment.’ 11 U.S.C. § 1502(5) … Likewise, § 1502(2) refers to an establishment as ‘any place of operations where the debtor carries out a nontransitory activity.’ Id. § 1502(2) (emphasis added). The use of the present tense implies that the court’s establishment analysis should focus on whether the debtor has an establishment in the foreign country where the bankruptcy is pending at the time the foreign representative files the petition for recognition under Chapter 15. …”
“So in order for AD to have an establishment in Israel, AD must have (1) had a place of operations in Israel and (2) been carrying on nontransitory economic activity in Israel at the time that IBR brought the petition for recognition in the United States. Neither Chapter 15 nor its legislative history explain what it means for a debtor to have ‘any place of operations’ or to have ‘been carrying on nontransitory economic activity’ in a location. See H.R. Rep. No. 109‑31(I), at 107, reprinted in 2005 U.S.C.C.A.N. at 170 (mentioning only that the definition was taken from Model Law for Cross‑Border Insolvency Article 2).
The Model Law for Cross‑Border Insolvency (MLCBI), however, and the sources from which it emanates provide guidance concerning what it means for a debtor to have an establishment in a location. The drafters of the MLCBI relied on the EU Convention to define an establishment. See Guide to Enactment of the UNCITRAL Model Law on Cross‑Border Insolvency § 75 (1997). Per the EU Convention’s legislative history, in order to have a ‘place of operations’ in Israel, AD must have had ‘a place from which economic activities are exercised on the market (i.e. externally), whether the said activities are commercial, industrial or professional’ at the time that IBR filed the U.S. petition for recognition. COUNCIL REPORT ON THE CONVENTION ON INSOLVENCY PROCEEDINGS, at 49, No. 6500/96. The mere presence of assets in a given location does not, by itself, constitute a place of operation. Id. at 48.”
“In the context of corporate debtors, there must be a place of business for there to be an establishment. … Equating a corporation’s principal place of business to an individual debtor’s primary or habitual residence, a place of business could conceivably align with the debtor having a secondary residence or possibly a place of employment in the country where the receiver claims that he has an establishment. See 11 U.S.C. § 1516(c) (equating a corporate debtor’s registered office with the habitual residence in the case of an individual). At the time IBR filed his petition for recognition, AD possessed neither a secondary residence nor place of employment in Israel.” [Slip op. 15‑16].
Citation: In the Matter of: Yuval Ran; Levie v. Ran, No. 09‑20288 (5th Cir. May 27, 2010).
Filed in: 2010 International Law Update, Issue 5
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BANKRUPTCY
In international bankruptcy matter, Fifth Circuit holds that bankruptcy court has jurisdiction to offer avoidance relief under foreign law in Chapter 15 bankruptcy proceeding
Condor Insurance, Ltd., an insurance and surety bond business located in Nevis (in the Leeward Islands chain of the eastern Caribbean), filed a petition in a Nevis court to “wind down” (similar to a Chapter 7 proceeding in the U.S.) The Joint Official Liquidators (JOL) in the Nevis proceeding filed a Chapter 15 proceeding in a federal bankruptcy court in Mississippi. The suit alleges that Condor Insurance had allegedly used fraud when it transferred $313 million in assets to Condor Guaranty, Inc., a U.S. corporation.
A Chapter 15 proceeding permits a foreign representative of a foreign insolvency proceeding to seek the aid of the U.S. bankruptcy courts in an ancillary proceeding once the bankruptcy court has recognized the foreign proceeding as a foreign main or non‑main proceeding under the Chapter. Condor Guaranty moved to dismiss contending that avoidance actions are only available in U.S. Chapter 7 or Chapter 11 bankruptcy proceedings. Since Condor Insurance is a foreign company, Condor argued that it cannot file a Chapter 7 or 11 case in the U.S.
The Bankruptcy Court agreed and dismissed the Chapter 15 proceeding. The district court affirmed it. The foreign representatives appealed. The U.S. Court of Appeals for the Fifth Circuit reverses. It rules that the bankruptcy court does have jurisdiction in cases of this kind.
The Court first clarifies the issue at bar. “There is no question that the bankruptcy court has jurisdiction to recognize the Nevis proceeding as a foreign main proceeding. Our question is whether the exceptions listed in § 1521(a)(7) to the relief available in the ancillary proceeding exclude not only avoidance actions under U.S. law but also exclude reliance upon [the] domestic law of the foreign main proceeding. …” [Slip op. 2]
“Our interpretive task in part guided by the circumstance that Chapter 15 implements the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross‑B order Insolvency. … Chapter 15 directs courts to ‘consider its international origin, and the need to promote an application of th[e] chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions’ in interpreting its provisions. …” [...]
“The UNCITRAL Model Law represents a culmination of a long standing effort by the United States and other countries to develop a uniform system guiding needed cooperation. … That the final negotiations included thirty‑six UNCITRAL members—including the United States—representatives of forty observer states, and thirteen international organizations evidences its widespread support. …The Model Law was ‘expressly designed to be integrated into local insolvency law’ … and Chapter 15 closely hewed to the text of the enactment. ‘Any departures from the actual text of the Model Law . . . were [to be] as narrow and limited as possible.’ … All this [was] part of an effort by the United States to harmonize international bankruptcy proceedings for the benefit of American businesses operating abroad. As directed by Congress, we mind this background as we discern the Chapter’s reach.”
“Chapter 15 provides for the ‘recognition’ of a ‘foreign proceeding’ and an ancillary proceeding to assist the foreign proceedings. To be recognized, the foreign proceeding must either fall within the definition of a ‘foreign main proceeding’… or ‘foreign nonmain proceeding.’ … With recognition, the foreign representative may access federal courts with its claims under Chapter 15.”
“The foreign representatives seek relief under § 1521(a) of Chapter 15. Section 1521(a) provides that the bankruptcy court may grant ‘any appropriate relief,’ including staying various aspects of the proceedings, suspending rights of transfer, providing for discovery, granting administrative powers to the foreign representatives and ‘granting any additional relief that may be available to a trustee, except for relief available under §§ 522, 544, 545, 547, 548, 550, and 724(a).’ …”
“This exception does not exist in the Model Law. … While it is plain that relief under the listed sections is excluded, the statute is silent regarding proceedings that apply foreign law, including any rights of avoidance such law may offer.”
“The sections explicitly excepted from § (a)(7) are often referred to as ‘avoidance powers’—a trustee’s powers to avoid the transfer of debtor property that would deplete the debtor’s estate at the expense of creditors. Such powers, generally described, include those addressing exempt property (§ 522), the ‘strong arm’ power, which permits the trustee to act as a judicial lien creditor (§ 544), the power to avoid statutory liens (§ 545), the power to avoid transactions as ‘preferences’ (§ 547), the power to avoid fraudulent transfers (§ 548) …” [...]
“Generally where there are enumerated exceptions ‘additional exceptions are not to be implied, in the absence of a contrary legislative intent.’ … The statute provides for ‘any relief’ and excepts only actions under [the above cited] sections … and includes no other language suggesting that other relief might be excepted. While the statute denies the foreign representative the powers of avoidance created by the U.S. Code absent a filing under Chapter 7 or 11 of the Bankruptcy Code, it does not necessarily follow that Congress intended to deny the foreign representative powers of avoidance supplied by applicable foreign law. If Congress wished to bar all avoidance actions whatever their source, it could have stated so; it did not. …”
“The stated purpose and overall structure of Chapter 15 reflects its international origin and strongly suggests the answer—§ 1521(a)(7) does not exclude avoidance actions under foreign law. Section 1501 states the purpose of the Chapter is to further cooperation between the U.S. courts, parties in U.S. bankruptcy proceedings and foreign insolvency courts and authorities, as well as promote ‘greater legal certainty,’ ‘fair and efficient administration of cross‑border insolvencies that protects the interests of all creditors,’ ‘protection and maximization of the value of the debtor’s assets,’ and ‘facilitation of the rescue of financially troubled businesses.’ … Whatever its full reach, Chapter 15 does not constrain the federal court’s exercise of the powers of foreign law it is to apply.”
“Chapter 15 functions through the recognition of a foreign proceeding. … Only with recognition does broad relief become available: the representative is able to sue and be sued in U.S. courts, … to apply directly to a U.S. court for relief, … to commence a non‑Chapter 15 case, … to intervene in any U.S. case in which the debtor is the party, … and U.S. courts must grant comity and cooperation to the foreign representative. … Under § 1520, upon recognition of a foreign main proceeding, certain relief is granted automatically including adequate protection, an automatic stay, and the power to prevent transfers of the debtor’s property. … Additionally, as a catch‑all, under § 1507 the court has authority to provide additional assistance to a foreign representative subject to the restrictions elsewhere in the Chapter. …” [...]
“ …[T]he Model Law permitted the recognizing court to grant any appropriate relief and granted standing to the foreign representatives to bring avoidance actions under the law of the recognizing state. … This purposefully left open the question of which law the court should apply …—in deference to the choice of law concerns raised by the United States.” [...]
“This case is illustrative of Chapter 15’s response to concerns of the UNCITRAL delegation. The foreign representatives are not seeking to mix and match foreign and U.S. law—they only seek the application of Nevis law. The foreign representatives gain no powers not contemplated by the laws of Nevis through filing suit in the United States and the distribution regime established by Nevis law is not threatened by the potential application of conflicting avoidance rules.”
“Congress did not intend to restrict the powers of the U.S. court to apply the law of the country where the main proceeding pends. Refusing to do so would lend a measure of protection to debtors to hide assets in the United States out of the reach of the foreign jurisdiction, forcing foreign representatives to initiate much more expansive proceedings to recover assets fraudulently conveyed, the scenario Chapter 15 was designed to prevent. …” [Slip op. 3‑13]
Chapter 15 was intended to facilitate cooperation between U.S. courts and foreign bankruptcy proceedings. Thus, the Court reads § 1521(a)(7) to permit relief under foreign avoidance law.
Citation: In re Condor Insurance Limited, No. 09–60193 (5th Cir. March 17, 2010).
Filed in: 2010 International Law Update, Issue 3
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Fourth Circuit determines that presumption against extraterritoriality does not bar application of U.S. Bankruptcy Code to avoid debtor’s transfer of Bahamian realty
In 1976, Betty Irene French (the debtor), a resident of Maryland, bought a house in the Bahamas. At a Christmas party in 1981 in Maryland, she gave a deed to the property to her children, Randy Lee French and Donna Marie Shaka (the transferees). To avoid high local transfer taxes, however, the transferees did not immediately record the deed in the Bahamas. In the late 1990s, however, the debtor and her husband were running into financial problems; accordingly, in mid-2000, the transferees decided to record the deed in the Bahamas. In October 2000, Mrs. French’s creditors filed an involuntary Chapter 7 bankruptcy petition against her in Maryland. The bankruptcy court entered an Order for Relief in January 2001.
In August 2002, the bankruptcy trustee filed a proceeding against the transferees to avoid the transfer of the Bahamian property and to recover the property or its fair market value for the benefit of the estate. The trustee alleged that the debtor and the transferees had engaged in a constructively fraudulent transfer in breach of the Bankruptcy Code since the debtor had been insolvent at transfer time and had not received a reasonably equivalent value in return. See 11 U.S.C. Section 548(a)(1)(B)(2000).
The transferees moved to dismiss. Relying on the presumption against extraterritoriality, they argued that the court should not apply Section 548 to transfers of foreign property. The bankruptcy court denied the motion. The trustee then moved for summary judgment. The bankruptcy court granted it, and the district court confirmed. On the transferees’ appeal, the U.S. Court of Appeals for the Fourth Circuit affirms.
The Court explains. “It is a longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’” [Slip op. 3 (quoting EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991))]. This presumption applies only when a party seeks to apply a U.S. statute to conduct that took place beyond U.S. territorial boundaries.
The Fourth Circuit opines that, in determining whether a transaction is foreign or domestic, “a court should consider whether the participants’, acts, targets, and effects involved in the transaction at issue are primarily foreign or primarily domestic.” [Slip op. 4] In this case, the perpetrator and most of the victims of the fraudulent transfer have long been located in the U.S. In addition, the conduct constituting the constructive fraud took place in the U.S.
A factor that merits special weight in the balancing test, of course, is the fact that the situs of the real property is the Bahamas.
“The law has long recognized the powerful interest that states and nations have in the real property within their boundaries.” [Slip op. 5] Nevertheless, the Court finds that the language of the Bankruptcy Code clearly intends the “property of the estate” to include both domestic and foreign assets. The Code expressly disallows certain transfers of estate property and empowers the trustee to get it back. In the Code, Congress clearly tried to prevent debtors from improperly disposing of estate property that would otherwise be available to creditors, irrespective of its location. Therefore, the usual presumption against extraterritoriality does not bar the application of Section 548 here.
Citation: In re French, 2006 WL 328392, No. 05-1054 (4th Cir. February 14, 2006).
Filed in: 2006 International Law Update, Issue 3
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In transnational bankruptcy proceeding, Eighth Circuit upholds auxiliary jurisdiction of Nebraska bankruptcy court to issue injunctions in aid of liquidation proceeding at corporation’s domicile in Cayman Islands
Phyllis Hoffman (plaintiff) was one of about 950,000 buyers who are parties to a Vehicle Service Contract (VSC) guaranteed by National Warranty Insurance Group (NWIG). NWIG is a Cayman Islands corporation. It operated a risk retention group insuring group members who were obligated to contract holders who had bought VSCs from those group members. NWIG’s principal place of business was Lincoln, Nebraska and all of its business and assets lay within the United States.
After a number of incidents where group members declined to let NWIG use their reserve accounts to pay claims, plaintiff filed a lawsuit against NWIG which she hoped to convert into a class action. NWIG then transferred $24 million out of its U.S. bank accounts to banks in the Cayman Islands and filed for liquidation under Cayman law.
NWIG’s official liquidators were Theo Bullmore and Simon Whicker. They filed a petition in a Nebraska bankruptcy court under 11 U.S.C. Section 304 seeking to enjoin all proceedings against the assets linked to the Cayman Island liquidation. Plaintiff, on behalf of herself and others similarly situated, opposed the requested Section 304 relief. After conducting a trial on the merits of the injunction, the bankruptcy court granted it. The Bankruptcy Appellate Panel affirmed the decision of the bankruptcy court. On further appeal, the U.S. Court of Appeals for the Eighth Circuit also affirms. According to the Court of Appeals, the key issue is whether the Bankruptcy Appellate Panel had mistakenly upheld the bankruptcy court’s decision to exercise ancillary jurisdiction over the present matter.
“Congress expressly granted ancillary jurisdiction to bankruptcy courts to act as local auxiliaries to a foreign bankruptcy proceeding to honor requests from foreign representatives for the turnover of assets, injunctions and other such relief. See 11 U.S.C. Section 304 (2004). Ancillary jurisdiction is triggered by a foreign representative filing a petition showing the commencement of a foreign proceeding. Id. [Plaintiff] challenges the bankruptcy court’s finding [that] the Cayman Islands liquidation was a ‘foreign proceeding.’ As this challenge implicates the bankruptcy court’s jurisdiction, we review the matter de novo.”
The Bankruptcy Code defines the term ‘foreign proceeding’ as: ‘a proceeding, whether judicial or administrative and whether or not under bankruptcy law, in a foreign country in which the debtor’s domicile, residence, principal place of business, or principal assets were located at the commencement of such proceeding, for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge, or effecting a reorganization, 11 U.S.C. Section 101(23). The bankruptcy court found [that] the Cayman Islands proceeding was a foreign proceeding in National Warranty’s domicile for the purpose of winding up and liquidating the corporation.”
On appeal, a major point of contention is the meaning of the term domicile. “The bankruptcy court found, and the bankruptcy appellate panel agreed, [that] the Cayman Islands is National Warranty’s domicile because it is its place of incorporation. Ms. Hoffman contends, as a matter of law, [that] the term ‘domicile’ as used in Section 304 applies only to natural person debtors because corporate debtors are not generally deemed to have a ‘domicile.’ We reject this argument.”
“The meaning of the term ‘domicile’ and the term’s application to corporate debtors is well settled. For years, federal courts interpreting jurisdictional and venue issues have considered a corporation’s domicile to be its place of incorporation. [Cite]. Ms. Hoffman argues that jurisdiction and venue cases are inapplicable to bankruptcy proceedings. However, even within the legal discipline of bankruptcy, a corporation’s domicile is the place of incorporation. See, e.g., Bank of Augusta v. Earle, 38 U.S. 519, 588 (1839) (a corporation ‘must dwell in the place of its creation’). Moreover, we can think of no reason to distinguish domicile in jurisdiction cases from domicile in bankruptcy cases involving Section 304. We thus conclude [that] the term ‘domicile’ as used in Section 304 refers to a corporation’s place of incorporation.” [962]
Citation: In re: National Warranty Insurance Risk Retention Group (Hoffman v. Bullmore), 384 F.3d 959 (8th Cir. 2004).
Filed in: 2004 International Law Update, Issue11
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In bankruptcy proceeding involving simultaneous proceedings in courts of Delaware and Belgium, Third Circuit remands to determine dictates of international comity and choice of law and suggests that Belgian and Delaware courts communicate among themselves as to how best to resolve transnational complexities
Lernout & Hauspie Speech Products, N.V. (L&H) is a company established in Belgium that does business in the U.S. It specializes in speech recognition technology and related products. Stonington is an ERISA fiduciary that manages investment capital of various pension funds and financial institutions. In 1995, it bought Dictaphone Corporation (DC) and made it into a respected medical transcription service.
In mid-2000, L&H merged with DC in exchange for L&H stock. On November 27, 2000, Stonington sued L&H in Delaware state court, alleging that the L&H stock was worthless and that L&H had procured the purchase by fraud. On November 28, 2000, Stonington obtained a Belgian court order directing L&H to turn over its shares of DC to a court-appointed trustee. On November 29, 2000, L&H filed for Chapter 11 bankruptcy in Delaware federal court. One day later, it filed a second plenary insolvency proceeding in Belgium.
The main question in this proceeding is how to treat the DC Merger Claims. “Stonington asserted the right to pursue allowance and treatment of these claims in Belgium, where they would be treated as unsecured claims, on a parity with other unsecured creditors, and where they would not be subject to subordination, as would be called for under Section 510 of the U.S. Bankruptcy Code. It is clear that L&H desired that Section 510(b) be applied to Stonington’s claims, and [it] seems that the amount of Stonington’s claims – estimated to be $500 million – would, in combination with the other 510(b) claims, dwarf the unsecured claims if not subordinated.” [Slip Op. 5-6]
In May 2001, the U.S. Bankruptcy Court held that Stonington’s are pre-petition claims which are subject to the mandatory subordination of Section 510(b). The Belgian court, in the following month, rejected L&H’s reorganization plan that would have subordinated Stonington’s claims based on principles of Belgian bankruptcy law that require equal treatment of such claims. Because of this conflict between U.S. and Belgian bankruptcy laws, Stonington’s Belgian counsel suggested that L&H dismiss its Chapter 11 case because of the “impossible mission” of “combining the irreconcilable requirements of Belgian and U.S. law.”
The Delaware state court eventually granted L&H’s motion to determine the matters according to the U.S. Bankruptcy Court, and enjoined Stonington from pursuing the matter in Belgium. Stonington noted its appeal. The U.S. Court of Appeals for the Third Circuit reverses and remands.
As for the “Anti-Suit” Injunction, the Court cautions: “Based on a ‘serious concern for comity,’ we have adopted a restrictive approach to granting such relief. … And, we have described international ‘comity’ as the ‘recognition which one nation extends within its own territory to the legislative, executive, or judicial acts of another … [that] should be withheld only when its acceptance would be contrary or prejudicial to the interest of the nation called upon to give it effect.’ …”
“The principles of comity are particularly appropriately applied in the bankruptcy context because of the challenges posed by transnational insolvencies and because Congress specifically listed ‘comity’ as an element to be considered in the context of such insolvencies, albeit in relation to ancillary proceedings.” [Slip op. 16] Here, however, the Third Circuit does not have enough information to determine whether this is one of those rare cases where it should enjoin a party from taking part in a foreign proceeding. It therefore remands this matter to the U.S. Bankruptcy Court to consider the issue.
The Circuit Court then turns to the choice-of-law issue, which requires more than just an analysis of contacts. “It requires, in addition, a qualitative assessment that can only occur if there is some understanding, and explication, of the way in which the allowance, or subordination, of the claims at issue would advance or detract from each nation’s policy regarding insolvency proceedings and distributions to creditors. For instance, the Bankruptcy Court should consider the strength of the United States’ interest in applying its bankruptcy laws and, specifically, its subordination rules in these circumstances.”
“The policies generally furthered by subordination may be less compelling here if Stonington was induced to enter a merger agreement, and become an equity holder, by fraud. The Bankruptcy Court should also consider the countervailing Belgian subordination rules and underlying policies, which are mentioned, but not developed, in the record. This discussion was not present in the Bankruptcy Court’s consideration here and should be undertaken when the Bankruptcy Court engages in a choice-of-law determination.” [Slip op. 30-31]
In remanding the case to the Bankruptcy Court, the Court furnishes some guide lines.. “We strongly recommend, in a situation such as this, that an actual dialogue occur or be attempted between the courts of the different jurisdictions in an effort to reach agreement as to how to proceed or, at the very least, an understanding as to the policy considerations underpinning salient aspects of the foreign laws. Maxwell Communication Corp. v. Societe General (In re Maxwell Communication Corp.), 93 F.3rd 1036 (2d Cir. 1996) [see 1996 Int'l Law Update 138] provides a good example. There, the Court of Appeals for the Second Circuit attributed the ‘high level of international cooperation and significant degree of harmonization of the laws of the two countries’ in large part to ‘the cooperation between the two courts overseeing the dual proceedings.’ [Cite]”
“While we do not know whether the cooperation there was initiated by the court or the parties, there is no reason that a court cannot do so, especially if the parties (whose incentives for doing so may not necessarily be as great) have not been able to make progress on their own. … In Maxwell, the court suggested that ‘bankruptcy courts may best be able to effectuate the purposes of bankruptcy law by cooperating with foreign courts on a case-by-case basis.’ …”
“Even if cooperation could not be achieved, it would be valuable to communicate regarding the policies animating a certain law so as to be better able to perform a choice-of-law analysis. While not required by our case precedent or any principle of law, we urge that, in a situation such as this, communication from one court to the other regarding cooperation or the drafting of a protocol could be advantageous to the orderly administration of justice.” [Slip op. 35-37]
Citation: Stonington Partners, Inc. v. Lernout & Hauspie Speech Products N.V., 310 F.3d 118 (3rd Cir. 2002).
Filed in: 2002 International Law Update, Issue 11
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Tenth Circuit affirms summary judgment for defendant where Japanese trustee sued to set aside transfer of golf course in U.S. as invalid under Japanese bankruptcy law
Plaintiff-appellant is the trustee in a Japanese bankruptcy proceeding concerning Grandote Country Club Ltd. Plaintiff seeks to gain title to a golf course in Colorado by invalidating the transfer of ownership, arguing that it was fraudulent and that a later tax sale was invalid under the Colorado Uniform Fraudulent Transfer Act (hereinafter CUFTA) [Colo. Rev. Stat § 38-8-101 to 38-8-112]. The district court granted summary judgment, and the U.S. Court of Appeals for the Tenth Circuit affirms.
The trustee first argued that Japanese law should govern the case. The Court disagrees, holding that because the dispute involves real property, application of local law is appropriate. “Moreover, both federal and state choice of law principles favor application of the ‘law of the jurisdiction having the greatest interest in the litigation’… Without question, Colorado has the greatest interest in the litigation: the property is located in Colorado, the tax sale was conducted for failure to pay Colorado taxes, most of the agreements related to the property were executed in Colorado, and there has been extensive litigation in Colorado courts to determine the owner of the property.” [Slip op. 9-10]
A second contention was that the issuance of title violated CUFTA. The Court holds that “[a] a transfer is not fraudulent under CUFTA where an asset is acquired for a ‘reasonably equivalent value’ through a ‘regularly conducted, non-collusive sale, foreclosing on assets subject to a lien.’” Colo. Rev. Stat. § 38-8-104(2). The Court summarily rejects the idea that the transfer was not for “reasonably equivalent value” under CUFTA.
Plaintiff thirdly urged that the Japan-to-Colorado transfer was fraudulent because Noriyuki Hoshi was the only person authorized to convey and he did not do so. Defendant submitted an affidavit averring that Hoshi was, in fact, the signatory on the documents. The Court concludes that because plaintiff presented no admissible evidence to support his allegations of fraud, there was no genuine issue of material fact. As the complaint only contains hearsay allegations, the Court rules that the plaintiff failed to support his allegations by proffering evidence admissible under the Federal Rules of Evidence as required by Civil Rule 56.
Citation: In re Grandote Country Club Co., Ltd., 252 F.3d 1146 (10th Cir. 2001).
Filed in: 2001 International Law Update, Issue7
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On petition by bankruptcy Trustee and to assure availability of his assets for creditors, Australian Federal Court grants Mareva injunction regulating widow’s sale of valuable Florida real estate owned by bankrupt former husband at time of his death
Langley George Hancock died on March 27, 1992, owning several valuable properties in Australia and one in Orlando, Florida. In May 1995, the Western Australia Supreme Court granted probate as to the Hancock estate to executors named in his will. Questions later arose as to whether Hancock had been solvent at the time of his death. Pursuant to a creditor’s petition filed by Hancock Prospecting Pty. Ltd. in December 1997, a federal bankruptcy proceeding began. The Federal Court of Australia ordered the estate to be administered under Part XI of the Bankruptcy Act 1966 (Cth) and appointed a Mr. Donnelly as Trustee.
The Trustee alleged that, despite his insolvency, Mr. Hancock had given Mrs. Rosemarie Porteous (the former Mrs. Rose Hancock) $254,129.71 on October 23, 1991 and that this gift amounted to an act of bankruptcy under the statute. If true, bankruptcy administration would relate back to that date. As the Court notes: “[t]his commencement date is significant for the reason, among others, that under s120 of the Act, gifts made within a period of 5 years prior to the commencement date are, subject to one exception, void as against the Trustee. The exception is that a gift made more than two years prior to the commencement date will not be void as against the Trustee if the transferee proves that the transferor was solvent at the time of the transfer.” [Slip op. 2-3]
In essence, the Trustee was trying to recover under s120 of the Act many gifts of money Mr. Hancock had allegedly made to Mrs. Porteous during the five years prior to October 23, 1991 plus interest on these amounts. He alleged also that Mrs. Porteous used some of these funds to invest in various properties in Australia as well as one property in Orlando, Florida. On March 15, 2001, the Trustee moved the Court to issue several injunctive orders to make sure that these properties or the proceeds from their sales are available to satisfy any orders issued in favor of the Trustee.
As to the United States property, the Trustee sought an order restraining respondents or their representatives from selling, charging, mortgaging, encumbering or otherwise disposing of the property located in Seminole County, Florida (the Orlando property) during the pendency of the bankruptcy proceedings without giving 21-days written notice to the Trustee.
Moreover, in the event the Orlando property is sold, the Trustee asked the Court to order that respondents give not less than 21 days’ written notice to the Trustee before the settlement date on the sale. In addition, the Trustee requested that, in the case of a sale of the Orlando property, the Court order the retention of any proceeds of the sale in a joint bank account in the names of the Trustee and of the solicitor for the respondents in an amount equal to the total claims of the Trustee with respect to the Orlando Property plus interest pursuant to the Federal Court Act.
The Court first notes that injunctive relief against the parties to a proceeding focuses on preventing abuse or frustration of the Court’s process. It then points out that a party seeking a Mareva injunction [see Mareva Compania Naviera S.A. v. International Bulkcarriers S.A. [1975] 2 Lloyd’s Rep. 509; [1980] 1 All E.R. 213] must show three elements.
The first element is, that he has a good arguable case or a sufficiently realistic prospect of success in the proceedings. Secondly, the applicant has to show that, without such an order, a real risk exists of inability to satisfy a favorable judgment because a defendant will have hidden or dissipated the assets in question. The final element demands a showing that the balance of convenience requires the entry of the requested order.
In the Court’s view, a vital aspect of a good arguable case here turns on evidence of Mr. Hancock’s insolvency at time of death. The Trustee alleges that, at this point, the deceased was unable to repay debts owed to Clough Building Pty. Ltd., The Hancock Family Memorial Foundation Ltd. and Hancock Mining Ltd. The trustee attached voluminous documentary evidence about Mrs. Porteous’ finances and the gifts she got from deceased. Defendants argued that this so-called “evidence” contains nothing but contested allegations, insufficient to show an arguable case. The Court, however, disagrees.
The Court then considers the danger of dissipation of assets based mainly on a four-day deposition of Mrs. Porteous. At an earlier time, it appears that she may have intended to bring any assets from the sale of the Orlando Property back to Australia.
“The impression created by the whole of the transcript, however, is that Mrs Porteous’s life plans are presently rather fluid. The question of her purchasing a French chateau was discussed along with other plans she has for her future. While the particular property might be beyond her reach, the discussion shows that she is not inimical to living overseas. In addition there is, as counsel for the applicant observed, a certain inconstancy of intention. In my opinion there is a strong possibility that Mrs Porteous may alter her plans and deal with the properties in a manner inconsistent with preserving the assets (or their proceeds) in a form accessible to the Trustee.” [Slip op. 17-18]
Finally, the Court decided that, since the parties main dispute was over the amount of interest due, the balance of convenience favors the granting of the Trustee’s motion as to the Orlando Property.
The Court then issues the restraining orders. As to the potential sale of the Orlando Property, and the advance notice of settlement, the Court grants the order essentially in the terms requested above.
With respect to the joint bank account for the proceeds of the sale, the Court’s order reads more specifically as follows: “In the event of sale of the Orlando Property, there shall be retained out of the proceeds of such sale and placed in a joint bank account in the names of the Applicant [Trustee] and the solicitor for the Respondents, an amount of $ 1,590,531.54 together with interest on that amount calculated in accordance with the rates of interest prescribed under Schedule J of the Supreme Court Rules 1970 (NSW) from 8 April 1999 to the date of settlement of such sale.” [Slip op. 22-23]
Citation: Donnelly (Trustee) in matter of bankrupt estate of Hancock (deceased) v. Porteous, [2001] F.C.A. 345, 2001 Aust. Fed. Ct. Lex. 5 (Aust. Fed. Ct., New S. Wales, April 2) (Reed Intl. Books, Aust.).
Filed in: 2001 International Law Update, Issue5
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Applying Arizona law in U.S. bankruptcy proceeding, Ninth Circuit approves enforcement of English judgment that awarded litigation costs and attorneys’ fees against bankrupt
This case involves the bankruptcy of Dr. Jawad Hashim, his wife, and his two sons. Hashim was the first President and Director General of the “Arab Monetary Fund” (AMF), an international organization similar to the International Monetary Fund (IMF). In addition, Hashim also served as planning minister under Saddam Hussein. In 1982 or 1983, Hashim defected to Canada and Saddam Hussein allegedly froze the family’s Iraqi assets.
When the AMF audited its accounts, it charged Hashim and others with “massive misappropriation and embezzlement.” In December 1988, the AMF sued Hashim and his family in Canada and England. The Chancery Division of the English High Court of Justice ordered Hashim to repay approximately $50 million plus $80 million in interest. The court also held the Hashims liable to the AMF for its litigation costs including attorneys’ fees. In August 1999, the English court set the cost award at approximately $960,000.
The Hashims moved to Arizona after the English litigation and petitioned the federal court there for Chapter 7 bankruptcy protection. AMF filed a proof of claim in June 1995, requesting “in excess of $10,000,000″ to satisfy the English court’s award of costs. In 1996, the U.S. Bankruptcy Court disallowed the AMF claim in the Hashim bankruptcies, stating that the amount of the award was so disproportionate to AMF’s successful claims that it was “repugnant to American jurisprudence.” [See Restatement (Third) of Foreign Relations Law, Section 482(2)(d) (1987) (a court need not recognize a foreign judgment if that judgment is repugnant to U.S. public policy)]. The U.S. Court of Appeals for the Ninth Circuit, however, reverses the bankruptcy court’s order and remands.
The law of the state where the bankruptcy is pending governs the validity of a creditor’s claim against the bankruptcy estate. The Arizona courts generally follow the Restatement (Second) of Conflict of Laws, Section 98, a which meets the conditions specified in Comment c will be given the same degree of recognition as a sister State judgment … so far as the immediate parties … are concerned.” (Section 98, comment f (1971)). The Hashims lived in England and owned substantial property there. In the Court’s view, they are improperly trying to evade a judgment from a jurisdiction to which they had voluntarily submitted.
“We must decline, absent grave procedural irregularities or allegations of fraud, to impugn the lawfulness of the judgments of that judicial system from which our own descended. … This imperative is hardly attenuated when questioned only by parties who, like the Debtors, heretofore regarded the English judicial system with such esteem that they voluntarily invested and resided in its exclusive jurisdiction. It is plain that Arizona law would not support the bankruptcy court’s order denying comity to the English court’s award of costs even if the award were to amount to $10 million. In any event, the award actually is less than one tenth of that sum, and the bankruptcy court’s order simply cannot stand.” [Slip op. 10-11]
Citation: In re Jawad Mahmoud Hashim, No. 98-17128 (9th Cir. May 30, 2000).
Filed in: 2000 International Law Update, Issue 6
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British Columbia Supreme Court dismisses bankruptcy petition filed against debtors by stranger corporation formed to help numerous low-income creditors holding unpaid lottery tickets to collect their claims in return for share of profits as abuse of bankruptcy and violation of bans on maintenance and champerty
The Interclaim group of companies (ICG) was set up in 1996. Interclaim Bermuda Ltd. (IBL) is a private Bermuda corporation. Interclaim Holdings Ltd. (IHL) and Interclaim Recovery Ltd (IRL) are wholly-owned subsidiaries of IBL and Irish corporations.
The ICG engaged in the business of buying complex, multi-jurisdictional legal claims and judgments from persons who did not have the means to enforce them. These are acquired from financial institutions, sovereign governments and individuals. IHL acquires these interests; IRL provides services to IHL for investigating and enforcing those claims or debts.
The debtors were engaged in internationally marketing lottery tickets. Some time later, ICG found out that the debtors were trying to shelter millions of dollars owed to buyers of lottery tickets and trade creditors.
ICG tried to get title to the legal claims by paying the ticket buyers and trade creditors a percentage of the worth of their claims. In return, the payees would agree to transfer their interests to ICG and to take part nominally in ICG’s plan to recover the debts.
It soon became clear to ICG that it was impracticable to make deals with each of the myriad, unconnected and underfunded victims. It then conceived the idea of petitioning the debtors into bankruptcy under the Bankruptcy and Insolvency Act, listing fifteen buyers of lottery tickets as co-petitioners.
When ICG had done this, the debtors applied to the Supreme Court of British Columbia to set aside the interim receivership order and to dismiss the petition. Their complaint was that ICG was making an improper use of bankruptcy that amounted to unlawful champerty and maintenance. The Court grants the application and dismisses the petition.
In the Court’s view, the Act sought to furnish a remedy for the creditors of an insolvent debtor, setting up a procedure whereby the Court could see to the pro rata payment of creditors. On the other hand, ICG was trying to utilize bankruptcy as a legal platform to secure a stake in the claims of known and unknown claimants. It would be an unsound policy to let the Act be abused in this novel way.
In addition, the law of champerty and maintenance tries to keep strangers from intruding into the litigation of third parties without justification. If the assignee of another’s claim had a “genuine pre-existing commercial interest” in the litigation, the courts would usually uphold the assignment. Present law, however, does not put up with a stranger getting involved in third-party litigation merely to share in the profits. This would not be a “valid commercial interest.”
In this case, ICG had no relationship with the ticket buyers. Although ICG’s intervention may have offered claimants the most practical chance to advance their claims effectively, it breached the existing common law ban on maintenance and champerty.
Finally, the Court sees a basic unaddressed issue of access to justice in this case. It invites the higher courts to give thought to whether sound policy might suggest the creation of a new exception to these doctrines in cases similar to this one.
Citation: In re Down, 178 D.L.R. 4th 294 (B.C.S.C. 1999).
Filed in: 1999 International Law Update, Issue 12
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In case where foreign creditor intended foreign collection of debt discharged in U.S. bankruptcy proceeding, Ninth Circuit holds that U.S. bankruptcy statute applies extraterritorially
The Hong Kong and Shanghai Banking Corp., Ltd. (HKS) lent more than $ 24,000,000 to Odyssey International Holdings, Ltd. The latter is a British Virgin Islands corporation with offices in Hong Kong. William Neil Simon, Odyssey’s major shareholder, personally guaranteed the loan. Simon’s guarantee provided that Hong Kong law should apply and that Hong Kong courts have jurisdiction.
Instead of paying off the loan, however, Simon went to the U.S. and filed for personal bankruptcy under Chapter 7 of the U.S. Bankruptcy Code, listing the loan on the bankruptcy schedules. In 1995, the Bankruptcy Court discharged Simon from all debts and enjoined other collection actions under 11 U.S.C. § 524.
Shortly thereafter, HKS sought a declaratory judgment that the bankruptcy discharge had no legal effect outside the U.S., thus leaving HKS free to file collection proceedings in Hong Kong. The Bankruptcy Court ruled against HKS and the district court affirmed. HKS then turned to the Court of Appeals, arguing that the discharge injunction constituted an improper extraterritorial application of § 524.
The U.S. Court of Appeals for the Ninth Circuit affirms. In its view, the U.S. Congress has authority to extend the reach of its laws beyond the territorial boundaries of the U.S. Whether Congress has exercised that authority in a particular case is a matter of statutory construction. Here, Congress clearly intended extraterritorial application of 11 U.S.C. § 524. The court’s “custody” over the debtor’s property through in rem jurisdiction creates a fiction that the property — regardless of its actual situs — is legally located within the jurisdiction of the court.
This is consistent with international comity. “The sole, plenary insolvency proceeding was initiated in the United States without objection and with the participation of the appellant. Hong Kong-Shanghai cannot point to a single conflict which exists between Hong Kong and United States law on the issue in question. In fact, the section 524 discharge injunction does not apply to the Hong Kong courts at all, but only to the creditor who enjoyed the benefits of participating in the United States bankruptcy. Under these circumstances, international comity does not dictate a result contrary to that reached by the district and bankruptcy courts.” [Slip op. 20-21]
Citation: In Re: William Neil Simon, No. 96-16859 (9th Cir. August 27, 1998).
Filed in: 1998 International Law Update, Issue 9
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