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German High Court (BGH) debates whether filing of foreign bankruptcy proceeding should lead to stay of domestic proceedings involving foreign debtor
The German High Court (Bundesgerichtshof, BGH) is considering whether to retain the rule that the beginning of a foreign bankruptcy proceeding does not interrupt domestic proceedings against or by that party. The IX. Civil Branch (Zivilsenat) of the BGH has submitted the issue for a joint decision by the two other BGH Branches with jurisdiction over such matters, the I. Civil Branch and the Cartel Senate.
In 1992, the Luxembourg defendant’s vessel damaged the German plaintiff’s small container vessel (Leichter) on the Rhine River. The plaintiff claimed DM 83,268.22 [about $46,000] in damages. In the meantime, the Luxembourg district court began bankruptcy proceedings against defendant. The question is whether the Luxembourg proceeding should interrupt the plaintiff’s German action against defendant.
The I. Civil Branch of the BGH would like to change the rule. It wants a foreign bankruptcy proceeding against a debtor to stay a domestic proceeding that may affect the bankruptcy estate. This would happen only as long as the foreign law looks upon the bankruptcy trustee as the sole person competent to conduct legal proceedings. This already seems to have become the generally accepted opinion.
Citation: Unterbrechungswirkung ausländischer Konkurseröffnung (Vorbereitungsanfrage zum Grossen Senat), BGH, Beschl. v. 13.5.1997 – IX ZR 309/96, reported in 1997 NJW, Heft 38, page 2525.
Filed in: 1997 International Law Update, Issue 12
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Second Circuit rules that English law controls on issue of whether bankrupt Maxwell empire could avoid sizeable pre-filing payments to English and French banks; Court praises joint Anglo-American judicial cooperation
The following case is a spin-off of the swirl of legal events set in motion by the mysterious death of British media tycoon, Robert Maxwell. Death drove his international corporation (debtor) into bankruptcy both in the English courts and in the federal courts in New York.
Though debtor had its headquarters and management in the UK, the U.S. was the situs of about 80% of its assets. Its two main assets were U.S. subsidiaries, MacMillan, Inc. and Official Airlines Guide, Inc. On December 16, 1991, debtor filed for Chapter 11 bankruptcy protection in New York and for protection under English law the next day in the High Court. Debtor tried to avoid three transfers of funds carried out within 90 days of its filings. Two multi-million pound transfers went to British banks while one transferee bank was French (Société Générale). All three banks had branches abroad including in New York City. Debtor’s credit arrangement with Barclay’s and Westminster provided for the application of English law to any disputes.
With a highly praiseworthy degree of mutual cooperation, the American and English courts made every effort to maximize the payment to creditors by selling debtor’s subsidiaries as going businesses and through harmonization of their adjudications. Both courts made every effort to coordinate their differing legal rules and to allow world-wide creditors to file claims in either court. The English court also rejected Barclay’s request for an anti-suit injunction against the American proceedings. The American courts, however, still had to rule on administrators’ effort to avoid the above pre-petition transfers under American law. Ultimately the district court denied the banks’ motions to dismiss these claims for failure to state a claim based on international comity, extraterritoriality and choice-of-law considerations.
The U.S. Court of Appeals for the Second Circuit affirms. Citing the Supreme Court’s classic definition of international comity in Hilton v. Guyot, 159 U.S. 113, 163 (1895), the Court finds that international comity and its impact on the interpretation of bankruptcy law is part of American law. In the Court’s view, it should use modern choice-of-law analysis to determine whether congress could reasonably have intended its statutes to have an extraterritorial reach or to prevail over foreign substantive law.
Finding a true conflict between relevant rules of English and American law, the Court sees a much closer link between England and the transactions in question. Debtor is an English corporation that contracted most of its debts in England. The transfers in question also came from accounts kept in two English banks. The only significant nexus to the U.S. was the sale of debtor’s subsidiaries but, as going concerns, their sale had little or no adverse impact on the local economy. Finally, the Court praises the pioneering efforts taken by the lower courts to pool resources for the benefit of creditors and to make the international judicial system work with uncharacteristic smoothness.
Citation: In re Maxwell Communication Corporation plc, 93 F.3d 1036 (2d Cir. 1996).
Filed in: 1996 International Law Update, Issue 12
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Seventh Circuit affirms U.S. bankruptcy court’s injunction that barred American citizen from interfering with affairs of company incorporated in St. Kitts and Nevis, despite prior receivership ordered by Nevis court
The high-flying business of Rimsat, Ltd., a company incorporated in the Federation of Saint Kitts and Nevis, part of the British Commonwealth, was to provide satellite communications to Tonga and other islands in the South Pacific. Rimsat used Russian satellite equipment, and had its principal place of business in Fort Wayne, Indiana. Trouble later developed between the managing director and one Carl Hilliard, an American director and shareholder. Hilliard obtained an injunction from the High Court in Nevis which, inter alia, appointed him receiver with full powers to manage Rimsat.
Two weeks later, several of Rimsat’s creditors filed a Chapter 11 petition in federal bankruptcy court in Fort Wayne. The bankruptcy judge enjoined Hilliard from exercising control over Rimsat’s property or otherwise interfering with the bankruptcy proceeding. Taking an appeal, Hilliard argued that the bankruptcy court should have suspended or dismissed all American proceedings in deference to his Federation receivership.
The U.S. Court of Appeals for the Seventh Circuit affirms the bankruptcy court. The Bankruptcy Code authorizes (but does not command) a suspension or dismissal of proceedings if there “is a pending foreign proceeding.” [See § 305(a)(2)(A)]. The Code defines this phrase as a proceeding “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 …” [See § 101(23)]
“The fact that the stay affected proceedings in a foreign country would be relevant to a motion to lift the automatic stay …, had one been made (none was). The movant could argue for relief from the stay on the basis of the doctrine of comity, though the argument … might not succeed. But the mere existence of a foreign proceeding affecting the debtor does not, as Hilliard believes, invalidate the stay by giving it an impermissible extraterritorial reach. … There is no authority for allowing the presumption against the extraterritorial application of U.S. statutes … to defeat application of the automatic stay to a U.S. citizen to prevent his interfering with a U.S. bankruptcy proceeding in which the debtor is a corporation headquartered in the United States.” [3]
Citation: In the Matter of: Rimsat, Ltd., v. Hilliard, 98 F.3d 956 (7th Cir. 1996).
Filed in: 1996 International Law Update, Issue 12
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