United States: No Comity Extended To Foreign Bankruptcy Without Chapter 15 Recognition

Last Updated: February 27 2019
Article by Dan T. Moss and Mark G. Douglas

U.S. courts have a long-standing tradition of recognizing or enforcing the laws and court rulings of other nations as an exercise of international "comity." Prior to the enactment of chapter 15 of the Bankruptcy Code in 2005, the procedure for obtaining comity from a U.S. court in cases involving a foreign bankruptcy or insolvency case was haphazard and unpredictable. A ruling recently handed down by the U.S. District Court for the Northern District of Illinois indicates that the enactment of chapter 15 was a game changer in this context. In Halo Creative & Design Ltd. v. Comptoir Des Indes Inc., 2018 WL 4742066 (N.D. Ill. Oct. 2, 2018), the court denied a motion for a stay of U.S. litigation in light of the pendency of the defendant's Canadian bankruptcy proceeding because a U.S. bankruptcy court had not recognized the Canadian bankruptcy under chapter 15.

Comity

"Comity" is "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). International comity has been interpreted to include two distinct doctrines: (i) "legislative," or "prescriptive," comity; and (ii) "adjudicative comity," Maxwell Communication Corp. v. Societe Generale (In re Maxwell Communication Corp.), 93 F.3d 1036, 1047 (2d Cir. 1996).

The former "shorten[s] the reach of a statute"—one nation will normally "refrain from prescribing laws that govern activities connected with another state when the exercise of such jurisdiction is unreasonable." Official Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(c)), 575 B.R. 229, 237 (Bankr. S.D.N.Y. 2017).

"Adjudicative comity," or "comity among courts," is an act of deference whereby the court of one nation declines to exercise jurisdiction in a case that is properly adjudicated in a foreign court. Because a foreign nation's interest in the equitable and orderly distribution of a foreign debtor's assets is an interest deserving respect and deference, U.S. courts generally defer to foreign bankruptcy proceedings and decline to adjudicate creditor claims that are the subject of such proceedings. See Canada Southern Railway Co. v. Gebhard, 109 U.S. 527, 548 (1883) ("the true spirit of international comity requires that [foreign schemes of arrangement], legalized at home, should be recognized in other countries"); accord In re Int'l Banking Corp. B.S.C., 439 B.R. 614, 624 (Bankr. S.D.N.Y. 2010) (citing cases).

Prior to 2005, as an exercise of comity, U.S. courts regularly enforced stays of creditor collection efforts against foreign debtors or their U.S. assets issued in connection with foreign bankruptcy proceedings. See, e.g., Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187 (3d Cir. 1994) (deferring to a Mexican bankruptcy proceeding); Badalament, Inc. v. Mel-O-Ripe Banana Brands, Ltd., 265 B.R. 732 (E.D. Mich. 2001) (deferring to a Canadian bankruptcy proceeding); Lindner Fund, Inc. v. Polly Peck Int'l PLC, 143 B.R. 807 (S.D.N.Y. 1992) (citing cases and dismissing litigation brought in the U.S. against a U.K. company that was a debtor in U.K. insolvency proceedings); Cornfeld v. Investors Overseas Services, Ltd., 471 F. Supp. 1255 (S.D.N.Y. 1979) (deferring to a Canadian bankruptcy proceeding), aff'd, 614 F.2d 1286 (2d Cir. 1979).

In many such cases, U.S. courts recognized and enforced the stays of foreign courts in granting relief in an "ancillary proceeding" brought by the representative of a foreign debtor under section 304 of the Bankruptcy Code—the repealed precursor to chapter 15 of the Bankruptcy Code. Section 304 expressly authorized a U.S. bankruptcy court to enjoin the commencement or continuation of any action against a foreign debtor with respect to property involved in a foreign bankruptcy case. See, e.g., JP Morgan Chase Bank v. Altos Hornos de Mexico S.A. de C.V., 412 F.3d 418 (2d Cir. 2005); Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452 (2d Cir. 1985); Hoffman v. Joint Official Liquidators (In re Nat'l Warranty Ins. Risk Retention Grp.), 306 B.R. 614 (B.A.P. 8th Cir.), aff'd, 384 F.3d 959 (8th Cir. 2004).

However, an ancillary proceeding under section 304 was "not the exclusive remedy for foreign debtors opposing actions by local creditors against assets located in the United States." Hembach v. Quikpak Corp., 1998 WL 54737, *4 (E.D. Pa. Jan. 8, 1998). The foreign representative could request that the U.S. court recognize foreign bankruptcy proceedings as a matter of international comity, without seeking relief under section 304. See Interpool, Limited v. Certain Freights of the M/VS Venture Star, Mosman Star, Fjord Star, Lakes Star, Lily Star, 878 F.2d 111 (3d Cir. 1989); Remington Rand Corporation–Delaware v. Business Sys. Inc., 830 F.2d 1260, 1267–68 (3d Cir. 1987) (section 304 "expresse[d] Congressional recognition of an American policy favoring comity for foreign bankruptcy proceedings . . . [and was] not the exclusive source of comity"); In re Enercons Virginia, Inc., 812 F.2d 1469, 1471–72 (4th Cir. 1987); see generally Collier on Bankruptcy ¶ 1509.02 (16th ed. 2019) ("Thus, foreign representatives could, theoretically at least, try their luck in a variety of courts, with failure in one not precluding a second try in another.").

Chapter 15 Alters the Landscape

Even though comity is alive and well in both bankruptcy and non-bankruptcy contexts, the enactment of chapter 15 in 2005 changed the requirements for seeking recognition and enforcement in the U.S. of foreign bankruptcy court orders or laws impacting a foreign debtor or its U.S. assets.

Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." A "foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:

a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.

More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the U.S. of both a "foreign main proceeding"—a case pending in the country where the debtor's center of main interests is located (see 11 U.S.C. § 1502(4))—and "foreign nonmain proceedings," which may have been commenced in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)).

If the bankruptcy court recognizes a foreign proceeding as either a main or nonmain proceeding, the automatic stay prevents creditor collection efforts in the U.S. (see section 1520(a)), and section 1521(a) authorizes the court to grant a broad range of provisional and other relief designed to preserve the foreign debtor's assets (including injunctive relief) or otherwise to provide assistance to the court presiding over the debtor's foreign proceeding.

Section 1509(b) provides that, if the U.S. bankruptcy court recognizes a foreign proceeding, the foreign representative may apply directly to another U.S. court for appropriate relief, and a U.S. court "shall grant comity or cooperation to the foreign representative." Section 1509(c) accordingly specifies that a request for comity or cooperation from another U.S. court "shall be accompanied by a certified copy of an order granting recognition" under chapter 15. This provision reflects lawmakers' intention that chapter 15 be the "exclusive door to ancillary assistance to foreign proceedings," with the goal of controlling such cases in a single court. Collier on Bankruptcy ¶ 1509.03 (16th ed. 2019) (quoting H.R. Rep. No. 109-31(I), 110 (2005) ("Parties would be free to avoid the requirements of [chapter 15] and the expert scrutiny of the bankruptcy court by applying directly to a state or Federal court unfamiliar with the statutory requirements. . . . This section concentrates the recognition and deference process in one United States court, ensures against abuse, and empowers a court that will be fully informed of the current status of all foreign proceedings involving the debtor.")).

If a U.S. bankruptcy court denies a petition for recognition of a foreign proceeding, section 1509(d) authorizes the court to "issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation" from U.S. courts. However, a foreign representative's failure to commence a chapter 15 case or to obtain recognition does not prevent the foreign representative from suing in a U.S. court "to collect or recover a claim which is the property of the debtor." 11 U.S.C. § 1509(f).

Therefore, unlike practice before the enactment of chapter 15, a foreign representative must comply with the requirements of chapter 15 to obtain the various forms of relief or assistance contemplated by the chapter, including a stay of U.S. court proceedings against a foreign debtor or its assets. See Oak Point Partners, Inc. v. Lessing, 2013 WL 1703382 (N.D. Cal. Apr. 19, 2013); Orchard Enter. NY, Inc. v. Megabop Records Ltd., 2011 WL 832881 (S.D.N.Y. Mar. 4, 2011); Econ. Premier Assurance Co. v. CPI Plastics Grp., Ltd., 2010 WL 11561369 (W.D. Ark. June 7, 2010); Reserve Int'l Liquidity Fund, Ltd. v. Caxton Int'l Ltd., 2010 WL 1779282 (S.D.N.Y. Apr. 29, 2010); Andrus v. Digital Fairway Corp., 2009 WL 1849981 (N.D. Tex. June 26, 2009); U.S. v. J.A. Jones Const. Grp., LLC, 333 B.R. 637 (E.D.N.Y. 2005); see also Giant Screen Sports LLC v. Sky High Entm't, 2007 WL 627607 (N.D. Ill. Feb. 27, 2007) (granting a stay where the debtor's foreign proceeding was recognized under chapter 15). But see Bickerton v. Bozel S.A. (In re Bozel S.A.), 434 B.R. 86 (Bankr. S.D.N.Y. 2010) (without mentioning section 1509(b), allowing a liquidator appointed in the British Virgin Islands ("BVI") liquidation proceedings of a BVI company to seek relief in the chapter 11 case of its subsidiary).

Halo Creative

Halo Creative & Design Ltd. and its affiliates (collectively, "Halo") were designers and distributors of high-end furniture and lighting. In 2014, Halo sued a competitor—Comptoir Des Indes Inc. ("CDI")—for copyright, trademark, and patent infringement in the U.S. District Court for the Northern District of Illinois. A jury awarded Halo $3.6 million in damages in January 2018.

On March 9, 2018, CDI filed for bankruptcy in Canada under the Canadian Bankruptcy and Insolvency Act (the "CBIA"). Section 69 of the CBIA provides for a stay of all creditor collection actions during the pendency of a debtor's bankruptcy case.

After filing for bankruptcy, CDI filed several post-judgment motions in the U.S. district court, including a motion to stay all proceedings in the litigation consistent with section 69 of the CBIA. In its motion, CDI cited section 1515 of the Bankruptcy Code, which provides that a petition for recognition of a foreign proceeding under chapter 15 shall be accompanied by appropriate evidence of the pendency of the foreign proceeding. It also cited several pre-2005 decisions for the proposition that "[a] Canadian automatic stay, like that of the U.S. Bankruptcy Code, would prohibit prosecution of claims against the debtor's estate, and U.S. courts usually honor that stay" as an exercise of comity. See Banyan Licensing, Inc. v. Orthosupport International, Inc., 2002 WL 31059365 (N.D. Ohio Aug. 15, 2002); Mel-O-Ripe Banana, 265 B.R. at 736–38; Klesman & Assocs. v. American Sensors Inc., 1997 WL 433619 (N.D. Ill. July 29, 1997).

The district court denied the motion for a stay. Initially, the court noted that the problem with CDI's motion for injunctive relief was that CDI had not accompanied its motion with the certified recognition order required by section 1509(c) of the Bankruptcy Code, nor was it evident that CDI had complied with the other rules and procedures laid out in chapter 15.

Next, the district court noted that the case law addressing whether a foreign representative may request a stay of U.S. court proceedings involving a debtor in a foreign liquidation case "'makes clear that foreign representatives must be recognized under Chapter 15 to seek a stay from a federal court'" (quoting Reserve Int'l Liquidity Fund, 2010 WL 1779282, at *5). In the absence of a U.S. bankruptcy court order recognizing CDI's Canadian bankruptcy case, the district court ruled, it had no authority to reconsider CDI's request for a stay. According to the court, all of the cases cited by CDI in support of the motion were decided before the enactment of chapter 15 and were therefore inapposite.

Outlook

Chapter 15 in no way prevents U.S. courts from honoring the long-standing tradition of affording comity to the judgments of foreign courts and the laws of foreign countries. However, as illustrated by Halo Creative, in the context of cross-border bankruptcy proceedings, chapter 15 serves as the gatekeeper for obtaining recognition in the U.S. of foreign bankruptcy court orders or foreign bankruptcy laws. Failure to comply with chapter 15's procedures will mean that a U.S. court does not have the power to extend comity to foreign restructuring proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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