Recently, there has been a difference of opinion on whether a foreign liquidator should initiate Chapter 15 proceedings before seeking courtesy in the United States (the “United States”).
In Moyal vs. Münsterland Gruppe GMbH & Co. KG1, a plaintiff brought an action in New York State court, which was ultimately returned to the Southern District of New York, to seek damages from a defendant for breach of an agreement of distribution. The defendant decided not to respond to the complaint due to the lack of financial resources to defend the lawsuit. Shortly thereafter, the president of the district court referred the case back to a district judge for a contested hearing to determine the amount of damages owed by the defendant. Two years later, the defendant brought proceedings in the district court of Münster in Germany to seek bankruptcy protection under German insolvency law, when an insolvency administrator was appointed. .
The insolvency administrator has filed a motion to dismiss or stay the New York action as the German Civil Procedure Code stays all previously filed actions against the defendant. In addition, less than two weeks later, the defendant’s lawyer filed a motion to remove his duties as the defendant’s lawyer, allegedly because under German law the lawyer’s mandate to act for the defendant was terminated when filing the German insolvency proceedings. The plaintiff raised several arguments in response to the motion to dismiss, including whether the insolvency administrator should have commenced Chapter 15 proceedings for a stay of the action.
The court ruled that the defendant was entitled to a stay of the action under the principles of comity “since it has shown that the German insolvency proceedings are procedurally fair and do not contravene the laws or the law. ‘United States public order’.2 The court noted that “the plaintiff’s suggestion that the insolvency trustee appointed under German law should have initiated proceedings in the United States bankruptcy court under Chapter 15 of the Bankruptcy Code to request a stay of the action in the district court was absurd and would go against the principles of comity.3
The court’s statement regarding the need for Chapter 15 relief appears to be at odds with overwhelming case law dealing with the need for a Chapter 15 case when seeking court comity. American. In fact, the district court cited only one authoritative source in support of its deference to the German proceeding in the absence of a Chapter 15 proceeding. The trial judge was apparently persuaded that the need for a Chapter 15 remedy was not justified in view of the state of the proceedings before him. Thus, in response to the claimant’s argument that the lawyer did not have the power to file the motion for dismissal or stay under German law when German insolvency began, the court ruled that argument “ unfounded “since at the time of the presentation of the request, the lawyer was” still the lawyer of record. “4 It should be noted that, despite the legislative intention that Chapter 15 should be the “single point of entry” for seeking courtesy and assistance in the United States by foreign liquidators, there have been instances where the courts have determined that recognition of Chapter 15 is not required, particularly in circumstances not involving the facilitation of cross-border restructurings or where corporate governance or administrative tasks in accordance with local state law are the main objective of the activity in the United States. 5 In a more recent decision, also involving German insolvency proceedings, the District Court for the Southern District of Texas noted that “it is clear from the structure of Chapter 15 that recognition is a prerequisite for obtaining the courtesy of any US court with respect to foreign insolvency proceedings. HFOTCO LLC v. Zenia Special Mar. Enter.6
This decision arose out of an event at a terminal owned by HFOTCO LLC located in a shipping channel in Houston, Texas. A ship, the Minerva zenia, moored at the terminal, would have caused damage to the terminal quay when another vessel, the X-Press Machu Picchu (f / k / a M / V Constantine S) accelerated by the Minerva zenia at a speed dangerous for these waters. According to the notice, HFOTCO “sued Minerva Zenia Interests (sic) for negligence” and Minerva Zenia filed a third party complaint against the people it held responsible, including: MS Constantin S, the former owner of M / V Constantine S, the X-press Machu Picchu, and the German Insolvency Administrator for MS Constantin S, among other parties.7
MS Constantin S initiated insolvency proceedings in Germany in May 2014, and a German administrator was appointed to administer the assets of MS Constantin S, including the M / V Constantine S. It was alleged that the insolvency administrator continued to retain the M / V Constantine S operational until its sale two months before the accident at the HFOTCO terminal. Mr. S. Constantin S argued that all claims against him should be dismissed because he had initiated bankruptcy proceedings in Germany and all subsequent legal actions should be directed to the insolvency administrator and, by Therefore, international comity dictated that the US court should “respect German insolvency proceedings in dismissing all claims against Mr. S. Constantine S because she was not the appropriate defendant under German law.8
After considering the principles of international comity and the origins of Chapter 15, the District Court declared that it was powerless to grant the relief sought by Mr. S. Constantine S without the commencement of a Chapter 15 motion. “Tto the knowledge of the court, there is no other mechanism allowing Mr. S. Constantin S to seek the relief he wishes apart from Chapter 15. The sensible solution would be for Mr. S. Constantin S to ensure that the appointed foreign representative of his insolvency proceedings in Germany . . . immediately seek recognition from the bankruptcy court.9 In the absence of recognition under Chapter 15, the District Court dismissed Mr. S. Constantin S’s request to dismiss the claims against him.
The Texas District Court has taken the majority approach when it comes to a foreign representative seeking courtesy in the United States. However, some courts have found exceptions to the requirement to seek recognition first when faced with unique or opportune circumstances. The most prudent solution in all cases is to prioritize obtaining recognition of the foreign proceeding before relying on a court to excuse the lack of such recognition, especially when it comes to to seek the comity of a foreign law or of a proceeding in a United States court.
1 Moyal v. Münsterland Gruppe GMbH & Co. KG, 2021 US Dist. LEXIS 93398 (May 7, 2021).
2 Username. at 8.
3 Username. at 8 fn 1.
4 Username. at 8.
5 See Trikona Advisors Ltd. vs. Chugh, 846 F.3d 22 (2d Cir. 2017) (the party is not precluded from seeking the estoppel collateral to the findings of fact of a Cayman court where no restructuring was involved in the absence of recognition of the chapter 15); Iida v. Kitahara (In re Iida), 377 BR 243 (9th Cir. BAP 2007) (With respect to corporate governance, such as the replacement of a director or dissident officer, Chapter 15 is not a prerequisite for taking such action ); In Re Loy, 380 BR 154 (Bankr. ED Va. 2007) (Fling of lis pendens under state law or the UCC statement should not require recognition of Chapter 15).
6 HFOTCO LLC v. Zenia Special Mar. Enter., n ° CV H-19-3595, 2021 WL 2834687 (SD Tex. July 7, 2021) at * 4.
7 Username. to 1.
8 Username. at 2 hours.
9 Username. at 4 o’clock; see also United States v. JA Construction Co., 333 BR 637, 639 (EDNY 2005) (“In the absence of recognition under Chapter 15, this Court does not have the power to consider the applicant’s request for suspension”); Andrus v. Digital Fairway Corp., 2009 WL 1849981 (ND Tex. June 26, 2009) at 2 (“Chapter 15 prohibits a clear and uniform procedure by which a foreign entity entrusted with the management of a bankruptcy in that jurisdiction can seek assistance from the American courts . ”).