Janet Wong

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff 

On appeal, the Third Circuit set out the following updated test based on Philadelphia Gear.^[13] A court must determine whether foreign bankruptcy proceedings are “parallel” to a civil action in the U.S. court.^[14] Such parallelism occurs “when: (1) the foreign bankruptcy is ongoing in a duly authorized tribunal while the civil action is pending before the United States court; and (2) the outcome of the United States civil action may affect the debtor’s estate.”^[15] If the foreign bankruptcy is parallel to the U.S. civil action, the party seeking the extension of comity must establish its prima facie case.^[16] This requires showing (1) “‘the foreign bankruptcy law shares [the U.S.] policy of equal distribution of assets,’ and (2) ‘the foreign law mandates the issuance or at least authorizes the request for the stay.’”^[17]

Additionally, if a prima facie case is established, the court must make additional inquiries to ensure that the foreign bankruptcy is fair to the parties and compatible with U.S. public policy preferences.^[18] These inquiries are “whether (1) the foreign bankruptcy proceeding is taking place in a duly authorized tribunal, (2) the foreign bankruptcy court provides for equal treatment of creditors, (3) extending comity would be ‘in some manner inimical to this country's policy of equality,’ and (4) the party opposing comity would be prejudiced.”^[19] The first inquiry is satisfied “if the foreign proceeding is parallel to the domestic action.”^[20] The second inquiry requires an assessment of whether “‘any plan of reorganization is fair and equitable as between classes of creditors that hold claims of differing priority or secured status.’”^[21] The third inquiry requires the court to consider a list of factors that indicate procedural fairness in the foreign bankruptcy proceedings including the following:

"(1) whether creditors of the same class are treated equally in the distribution of assets; (2) whether the liquidators are considered fiduciaries and are held accountable to the court; (3) whether creditors have the right to submit claims which, if denied, can be submitted to a bankruptcy court for adjudication; (4) whether the liquidators are required to give notice to the debtors[’] potential claimants; (5) whether there are provisions for creditors[’] meetings; (6) whether a foreign country[’]s insolvency laws favor its own citizens; (7) whether all assets are marshalled before one body for centralized distribution; and (8) whether there are provisions for an automatic stay and for the lifting of such stays to facilitate the centralization of claims.^[22]"

The foreign bankruptcy proceedings, however, “need not function identically to similar proceedings” in the United States.^[23] The fourth inquiry requires the court to “assess whether the pending foreign bankruptcy proceedings provide due process protections for the party opposing the extension of comity.”^[24] To do so, it can apply the same factors from the third inquiry to the specific party opposing comity “to evaluate whether such protections have been available to that party in practice (as applicable).”^[25]

In Vertiv, the proceedings were parallel for two reasons.^[26] First, Singapore had unquestioned jurisdiction over the liquidation proceedings of Wayne Burt while the civil action, in which Wayne Burt was a necessary party, was pending in the District Court.^[27] Second, the outcome of the civil action could affect Wayne Burt’s estate since Vertiv was seeking damages.^[28] Additionally, there was a prima facie case for two reasons.^[29]First, “Singapore shares the United States’ policy of equal distribution of assets among similarly situated creditors.”^[30] Second, because “Singapore law prohibits any action or proceeding against Wayne Burt without leave of the Singapore court,” and the Singapore court had not granted leave for the civil action, a stay or dismissal of that action was warranted.^[31] The Third Circuit left the remainder of the test for the District Court to apply should the District Court choose to “resolve the motion [to dismiss] on international comity grounds.”^[32]

Vertiv shows the courts’ willingness to provide comity to foreign bankruptcy proceedings in the non-chapter 15 context.^[33] In Vertiv, the Third Circuit set out a refreshed Philadelphia Gear test that would “govern adjudicatory comity with regard to pending foreign bankruptcy proceedings.”^[34] Post-Vertiv, the Austar test is inapplicable in a bankruptcy-specific comity situation.^[35]