The “home court” rule does not apply in chapter 15 cases, according to Delaware’s Chief District Judge Colm F. Connolly, who affirmed Bankruptcy Judge Thomas M. Horan.

Judge Connolly’s September 23 opinion means that a creditor must pursue a prebankruptcy claim against a chapter 15 debtor in the foreign court, because the bankruptcy court in a chapter 15 case does not adjudicate claims.

The Suit on a Prebankruptcy Claim

The Bermudian debtor was the sole limited partner in a fund designed to invest in emerging technology companies. Before bankruptcy, the manager of the fund notified the debtor that it had failed to make a $625,000 capital contribution. Consequently, the manager claimed that the debtor was a “defaulting partner.”

Shortly after the notice, the debtor filed winding-up proceedings in Bermuda, where the Bermudian court entered a winding-up order and appointed joint liquidators. The debtor filed a chapter 15 petition in Delaware, where the bankruptcy court granted foreign main recognition.

Meanwhile, the liquidators and the fund were in discovery disputes. On the day when the fund was supposed to produce documents, the fund instead filed an adversary proceeding in the Delaware bankruptcy court. In the adversary proceeding, the fund sought a declaration that the debtor was in breach of contract, that the debtor was a “defaulting partner” and that the fund should be entitled to exercise all remedies.

The liquidators responded by sending a letter to the fund claiming there was a violation of the Section 362 automatic stay. The fund then filed a motion in the bankruptcy court seeking a declaration that there was no stay violation or, alternatively, seeking a modification of the automatic stay.

In a bench opinion, Bankruptcy Judge Horan decided that the automatic stay barred the adversary proceeding and that “home court” rule does not apply in chapter 11. The fund appealed but did not succeed.

No Claims Adjudication in Chapter 15

Addressing the merits, District Judge Connolly began by explaining how Section 1520(a)(1) invokes the Section 362 automatic stay on foreign main recognition “with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the United States.” Almost immediately, he said that the adversary proceeding in bankruptcy court “fit[s] within the prohibitions set forth in § 362(a)(l)” because the fund was seeking “monetary damages and declaratory relief against the Debtor based on the Debtor’s prebankruptcy conduct.”

Judge Connolly said that the fund wanted him to “ignore” the Bankruptcy Code and “invent an exception to the automatic stay’s application in Chapter 15 cases.”

Judge Connolly explained why he declined the invitation to allow the adversary proceeding. Quoting Third Circuit authority, he said that “a Chapter 15 court in the United States acts as an adjunct or arm of a foreign bankruptcy court where the main proceedings are conducted” and is “‘ancillary’ to a foreign debtor’s main insolvency proceeding pending before a foreign court.”

In chapter 15, neither Section 501 nor Section 502 applies. Section 501 governs the filing of claims, while Section 502 controls the allowance of claims.

Although recognition invokes the Section 362 automatic stay, the ancillary purpose of the U.S. court is shown by the exclusion of Section 501 from chapter 15 cases. As a result, Judge Connolly said that “claims against a foreign debtor in a Chapter 15 case are channeled to the debtor’s foreign main proceeding . . . . where distributions to creditors based on those adjudications are made.”

Judge Connolly said that the decision by Bankruptcy Judge Horan was “consistent with the rulings of many courts who have refused to adjudicate creditor claims in the United States against a foreign debtor that is the subject of a foreign bankruptcy proceeding.”

Given how the Companies Act in Bermuda imposes a stay arising from the liquidation, Judge Connolly said that the “principles of international comity weigh strongly against permitting [the fund’s] adversary proceeding to continue within the United States.”

No ‘Home Court’ Rule in Chapter 15

The fund contended that the bankruptcy court erred by not applying the “home court” rule. Judge Connolly characterized the rule as “a judicially created exception to the automatic stay which permits the filing of an adversary proceeding against a debtor in a case under Chapter 7 or Chapter 11.”

Judge Connolly held that “the rationale underlying the home court rule does not apply to cases under Chapter 15 [because] there is no claims adjudication process for the U.S. Bankruptcy Court to oversee” in chapter 15. “Put differently,” he said, “the ‘home court’ of the foreign debtor is the foreign main proceeding — not the Chapter 15 case.”

The fund made several other arguments that Judge Connolly rejected. For example, the fund contended that imposing the automatic stay left it with no forum in which to assert its claims, because the Bermudian court did not have jurisdiction over the fund.

The fund could have filed a claim in Bermuda but perhaps chose not to do so to avoid a submission to jurisdiction. In declining to file a claim, Judge Connolly said that the fund “does so at its own peril.”

Judge Connolly pointed to the occasions when the fund could have sued the debtor. For example, the fund could have sued in the U.S. prior to foreign main recognition. Or, the fund could have filed a claim in Bermuda or could have asked the Bermudian court for permission to sue the debtor in the Cayman Islands, where the fund was organized.

Having found that the fund violated the automatic stay, Judge Connolly also upheld the decision by Bankruptcy Judge Horan that the fund had not shown “cause” to modify the automatic stay. He affirmed the order by Judge Horan, which found a violation of the automatic stay, and directed the fund to dismiss the adversary proceeding with prejudice.