Chapter 15 of the Bankruptcy Code, the U.S. version of the United Nations Model Law on Cross-Border Insolvency, is not the exclusive method for giving preclusive effect to a decision from a foreign bankruptcy court, at least when the party seeking enforcement is not the foreign representative.
In a Jan. 18 opinion, the Second Circuit relegated chapter 15 to its designed purpose: assisting foreign bankruptcy tribunals. The appeals court said chapter 15 was not intended to inhibit private parties when they are enforcing foreign bankruptcy judgments in the U.S.
The case arose from disputes between two men who together had owned an investment advisory firm. One initiated a winding up proceeding in the Cayman Islands against the advisory firm. The foreign court eventually granted the petition to liquidate the firm, and the decision was affirmed all the way up to the Privy Council in London.
Meanwhile, the other owner filed a lawsuit in federal district court against his former partner, alleging breach of fiduciary duty and other claims related to the advisory firm.
The district court ultimately granted summary judgment in favor of the defendant and dismissed the suit by giving collateral estoppel effect to findings by the Caymans court made in the course of granting the winding up petition.
In the Second Circuit, the defeated plaintiff argued that the judgment from the foreign court could not have preclusive effect because there was no chapter 15 recognition given to the Cayman Islands liquidation. Writing for the appeals court, Circuit Judge John M. Walker, Jr. rejected the argument, saying that “the requirements of chapter 15 do not apply here.”
Judge Walker based his decision on the purposes of chapter 15. He said it was designed to consolidate “multinational bankruptcies into one single proceeding” and address a “persistent problem” where some creditors attempt to recover more than their fair share by suing a debtor in several countries.
When called upon to give preclusive effect to the findings of the foreign court, Judge Walker said that the U.S. court was not assisting a foreign liquidation nor was a foreign court assisting a bankruptcy in the U.S. He also said that neither of the parties in the federal district court was the foreign representative and neither was seeking the U.S. court’s assistance in enforcing a foreign judgment.
In addition, Judge Walker said that the U.S. suit was a non-bankruptcy action that was “unconnected to any foreign or U.S. bankruptcy proceeding.” Consequently, he narrowly held that “chapter 15 does not apply when a court in the U.S. simply gives preclusive effect to factual findings from an otherwise unrelated foreign liquidation proceeding.”
Judge Walker also held that chapter 15 was neither an express nor an implied federal preemption of state law of comity, which underlaid the district court’s decision to invoke collateral estoppel in dismissing the suit.
Although the holding is narrow, some language in the opinion might be taken out of context to mean that chapter 15 must be invoked before directly enforcing a foreign judgment in the U.S. In a footnote, Judge Walker said that a Connecticut state court ruling to that effect may not have been correctly decided.
In the Connecticut case, one of the parties to the foreign liquidation, not the foreign representative, sought to enforce an award of attorneys’ fees in the U.S. Judge Walker said that directly seeking enforcement of a foreign bankruptcy court order “arguably falls within the scope of chapter 15.”
However, Section 1509(a) says that a chapter 15 case is initiated by the filing of a petition for recognition by a “foreign representative,” not by a private party in a foreign bankruptcy. Thus, it is doubtful that a private party could employ chapter 15 for direct enforcement of a foreign judgment when the foreign representative sees no reason for incurring the expense.
In addition, Section 1509(f) provides that the lack of a chapter 15 case “does not affect any right the foreign representative may have to sue in a court in the U.S. to collect or recover a claim which is property of the debtor.” Thus, the statute implies that even foreign representatives are not required to obtain chapter 15 recognition before suing in the U.S.