U.S. Judge Willing to Split with the U.K. over Chapter 15 Foreign Recognition

Why did Bankruptcy Judge Martin Glenn of New York write a 55-page opinion enforcing a Croatian reorganization plan in the U.S. under chapter 15 when there was no creditor opposition?

Answer: He was sending a message to judges in Britain telling them to reconsider an 1890 decision by the U.K. Court of Appeal known as Gibbs. The U.K. court ruled in Gibbs that a creditor could sue and recover a judgment in England on a contract to be performed in England that was governed by English law, even though the debt owed by the French debtor had been discharged in a French bankruptcy.

Secondarily (or perhaps primarily), Judge Glenn was saying in his October 24 opinion that U.S. courts should grant or deny recognition to foreign proceedings under chapter 9 without regard for how courts abroad might rule in the same case.

The Bankruptcy of Croatia’s Largest Business

The case involved a bankrupt Croatian company known as Agrokor. It was the largest company in Croatia, with revenue representing 15% of the country’s GDP. Among other businesses, Agrokor operated Croatia’s largest supermarket chain.

Insolvent, 77 Agrokor companies filed for bankruptcy reorganization in Croatia last year. There were some 80 other Agrokor companies operating outside of Croatia that were not in bankruptcy anywhere.

In July, nine of the Agrokor companies filed chapter 15 petitions in New York. In September, Judge Glenn recognized the Croatian bankruptcy as the foreign main proceeding. However, he reserved judgment on whether he would recognize and enforce the Croatian reorganization plan in the territorial U.S.

Meanwhile, a court in the U.K. had also recognized Croatia as home to the foreign main proceeding under the U.K.’s version of the UNCITRAL Model Law, which the U.S. adapted as chapter 15. The U.K. court also reserved judgment on recognizing and enforcing the Croatian plan in the U.K. The U.K.’s foreign main recognition has not become final because an appeal is pending.

Switzerland has given final foreign main recognition to the Croatian proceedings, but Bosnia-Herzegovina, Montenegro, Serbia and Slovenia have all denied foreign main recognition.

U.K. Will Determine the Success of the Croatian Plan

Almost two-thirds of the Croatian companies’ debt is governed by English law. The other third is governed by New York law.

If Gibbs retains vitality and is controlling, the U.K. court will presumably refuse to recognize and enforce the Croatian reorganization plan in the U.K. Judge Glenn noted that the English High Court had followed Gibbs in 2018.

Considering “the amount of prepetition debt governed by English law,” Judge Glenn said that “a refusal of the English court to enforce parts of the [Croatian reorganization plan] would most certainly cause [the plan] to fail.”

The Question for Judge Glenn

The reorganization plan and Croatian bankruptcy law hit all the right buttons typically resulting in recognition and enforcement in the U.S. Judge Glenn said that Croatian law tracks the U.S. Bankruptcy Code “closely,” gives creditors “meaningful participation” in the proceedings, is procedurally fair, employs distribution rules “closely” following the priorities in U.S. law, and requires approval by a two-thirds vote of non-insider creditors.

Judge Glenn nonetheless analyzed whether he should consider how the courts in other nations will rule. Specifically, should he enforce the plan in the U.S. if the U.K court rules that the plan is not enforceable in the U.K.?

In particular, Judge Glenn asked whether it would be “appropriate” to extend comity to Croatia by enforcing the plan “if doing so could be seen as a refusal to extend comity” to the U.K., “particularly where a majority of the debt to be modified is governed by the law of” England.

Do What’s Right; Don’t Count Noses

Judge Glenn wrote a scholarly analysis of Gibbs, its history and critical commentary. He explained how Gibbs is an example of 19th century “territorialism,” which has been supplanted by “modified universalism,” as exemplified by the UNCITRAL Model Law.

Judge Glenn cited a “distinguished professor” of U.K. law who said that the “Gibbs doctrine belongs to an age of Anglocentric reasoning which should be consigned to history.”

Adding his own commentary, Judge Glenn said that Gibbs “would violate the fundamental principle of equality of distribution” by allowing a greater recovery by creditors whose claims are governed by English law.

Declining to follow how the U.K. might rule, Judge Glenn held, “Courts in other jurisdictions will make their own, independent decisions whether to recognize and enforce” the Croatian plan. The fact that the U.K. might refuse to recognize the discharge, he said, is not “a basis for this Court to decline to recognize and enforce the [Croatian plan] within the territorial jurisdiction of the U.S.”

Assuming the Croatian plan is upheld on appeal in Croatia, Judge Glenn therefore said he would recognize the Croatian plan “in full within the territorial jurisdiction of the U.S., including the provisions modifying the English law governed debt and the New York law governed debt.”

Question: How will the forces at play in Brexit influence how U.K. courts rule on Gibbs?