A foreign company is not obligated to obtain recognition of a foreign bankruptcy proceeding under chapter 15 to enforce a discharge arising from a foreign reorganization plan, according to District Judge Katherine Polk Failla of Manhattan.
In her February 21 opinion, Judge Failla also enforced a third-party, non-debtor release in the foreign reorganization plan without discussing whether a similar release would be permissible under the Bankruptcy Code.
A Canadian company commenced a debt restructuring in a Canadian court under the Companies’ Creditors Arrangement Act, or CCAA. The company’s stock was traded on the New York Stock Exchange.
The plaintiffs in Judge Failla’s court were stockholders who were aware of the CCAA proceedings but elected not to participate nor to file claims by the bar date. The day before the CCAA plan was scheduled for court approval, the plaintiffs filed suit in New York accusing the Canadian company and its chief executive of violating U.S. securities law.
The approval hearing in Canada was adjourned to enable the plaintiffs to participate in the CCAA proceeding, but the plaintiffs again elected not to appear and did not object to approval of the reorganization. With unanimous creditor support, the Canadian court approved the reorganization.
The Canadian plan extinguished the plaintiffs’ stock and included a release barring clams against the chief executive. In Judge Failla’s court, the company and the chief executive filed a motion to dismiss under Rule 12(b)(1) based on international comity. Judge Failla granted the motion, dismissing suit as to both the company and the chief executive.
Courts in the Second Circuit, Judge Failla said, have discretion to dismiss suits based on international comity, even if the U.S. suit alleges violations of U.S. securities laws.
To warrant dismissal, there are two main factors: (1) Did the foreign proceeding satisfy fundamental standards of procedural fairness, and (2) would granting comity violate any U.S. laws or public policy?
With regard to procedural fairness, Judge Failla said it was “irrelevant” that the Canadian court lacked personal jurisdiction over the plaintiffs. Similarly, she said it was “irrelevant” that the company did not seek recognition of the foreign proceeding under chapter 15 of the Bankruptcy Code.
Judge Failla said that the plaintiffs, “in effect, engaged in forum shopping by electing to file an action in this Court in lieu of filing a claim” in the CCAA proceeding. She added that the plaintiffs “had ample opportunity to litigate their claims in the [CCAA proceeding] fully and fairly, and cannot now claim prejudice resulting from their own choice not to do so.”
The plaintiffs contended that the defendants had shown no exceptional circumstances to warrant dismissal. Significantly, Judge Failla said that the exceptional circumstances requirement does not apply to foreign bankruptcy proceedings.
Judge Failla found that dismissal would not violate any U.S. law or policy, without analyzing whether the non-debtor release would be permissible under the Bankruptcy Code.
With regard to dismissal of the suit against the chief executive, Judge Failla said that failing to dismiss as to him “would interfere with the outcome of the [CCAA proceeding] and defeat the purpose of granting comity to the Canadian court.” She noted that the Second Circuit has upheld dismissal of fraud claims against individual defendants as part of a grant of comity to a foreign bankruptcy.
Dismissing the suit as to both the company and the chief executive, Judge Failla said that the plaintiffs “cannot complain of prejudice that flows from their strategic decision not to participate in the CCAA Proceeding.”