A decision by Bankruptcy Judge James L. Garrity, Jr., of New York shows the deference given to foreign liquidators who file a chapter 15 petition to extinguish a derivative suit in the U.S. that the liquidators labeled a “nuisance case” that was depleting the debtor’s few remaining assets.
The debtor’s parent company was incorporated in Bermuda. Operations were in the U.S. and Canada.
The debtor was acquired in a leveraged buyout in 2004. In 2006, the debtor repaid the buyers for the $200 million they had invested to effect the buyout. A year later, the company refinanced, took down additional debt and paid a $375 million dividend to the owners.
In 2012, 71 shareholders with less than 4% of the stock brought a derivative action in New York state court against the debtor’s directors and controlling shareholders. The suit didn’t go well for the plaintiffs. By 2020, the plaintiffs were on their sixth amended complaint, the prior iterations having been dismissed in whole or in part. Of course, the debtor was named as a defendant in the derivative suit.
Meanwhile, the controlling shareholders had begun a members’ voluntary liquidation in 2013 in Bermuda, where the court had appointed joint liquidators. In 2019, the Bermudian court converted the case to a voluntary winding-up and retained the joint liquidators.
By 2020, with only $100,000 remaining in the administratively insolvent Bermudian estate, the liquidators filed suit in Bermuda to bar the New York plaintiffs from proceeding with the suit. The plaintiffs responded by asking the state court to enjoin the liquidators from attempting to stop the suit in Bermuda.
To bring the dispute to a head in a court with undisputed jurisdiction to decide whether the plaintiffs could proceed with the suit in state court, the liquidators filed a chapter 15 petition in New York in 2020. Judge Garrity granted so-called foreign main recognition a few months later, overruling objections from the New York plaintiffs.
In granting recognition, Judge Garrity said that foreign main recognition could be given even when the purpose of the chapter 15 filing was to enjoin the shareholders’ suit in New York. In his recognition opinion, however, he left the door open for modifying the automatic stay on motion by the plaintiffs in the New York suit. In re Culligan Ltd., 20-12192, 2021 BL 250936, 2021 Bankr. Lexis 1783, 2021 WL 2787926 (Bankr. S.D.N.Y. July 2, 2021). To read ABI’s report, click here.
Recognition invoked the automatic stay in Section 362, halting the suit in state court.
Responding in bankruptcy court, the plaintiffs filed a motion to lift the automatic stay to permit the suit to continue in state court and to compel the liquidators to abandon the suit to them. Judge Garrity denied the plaintiffs’ motion in an opinion on September 12.
With regard to abandonment, Judge Garrity ruled that the statute contains no statutory power for creditors or shareholders to move to compel abandonment in a chapter 15 case, because Section 554 is not among the sections incorporated into chapter 15 cases by Section 103(a) or Section 1520(a). On the other hand, Section 1527(a)(7) permits a foreign representative to move for abandonment.
Even if the statute entitled the plaintiffs to move to compel abandonment, Judge Garrity cited the liquidators’ belief that the suit was a “nuisance case” and that they would be “adversely impacted” by abandoning the suit to the plaintiffs and incurring fees arising from the suit.
Having rejected the request for abandonment, Judge Garrity turned to the plaintiffs’ motion to modify the automatic stay.
Judge Garrity concluded that the 12 Sonnax factors did not favor a stay modification. Among other things, he said “it is not unreasonable for the Foreign Representatives to view the New York Action as a ‘nuisance case’ that is draining the limited remaining assets of the Debtor.”
Having failed on Sonnax, the plaintiffs contended that Judge Garrity should modify the stay because the chapter 15 filing was a bad faith litigation tactic. Rejecting the bad faith argument, Judge Garrity said:
[T]he Foreign Representatives readily admit that the chapter 15 filing is part of their strategy to enjoin, control, and eventually dismiss, an action that they view as meritless, which is draining the Debtor’s limited assets and preventing the orderly completion of the Bermuda Liquidation. This strategy is not so much a tactic to combat a negative outcome in the New York Action as it is a tactic to bring the New York Action to a conclusion in furtherance of the Debtor’s wind-down.
Judge Garrity said that “the Foreign Representatives ‘may or may not be correct’ that dismissal of the New York Action is the best course of action, [citation omitted], but for reasons outlined herein, their view is not unreasonable.”
Judge Garrity denied the plaintiffs’ motion to modify the stay.
A decision by Bankruptcy Judge James L. Garrity, Jr., of New York shows the deference given to foreign liquidators who file a chapter 15 petition to extinguish a derivative suit in the U.S. that the liquidators labeled a “nuisance case” that was depleting the debtor’s few remaining assets.
The debtor’s parent company was incorporated in Bermuda. Operations were in the U.S. and Canada.
The debtor was acquired in a leveraged buyout in 2004. In 2006, the debtor repaid the buyers for the $200 million they had invested to effect the buyout. A year later, the company refinanced, took down additional debt and paid a $375 million dividend to the owners.