Based on comity, the Third Circuit has crafted a wholly common law alternative to chapter 15.
When a foreign liquidator has not filed a petition for recognition of a foreign bankruptcy proceeding under chapter 15, the Third Circuit has laid down complex rules explaining when common law notions of comity, alone, will permit a U.S. court to enjoin or dismiss a case in the U.S. involving a defendant in bankruptcy proceedings abroad.
The opinion makes chapter 15 either optional or irrelevant.
The Third Circuit’s disregard of chapter 15 is “most unfortunate,” according to Prof. Jay L. Westbrook, the country’s leading expert on cross-border insolvency and one of the drafters of chapter 15. He told ABI:
Reading the Third Circuit’s opinion had an otherworldly feel, a case in an alternative universe where the adoption of Chapter 15 never happened. Hamlet without the Prince.
Before we offer Prof. Westbrook’s critique of the Third Circuit’s opinion, here’s what happened:
The Singaporean Defendant
As plaintiff in two lawsuits in federal district court in New Jersey, a Delaware corporation sued a Singaporean corporation whose primary place of business was in Singapore. The defendants’ directors agreed to entry of a consent judgment for $29 million against the defendant corporation.
Later, the liquidator for the Singapore corporate defendant moved to vacate both judgments under Rule 60(b), asserting that the corporation was in liquidation in Singapore that began before the suits were filed in New Jersey and on which the directors had no authority to act when they consented to entry of judgment.
The liquidator asserted that he could not have intervened because he had no notice of the suit in New Jersey. The district court vacated both judgments based on evidence of “misconduct” in Rule 60(b)(3). Later, the liquidator moved to dismiss the suits under Rule 12(b)(2) and (b)(6) on grounds of “international comity.”
Based on comity, the district court dismissed both suits. The plaintiff appealed.
In her February 1 opinion, Third Circuit Judge Arianna J. Freeman said that the district court had ruled “despite little recent guidance from this Court.” Indeed, Judge Freeman is correct. Prof. Westbrook observed that the “cases cited in support of the Third Circuit’s decision all predate the adoption of Chapter 15 in 2005.”
Without referring to the requirements in chapter 15, Judge Freeman said that the appeals court would “now clarify the standard courts must apply when deciding whether to abstain from adjudicating a case in deference to what is essentially a pending foreign bankruptcy proceeding.”
Judge Freeman reviewed the district court’s grant of comity for abuse of discretion. She never mentioned that she was creating a common law alternative to chapter 15, nor did she discuss whether a common law equivalent to chapter 15 is even permissible. The Third Circuit opinion might even be read to add an additional layer of requirements on top of chapter 15.
This writer submits that review should have been de novo, to inquire as to whether the district court applied the correct law by failing to analyze the defendant’s motion to dismiss in light of chapter 15.
New Rules for Abstention Based on Comity
Judge Freeman explained that the appeal “involves adjudicatory comity, which is a discretionary act of deference to a foreign court” to be invoked “when there is or was a ‘parallel’ foreign proceeding.” To decide whether there was a parallel proceeding, she drew an analogy to “whether a civil action is ‘related to’ a United States bankruptcy proceeding.”
Judge Freeman said that a suit is “related to” a bankruptcy “if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action.” She therefore held that a lawsuit in the U.S.
is “parallel” to a foreign bankruptcy proceeding when: (1) the foreign bankruptcy proceeding is ongoing in a duly authorized tribunal while the civil action is pending before the United States court; and (2) the outcome of the United States civil action may affect the debtor’s estate. [Citation omitted.]
With regard to the existence of a parallel foreign proceeding, Judge Freeman saw no reason for remand “because parallelism is established by the undisputed facts.” The $29 million judgment, she said, would “plainly affect” the liquidation in Singapore.
After finding a parallel proceeding, Judge Freeman cited Hilton v. Guyot, 159 U.S. 113, 164 (1895), to say that the U.S. court “then reviews the procedures and the system of laws in the foreign court and assesses whether the foreign proceedings are likely to (or likely did) result in the impartial administration of justice.” However, she said, “foreign bankruptcy proceedings need not function identically to similar proceedings in this country in order to be consistent with the United States’ policy of equality.”
Judge Freeman concurred with the district court’s findings about the liquidation proceedings in Singapore, where she saw a “policy of equal distribution of assets among similarly situated creditors” and a prohibition of actions against the debtor without permission from the court in Singapore.
However, Judge Freeman remanded the case, because the district court had not made all of the findings in the Third Circuit’s new test for comity. After deciding to invoke comity, she did say that the court “ordinarily should stay the civil action or dismiss it without prejudice.”
Observations by Prof. Westbrook
With the adoption of chapter 15 in 2005, Congress laid out intricately crafted procedures and standards for recognizing bankruptcy proceedings abroad, halting suits in the U.S. against foreign debtors and enforcing the rulings of foreign bankruptcy proceedings in the U.S.
The Third Circuit, however, did not discuss the pivotal question: In view of the existence of chapter 15, are there common law grounds that a foreign liquidator may employ to halt a lawsuit in the U.S., or is chapter 15 the exclusive remedy?
Prof. Westbrook noted how the Third Circuit failed to recognize that Section 1509(c) was designed to prevent the invocation of common law in place of chapter 15.
The professor explained how Section 1509(c) “requires that a request for comity by a foreign liquidator be accompanied by a certificate of recognition from the U.S. court that has recognized the foreign proceeding.” The professor explained that Section 1509(c) “was the subject of considerable discussion among those of us advising the government about the drafting of Chapter 15 and various responsible executive department officials.”
As one of the drafters of chapter 15, Prof. Westbrook wrote an article in 2005 saying explicitly that common law was no longer an alternative for foreign liquidators to halt lawsuits in the U.S. He said:
Now the foreign representative must go through the Chapter 15 process to get the United States action stayed. Deferral for comity reasons in other courts is not authorized without the Chapter 15 process. The goal is to have the Chapter 15 criteria applied uniformly and by courts with specialized knowledge of the bankruptcy process. [Emphasis added.]
Westbrook, Chapter 15 at Last, 79 Am. Bankr. L.J. 713 at 726 (2005).
Prof. Westbrook said that “the Third Circuit could have considered that Section 1509(f) provides an exception to the recognition requirement solely for suits by the liquidator to recover a claim which is property of the debtor, but the Third Circuit in this case does not cite it or anything else in Chapter 15.”
“Worse still,” the professor said, the Third Circuit “announced that its analysis must be applied in all cases of a comity request by a foreign liquidator going forward. Why would a foreign representative bother to get recognition under Chapter 15 when a dismissal of a U.S. lawsuit requires only a motion to dismiss unaccompanied by all the protections for the U.S. plaintiff embodied in Chapter 15?”
Prof. Westbrook occupies the Benno C. Schmidt Chair of Business Law at the University of Texas School of Law.
A Final Observation
The Singaporean liquidator could have obtained the same relief and more by filing a chapter 15 petition. The liquidator likely would have obtained foreign main recognition in chapter 15, automatically invoking the Section 362 stay under Section 1520(a)(1) and barring enforcement of the consent judgment in the U.S.
Foreign main recognition likely would have entitled the liquidator to enforce the Singaporean court’s treatment of the plaintiff’s claim in the U.S. under Section 1521(a). Under the same section, the chapter 15 court might have been able to vacate the consent judgments, perhaps by issuing a report and recommendation to the district court.
To this writer, pursuing a common law remedy seems foolish when chapter 15 is available, offers a wider range of relief and is enforceable in bankruptcy courts familiar with its procedures.
The opinions are those of this writer, not ABI.
Based on comity, the Third Circuit has crafted a wholly common law alternative to chapter 15.
When a foreign liquidator has not filed a petition for recognition of a foreign bankruptcy proceeding under chapter 15, the Third Circuit has laid down complex rules explaining when common law notions of comity, alone, will permit a U.S. court to enjoin or dismiss a case in the U.S. involving a defendant in bankruptcy proceedings abroad.
The opinion makes chapter 15 either optional or irrelevant.
The Third Circuit’s disregard of chapter 15 is “most unfortunate,” according to Prof. Jay L. Westbrook, the country’s leading expert on cross-border insolvency and one of the drafters of chapter 15.