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Comity Confusion


Two recent decisions illustrate the correct approach to determining whether recognition under chapter 15 is required before comity can be granted to an order entered in a foreign insolvency proceeding.  In EMA GARP Fund v. Banro Corporation, et al, 2019 WL 773988 (S.D.N.Y. Feb. 2, 2019) (GARP), the defendants successfully moved for dismissal of securities law claims based on a request that the court grant comity to the Canadian restructuring (a CCAA proceeding) of Banro.  The restructuring included the settlement and release of claims against the individual defendants, including Banro’s former CEO.  There was no chapter 15 proceeding nor any argument that one was required as a prerequisite to granting comity.  Instead, the court reviewed the facts and procedures of the CCAA proceeding and concluded that they met the Second Circuit’s requirements (primarily procedural fairness) for granting comity to a foreign bankruptcy order.

In Halo Creative & Design Limited v. Comptoir Des Indes Inc., 2018 WL 4742066 (N.D. Ill. 2018) (Halo), the defendant asked the court to stay U.S. litigation by granting comity to a stay entered in its Canadian proceeding.[1]  The court declined to enforce the Canadian stay, ruling that the debtor must first obtain chapter 15 recognition of the Canadian proceeding.  The court relied in part on two of the earlier decisions under chapter 15 to the same effect, United States v. J.A. Jones Const. Grp., LLC, 333 B.R. 637, 638 (E.D.N.Y. 2005) and Reserve Int’l Liquidity Fund, Ltd. v. Caxton Int’l Ltd., No. 09 CIV. 9021, 2010 WL 1779282, at *5 (S.D.N.Y. Apr. 29, 2010).

Section 1509 of the Bankruptcy Code provides in pertinent part:
(b) If the court grants recognition under section 1517, and subject to any limitations that the court may impose consistent with the policy of this chapter—
(1) the foreign representative has the capacity to sue and be sued in a court in the United States;
(2) the foreign representative may apply directly to a court in the United States for appropriate relief in that court; and
(3) a court in the United States shall grant comity or cooperation to the foreign representative.
(c) A request for comity or cooperation by a foreign representative in a court in the United States other than the court which granted recognition shall be accompanied by a certified copy of an order granting recognition under section 1517.

On its face, Section 1509 applies to requests for comity by a foreign representative but not to requests by an independent party.  In GARP, the request for comity was made by defendants who were not foreign representatives acting on behalf of a foreign proceeding; i.e. no chapter 15 recognition was required.  In Halo, the request for comity was made by a DIP acting as a foreign representative on behalf of a foreign proceeding; i.e. chapter 15 recognition was required.

Most of the courts that have encountered this issue have recognized and correctly applied this seemingly straightforward dichotomy.  However, some courts have confused the issue.  The following chart is illustrative (but not intended to be exhaustive):

United States v. J.A. Jones Const. Grp., LLC, 333 B.R. 637, 638 (E.D.N.Y. 2005) Receiver of Canadian company that was a defendant in an action by the U.S. wrote a letter to the U.S. Disctrict Court asking that the litigation be stayed in accordance with Canadian bankruptcy law.  The court declined because “…relief under Chapter 15 is available only after a foreign representative commences an ancillary proceeding for recognition of a foreign proceeding before a bankruptcy court…”
In the absence of recognition under chapter 15, this Court has no authority to consider Mr. Breton’s request for a stay.”
In re Katsumi Iida, 377 B.R. 243 (BAP 9th Cir. 2007) Trustee appointed in a Japanese bankruptcy proceeding exercised debtor’s rights as sole shareholder of Hawaiian corporations that indirectly owned two valuable hotels and removed officers and directors.  The trustee then obtained approval of the Japanese bankruptcy court to sell one of the hotels.
Many months later, Iida sued the Trustee in a Hawaii state court for a declaration that Iida was the sole shareholder and that the removed officers and directors should be reinstated.  The trustee obtained approval from the Japanese court of his past and present actions and authority to take all steps necessary to enforce the approval order in the U.S.  The trustee filed a petition for chapter 15 recognition and the debtor opposed, arguing that the trustee’s removal of the officers and directors prior to obtaining recognition (or similar relief under its predecessor, §304, which was in effect at the time of the corporate actions) was manifestly contrary to the public policy of the United States.  The bankruptcy court granted recognition, the trustee removed the declaratory judgment action to the bankruptcy court and moved to dismiss it.  The bankruptcy court treated the dismissal motion as a motion for summary judgment  and granted it, finding that the trustee was authorized to act as shareholder.  The Bankruptcy Appellate Panel affirmed:
“In this instance, the Foreign Representative’s actions in exercising shareholder rights to change the directors and officers of the Hawaii Corporations … did not impel a need for judicial assistance. Thus, even if chapter 15 had been in effect when the Foreign Representative removed and replaced the officers and directors of the Hawaii Corporations, there would have been no impediment imposed by chapter 15.
The need for judicial assistance did not arise until the Iidas filed the Declaratory Judgment Action in Hawaii state court. By then, chapter 15 was in effect. The Foreign Representative complied with § 1509 by obtaining recognition, after which he removed the Declaratory Judgment Action to the bankruptcy court, which rendered the decision now on appeal.
…The Iidas have not articulated a fundamental policy of the United States that is offended by recognizing the Japanese bankruptcy proceeding.”
Reserve Int’l Liquidity Fund, Ltd. v. Caxton Int’l Ltd., No. 09 CIV. 9021, 2010 WL 1779282, at *5 (S.D.N.Y. Apr. 29, 2010). Liquidators of Reserve International Liquidity Fund appointed in a British Virgin Islands proceeding wrote to the District Court in which an interpleader action was pending.  The liquidators asserted that they had “displaced” the Fund’s directors and could control the Fund’s role in the interpleader proceeding.  The Fund opposed and asserted that the Liquidators must obtain chapter 15 recognition before they could appear in the proceeding.
The District Court agreed:
“If this Court were to acknowledge the Liquidators as in control of the Fund, such recognition would short-circuit any bankruptcy court determination as to whether the BVI liquidation proceeding should be recognized under Chapter 15. It would also set a precedent that Liquidators appointed in the BVI are ‘free to avoid the requirements’ of Chapter 15. Such a result is incompatible with Congress’ intent in enacting Chapter 15.
Accordingly, before the Liquidators can appear in this action, seek a stay, or intervene on behalf of the Fund, they must obtain recognition under Chapter 15.”
Oak Point Partners v. Lessing, 2013 WL 1703382 (N.D. Cal. 2013) Motion to dismiss on grounds of international comity filed by insolvency administrator; denied because no chapter 15 recognition was obtained (citing 9th Cir. BAP in In re Iida, 377 B.R. 243 (2007).
Pope Investments, LLC v. Pacificnet Games, 2013 WL 6515754 (N.Y. Sup. Ct. 2013) Incorrectly denying the request of an individual for comity to an alleged discharge and stay in a Hong Kong proceeding because no chapter 15 recognition had been obtained.  There was no request by a foreign representative and section 1509 should not have applied.
Basile v. CAI Master Allocation Fund, Ltd., 39 Misc. 3d 1217(A) (N.Y. Sup. CT. 2013) Granting comity to a stay in a Bermuda bankruptcy proceeding on the request of the liquidators.  The court incorrectly stated:
“Here, it may well have been more proper for defendants to have filed a petition with a federal court for an order recognizing the winding-up proceeding and staying conflicting proceedings within the United States.  Nonetheless, their failure in this regard does not alter the policy underlying the Bankruptcy Code provisions, nor does it interfere with this court’s ability to accord comity to foreign judicial proceedings.”
Oui Financing v. Dellar and Oui Management, 2013 WL 5568732 (S.D.N.Y. 2013) Individual defendant, the president and a shareholder of Oui Management (OM), moved to dismiss litigation on his guaranty of OM’s debts based on a stay entered as part of OM’s court-approved French safeguard plan.  The court, without any discussion of chapter 15 or recognition, correctly granted comity to the stay order.
Barclays Bank PLC v. Kemsley, 44 Misc. 3d 773 (N.Y. Sup. Ct. 2014) Defendant pled his UK bankruptcy discharge in defense of a claim by plaintiff bank.  The trustees in the defendant’s UK bankruptcy had previously sought chapter 15 recognition but recognition was denied because the debtor’s COMI was no longer in the UK.  The bankruptcy court noted that denial of recognition did not impair the debtor himself from seeking comity with respect to his UK discharge.  The NY state court granted comity to enforce the UK discharge, noting the bankruptcy court’s comments:
“In that regard, Judge Peck stated that “all of the provisions of Section 1509 deal with rights of the foreign representative”
and that “[l]ooking literally at the language of Section 1509 (d), which deals, literally, with the situation of nonrecognition, it is apparent from the plain language that the consequence of nonrecognition applies only to prevent the foreign representative from obtaining
comity or cooperation from courts in the United States, and does not, by its literal terms, preclude the foreign debtor from asserting an entitlement to
comity . . .”
Markwood Investments Ltd. v. Neves, 570 B.R. 420 (S.D. Fla. 2017) The defendant, who was an individual, had been released pursuant to a court-approved settlement with an Italian Judicial Administrator appointed in the equivalent of a criminal forfeiture proceeding.  The court correctly, and with no discussion of whether a chapter 15 was required, granted comity to the Italian order.
Trikona Advisers Limited v. Chugh, 846 F. 2d 22 (2d Cir. 2017) Before entering liquidation proceeding, Trikona, a Cayman Islands investment company, was controlled by one of two beneficial owners (Kalra) and brought suit in D. Conn. against the other beneficial owner (Chugh) for breach of fiduciary duties.  Chugh filed a petition in the Cayman Islands to wind up Trikona and Kalra opposed.  After seven days of trial, the court rejected Kalra’s allegations and ordered the winding up of Trikona.
Chugh moved to dismiss the D. Conn. Litigation based on collateral estoppel since the Cayman court had found for Chugh on all of Kalra’s assertions.  Kalra argued that chapter 15 recognition was required before collateral estoppel could be applied to the findings of the Cayman court.  The D. Conn. Court correctly disagreed and the 2d Circuit affirmed:
“…the requirements of Chapter 15 do not apply here…No party to the district court proceeding is a “representative” of a “foreign proceeding,” as those terms are defined in 11 U.S.C. §§ 101(24) and (23). And no party to the district court proceeding is seeking the assistance of the district court in enforcing or administering a foreign liquidation proceeding, 11 U.S.C. § 1501(b)(1); nor is any party seeking the assistance of a foreign country, 11 U.S.C. § 1501(b)(2); nor does the case involve a proceeding under the bankruptcy Code pending concurrently with a foreign liquidation proceeding, 11 U.S.C. § 1501(b) (3); nor are foreign creditors seeking to commence an action under the Bankruptcy Code, 11 U.S.C. § 1501(b)(4).”

Whether chapter 15 recognition is a prerequisite to a request to a U.S. court that it grant comity to an order entered in a foreign insolvency proceeding should turn on who is making the request. For a foreign representative to request comity, chapter 15 recognition is required.  For any other party, no recognition is required.

[1] While not discussed in the decision, the debtor had made a debt-reduction proposal under the Canadian Bankruptcy & Insolvency Act.  The proposal triggers an automatic stay in Canada.  While a Trustee (a licensed insolvency professional) assists with the proposal, the debtor remains as a debtor in possession.

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Hon. Leif Clark (ret.) was a U.S. Bankruptcy Judge for over 25 years. He has an international reputation for influencing the development of insolvency law both domestically and internationally. He has broad experience in international legislative development, the training of lawyers and judges, scholarship and as a sought-after mediator of complex disputes involving finance and insolvency.
Jack Esher has over 25 years of experience as a mediator, arbitrator and neutral adviser, including mediation of cross-border disputes in the country’s biggest cases. A pioneer in developing mediation as an innovative and effective dispute resolution process in insolvency matters, he has conducted mediation and negotiation trainings nationally and internationally for professionals, business leaders and judges.
Dan Glosband has 45 years of sophisticated insolvency practice, focusing on cross-border cases. He was part of the small drafting group for the UNCITRAL Model Law on Cross-Border Insolvency, one of the primary draftsmen of Chapter 15 of the Bankruptcy Code and has been an expert witness on U.S. insolvency law in major foreign proceedings.



By Dan Glosband