Is Chapter 15 A Prerequisite To Obtaining Comity From A US Court With Respect To Foreign Insolvency Proceedings?

• Published date: 10 February 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Arnold & Porter
• Author: Maja Zerjal Fink and Lucas B. Barrett

Synopsis

US courts have a long tradition of granting comity and enforcing orders of foreign courts. With the enactment of US Bankruptcy Code section 304 in 1978, and Chapter 15 in 2005, representatives in foreign bankruptcy cases generally sought relief in US courts through section 304 and later Chapter 15. It remains an open question, however, whether commencing a chapter 15 case is a prerequisite to obtaining comity with respect to a foreign insolvency proceeding. Based on two recent decisions, the answer may be that it depends on the US court deciding the issue.

Comity in the insolvency context

Comity has been defined as 'the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protection of its laws.'² Prior to 1978 and the enactment of US Bankruptcy Code section 304, comity was the sole standard by which a foreign insolvency proceeding could be recognised by a court in the US. Through comity, United States courts generally recognised orders of foreign courts so long as (a) the foreign court had jurisdiction over the relevant parties and (b) the proceeding comported with United States notions of due process.³ Comity was important to advance the principle of 'universalism', which provides that the country with the greatest interest in a bankrupt debtor administers all the debtor's assets.⁴ Conversely, 'territoriality' advances the idea that each country distributes the assets located inside its borders.

Although recognition of orders and judgments based on comity was generally favoured, results were not always consistent.⁵ With the enactment of US Bankruptcy Code section 304, foreign representatives⁶ were provided a statutory basis to protect assets located within the territorial jurisdiction of the US by commencing an ancillary proceeding in the US.⁷ Section 304 was repealed in 2005 with the adoption of Chapter 15, which incorporated into the US Bankruptcy Code the Model Law on Cross-Border Insolvency. US Bankruptcy Code section 1509(b) provides that, upon recognition of a foreign proceeding, the foreign representative may apply directly to another US court for appropriate relief, which 'shall be accompanied by a certified copy of an order granting recognition' under chapter 15, and such US Court 'shall grant comity or cooperation.' This provision seemingly reflects the intention that chapter 15 be the exclusive way for foreign debtors to seek assistance in the US.

A New York court concludes the foreign automatic stay can be enforced in the US based on comity - without the need to commence a chapter 15 case

In February 2019, David Moyal sued German company Munsterland Gruppe GMBH & Co. KG ('MGKG') in New York County Supreme Court, seeking damages from MGKG for breach of a distribution agreement.⁸ The case was then removed to the District Court for the Southern District of New York.⁹ On March 12, 2020 the parties jointly sought a default with MGKG conceding liability because it lacked the financial resources to defend against the action and a judgment enforcement it anticipated Moyal would commence.¹⁰

On March 11, 2021, MGKG commenced an insolvency case under the German Insolvency Act.¹¹...