N.Y. District Court Rules That Chapter 15 Recognition Not Required To Enforce Foreign Bankruptcy Injunction

• Published date: 23 September 2021
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Ms Corinne Ball, Dan T. Moss, Michael C. Schneidereit, Isel M. Perez and Mark Douglas

U.S. courts have a long-standing tradition of recognizing or enforcing the laws and court rulings of other nations as an exercise of international "comity." It has been generally understood that recognition of a foreign bankruptcy proceeding under chapter 15 is a prerequisite to a U.S. court enforcing, under the doctrine of comity, an order or judgment entered in a foreign bankruptcy proceeding or a provision in foreign bankruptcy law applicable to a debtor in such a proceeding.

A ruling recently handed down by the U.S. District Court for the Southern District of New York directly challenges this principle, which has existed since chapter 15 was enacted in 2005. In Moyal v. Munsterland Gruppe GmbH & Co., 2021 WL 1963899 (S.D.N.Y. May 17, 2021), the court dismissed litigation against a German company, finding that, under principles of comity, the lawsuit was stayed by operation of German law when the company filed for bankruptcy in Germany. The district court did so despite the absence of any order issued by a U.S. bankruptcy court recognizing the German bankruptcy proceeding under chapter 15.

Comity

"Comity" is "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." Hilton v. Guyot, 159 U.S. 113, 164 (1895). International comity has been interpreted to include two distinct doctrines: (i) "legislative," or "prescriptive," comity; and (ii) "adjudicative comity." Maxwell Comm'n Corp. v. Société Générale (In re Maxwell Comm'n Corp.), 93 F.3d 1036, 1047 (2d Cir. 1996).

The former "shorten[s] the reach of a statute"-one nation will normally "refrain from prescribing laws that govern activities connected with another state when the exercise of such jurisdiction is unreasonable." Official Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(C) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(C)), 575 B.R. 229, 237 (Bankr. S.D.N.Y. 2017).

"Adjudicative comity," or "comity among courts," is an act of deference whereby the court of one nation declines to exercise jurisdiction in a case that is properly adjudicated in a foreign court. Because a foreign nation's interest in the equitable and orderly distribution of a foreign debtor's assets is an interest deserving respect and deference, U.S. courts generally defer to foreign bankruptcy proceedings and decline to adjudicate creditor claims that are the subject of such proceedings. See Canada Southern Railway Co. v. Gebhard, 109 U.S. 527, 548 (1883) ("the true spirit of international comity requires that [foreign schemes of arrangement], legalized at home, should be recognized in other countries"); accord In re Int'l Banking Corp. B.S.C., 439 B.R. 614, 624 (Bankr. S.D.N.Y. 2010) (citing cases).

Prior to 2005, as an exercise of comity, U.S. courts regularly enforced stays of creditor collection efforts against a foreign debtor or its U.S. assets issued in connection with foreign bankruptcy proceedings. See, e.g., Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187 (3d Cir. 1994) (deferring to Mexican bankruptcy proceeding); Badalament, Inc. v. Mel-O-Ripe Banana Brands, Ltd., 265 B.R. 732 (E.D. Mich. 2001) (deferring to Canadian bankruptcy proceeding); Lindner Fund, Inc. v. Polly Peck Int'l PLC, 143 B.R. 807 (S.D.N.Y. 1992) (citing cases and dismissing litigation brought in U.S. against UK company that was debtor in UK insolvency proceedings); Cornfeld v. Investors Overseas Services, Ltd., 471 F. Supp. 1255 (S.D.N.Y. 1979) (deferring to Canadian bankruptcy proceeding), aff'd, 614 F.2d 1286 (2d Cir. 1979).

In many such cases, U.S. courts recognized and enforced the stays of foreign courts in granting relief in an "ancillary proceeding" brought by the representative of a foreign debtor under section 304 of the Bankruptcy Code-the repealed precursor to chapter 15 of the Bankruptcy Code. Section 304 expressly authorized a U.S. bankruptcy court to enjoin the commencement or continuation of any action against a foreign debtor with respect to property involved in a foreign bankruptcy case. See, e.g., JP Morgan Chase Bank v. Altos Hornos de Mexico S.A. de C.V., 412 F.3d 418 (2d Cir. 2005); Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452 (2d Cir. 1985)...