Recognition, Not Relitigation

Happily for the French, the bankruptcy court officially recognizes the sauvegarde proceeding and officially condones the administrator as its “foreign representative.” The bankruptcy judge is seized of jurisdiction to assist the foreign representative in his duties. The court promptly halts any sale of the boats and provisionally releases them to French representative, but orders that any transfer of the boat had to be court-approved. Understandably, the Canadians are not happy, and motions and objections and discovery requests begin to fly between the Canadians, the French, and several American lawyers, all under the jurisdiction of a U.S. court in Fort Lauderdale assisting in an insolvency proceeding taking place in France.

It is now the Canadians' turn to make their next move. They want to block any permanent entrustment of the boats to the French and, claiming that they had been deprived of due process in the sauvegarde, begin to seek discovery in France. Specifically, the Canadians want to discover SNP's reorganization plan provided by the court overseeing the sauvegarde. The court orders the boat company to respond to the Canadians' discovery request. SNP objects and argues the court does not have the power to grant the Canadians discovery and that the Canadians essentially want to “relitigate” the sauvegarde itself. SNP refuses to provide discovery. Ultimately, the bankruptcy judge sanctions the boat company for noncompliance with discovery, returns the boats to the Broward sheriff, and dismisses the case.

The Appeal

On appeal, the district court reversed. The court ruled that the bankruptcy court had indeed overstepped its authority by ordering further discovery in France to look into whether the Canadians had been afforded due process over in the French proceeding. See SNP Boat, 483 B.R. at 786 (“Thus, it was an abuse of the bankruptcy court's discretion to order discovery for the purposes of determining whether St. James' interests were sufficiently protected in the specific French sauvegarde proceeding.”). The district court held that Chapter 15 does not contemplate digging into the decision-making details of the foreign proceeding that has already been granted comity by the bankruptcy court.

The court stated: “To inquire into a specific foreign proceeding is not only inefficient and a waste of judicial resources, but more importantly, necessarily undermines the equitable and orderly distribution of a debtor's property by transforming a domestic court into a foreign appellate court where creditors are always afforded the proverbial 'second bite at the apple.'” 483 B.R. at 786. “In concluding the jurisdiction is limited to a determination that French sauvegarde proceedings generally are sufficient to protect creditors' interests, it follows that a bankruptcy court is without jurisdiction to inquire whether a particular creditor's interests are sufficiently protected in any specific foreign proceeding.” Id. (emphasis added).

Chapter 15 Proceedings Inherently Ancillary

Besides providing a dramatic backdrop for a bankruptcy case (which cases admittedly do not have reputation for enthralling plots), the SNP Boat decision illuminates the fundamental nature of Chapter 15 proceedings, which is often forgotten in the context of other, more frequently used, sections of the Code. First and foremost, a Chapter 15 proceeding is an ancillary proceeding. The court's role is not to administer an estate but to provide assistance to a foreign representative administering another estate. See 11 U.S.C. ' 1502(b) (“This chapter applies where (1) assistance is sought in the United States by a foreign court or a foreign representative in connection with a foreign proceeding; (2) assistance is sought in a foreign country in connection with a case under this title ' “). “Chapter 15 creates an ancillary proceeding in the United States to provide support to the foreign insolvency administrator.” In re ABC Learning Centres Ltd., 728 F. 3d 301, 305-06 (3rd Cir. 2013). “Thus, a Chapter 15 court in the United States acts as an adjunct or arm of a foreign bankruptcy court where the main proceedings are conducted.” Id. at 306 (quoting In re Fairfield Sentry Ltd. Litigation, 458 B.R. 665, 678-79.

The holding in the SNP Boat case is a perfect example of the ancillary, assistance-driven nature of Chapter 15. Stripped to its core, SNP Boat was really nothing more than an in rem proceeding wherein the foreign representative had asked assistance with taking possession of two yachts. The proceeding was never supposed to be a litigious battle over the Canadian company's prior treatment by the French courts, but rather a request for the court to exercise its jurisdiction over local property.

This year, a Third Circuit case firmly reiterated Chapter 15's role as an international assistance vehicle. In In re Learning Centres Ltd., 728 F. 3d 301 (3rd Cir. 2013) the court upheld the recognition an Australian bankruptcy proceeding and an automatic stay that the court had on all of the Australian debtor's assets in the United States. The circuit court engaged in an in-depth discussion of the policy behind Chapter 15, namely its purpose to provide assistance to foreign courts, and how the chapter was modeled on the Model Law developed by the United Nations Commission on International Trade Law (UNCITRAL). “Multiple systems limit[] the ability of any one bankruptcy regime to protect assets against dissipation, and allow[s] creditors to skip ahead of their priority by seizing assets in foreign jurisdictions.” ABC Learning Centres Ltd., 728 F. 3d at 305. “The Model Law reflects a universalism approach to transnational insolvency. It treats the multinational bankruptcy as a single process in the foreign main proceeding, with other courts assisting in that single proceeding.” Id. at 306.

Recognition Does Not Mean Relitigation

Another reminder from SNP Boat is the leading role that the principle of comity plays in the U.S. courts' assistance under Chapter 15. In re Cozumel Caribe, S.A. de C.V., 482 B.R 96, 113 (Bankr. S.D.N.Y. 2012) (“A central tenet of [C]hapter 15 is the importance of comity in cross-border insolvency proceedings. Comity is not defined in Chapter 15 but it pervades the statute.”).

“American courts have long recognized to the particular need to extend comity to foreign bankruptcy proceedings.” Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F. 2d 709. 713 (2d Cir. 1987). It is this principle of comity, along with the ancillary purpose of Chapter 15, that also guided the SNP Boat court in holding that the bankruptcy court did not have the authority to launch an inquiry of how a foreign proceeding had already treated certain creditors. Rather, the court should grant deference to the foreign court's proceeding, even if it is not always identical to the U.S. system. As the court stated, to do so would allow parties to re-litigate the case and “transform[] a domestic court into a foreign appellate court where creditors are always afforded the proverbial 'second bite at the apple.'” SNP Boat, 483 B.R. at 786.

In Re Vitro

The principle of comity does not mean that the court must give carte blanche to every foreign representative walking through the courthouse doors, or approve every action that a foreign representative requests. The court is still required to ensure that, when taking its own actions, a sufficient level of protection is afforded to creditors. The Code also carves out an exception in Chapter 15, stating that the court can refuse to take action if it would be “manifestly contrary to the public policy of the United States.” 11 U.S.C. ' 1506. A recent decision from the Fifth Circuit points out certain issues that with respect to a foreign proceeding that will prevent a court from enforcing it.

In In Vitro, S.A.B. de C.V., 437 B.R. 117 (5th Cir. 2012), the court declined to assist with a Mexican reorganization plan with respect to its effect on creditors in the United States. The court examined the plan and held that it would adversely affect U.S. creditors because it provided for releases of non-debtor guarantors of the debtor. The guarantors also happened to be subsidiary companies of the debtor. Because the court did not agree with how the Mexican plan would affect creditors, it declined enforcement.

At first blush, it would appear that there is a conflict between SNP Boat and Vitro. SNP asserts that a U.S. court is not to examine how a foreign court treats creditors in determining the reorganization plan. Then, in Vitro, the court examined the Mexican bankruptcy plan and disapproved of its effect on creditors. But the two decisions are not at odds at all. Both decisions indicate that a U.S. court is not to look into the specifics of how the foreign court made its decisions, drew up its bankruptcy plan, or treated its creditors in the process. The American court's role, however, is to judge how implementing the foreign proceeding will affect creditors here. The SNP court held that the only inquiry a U.S. court is allowed to make into a foreign proceeding is whether the country's law generally “comport with due process and not whether the specific individual proceeding afforded due process.” 483 B.R. at 785-86. The court “is not required to make an independent determination about the propriety of individual acts of a foreign court.” In re Metcalfe & Mansfield Alternative Invs., 421 B.R. 685, 697 (Bankr. S.D. N.Y. 2010).

Vitro also reached the same conclusion. The Vitro court refused to enforce the Mexican plan because it granted non-debtor releases, which are “manifestly contrary to public policy” and thus could not be permitted here in the United States. The court did not make detailed inquiries into how the Mexican court reached its conclusion, but rather look at how the plan, as it was packaged, would have an effect if implemented here. Even though it declined enforcement of the foreign plan, the Vitro court nonetheless made it a point to specifically state that it based its decision on U.S. public policy implications and that no American court should look into the inner workings and decisions of a foreign court's decision.

Importantly, the court stated, “The narrow public policy exception contained in ' 1506 is intended to be invoked only under exceptional circumstances concerning matters of fundamental importance for the United States. The key determination required by this Court is whether the procedures used in the foreign proceeding meet our fundamental standards of fairness.” Vitro, 437 B.R. 117.

Conclusion

Although they reached different conclusions in granting relief, both SNP Boat and Vitro have illuminated both the courts' limitations and deference to foreign countries in Chapter 15 proceedings. Many foreign bankruptcy practitioners are keenly interested in Chapter 15 and how it grants them access to U.S. courts. Hopefully these and future cases will continue to support the spirit of international collaboration while also providing a baseline protection for creditors in the United States.

Gary D. Farmer is Of Counsel at Hinshaw & Culbertson LLP in Ft. Lauderdale, FL, where he represents domestic and international businesses in commercial litigation and business disputes, corporate affairs, and creditors' rights matters. He is fluent in French and also maintains a practice representing French clients. Prior to the author joining the firm, Hinshaw & Culbertson LLP represented SNP Boat Service in the matter discussed above.

If there were a James Bond movie featuring only lawyers, this might be it: SNP Boat Service, S.A. v. Hotel Le St. James , 483 B.R. 776 (Bankr. S.D. Fla. 2012). It begins in the south of France with a company that builds and designs luxury yachts. As part of a business deal, the company agrees to accept a trade-in yacht from a Canadian company 5,000 miles across the Atlantic. Unfortunately the deal results in a nasty contract dispute. The French sue the Canadians in France. The Canadians sue the French in Canada. The Canadians get a default judgment in Canada first and promptly start looking for assets to collect. They learn of two yachts owned by the French company that are berthed ' now enter a third country ' in the United States, several thousand miles south in Fort Lauderdale, FL. The Canadians head for Florida and promptly domesticate their judgment in the local Broward County court. Armed with a writ of execution from the court, the Broward county sheriff seizes the French boats for the Canadians.

But the French have an ace up their sleeve. Several months earlier, and before the Canadians had sued them, the French courts had approved a sauvegarde proceeding for the boat company. Such a proceeding is similar to an American Chapter 11 bankruptcy filing in that the goal of a sauvegarde (literally “safeguard”) is to allow the debtor to negotiate its debts while continuing to operate. Important for the French boat company, a sauvegarde proceeding also provides for an international automatic stay of all legal proceedings against the debtor. The French court-appointed administrator overseeing the boat company's sauvegarde knows that this stay should apply to any enforcement actions against the yachts in Florida. The administrator also wants control over the yachts because they are assets of the company that he is helping to reorganize.

Before the Canadians can sell the seized boats, the French dispatch a representative to Fort Lauderdale. The “French representative” files a petition with the bankruptcy court asking the court to recognize the sauvegarde under Chapter 15 of the Bankruptcy Code. Under Chapter 15, a U.S. bankruptcy court can grant “recognition” to a foreign proceeding that is “under a law relating to insolvency or adjustment of debt” where the “assets and affaires” of a debtor are being supervised “for the purpose or reorganization or liquidation.” If successful, court recognition of the sauvegarde would result in an automatic stay on any claims on the debtor's assets and, unfortunately for the Canadians, would stop any sale of the boats and might even result in their entrustment to the French parties.

Happily for the French, the bankruptcy court officially recognizes the sauvegarde proceeding and officially condones the administrator as its “foreign representative.” The bankruptcy judge is seized of jurisdiction to assist the foreign representative in his duties. The court promptly halts any sale of the boats and provisionally releases them to French representative, but orders that any transfer of the boat had to be court-approved. Understandably, the Canadians are not happy, and motions and objections and discovery requests begin to fly between the Canadians, the French, and several American lawyers, all under the jurisdiction of a U.S. court in Fort Lauderdale assisting in an insolvency proceeding taking place in France.

It is now the Canadians' turn to make their next move. They want to block any permanent entrustment of the boats to the French and, claiming that they had been deprived of due process in the sauvegarde, begin to seek discovery in France. Specifically, the Canadians want to discover SNP's reorganization plan provided by the court overseeing the sauvegarde. The court orders the boat company to respond to the Canadians' discovery request. SNP objects and argues the court does not have the power to grant the Canadians discovery and that the Canadians essentially want to “relitigate” the sauvegarde itself. SNP refuses to provide discovery. Ultimately, the bankruptcy judge sanctions the boat company for noncompliance with discovery, returns the boats to the Broward sheriff, and dismisses the case.

The Appeal

On appeal, the district court reversed. The court ruled that the bankruptcy court had indeed overstepped its authority by ordering further discovery in France to look into whether the Canadians had been afforded due process over in the French proceeding. See SNP Boat, 483 B.R. at 786 (“Thus, it was an abuse of the bankruptcy court's discretion to order discovery for the purposes of determining whether St. James' interests were sufficiently protected in the specific French sauvegarde proceeding.”). The district court held that Chapter 15 does not contemplate digging into the decision-making details of the foreign proceeding that has already been granted comity by the bankruptcy court.

The court stated: “To inquire into a specific foreign proceeding is not only inefficient and a waste of judicial resources, but more importantly, necessarily undermines the equitable and orderly distribution of a debtor's property by transforming a domestic court into a foreign appellate court where creditors are always afforded the proverbial 'second bite at the apple.'” 483 B.R. at 786. “In concluding the jurisdiction is limited to a determination that French sauvegarde proceedings generally are sufficient to protect creditors' interests, it follows that a bankruptcy court is without jurisdiction to inquire whether a particular creditor's interests are sufficiently protected in any specific foreign proceeding.” Id. (emphasis added).

Chapter 15 Proceedings Inherently Ancillary

Besides providing a dramatic backdrop for a bankruptcy case (which cases admittedly do not have reputation for enthralling plots), the SNP Boat decision illuminates the fundamental nature of Chapter 15 proceedings, which is often forgotten in the context of other, more frequently used, sections of the Code. First and foremost, a Chapter 15 proceeding is an ancillary proceeding. The court's role is not to administer an estate but to provide assistance to a foreign representative administering another estate. See 11 U.S.C. ' 1502(b) (“This chapter applies where (1) assistance is sought in the United States by a foreign court or a foreign representative in connection with a foreign proceeding; (2) assistance is sought in a foreign country in connection with a case under this title ' “). “Chapter 15 creates an ancillary proceeding in the United States to provide support to the foreign insolvency administrator.” In re ABC Learning Centres Ltd., 728 F. 3d 301, 305-06 (3rd Cir. 2013). “Thus, a Chapter 15 court in the United States acts as an adjunct or arm of a foreign bankruptcy court where the main proceedings are conducted.” Id. at 306 (quoting In re Fairfield Sentry Ltd. Litigation, 458 B.R. 665, 678-79.

The holding in the SNP Boat case is a perfect example of the ancillary, assistance-driven nature of Chapter 15. Stripped to its core, SNP Boat was really nothing more than an in rem proceeding wherein the foreign representative had asked assistance with taking possession of two yachts. The proceeding was never supposed to be a litigious battle over the Canadian company's prior treatment by the French courts, but rather a request for the court to exercise its jurisdiction over local property.

This year, a Third Circuit case firmly reiterated Chapter 15's role as an international assistance vehicle. In In re Learning Centres Ltd., 728 F. 3d 301 (3rd Cir. 2013) the court upheld the recognition an Australian bankruptcy proceeding and an automatic stay that the court had on all of the Australian debtor's assets in the United States. The circuit court engaged in an in-depth discussion of the policy behind Chapter 15, namely its purpose to provide assistance to foreign courts, and how the chapter was modeled on the Model Law developed by the United Nations Commission on International Trade Law (UNCITRAL). “Multiple systems limit[] the ability of any one bankruptcy regime to protect assets against dissipation, and allow[s] creditors to skip ahead of their priority by seizing assets in foreign jurisdictions.” ABC Learning Centres Ltd., 728 F. 3d at 305. “The Model Law reflects a universalism approach to transnational insolvency. It treats the multinational bankruptcy as a single process in the foreign main proceeding, with other courts assisting in that single proceeding.” Id. at 306.

Recognition Does Not Mean Relitigation

Another reminder from SNP Boat is the leading role that the principle of comity plays in the U.S. courts' assistance under Chapter 15. In re Cozumel Caribe, S.A. de C.V., 482 B.R 96, 113 (Bankr. S.D.N.Y. 2012) (“A central tenet of [C]hapter 15 is the importance of comity in cross-border insolvency proceedings. Comity is not defined in Chapter 15 but it pervades the statute.”).

“American courts have long recognized to the particular need to extend comity to foreign bankruptcy proceedings.” Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B. , 825 F. 2d 709. 713 (2d Cir. 1987). It is this principle of comity, along with the ancillary purpose of Chapter 15, that also guided the SNP Boat court in holding that the bankruptcy court did not have the authority to launch an inquiry of how a foreign proceeding had already treated certain creditors. Rather, the court should grant deference to the foreign court's proceeding, even if it is not always identical to the U.S. system. As the court stated, to do so would allow parties to re-litigate the case and “transform[] a domestic court into a foreign appellate court where creditors are always afforded the proverbial 'second bite at the apple.'” SNP Boat, 483 B.R. at 786.

In Re Vitro

The principle of comity does not mean that the court must give carte blanche to every foreign representative walking through the courthouse doors, or approve every action that a foreign representative requests. The court is still required to ensure that, when taking its own actions, a sufficient level of protection is afforded to creditors. The Code also carves out an exception in Chapter 15, stating that the court can refuse to take action if it would be “manifestly contrary to the public policy of the United States.” 11 U.S.C. ' 1506. A recent decision from the Fifth Circuit points out certain issues that with respect to a foreign proceeding that will prevent a court from enforcing it.

In In Vitro, S.A.B. de C.V., 437 B.R. 117 (5th Cir. 2012), the court declined to assist with a Mexican reorganization plan with respect to its effect on creditors in the United States. The court examined the plan and held that it would adversely affect U.S. creditors because it provided for releases of non-debtor guarantors of the debtor. The guarantors also happened to be subsidiary companies of the debtor. Because the court did not agree with how the Mexican plan would affect creditors, it declined enforcement.

At first blush, it would appear that there is a conflict between SNP Boat and Vitro. SNP asserts that a U.S. court is not to examine how a foreign court treats creditors in determining the reorganization plan. Then, in Vitro, the court examined the Mexican bankruptcy plan and disapproved of its effect on creditors. But the two decisions are not at odds at all. Both decisions indicate that a U.S. court is not to look into the specifics of how the foreign court made its decisions, drew up its bankruptcy plan, or treated its creditors in the process. The American court's role, however, is to judge how implementing the foreign proceeding will affect creditors here. The SNP court held that the only inquiry a U.S. court is allowed to make into a foreign proceeding is whether the country's law generally “comport with due process and not whether the specific individual proceeding afforded due process.” 483 B.R. at 785-86. The court “is not required to make an independent determination about the propriety of individual acts of a foreign court.” In re Metcalfe & Mansfield Alternative Invs., 421 B.R. 685, 697 (Bankr. S.D. N.Y. 2010).

Vitro also reached the same conclusion. The Vitro court refused to enforce the Mexican plan because it granted non-debtor releases, which are “manifestly contrary to public policy” and thus could not be permitted here in the United States. The court did not make detailed inquiries into how the Mexican court reached its conclusion, but rather look at how the plan, as it was packaged, would have an effect if implemented here. Even though it declined enforcement of the foreign plan, the Vitro court nonetheless made it a point to specifically state that it based its decision on U.S. public policy implications and that no American court should look into the inner workings and decisions of a foreign court's decision.

Importantly, the court stated, “The narrow public policy exception contained in ' 1506 is intended to be invoked only under exceptional circumstances concerning matters of fundamental importance for the United States. The key determination required by this Court is whether the procedures used in the foreign proceeding meet our fundamental standards of fairness.” Vitro, 437 B.R. 117.

Conclusion

Although they reached different conclusions in granting relief, both SNP Boat and Vitro have illuminated both the courts' limitations and deference to foreign countries in Chapter 15 proceedings. Many foreign bankruptcy practitioners are keenly interested in Chapter 15 and how it grants them access to U.S. courts. Hopefully these and future cases will continue to support the spirit of international collaboration while also providing a baseline protection for creditors in the United States.

Gary D. Farmer is Of Counsel at Hinshaw & Culbertson LLP in Ft. Lauderdale, FL, where he represents domestic and international businesses in commercial litigation and business disputes, corporate affairs, and creditors' rights matters. He is fluent in French and also maintains a practice representing French clients. Prior to the author joining the firm, Hinshaw & Culbertson LLP represented SNP Boat Service in the matter discussed above.