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Posts Tagged ‘comity’
International readers of this blog – and those in the US who practice internationally – are more than likely aware of the doctrine of “comity” embraced by US commercial law.¬† In a nutshell, “comity” is shorthand for the idea that US courts typically afford respect and recogntion (i.e., enforcement) within the US to the judgment or decision of a non-US court – so long as that decision comports with those notions of “fundamental fairness” that are common to American jurisprudence.
In the bankruptcy context, “comity” forms the backbone for significant portions of the US Bankruptcy Code’s Chapter 15.¬† Chapter 15 – enacted in 2005 – provides a mechanisim by which the administrators of non-US bankruptcy proceedings can obtain recogntion of those proceedings, and further protection and assistance for them, inside the US.
But in at least some US bankruptcy courts, “comity” for non-US insolvencies only goes so far.¬† Last month, US Bankruptcy Judge Thomas Argesti, of Pennsylvania’s Western District, offered his understanding of¬†where “comity” stops – and where US bankruptcy proceedings begin.
Judge Argesti currently presides over¬†Chapter 15 proceedings commenced in furtherance of two companies – Canada’s Railpower Technologies Corp. (“Railpower Canada”) and its wholly-owned US subsidiary, Railpower US.¬† The two Railpower entities commenced proceedings under the Canadian Companies Creditors’ Arrangement Act (“CCAA”) in Quebec in February 2009.¬† Soon afterward, their court-appointed monitors, Ernst & Young, Inc., sought recogntition of the Canadian Railpower cases in the US.
Railpower US’ assets and¬†employees – and¬†90% of its creditors – were¬†located in the US.¬†¬†The company was managed from offices in Erie, PA.¬† Nevertheless, it carried on its books an inter-company obligation of $66.9 million, owed to its Canadian parent.¬† From the outset, Railpower US’ American¬†creditors asserted this “intercompany debt” was, in fact, a contribution to equity which should be subordinate to their trade claims.¬† Judge Argesti’s predecessor, now-retired Judge Warren Bentz, therefore conditioned recognition of Railpower US’ case upon his ability to review and approve any proposed distribution of Railpower US’ assets.¬† After the company’s assets were sold, Judge Bentz further required segregation of the sale proceeds pending his authorization as to their distribution.¬† Finally,¬†after the Canadian monitors obtained a “Claims Process Order” for the resolution of claims in the CCAA proceedings and sought that order’s enforcement in the US, Judge Bentz further “carved out” jurisdiction for himself to adjudicate the inter-company claim if the trade creditors received anything less than a 100% distribution under the CCAA plan.
Railpower US’ assets were sold – along with the assets of its Canadian parent – to R.J. Corman Group, LLC.¬† Railpower US was left with US$2 million in sale proceeds against US$9.3 million in claims (other than the inter-company debt).¬† The Canadian monitor indicated¬†its intention to file a “Notice of Disallowance” of the inter-company debt in the Canadian proceedings, but apparently never did.¬† Meanwhile, approximately CN$700,000 was somehow “upstreamed” from Railpower US to Railpower Canada.¬† Finally, despite the¬†monitor’s¬†assurances to the contrary, Railpower Canada’s largest shareholder – and an alleged secured creditor – sought relief in Quebec to throw both¬†Railpower entities into liquidation proceedings under¬†Canada’s Bankruptcy and Insolvency Act.
Enough was enough for Railpower US’ American creditors.¬† In August 2009, they filed an involuntary Chapter 7 proceeding against Railpower US, seeking to regain control over the case – and Railpower US’ assets – under the auspices of an American panel trustee.
The Canadian monitor requested abstention under Section 305 of the Bankruptcy Code.¬† Significantly re-drafted in the wake of Chapter 15’s enactment, that section permits a US bankruptcy court to dismiss a bankruptcy case, or to suspend bankruptcy proceedings, if doing so (1) would better serve the interests of the creditors and the debtor; or (2) would best serve the purposes of a recognized Chapter 15 case.
Judge Argesti’s 14-page decision, in which he denied the monitors’ motion and permitted the Chapter 7 case to proceed,¬†is one of apparent first impression on this section where it regards a Chapter 15 case.
Where the “better interests of the creditors and the debtor” are concerned, Judge Argesti’s discussion essentially boils down to the proposition that because creditors representing 85% – by number and by dollar amount – of Railpower US’ case sought¬†Chapter 7, those creditors have spoken for themselves as to what constitutes their “best interests” (“The Court starts with a presumption that these creditors have made a studied decision that their interests are best served by pursuing the involuntary Chapter 7 case rather than simply acquiescing in what happens in the Canadian [p]roceeding.”).
The more interesting aspect of the decision concerns Judge Argesti’s discussion of whether or not the requested dismissal “best serve[d] the purposes” of Railpower’s Chapter 15 cases.¬† For guidance on this issue, Judge Argesti turned to Chapter 15’s statement of policy, set forth in Section 1501 (“Purpose and Scope of Application”) – which states Chapter 15’s purpose of furthering principles of comity and protecting the interests of all creditors.¬† Then, proceeding point by point through each of the 5 enunciated principles behind the statute, he arrived at the conclusion that the purposes of Chapter 15 were not “best served” by dismissing the involuntary Chapter 7 case.¬† As a result, Railpower US’ Chapter 7 case would be permitted to proceed.
Judge Argesti’s analysis appears¬†to focus primarily on (i) the Canadian monitors’ apparent delay in seeking disallowance of the inter-company debt in Canada; (ii) the “upstreaming” of CN$700,000 to Railpower Canada; and (iii) the monitors’ apparent failure, as of the commencement of the involuntary Chapter 7, to “unwind” these transfers or to recover them from Railpower Canada for the benefit of Railpower US’ creditors.¬† It also rests on the fact that Railpower US was – for all purposes – a US debtor, with its assets and creditors located primarily in the US.
In this context, and in response to the monitors’ protestations that comity entitled them to judicial deference regarding the Chapter 15 proceedings, Judge Argesti noted that:
Judge Argesti’s decision may be limited to its comparatively unique facts.¬† However, it should also serve as a cautionary tale for representatives seeking to rely on principles of comity when administering business assets in the US.¬† In addition to his more limited construction of “comity,” Judge Argesti also noted that recognition of Railpower US’ Chapter 15 case was itself subject to second-guessing where subsequently developed evidence suggested that the company’s “Center of Main Interests” was not in Canada, but in the US.
For anyone weighing strategy attendant to the American recognition of a non-US insolvency proceeding, this decision is important reading.
From New York’s Southern District comes the strange tale of the Canadian asset backed commercial paper market, and a decision that raises the question of whether foreign courts provide a possible strategic “end run” around US law for parties doing business in the US – and even for US litigants with a business presence overseas.
Collapse of the Canadian Asset Backed Commercial Paper Market
Asset backed commercial paper (ABCP) is a¬†Canadian short-term investment with a low interest yield.¬† Generally marketed as a “safe” investment, ABCP is considered “asset backed” because the cash used to purchase these notes goes to create a portfolio of financial or other assets, which are then security for repayment of the originally issued paper.¬† In flush times, ABCPs were typically paid off with the proceeds from the purchase of new paper – or simply rolled over into new paper purchases themselves.
But times did not stay flush.
By 2007, ABCPs were collateralized by everything from auto loans to residential mortgages – which, unlike the “short-term” paper they backed, had much longer maturities.¬† With the rapidly-cresting economic downturn, uncertainty began to ripple through the ABCP market by mid-2007.¬† Because ABCPs were not transparent investments and investors could not determine which assets backed their paper, the uncertainty soon grew into a full-scale liquidity crisis.
The Big Freeze – And The Planned Thaw
In August 2007, approximately CAN$32 billion of non-bank sponsored ABCP in the Canadian market was frozen after an agreement between the major market participants.¬† This “freeze” was implemented pending an attempt to resolve the crisis through a restructuring of the market.¬† A “Pan-Canadian Investors Committee” was created, which introduced a creditor-initiated Plan of Compromise and Arrangement under the Canadian Companies’ Creditors Arrangement Act (CCAA).¬† The Plan¬†was sanctioned in June 2008 in the Metcalfe cases.¬† Essentially, the Plan converted the noteholders’ frozen paper into new, long-term notes with a discounted face value that could be traded freely, in the hope that a strong secondary market for the notes would emerge in the long run.
Releases for Third Parties
Part of the Plan required that market participants, including banks, dealers, noteholders, asset providers, issuer trustees, and liquidity providers be released from any liability related to ABCP, with the exception of certain narrow fraud claims.¬† Among those receiving these releases were Bank of America, Deutsche Bank, HSBC Bank USA, Merrill Lynch International, UBS, and Wachovia Bank and their respective affiliates.
These third party releases were themselves the subject of appellate litigation in Canada, but were eventually upheld as within the ambit of the CCAA.¬† The Plan became effective in January 2009, and the court-appointed monitors (Ernst & Young, Inc.) sought US recognition of the Metcalfe cases in New York the following October.¬† More specifically, the monitors sought enforcement in the US of the third-party releases which were a centerpiece of the Canadian Plan.
Third-party releases of non-bankrupt parties are significantly limited under US bankruptcy law – and, in a number of circuits, prohibited altogether.¬† In the 2d Circuit – where the recognition cases are pending – they are permissible only where (i) “truly unusual circumstances render the release terms important to the success of the plan;” and (ii) the released claims “directly affect the res (i.e., the property) of the bankruptcy estate.”¬† In Bankruptcy Judge Martin Glenn’s view, the Canadian releases went a bit further than what the 2d Circuit would otherwise permit.¬† Nevertheless, Ernst & Young asked Judge Glenn to permit them.
Recognition and Enforcement In the US
Ernst &¬†Young’s request was based, first,¬†on Section 1509, which requires that if a US Bankruptcy Court grants recognition in a foreign main proceeding, it “shall grant comity or cooperation to the foreign representative.”¬† Moreover, where recognition is granted, the US court “may provide additional assistance to [the] foreign representative” (Section 1507(a)), provided that such assistance is “consistent with the principles of comity” and serves one or more articulated policy goals set forth in Section 1507(b).¬† The decision to provide such assistance “is largely discretionary and turns on subjective factors that embody principles of comity.”¬† It is also subject to a general but narrowly construed¬†“public policy” restriction in Section 1506.
Though it is given prominence in Chapter 15, the American concept of “comity” in fact grows out of many decades of US commercial experience: Over a century ago, the emerging freedom of markets, comparatively few limits on imports, exports, immigration and exchanges of information and capital flows gave rise to what has been termed as the “first age of globalization.” In keeping with the spirit of that age, US courts of the period sought to resolve commercial disputes involving international litigants in a manner that would facilitate free international trade. They did so by preserving, where possible, the sanctity of rulings rendered in foreign tribunals as those rulings pertained to US citizens involved in foreign transactions. Those efforts found their expression through application of the case law doctrine of “comity.”
As expressed long ago by the US Supreme Court, “comity” is that “recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation.” As described by more modern precedent, US courts will recognize the “[a]cts of foreign governments purporting to have extraterritorial effect” when those acts are consistent with US law and policy.
It is worth noting that “consistent with US law and policy” does not mean identical with US law and policy.¬† As Judge Glenn observed, “[t]he relief granted in the foreign proceeding and the relief available in a [US] proceeding need not be identical.”¬† Instead, the “key determination” is “whether the procedures used in [the foreign court] meet [US] fundamental standards of fairness.”
“Fundamental standards of fairness” are understandably vague, and – beyond the basic idea of due process – often difficult to establish.¬† In this case, Judge Glenn essentially found that though the releases in question likely went beyond what would pass muster under US law, third party releases weren’t completely unheard of – and besides, the decision of a Canadian court of competent jurisdiction should be entitled to recognition as a matter of comity in any event.
What It All Means
The Metcalfe decision is interesting.¬† One one hand, it seems to provide merely another example of the well-recognized fact that Canadian judgments are routinely upheld by US courts.¬† However, it also suggests that parties with access to foreign tribunals with insolvency schemes resembling the US, but providing relief somewhat different from (i.e., more favorable to) that available under US insolvency law, may be able to maneuver around US law by filing a “main [insolvency] case” in¬†a foreign jurisdiction, then seeking recognition and enforcement of that relief in the US – on the basis of comity.
Something to think about.
Since mid-July, Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey have awaited Judge David Godbey’s decision on the liquidators’ request for recognition of their liquidation of Stanford International Bank, Ltd. (SIB), now pending in Antigua.
As discussed in a number of¬†previously-published posts (here, here, here, here, here, and . . . here), Messr‚Äôs. Wastell and Hamilton-Smith have been at odds with Mr. Janvey, who was appointed in Dallas’ U.S. District Court for the purpose of administering assets previously controlled by Sir Allen Stanford – including, presumably, SIB.¬† Stanford’s assets and creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.¬† Despite the apparent breadth of Judge Godbey’s original receivership order, the liquidators previously requested – and Judge Godbey (over Mr. Janvey’s strenuous objection) granted – a modification to that order for the purpose of commencing a case under Chapter 15¬†of the Bankruptcy Code¬†on SIB’s behalf.
While the parties await a ruling on recognition of the Chapter 15 case, Mr. Janvey’s receivership continues forward, with pleadings filed almost daily on a variety of issues.¬† Among the matters awaiting resolution in the receivership is a request by Sir Allen that raises issues which themselves may impact Judge Godbey’s decision on recognition.
In early July, Sir Allen filed a seemingly innocuous request for permission to certify tax returns for a number of Antiguan corporations.¬† He argued that the Antiguan court already had held these companies outside the U.S. District Court’s jurisdiction – and, therefore, outside the jurisdiction of the receivership.¬† Nevertheless, respect for the U.S. District Court and a preference for consistency between courts regarding the extent of the District Court’s jurisdiction made prudent a request further amendment of the receivership order to permit Stanford’s exercise of these corporate formalities.¬† A failure to exercise such formalities in short order would, according to Sir Allen, subject the corporations to being stricken from the Antiguan Companies Register.
About 2 weeks ago, Mr. Janvey fired back with an 8-page opposition.¬† In it, he argued that (i) the Antiguan court’s refusal to recognize his American receivership remains on appeal; (ii) Mr. Janvey himself never has been provided copies of the returns Sir Allen seeks to certify; (iii) Sir Allen has declined Mr. Janvey’s requests for these returns, apparently,¬†on the basis that doing so would violate his 5th Amendment rights against self-incrimination under the US Constitution; and (iv)¬†should Judge Godbey wish to preserve the Antiguan corporations in question from sanction, he need merely designate Mr. Janvey or his agent to certify the returns.¬† Janvey’s arguments are based on his fundamental contention that corporate separateness should be disregarded where the corporate form has been used for a fraudulent purpose – and where the corporations in question have been used for this purpose, they ought to be treated as “alter egos” of Stanford himself and therefore are within the ambt of the District Court’s jurisdiction.
Last Thursday, Sir Allen replied.¬† Relying once again on the Antiguan court’s prior denial of American jurisdiction over the corporations, Sir Allen insists that Mr. Janvey has no greater jurisdiction than the U.S. Court which appointed him¬†– and that Judge Godbey cannot simply ignore the prior Antiguan ruling.¬† Further, Sir Allen insists that his prior general¬†assertion of 5th Amendment rights doesn’t justify an inference of fraudulent activity regarding these corporations – and that Mr. Janvey has never provided any other evidence in support of these allegations.
Distilled to their essence, the parties’ positions closely parallel similar issues relevant to the Antiguan liquidators’ pending recognition request.¬† They also highlight a number of the complicated questions underlying that request, such as:
– What should be¬†the effect of the Antiguan court’s prior order regarding Janvey’s receivership?¬† Should the liquidators’ request for recognition of SIB’s liquidation be treated differently than Stanford’s request to certify returns for the Antiguan companies?¬† Or should a similar analysis apply to both orders?¬† How should the U.S. case law doctrine of comity (i.e., American courts’ respect for the rulings of foreign courts) – which informed many prior requests for ancillary relief under the US Bankruptcy Code and which even today informs much of the policy behind Chapter 15 – apply¬†in either case?
– To what extent, if any, should allegations of fraudulent intent¬†be relevant to determining the Stanford companies’ applicable “center of main interests” (COMI) – a decision critical to the relief that the liquidators seek?¬† And if the allegations of fraud were relevant, what would be the level of evidence ncessary to establish the requisite fraud?
– To what extent, if any, must an equitable receivership commenced in aid of a governmental enforcement action¬†arising from¬†alleged violations of US securities laws bend to the statutory provisions of cross-border commercial insolvency law?¬† And to what extent, if any, is a US Court able to uphold such enforcement in the face of a foreign court’s order (or, as here, multiple orders) apparently limiting its jurisdiction?
As with the recognition request, the parties now await Judge Godbey’s ruling.
When a foreign representative meets a federal receiver, who’s ultimately in charge?¬† And in charge of what?
The US Bankruptcy Code’s cross-border provisions were enacted by Congress to foster “cooperation between (A) courts of the United States, United States trustees, trustees, examiners, debtors and debtors in possession; and (B) the courts and other competent authorities of foreign countries involved in cross-border insolvency cases.”¬† The same provisions were also intended to promote “greater legal certainty for [international] trade and investment.”
To this end, Chapter 15 of the Bankruptcy Code sets forth relatively simple, straightforward requirements necessary for foreign representatives to obtain recognition of a “foreign proceeding,” and provides further that once such recognition is granted, US courts “shall grant comity or cooperation to the foreign representative.”¬† But the same chapter also provides that the recognizing US court may “modify or terminate” the relief otherwise available by statute to a foreign representative where the interests of creditors and the debtor “are sufficiently protected.”
These policy objectives – along with the Code’s cross-border provisions – are about to undergo a Texas-sized test next month, where a federal receiver appointed in Dallas to marshal the assets of Sir Allan Stanford’s Stanford Financial Group and other, related companies is wrangling with liquidators appointed for Antiguan affiliate Stanford International Bank, Ltd. – the entity that issued¬†“certificates of deposit”¬†purchased by investors in an alleged $8 billion, world-wide¬†Ponzi scheme.
The case is likely to offer important insight into how federal courts will reconcile¬†their equitable perogatives in other, non-bankruptcy insolvency proceedings (such as federal receiverships) with the Bankruptcy Code’s cross-border insolvency provisions.
In late February, the Securities and Exchange Commission sought a Temporary Restraining Order and immediate appointment of a receiver for the US-based assets of Stanford Financial Group (SFG) and related companies to stop an alleged¬†“massive, ongoing fraud orchestrated . . . through . . . Antiguan-based Stanford International Bank, Ltd. and its affiliated Houston-based financial advisors . . . .”
Upon US District Court Judge David Godbey’s grant of a TRO, Dallas attorney Ralph Janvey was appointed Receiver.¬† Very shortly thereafter, Antiguan regulators placed Stanford¬†International Bank,¬†Ltd.¬†(SIB) into liquidation and¬†appointed Nigel Hamilton-Smith and Peter Wastell as liquidators.
All the parties acknowledge that there were at least initial efforts to reach cooperative arrangements regarding the administration of the concurrent liquidation proceedings.¬† Unfortunately, these efforts apparently went nowhwere.
In mid-March, Janvey’s counsel requested an amendment of the District Court’s receivership order so as to provide Janvey with the exclusive power to commence any federal bankruptcy proceeding (including the prohibition of any petition for recogntion by any other party without prior Court order) and¬†to act as “foreign representative” in non-US courts on the companies’ behalf.¬† The proposed Order further left such arrangements in place for approximately 6 months.
Judge Godbey granted the motion, which was unopposed – but struck provisions of the Order that would designate Janvey as a “foreign representative” in non-US proceedings.
Last Monday, Hamilton-Smith and Wastell sought recognition under Chapter 15 before Judge Godbey and requested (i) a further amendment of Janvey’s already-amended receivership order so as to remove the prohibition against their commencement of a Chapter 15 case; and (ii) referral of the Chapter 15 case to the US Bankruptcy Court.
In papers supporting their requests, the English liquidators essentially argue that the receivership order is unenforceable insofar as it purports to restrict the commencement of a Chapter 15 case – and that the District Court simply may not enjoin such a filing.¬† Hamilton-Smith and Wastell claim further that Janvey has attempted – improperly and, apparently, without success – to interpose himself into the Antiguan liquidation and to have himself appointed as liquidator in that proceeding as well as in the US receivership.¬†¬† Predictably, Hamilton-Smith and Wastell also devote significant attention to establishing Antigua as the “center of main interests” for SIB’s Antiguan liquidation.
Mr. Janvey has yet to respond.¬† But he provided some indication of what that response will be in a 58-page Interim Report filed last Thursday.¬† In it, Janvey claims that SIB is an asset of the Receivership estate, since it was owned by¬†Sir Allan¬†Stanford on the date the receivership was instituted.¬† According to Mr. Janvey, his efforts to intervene in the Antiguan liquidation were rebuffed by the Antiguan court on the grounds that the receivership had no effect in Antigua, and that Janvey was therefore not an interested party to the liquidation.¬† Janvey further accuses Hamilton-Smith and Wastell of obtaining a Canadian registrar’s order recognizing them as the “foreign representatives” for SIB within the contemplation of Canadian insolvency law . . . all with no prior notice to him.
Not surprisingly, Janvey believes the US¬†– and not Antigua – constitutes the “center of main interests” for these cases, and that his receivership, rather than the Antiguan liquidation,¬†ought to be deemed the “main” or primary insolvency proceeding.
Can a federal court, acting within a federal receivership,¬†interpose its own additional barriers upon the Bankruptcy Code’s relatively minimal requirements for obtaining recognition of a foreign insolvency?¬† Can foreign representatives, once they have obtained recogntion for a foreign proceeding, demand and expect “comity” from any US court in aid of their own insolvency objectives, regardless of that court’s ongoing efforts to administer an insolvent estate?¬† Or can¬†that court modifiy the relief otherwise available to suit its own pre-existing administrative scheme for the same estate?¬† Can a federal court utilize its equitable powers to institute a receivership that will administer world-wide assets, claims, and recovery actions?¬† Or can the Court instead use similarly broad¬†discretion to fashion and direct the mutual cooperation that, to date, has eluded Messr’s. Janvey, Hamilton-Smith, and Wastell?
This is a matter well worth watching.
Judge Godbey has scheduled briefing¬†on the Antiguan liquidators’ requests into early May.¬† Copies of the SEC’s¬†papers in support of the TRO, the District Court’s¬†amended receivership order, the liquidators’ notice of Chapter 15 case, motion to amend the receivership order, and papers in support of the motion to refer matters to the Bankruptcy Court¬†. . . and the receiver’s interim report¬†. . . are all available here.