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      Insolvency News and Analysis - Week Ending August 29, 2014
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    Posts Tagged ‘“comity analysis”’

    “Comity Is Not Just A One-Way Street”

    Monday, April 19th, 2010

    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 Technologies Corp.
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    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.

    roundel adopted by Royal Canadian Air Force, f...
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    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:

    comity is not just a one-way street.  Just as this Court will defer to a [non-US] court if the circumstances require it, so too should a foreign court defer to this Court when appropriate.  In this case it was clear from the start that [this Court] expressed reservations about the distribution of Railpower US assets in the Canadian [p]roceeding . . . .  The Monitor has [not] explained how this [reservation] is to be [addressed] unless the Canadian Court shows comity to this Court.

    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.

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    Figuring Out the House Rules

    Monday, November 2nd, 2009

    In an age of globalized business, US-based firms commonly find themselves dealing with foreign creditors or in contractual relationships with foreign parties.  Those off-shore relationships can sometimes raise challenging issues when the firm needs to reorganize or wind down its operations under US insolvency law, and foreign creditors or contractual parties must determine how to proceed.

    Last week, the Delaware bankruptcy court addressed just one of those challenging issues:

    What happens when a claims dispute in US Bankruptcy Court runs afoul of European litigation procedures?

    Here’s the set-up:

    Global Power Equipment Group, Inc. and its related entities sought Chapter 11 protection in Delaware over three years ago after sustained losses in the companies’ heat recovery steam generator (HRSG) segment, and related liquidity problems, necessitated wind-down of the companies’ HRSG operations.

    In connection with the wind-down, Global Power and its affiliates sought – and obtained – permission to reject existing HRSG development contracts and to enter into new “completion” contracts with customers who still required delivery of HRSG units.  One of these customers was Maasvlakte, a Dutch company who had contracted for the construction of an HRSG project at a port facility in Rotterdam, the Netherlands.  Maasvlakte and several other companies involved in the project were corporate subsidiaries of Air Liquide Engineering, S.A., a French concern.

    Maasvlakte executed a completion contract which provided for a “step-down” of contractual claims commensurate with delivery of the project.  In the meantime, it filed two proofs of claim based on the prior contract: One against Deltak L.L.C. (the entity responsible for the project), and one against Global Power as guarantor of Deltak’s obligations.

    Sometime afterward, Deltak’s and Global Power’s plan administrator filed objections to Maasvlakte’s claims, on the basis of the “step-down” provisions in Deltak’s completion contract with Maasvlakte.  Maasvlakte responded, and the parties prepared to litigate their respective positions under the Federal Rules of Civil Procedure (FRCP), made applicable to claims objections through the Federal Rules of Bankruptcy Procedure.

    In early 2009, Deltak and Global Power propounded discovery on Maasvlakte to obtain information about testing in connection with the HRSG project; however, three days before production was due, Maasvlakte took the position that because many of the documents sought were physically located in France, under control of Air Liquide and unavailable to Maasvlakte, their production under the FRCP could not proceed because a French statute outlawed French companies’ participation in foreign discovery procedures outside those set forth in the Hague Convention.

    Under the Hague Convention rules claimed by Maasvlakte, discovery would require issuance of Letters of Commission through the US Consulate to the French Ministry of Justice – and it appears compliance would not be mandatory.  Processing them would require an additional 2 – 6 weeks.  Failure to comply with this procedure would subject the participating French company to sanctions in France.

    Deltak and Global Power disagreed, and sought to compel the discovery in Delaware.  Judge Brendan Shannon ordered the parties to meet and confer; however, the parties were apparently unable to come to terms.

    In a 40-page decision, Judge Shannon found that (i) Maasvlakte had the “control” of documents necessary for compelled production under the FRCP; and (ii) the “comity analysis” applicable to alternate discovery procedures in this case favored use of the FRCP.

    For the “comity analysis,” Judge Shannon employed prior Supeme Court authority - Société Nationale Indust. Aérospatiale v. U.S. Dist. Ct. for the S. Dist. Of Iowa, 482 U.S. 522 (1987) – to note that the Hague convention need not be employed ahead of the FRCP to obtain discovery from foreign litigants in connection with actions pending in the US.  Instead, it is an alternate procedure that does not automatically override existing US procedural rules.  This is so even when foreign law – such as the French statute in question (which, coincidentally, was the same one at issue in Société Nationale) – requires compliance with the Hague convention.

    To determine whether the Hague Convention should apply in place of ordinary US procedural rules, US courts are directed to apply a multi-part “comity analysis.”  This involves an evaluation of:

    - the importance of the documents or information requested to the litigation;

    - the degree of specificity of the request;

    - whether the information originated in the United States;

    - the availability of alternative means of securing the information; and

    - the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the requests would undermine important interests of the state where the information is located.

    Some US courts have added two other steps to the analysis: (i) good faith of the party resisting discovery; and (ii) the hardship of compliance on the party or witness from whom discovery is sought.

    In Maasvlakte’s case, Judge Shannon found that (i) the documents sought were central to the claims dispute between the parties; (ii) the request was sufficiently specific; (iii) the documents were originally produced in the Netherlands (where the French blocking statute does not apply) and only subsequently sent to France; (iv) the documents were not otherwise available to Deltak and Global Power, except through the Hague Convention; (v) the US interest in adjudicating the matter expeditiously through its courts outweighed the “attenuated” French interest occasioned by the fact that documents originally produced in the Netherlands were now held in France by a French company; and (vi) the hardship to Maasvlakte was “minimal” since, after all, it originally subjected itself to the Bankruptcy Court’s jurisdiction – and, apparently, assumed the risk of prosecution in France for so doing.  As for the risk of criminal sanctions to Maasvlakte and Air Liquide, it was Judge Shannon’s estimation that the French statute in question would “not subject [Maasvlakte or Air Liquide] to a realistic risk of prosecution, and cannot be construed as a law intended to universally govern the conduct of litigation within the jurisdiction of a United States court.”

    The only factor found weighing in favor of the Hague Convention in this case was Maasvlakte’s lack of bad faith.

    Judge Shannon’s decision offers counsel something to consider the next time a trans-national dispute forms the basis for a claim in a US bankruptcy.

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