October 2006

The Rise of International Comity and Universality (Or How the Bankruptcy World Is Shrinking)

Holland & Knight Newsletter
Robert J. Labate | Richard E. Lear | Robert J. Labate

Two recent decisions, one by the Eleventh Circuit Court of Appeals and one by the Judicial Committee of the Privy Counsel (United Kingdom), show that domestic courts (whether in the United Kingdom or in the United States) will recognize the validity of asset sales and restructuring plans approved in foreign bankruptcy proceedings based on principles of international comity and universality. Thus, a domestic creditor ignores a foreign bankruptcy proceeding at its own risk and may be barred from later challenging the validity of the rights granted, transferred or removed in the foreign proceeding.

Comity Basis for Dismissal in Daewoo Motor America, Inc. v. General Motors Corp.

In Daewoo Motor America, Inc. v. General Motors Corp. et al., 2006 WL 2327562 (11th Cir. Aug. 11, 2006), the Eleventh Circuit Court of Appeals found that the lower court did not abuse its discretion when it dismissed the complaint filed by Daewoo Motor America, Inc. (Daewoo America) based on the ground of international comity. While a de novo standard of review normally applies to an order granting a motion to dismiss, the appellate court noted that the principle of international comity is an abstention doctrine and, therefore, the lower court’s order was reviewed on an abuse of discretion standard.

The facts, though a bit complicated, can be summarized as follows. In 1997, Daewoo America was incorporated as the wholly-owned subsidiary of Daewoo Motor Co., Ltd. (Daewoo Korea) and served as the exclusive U.S. distributor of Daewoo automobiles and the exclusive provider of Daewoo warranty services and replacement parts. On November 10, 2000, Daewoo Korea filed for bankruptcy protection in Korea under the Korean Corporate Reorganization Act and, pursuant to Korean bankruptcy law, the Korean bankruptcy court appointed a receiver over Daewoo Korea’s assets. At the time of filing, Daewoo Korea notified Daewoo America of its reorganization plans and warned that creditors who failed to participate in the Korean bankruptcy proceeding might lose their rights. Subsequently, Daewoo America, with the assistance of Daewoo Korea, retained Korean legal counsel to act as Daewoo America’s agent in the Korean bankruptcy.

Both before and during its reorganization proceedings, Daewoo Korea negotiated with Ford Motor Company and General Motors Corporation about the possibility of a transfer of ownership of Daewoo Korea’s assets. On September 20, 2001, Daewoo Korea and General Motors Corporation executed a non-binding Memorandum of Understanding regarding the sale of Daewoo Korea’s assets to General Motors Corporation. The Korean bankruptcy court approved the Memorandum of Understanding on September 26, 2001. Daewoo America took the position that it was to be included in the assets to be purchased by General Motors Corporation, and that General Motors Corporation represented that Daewoo America would continue to distribute automobiles in the United States under the acquisition plan intended by General Motors Corporation. Subsequently, Daewoo America wrote to General Motors Corporation expressing concern over the possible exclusion of Daewoo America from the asset acquisition. Despite its concerns, in April 2002, Daewoo America executed a letter of proxy accepting Daewoo Korea’s proposed reorganization plan even though the summary of the plan received by Daewoo America and the other creditors did not refer to the Memorandum of Understanding or the proposed asset transfer.

Later, in April 2002, General Motors Corporation, Daewoo Korea and creditors of Daewoo Korea entered into a Master Transaction Agreement (MTA) whereby a new company, GMDAT, would acquire assets and assume liabilities of Daewoo Korea. Among the assets to be transferred were the plants at which the Daewoo automobiles to be exported for sale in the United States were manufactured. Daewoo America was not among the assets to be transferred to GMDAT. At the May 6, 2002, meeting of the creditors, the creditors of Daewoo Korea voted in favor of the original reorganization plan. The Korean court approved the plan, but requested that the receiver file a modified reorganization plan that reflected the terms of the MTA. Contemporaneously with the Korean court’s approval of the original reorganization plan, the Korean bankruptcy court approved the receiver’s petition to terminate the Daewoo America exclusive distribution agreement due to Daewoo America’s failure to pay $130 million owed to Daewoo Korea under the agreement. Faced with the loss of its distributorship, Daewoo America commenced a Chapter 11 case under the United States Bankruptcy Code on May 16, 2002, in the Central District of California.

Subsequent to Daewoo America’s bankruptcy filing, Daewoo Korea filed in the Korean bankruptcy proceeding a modified reorganization plan that included the terms of the MTA. Daewoo Korea also sent a letter to its creditors, including Daewoo America, to inform them that a meeting on the modified plan was scheduled for September 30, 2002. Daewoo America received another proxy form to vote on the modified plan. Daewoo America’s Korean counsel advised the company to file its claim in the Korean bankruptcy proceeding. On September 30, 2002, the creditors of Daewoo Korea approved the modified reorganization plan which included the terms of the MTA. Despite its notice of the proceedings and warnings from its counsel, Daewoo America took no action with respect to the modified plan.

Approximately one year later in its Chapter 11 case, Daewoo America filed a multiple count adversary proceeding against General Motors Corporation, GMDAT, and others alleging, among other things, fraud, tortious interference with contract, tortious interference with prospective economic advantage, aiding and abetting breach of fiduciary duty, successor liability and unjust enrichment. After the dismissal of a number of counts under Daewoo America’s complaint by the California bankruptcy court, the Judicial Panel on Multidistrict Litigation transferred the action to the United States District Court for the Middle District of Florida “‘for inclusion in the coordinated or consolidated pretrial proceedings incurring’ for In re Daewoo Motor Co., Ltd., Dealership Litigation, MDL Docket No. 1510.”

After instructing the parties to submit briefs on the question of international comity and holding a hearing, the District Court dismissed the remaining counts under Daewoo America’s complaint with prejudice on the ground of international comity. Specifically, the District Court explained that: (i) Korea had a “significant interest in regulating activity on its shores”; (ii) any differences between Korean and U.S. bankruptcy law were minimal and “do not offend U.S. notions of due process;” and (iii) Daewoo America had notice and a “full and fair opportunity to participate in the Korean bankruptcy process.” The District Court concluded by stating that the “fact that [Daewoo America] now seeks to hold GMDAT liable as the successor of [Daewoo Korea] highlights [Daewoo America’s] true intention – to collaterally attack the entire Korean reorganization process and result.” Id. at *6 (quoting Daewoo Motor America, Inc. v. General Motors Corp., 315 B.R. 148, 161 (M.D. Fla. 2004).

In affirming the District Court’s dismissal, the Eleventh Circuit held that principles of comity required the court to recognize and enforce the Korean court’s order. “To determine whether comity is appropriate, we evaluate three factors, ‘(1) whether the foreign court was competent and used proceedings consistent with civilized jurisprudence, (2) whether the judgment was rendered by fraud, and (3) whether the foreign judgment was prejudicial because it violated American public policy notions of what is decent and just.’” Id. at * 8 (quoting Ungaro-Benages v. Dresdner Bank AG, 379 F.3d 1227, 1238 (11th Cir. 2004) (internal quotations omitted). The Eleventh Circuit also noted that in considering whether to apply comity “[c]ourts also consider whether ‘the central issue in dispute is a matter of foreign law and whether there is a prospect of conflicting judgments.’” Id. (quoting Ungaro-Benages v. Dresdner Bank AG, 379 F.3d at 1238). Further, the Eleventh Circuit recognized that “[i]n matters concerning bankruptcy ‘the extension of comity enables the assets of a debtor to be dispersed in an equitable, orderly and systematic manner, rather than in a haphazard, erratic or piecemeal fashion.’” Id. (quoting Int’l Transactions, Ltd. v. Embotelladora Agral Regiomontana, SA de CV, 347 F.3d 589, 594 (5th Cir. 2003) (internal quotations omitted).

Here, the Eleventh Circuit noted, Daewoo America had adequate notice and an opportunity to participate in the Korean bankruptcy proceedings and that Daewoo America had, in fact, participated in those proceedings to a certain extent, but that, with respect to the modified plan, Daewoo America failed to do so. Principles of comity and “the interest of the system as a whole – that of promoting a ‘friendly intercourse between sovereignties,’” required recognition of the Korean court’s order, despite any negative impact that order may have on Daewoo America’s business. In re Daewoo Motor America, Inc. v. General Motors Corp., et al., 2006 WL 2327562 at *8 (quoting In re Maxwell Comm’n Corp., 93 F.3d 1036, 1053 (2d Cir. 1996) (internal quotations omitted).

After citing with approval Miller v. Meinhard-Commercial Corp., 462 F.2d 358 (5th Cir. 1972), the Eleventh Circuit concluded:

The complaint of Daewoo America, likewise, turns on what happened in the Korean bankruptcy proceeding and is inextricably intertwined with the order of the Korean court. In effect, Daewoo America seeks to redistribute the assets that were transferred with the approval of the Korean court.

“Universalism” Justifies U.K. Court Assistance to Enforce U.S. Bankruptcy Plan.

Dubbed by the Lords of the Judicial Committee of the Privy Council (United Kingdom) as the principle of “universalism,” the Privy Council’s decision on an appeal taken from the High Court of Justice of the Isle of Man recognized and determined that assistance should be given to enforce provisions contained in a plan of reorganization approved by a United States bankruptcy court. This decision eliminated a domestic creditor’s ability to ignore a foreign bankruptcy proceeding and simply object to enforcement of the order in its home country, and created an affirmative obligation to pursue claims. Cambridge Gas Transport Corp. v. The Official Committee of Unsecured Creditors (of Navigator Holdings PLC and Others) [2005] UKPC 46.

In Cambridge Gas, a shipping business filed for Chapter 11 reorganization in the Southern District of New York. Although the business sought reorganization under the laws of the United States, the business was owned by a group of Isle of Man companies, with each ship owned by a separate subsidiary of a management company, and each share of the management company being held by a holding company, Navigator Holdings plc (Navigator). Navigator, in turn, was held by companies incorporated in other offshore jurisdictions, including Cambridge Gas Transport Corporation (Cambridge), a Cayman company, and Vela Energy Holdings Ltd (Vela), a Bahamian company. Vela, through an intermediate Bahamian subsidiary, also owned Cambridge.

In the course of the New York bankruptcy proceeding, the creditors proposed, and the court confirmed, a reorganization plan whereby Navigator’s assets would be vested in the creditors of the shipping business. The mechanism, which the plan used to vest the assets in the creditors, was the transfer of the common stock of Navigator to a creditors’ committee as representative of Navigator’s creditors. Although workable in the United States, the plan, as proposed, could not automatically have effect under the law of the Isle of Man. The New York bankruptcy court, therefore, sent a Letter of Request to the High Court of Justice of the Isle of Man asking for assistance in giving effect to the plan and the order confirming the plan. Subsequently, the committee of creditors in Navigator’s bankruptcy case petitioned the High Court for an order vesting the shares in the creditors’ representative as contemplated by the reorganization plan. Cambridge, however, cross-petitioned and asked the High Court not to recognize or enforce the terms of the reorganization plan because Cambridge, a separate legal entity registered in the Cayman Islands, had never submitted to the jurisdiction of the New York court, unlike its indirect parent, Vela. Consequently, Cambridge argued, an order of that court could not affect Cambridge’s rights of property in shares in the Isle of Man.

Notwithstanding aspects of Cambridge’s argument that the Privy Council termed “remarkable” in consideration of Vela’s active role in the bankruptcy and the fact that Cambridge was no more than a “creature of the real parties in interest who were actively participating in the [New York bankruptcy] proceedings,” Cambridge’s objection succeeded before the High Court. The High Court determined that although Vela had participated in the bankruptcy proceedings in New York, its subsidiary, Cambridge, had not. This holding was upheld by the Court of Appeal, and the creditors’ committee, faced with concurrent findings of fact, did not appeal the determination that the New York bankruptcy court did not have jurisdiction over Cambridge. The High Court also determined that the bankruptcy court order was a judgment in rem purporting to change title to property outside of the court’s jurisdiction. Accordingly, the High Court determined that the plan of reorganization and the New York bankruptcy court’s order confirming the plan could not be recognized.

The Court of Appeal reversed the High Court, however, determining that the New York order was not a judgment in rem, but rather, a judgment in personum in proceedings in which Navigator had submitted to the jurisdiction of the New York bankruptcy court. The Court of Appeal determined that at common law the court had a broad discretionary jurisdiction to assist a foreign court dealing with the bankruptcy of a company over which that court had jurisdiction. Accordingly, the Court of Appeal concluded that it could and should assist the judgment of the New York bankruptcy court by vesting the Navigator shares in the creditors’ committee to enable the implementation of the plan of reorganization.

On appeal from the Court of Appeal to the Privy Council, Cambridge argued that the New York order was either in rem or in personum. If the order was in rem, everyone agreed that the New York order could not affect title to shares in the Isle of Man. On the other hand, if the order was in personum, the order could only affect the persons who had submitted to the jurisdiction of the New York bankruptcy court. Cambridge argued before the Privy Council that it was irrelevant that Navigator had submitted itself to the jurisdiction of the New York bankruptcy court and that the Court of Appeal, having determined that the order was in personum, then enforced the order against the wrong persona. Cambridge argued that Cambridge was the relevant persona because the New York order purported to deprive Cambridge of its property – the shares in Navigator.

The Privy Council observed that if the New York order and plan had to be classified as falling under either in rem or in personum, Cambridge would be entitled to the appeal. However, the Privy Council determined that bankruptcy proceedings do not fall into either category. The Privy Council noted that judgments in rem and in personum are judicial determinations of the existence of rights: in the one case, rights over property and in the other case, rights against a person. The Privy Council continued, “The purpose of bankruptcy proceedings, on the other hand, is not to determine or establish the existence of rights, but to provide a mechanism of collective execution against the property of a debtor by creditors whose rights are admitted or established.” Although the Privy Council recognized that it may be necessary in the course of bankruptcy proceedings to establish rights that are challenged, e.g., addressing claim objections, “these are incidental procedural matters and not central to the purpose of the [bankruptcy] proceedings.”

In rejecting Cambridge’s argument on appeal, the Privy Council stated that “The English common law has traditionally taken the view that fairness between creditors requires that, ideally, bankruptcy proceedings should have universal application. There should be a single bankruptcy in which all creditors are entitled and required to prove. No one should have an advantage because he happens to live in a jurisdiction where more of the assets or fewer of the creditors are situated.” Absent prejudice against a creditor under Isle of Man or local law (which could not be shown in this case because: (i) due to the insolvency of Navigator, Cambridge had no economic interest in the proceeding; and (ii) Cambridge had ample opportunity to participate in the bankruptcy proceeding if it wished to do so), the Privy Council held that the principle of universalism was sufficient for the Privy Council to determine that the Court of Appeal was right to recognize the New York order and plan of reorganization and order their implementation.

These recent decisions warn creditors that failing to participate in foreign bankruptcy proceedings is done at the creditor’s own peril. Principles of comity and universalism have brought the bankruptcy world closer together, leading courts to recognize and enforce judgments of foreign countries and sometimes even elevating foreign judgments to the status of a sister state judgment. Creditors thus can no longer wait for the enforcement of a foreign judgment to object to its content, but must protect their interests by actively participating in the foreign proceeding.

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