In re Manley Toys Ltd.

In re: MANLEY TOYS LIMITED, Debtor in a Foreign Proceeding.

Case No. 16-15374 (JNP)

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY

March 31, 2020

Chapter 15

MEMORANDUM DECISION ADDRESSING ISSUES ON REMAND AND DENYING MOTION FOR STAY RELIEF

JERROLD N. POSLUSNY, JR., U.S. Bankruptcy Judge

This matter comes before the Court on remand from the District Court (the "Remand Order") of an appeal of an order denying the motion for stay relief (the "Initial Motion") filed by ASI, Inc., f/k/a Aviva Sports, Inc. ("Aviva"). The Remand Order requires the Court to explain whether Aviva's arguments related to bad faith and judicial estoppel were considered in its original decision denying stay relief (the "Previous Decision") and further to determine whether additional evidence Aviva attempted to introduce on appeal alters the Court's determination to deny stay relief. Rather than simply briefing the matters in the Remand Order, Aviva filed a new motion for stay relief (the "Motion"). The Motion addresses not only the issues discussed in the Remand Order, but also seeks relief from stay to obtain: (a) evidence preservation orders in other courts; and (b) injunctive sanctions from the United States District Court for the District of Minnesota ("Minnesota Court") against Manley Toys, Ltd. (the "Debtor"). For the reasons discussed below, the Court denies the Motion.

Jurisdiction

The Court has jurisdiction under 28 U.S.C. § 157(b)(1) and § 1334(b) and (d). Venue is proper in this Court under 28 U.S.C. § 1410. The Motion is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G).

Background

The Court assumes familiarity with the history of this case and only reviews the facts relevant to the issues before the Court.¹ The Debtor is a foreign corporation that entered voluntary liquidation proceedings pursuant to section 228(1)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance of Hong Kong statutory law ("C(WUMP)O"). On March 22, 2016, Matt Ng and Robert Lees, in their capacities as the duly appointed joint and several liquidators (the "Liquidators")² of the Debtor, filed a petition under Chapter 15 of Title 11 of the United States Code (the "Bankruptcy Code"), on behalf of the Debtor for recognition of a foreign main proceeding. Dkt. No. 1. Aviva filed opposition. Dkt. No. 15. As part of the recognition proceedings Aviva served discovery demands on the Liquidators and later made an informal motion to compel (the "Motion to Compel"). Dkt. No. 40. The Court issued an oral decision (the "Discovery Decision") granting the Motion to Compel and requiring the Liquidators to turn over two-years of information requested by Aviva. Dkt. No. 51. On April 1, 2016, the Court entered a provisional stay order (the "Stay Order"), which incorporated the protections of section 362 of the Bankruptcy Code by its terms.³

Aviva filed the Initial Motion on September 13, 2016. Dkt. No. 144. The Liquidators opposed the Initial Motion. Dkt. No. 151. The Initial Motion sought relief from the automatic stay to allow Aviva to pursue claims for alleged fraudulent transfers made by the Debtor to third parties, as well as an action to pierce the corporate veil (collectively the "Claims"), and attach liability to the principals of the Debtor and another corporation called Toy Quest, Ltd. See Dkt. No. 144. In addition, the Initial Motion sought relief to allow Aviva to: (a) take post-judgment discovery fromthe Debtor or the Liquidators concerning the judgment it obtained against the Debtor or a separate judgment it obtained against Manley Toy Direct; (b) request relief from other courts in the United States with respect to the Debtor or the Liquidators to ensure the preservation of evidence relating to the judgments Aviva obtained against the Debtor or Manley Toy Direct; (c) seek injunctive sanctions against the Debtor for violating post-judgment discovery orders issued pre-petition by the Minnesota Court; and (d) seek to amend complaints or judgments to include third parties. Id.

On February 13, 2018, the Court issued a decision recognizing the foreign main proceeding (the "Recognition Opinion"). In re Manley Toys Ltd., 580 B.R. 632 (Bankr. D.N.J. 2018), aff'd, 597 B.R. 578 (D.N.J. 2019). Following this, the Court docketed the Previous Decision denying relief from stay as it pertained to the Claims. In re Manley Toys, 2018 WL 1071167, at *1. The Previous Decision ruled that, under Hong Kong law, once the liquidation was commenced the Claims qualified as generalized claims and thus property of the Debtor and could only properly be brought by the Liquidators for the benefit of all creditors. Id. Aviva appealed the Previous Decision to the District Court arguing, among other things, that the Court had not addressed its arguments that stay relief should be granted as to the Claims due to the bad faith of the Debtor and the Liquidators, and that the Liquidators should be judicially estopped from arguing that the alter ego claims were property of the Debtor. Additionally, Aviva requested the District Court take judicial notice of, and consider a letter from the Liquidators proposing settlement of the Claims (the "Settlement Letter") and Aviva's subsequent objection (the "Objection Letter" and with the Settlement Letter, the "Letters") to the proposed settlement. In re Manley Toys Ltd., 2019 WL 1987052, at *2 (D.N.J. May 6, 2019). The District Court remanded the case stating:

[T]he Bankruptcy Court's decision . . . does not appear to address the bad faith nor the estoppel issues.

* * *

The Court will remand this case for: (a) further consideration of Aviva's application for stay relief, and (b) a decision as to whether the Bankruptcy Court's consideration in that regard will include theletters Aviva has sought to introduce into the record of this appeal.

Id. at *3

During a hearing to consider the briefing schedule for the remanded issues, Aviva stated its intent to file a new motion for relief to address additional issues not listed in the Remand Order and requested permission to address all issues in a single brief. In the interest of judicial economy, the Court permitted the parties to brief all matters and objections in a single brief, and Aviva filed this Motion. Dkt. No. 374. As a result, the Court will first consider the matters raised in the Remand Order, and then will consider the additional matters raised by Aviva in the Motion.

Aviva argues that it should be allowed to pursue the Claims against the Debtor and its alleged "affiliates" because the alleged bad faith of the Debtor and the Liquidators constitute cause for stay relief. In addition to the allegations of bad acts committed by the Debtor and its principals pre-petition, Aviva asserts that the Liquidators have a conflict of interest because they are funded by Toy Quest and have failed to investigate or pursue fraudulent transfer and alter ego claims against Toy Quest and the Debtor's former principals. Dkt. No. 374. Somewhat paradoxically, the Motion then discusses the Liquidators' efforts to settle the Claims, and that Aviva believes the proposed settlement is the result of collusion and does not achieve a fair recovery. Id. Additionally, Aviva alleges that the Liquidators previously argued that creditors would be free to pursue alter ego claims if the foreign proceeding was recognized, and therefore, should be judicially estopped from arguing that creditors are barred from pursuing the Claims. Id.

In response, the Liquidators argue that Aviva never made a bad faith argument in the Initial Motion. Additionally, the Liquidators argue that there is no bad faith, and that bad faith is not grounds for relief from the stay under these circumstances. Dkt. No. 377. The Liquidators also argue that, because under Hong Kong law the Claims belong to the Debtor, relief from the stay is futile as Aviva would not be able to bring the Claims. Id. As to judicial estoppel, the Liquidators argue that Aviva did not meet its burden to establish that the doctrine applies in this case. Id.

The Letters

On appeal, Aviva attempted to introduce the Letters, which were not part of the record before this Court. Manley Toys, 2019 WL 1987052, at *2. The District Court did not decide whether it had authority to supplement the record on appeal, instead remanding the matter to this Court to consider whether the Letters should be considered as part of its decision. Id. (citing In re Capital Cities/ABC, Inc.'s Application for Access to Sealed Transcripts, 913 F.2d 89, 98 (3d Cir. 1990)). Aviva included the Letters and incorporated them into the Motion. Dkt. No. 374. Because there is no prejudice to the Liquidators by including these additional documents, the Court reviewed the Letters as part of its consideration of the Motion.

Chapter 15 Insolvency Proceedings

Congress enacted Chapter 15 to provide effective mechanisms for dealing with cases of cross-border insolvency with the following objectives:

(1) cooperation between . . . courts of the United States, . . . and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases;

(2) greater legal certainty for trade and investment;

(3) fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor;

(4) protection and maximization of the value of the debtor's assets; and

(5) facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

In re ABC Learning Centres Ltd., 728 F.3d 301, 304-05 (3d Cir. 2013) (citing 11 U.S.C. § 1501; UNCITRAL Model Law on Cross-Border Insolvency preamble (stating nearly identical purposes)). Uniformity and cooperation are essential to this goal, treating the "multinational bankruptcy as a single process in the foreign main proceeding, with other courts assisting in that single proceeding." Id. This is done to ensure that creditors are universally...