U.S. courts have a long-standing tradition of recognizing or enforcing the laws and court rulings of other nations as an exercise of international "comity." Since chapter 15 of the Bankruptcy Code was enacted in 2005, it has been generally understood that recognition of a foreign bankruptcy proceeding under chapter 15 is a prerequisite to the enforcement by a U.S. court of an order or judgment entered in such a foreign bankruptcy proceeding under the doctrine of comity. A ruling recently handed down by the U.S. District Court for the Southern District of New York directly challenges that principle. In EMA Garp Fund v. Banro Corp., 2019 WL 773988 (S.D.N.Y. Feb. 21, 2019), the court dismissed litigation against a Canadian company and its former CEO, finding that, under principles of comity, the lawsuit was barred by orders approving the company’s Canadian bankruptcy proceeding and releasing all claims against the defendants. The district court did so despite the absence of any order issued by a U.S. bankruptcy court recognizing the Canadian bankruptcy proceeding under chapter 15.
Comity
"Comity" is "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). International comity has been interpreted to include two distinct doctrines: (i) "legislative," or "prescriptive," comity; and (ii) "adjudicative comity." Maxwell Comm’n Corp. v. Societe Generale (In re Maxwell Comm’n Corp.), 93 F.3d 1036, 1047 (2d Cir. 1996).
The former "shorten[s] the reach of a statute"—one nation will normally "refrain from prescribing laws that govern activities connected with another state when the exercise of such jurisdiction is unreasonable." Official Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(C) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(C)), 575 B.R. 229, 237 (Bankr. S.D.N.Y. 2017).
"Adjudicative comity," or "comity among courts," is an act of deference whereby the court of one nation declines to exercise jurisdiction in a case that is properly adjudicated in a foreign court. Because a foreign nation’s interest in the equitable and orderly distribution of a foreign debtor’s assets is an interest deserving respect and deference, U.S. courts generally defer to foreign bankruptcy proceedings and decline to adjudicate creditor claims that are the subject of such proceedings. See Canada Southern Railway Co. v. Gebhard, 109 U.S. 527, 548 (1883) ("the true spirit of international comity requires that [foreign schemes of arrangement], legalized at home, should be recognized in other countries"); accord In re Int’l Banking Corp. B.S.C., 439 B.R. 614, 624 (Bankr. S.D.N.Y. 2010) (citing cases).
Prior to 2005, as an exercise of comity, U.S. courts regularly enforced stays of creditor collection efforts against a foreign debtor or its U.S. assets issued in connection with foreign bankruptcy proceedings. See, e.g., Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187 (3d Cir. 1994) (deferring to Mexican bankruptcy proceeding); Badalament, Inc. v. Mel-O-Ripe Banana Brands, Ltd., 265 B.R. 732 (E.D. Mich. 2001) (deferring to Canadian bankruptcy proceeding); Lindner Fund, Inc. v. Polly Peck Int’l PLC, 143 B.R. 807 (S.D.N.Y. 1992) (citing cases and dismissing litigation brought in U.S. against U.K. company that was debtor in U.K. insolvency proceedings); Cornfeld v. Investors Overseas Services, Ltd., 471 F. Supp. 1255 (S.D.N.Y. 1979) (deferring to Canadian bankruptcy proceeding), aff’d, 614 F.2d 1286 (2d Cir. 1979).
In many such cases, U.S. courts recognized and enforced the stays of foreign courts in granting relief in an "ancillary proceeding" brought by the representative of a foreign debtor under section 304 of the Bankruptcy Code—the repealed precursor to chapter 15 of the Bankruptcy Code. Section 304 expressly authorized a U.S. bankruptcy court to enjoin the commencement or continuation of any action against a foreign debtor with respect to property involved in a foreign bankruptcy case. See, e.g., JP Morgan Chase Bank v. Altos Hornos de Mexico S.A. de C.V., 412 F.3d 418 (2d Cir. 2005); Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452 (2d Cir. 1985); Hoffman v. Joint Official Liquidators (In re Nat’l Warranty Ins. Risk Retention Grp.), 306 B.R. 614 (B.A.P. 8th Cir.), aff’d, 384 F.3d 959 (8th Cir. 2004).
However, an ancillary proceeding under section 304 was "not the exclusive remedy for foreign debtors opposing actions by local creditors against assets located in the United States." Hembach v. Quikpak Corp., 1998 WL 54737, *4 (E.D. Pa. Jan. 8, 1998). The foreign representative could request that the U.S. court recognize foreign bankruptcy proceedings as a matter of international comity, without seeking relief under section 304. See Interpool, Limited v. Certain Freights of the M/VS Venture Star, Mosman Star, Fjord Star, Lakes Star, Lily Star, 878 F.2d 111 (3d Cir. 1989); Remington Rand Corporation–Delaware v. Business Sys. Inc., 830 F.2d 1260, 1267–68 (3d Cir. 1987) (section 304 "expresse[d] Congressional recognition of an American policy favoring comity for foreign bankruptcy proceedings . . . [and was] not the exclusive source of comity"); In re Enercons Virginia, Inc., 812 F.2d 1469, 1471–72 (4th Cir. 1987); see generally Collier on Bankruptcy ¶ 1509.02 (16th ed. 2019) ("Thus, foreign representatives could, theoretically at least, try their luck in a variety of courts, with failure in one not precluding a second try in another.").
Chapter 15 Alters the Landscape
The enactment of chapter 15 in 2005 changed the requirements for seeking recognition and enforcement in the U.S. of foreign bankruptcy court orders or laws impacting a foreign debtor or its U.S. assets.
Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." A "foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the U.S. of both a "foreign main proceeding"—a case pending in the country where the debtor’s center of main interest (COMI) is located (see 11 U.S.C. § 1502(4))—and "foreign nonmain proceedings" pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)).
Upon recognition of a foreign main proceeding, section 1520(a) provides that certain provisions of the Bankruptcy Code automatically come into force, including section 362, which imposes an automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets. If the bankruptcy court recognizes a foreign proceeding as either a main or nonmain proceeding, section 1521(a) authorizes the court to...
