Addressing issues of comity in a chapter 15 bankruptcy proceeding, Judge K. Michael Moore of the United States District Court for the Southern District of Florida recently ruled that a U.S. court can only examine whether the overarching foreign law in question comports with the United States' concepts of fairness and due process, but that it cannot examine specific proceedings or decisions of the foreign court. SNP Boat Service S.A. v. Hotel Le St. James, No. 11-62671 (S.D. Fla. Apr. 18, 2012). Chapter 15 of the Bankruptcy Code was enacted in 2005 for the purpose of providing an effective mechanism for dealing with cases of cross-border insolvency. Through chapter 15, a U.S. bankruptcy court can "recognize" a foreign restructuring proceeding and play an important role in the coordination of an international debtor's affairs. Accordingly, Judge Moore's ruling in SNP Boat Service is significant in that it clarifies a United States court's ability to question the legal framework of a foreign jurisdiction when determining whether or not to give force and effect to its rulings.
Background
When a debtor commences a restructuring proceeding outside of the United States, in order to protect any property located within the United States, the debtor frequently commences a chapter 15 action and seeks recognition of the foreign proceeding by a U.S. bankruptcy court. Chapter 15 allows a court-appointed foreign representative to distribute a debtor's U.S. property in the foreign case "provided that the court is satisfied that the interests of creditors in the United States are sufficiently protected." 11 U.S.C. § 1521(b). This determination is based, in part, on whether the laws governing the foreign proceeding comport with the United States' concept of due process.
In SNP Boat Service, debtor SNP Boat Service S.A., a corporation organized under the laws of France that designs luxury boats and provides related boat management services, and Hotel Le St. James, a Canadian corporation, had been litigating a contract dispute in both French and Canadian courts since 2008. In April of 2009, the French Commercial Court approved a sauvegarde proceeding for SNP (a sauvegarde proceeding shares certain similarities with a U.S. chapter 11 proceeding, including an automatic stay that has an international effect).
St. James ultimately obtained a judgment in the Canadian courts and, after learning that SNP had assets located in Florida, domesticated that judgment in the U.S. and caused the seizure of two of SNP's vessels. St. James intended to sell the vessels to satisfy its judgment. In the meantime, SNP had obtained an order in the sauvegarde proceeding that St. James' Canadian judgment had been improperly entered and was unenforceable. In response, St. James argued that it had not been afforded fundamental due process in the proceedings in France.
Before the Florida vessels were sold, the French Commercial Court appointed an administrator of SNP's estate and the administrator filed a chapter 15 petition seeking recognition of the French sauvegarde proceeding as a "foreign proceeding" pursuant to 11 U.S.C. § 1515. The U.S. bankruptcy court formally recognized the sauvegarde proceeding as a "foreign proceeding" and ordered a stay with respect to all of SNP's property located within the United States.
SNP then filed a motion seeking to have the chapter 15 foreign representative entrusted with one of the Florida vessels. This motion essentially sought to remove the Florida vessel from the jurisdiction of the U.S. bankruptcy court and subject it to the jurisdiction of the French Commercial Court. St. James also filed a motion seeking authority to compel discovery to determine whether its interests as a creditor had been "sufficiently protected" in the administration of the sauvegarde proceeding. SNP objected to this relief on several grounds. The competing motions presented three issues for the bankruptcy court.
First, SNP argued that the U.S. bankruptcy court did not possess the authority to order discovery for the purpose of inquiring into the French sauvegarde proceeding; in effect, SNP asserted that this action amounted to appellate oversight of the French Commercial Court. However, the bankruptcy court determined that it did indeed have the authority to inquire whether St. James had been afforded sufficient due process in the French sauvegarde proceeding, partially due to SNP and its foreign representative's uncooperative behavior during the chapter 15 proceeding. In particular, the bankruptcy court had been particularly displeased by SNP's repeated dilatory tactics with respect to St. James' requested discovery. This frustration eventually reached its peak after SNP filed a motion asking the bankruptcy court to clarify its discovery order and extend the deadline for conducting discovery due to the month-long August holiday in France.
The second issue involved SNP's assertion that a French "blocking statute" (which is generally designed to relieve non-U.S. parties from compliance with U.S. discovery requests) barred the requested discovery. The bankruptcy court also rejected this argument by SNP, ruling that such a blocking statute does not relieve foreign parties of the obligation to comply with United States discovery when the party is subject to the U.S. court's jurisdiction. Ultimately, the U.S. court concluded that the French blocking statute did not apply to the case at hand.
Finally, and primarily as a result of what it perceived to be a continued lack of cooperation on the part of SNP, the bankruptcy court ultimately denied with prejudice SNP's entrustment motion and dismissed the chapter 15 proceeding.
SNP appealed the bankruptcy court's rulings on each of these three issues and sought reinstatement of the chapter 15 proceeding.
Analysis
With respect to the acceptable level of inquiry into the specific proceedings taking place before the foreign court, the district court relied on the Second Circuit's ruling in Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709 (2d Cir. 1987), which addressed the issue of comity within the context of prior section 304 of the Bankruptcy Code, the predecessor cross-border insolvency statute to chapter 15. In Victrix, the Second Circuit looked "only to whether the 'foreign laws' at issue comported with due process and not whether the specific individual proceeding afforded due process." Thus, once the U.S. bankruptcy court determined that French sauvegarde proceedings were generally sufficient to protect creditors' interests, the bankruptcy court was without jurisdiction to inquire any further into any specific foreign proceeding.
The district court in SNP continued that "[t]o inquire into a specific foreign proceeding is not only inefficient and a waste of judicial resources, but more importantly, necessarily undermines the equitable and orderly distribution of a debtor's property by transforming a domestic court into a foreign appellate court where creditors are always afforded the proverbial 'second bite at the apple.'" In attacking the SNP sauvegarde, St. James had not alleged that creditors' interests as a whole were not sufficiently protected by the French insolvency laws. Thus, the district court held it would be unjust to allow a court to make specific inquiries as to the rights of an individual creditor that was no more entitled to a distribution of SNP's assets than any other.
Regarding the second issue concerning the effect of the French "blocking statute," the district court relied on Société Nationale Industrielle Aérospatiale v. U.S. Dist. Court for the S. Dist. of Iowa, 482 U.S. 522, 544 n.29 (1987), in concluding that the bankruptcy court did not abuse its discretion by disregarding the French blocking statute. The district court concluded that to give force and effect to such a foreign statute would bestow foreigners with a preferred status within the U.S. court system and also represent an "extraordinary exercise of legislative jurisdiction by the Republic of France over a United States district judge."
Finally, the SNP district court reversed the bankruptcy court's dismissal of the chapter 15 proceeding as a sanction, noting that the severe sanction of a dismissal or default judgment should only be used as a last resort and when other remedies would not ensure compliance with a court's orders. Significantly, the bankruptcy court's order denying SNP's entrustment motion did not explore the possibility of lesser sanctions. Accordingly, the district court concluded that the bankruptcy court abused its discretion when it dismissed SNP's entrustment motion with prejudice as a sanction.
The district court's ruling that a U.S. bankruptcy court may only inquire into the general framework of a foreign insolvency proceeding – and not specific individual proceedings – gives additional guidance to parties seeking to challenge a chapter 15 case. As long as the laws of a foreign insolvency regime are generally similar to the laws of the U.S., creditors may have limited bases on which to use chapter 15 to challenge the foreign court's rulings.
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