Bankruptcy Court In Chapter 15 Case Refuses To Extend Comity To Gibbs Rule In Enforcing Croatian Settlement Modifying English-Law Debt

For more than a century, courts in England and Wales have refused to recognize or enforce foreign court judgments or proceedings that discharge or compromise debts governed by English law. In accordance with a rule (the "Gibbs Rule") stated in an 1890 decision by the English Court of Appeal, creditors holding debt governed by English law may still sue to recover the full amount of their debts in England even if such debts have been discharged or modified in connection with a non-U.K. bankruptcy or insolvency proceeding.

Such territorialism flies in the face of the "modified universalist" framework governing cross-border insolvencies that has been sanctioned by the more than 40 countries, including the U.K. and the U.S., that have enacted some form of the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "CBI Model Law").

Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York recently addressed this inconsistency in In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2018). Having previously entered an order recognizing a Croatian company's restructuring proceeding under chapter 15 of the Bankruptcy Code, the court recognized and enforced a settlement agreement that restructured English-law debt. It concluded that, under principles of comity, it would be appropriate to enforce the settlement agreement in the U.S., even though enforcement of the agreement would represent a refusal to extend comity to the Gibbs Rule.

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. Id. at 238. U.S. courts generally extend comity whenever a foreign court has proper jurisdiction and "enforcement does not prejudice the rights of United States citizens or violate domestic public policy." CT Inv. Mgmt. Co., LLC v. Cozumel Caribe, S.A. de C.V. (In re Cozumel Caribe, S.A. de C.V.), 482 B.R. 96, 114 (Bankr. S.D.N.Y. 2012).

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 JP Morgan Chase Bank v. Altos Hornos de Mexico S.A. de C.V., 412 F.3d 418 (2d Cir. 2005) (applying principles of comity in an ancillary proceeding under section 304 of the Bankruptcy Code, the precursor to chapter 15 of the Bankruptcy Code); In re Int'l Banking Corp. B.S.C., 439 B.R. 614, 624 (Bankr. S.D.N.Y. 2010) (citing cases).

In this context, deference to a foreign proceeding is warranted "so long as the foreign proceedings are procedurally fair and . . . do not contravene the laws or public policy of the United States." Cozumel Caribe, 482 B.R. at 114. Courts examine a number of factors in assessing procedural fairness, including:

(1) whether creditors of the same class are treated equally in the distribution of assets; (2) whether the liquidators are considered fiduciaries and are held accountable to the court; (3) whether creditors have the right to submit claims which, if denied, can be submitted to a bankruptcy court for adjudication; (4) whether the liquidators are required to give notice to the debtor's potential claimants; (5) whether there are provisions for creditors meetings; (6) whether a foreign country's insolvency laws favor its own citizens; (7) whether all assets are marshalled before one body for centralized distribution; and (8) whether there are provisions for an automatic stay and for the lifting of such stays to facilitate the centralization of claims. Finanz AG Zurich v. Banco Economico S.A. , 192 F.3d 240, 249 (2d Cir. 1999).

Role of Comity in Cases Under Chapter 15 of the Bankruptcy Code

As with the CBI Model Law, comity is a pillar of chapter 15 of the Bankruptcy Code. Cozumel Caribe, 482 B.R. at 114-15 (a central tenet of chapter 15 is the importance of comity in...

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