Don’t Ignore Bankruptcy Code’s Chapter 15 in Civil Actions; It Ends the Unpredictable Ad Hoc Comity Analysis
In 2005, the United States adopted the Model Law on Cross-Border Insolvency, promulgated by the United Nations Commission on Internal Trade, under chapter 15 of the United States Bankruptcy Code. In so adopting, Congress intended chapter 15 “to be the exclusive door to ancillary assistance to foreign proceedings.” H.R.Rep. No. 109–31, at 110–11 (2005). Notwithstanding the express congressional intent, not all courts have required chapter 15 relief as a prerequisite to seeking relief in a pending civil litigation against a debtor. Two district court decisions highlight the divergent views.
First, in HFOTCO LLC v. Zenia Special Maritime Enterprise, the United States District Court for the Southern District of Texas (the “HFOTCO Court”), denied a motion for summary judgment seeking dismissal, based on German insolvency law, of all claims against a debtor that had a pending insolvency proceeding in Germany. Following the majority view, the HFOTCO Court found that it is powerless to afford comity to the movant because its insolvency proceeding had not been formally recognized under chapter 15.
Second, in David Moyal v. Münsterland Gruppe GmbH & Co. KG (the “New York Action”) the United States District Court of the Southern District of New York (the “Moyal Court”) dismissed a lawsuit against a German debtor, Münsterland Gruppe GmbH & Co. KG (“MGKG”), based on the pendency of its insolvency proceeding and the application of German law. The Moyal Court applied an outdated ad hoc comity analysis and summarily rejected as “absurd” the need for recognition under chapter 15. And, by implication, treated chapter 15 as a kind of discretionary alternative to general comity.
The HFOTCO Civil Action
In 2014, MS Constantin S entered into an insolvency proceeding in Germany. Mr. Veit Schwierholz was appointed as the insolvency administrator for MS Constantin S’s assets. An insolvency administrator is akin to a trustee in U.S. bankruptcy proceedings. In January 2018, Mr. Schwierholz sold a vessel named X-Press Machu Picchu (f/k/a M/V Constantin S). Two months later, the vessel was involved in an incident at the shipping terminal owned by HFOTCO. Specifically, a vessel, the Minerva Zenia, moored at the terminal, allegedly caused damage to the terminal when the M/V Constantin S passed along side it at an unsafe speed. After the incident, HFOTCO sued Minerva Zenia. Minerva Zenia, in turn, filed a third-party complaint against MS Constantin S and Mr. Schwierholz, based on allegations that the vessel was not sold and delivered to the buyer until after the incident.
MS Constantin S, in moving for summary judgment, argued that under German law, “any court action initiated after the commencement of insolvency proceedings must be directed against the insolvency administrator.” Therefore, as a matter of comity, the HFOTCO Court must recognize and respect German insolvency law by dismissing MS Constantin S as an improper defendant. In opposition, HFOTCO and Minerva Zenia argued that even if comity was appropriate, either MS Constantin S or Mr. Schwierholz must first obtain recognition by a U.S. bankruptcy court, under chapter 15, of the German insolvency proceeding. In response, MS Constantin S contended that it does not satisfy the definition of a “foreign representative” under Bankruptcy Code section 101(24) and, therefore, the requirements of chapter 15 do not apply.
On July 7, 2021, the HFOTCO Court denied the motion for summary judgment. Specifically, the HFOTCO Court found that the provisions of chapter 15 make explicit that prior to obtaining comity from any U.S. court with respect to a foreign insolvency proceeding and, concomitantly, foreign insolvency law, a foreign representative must file a petition for relief and obtain recognition by a U.S. bankruptcy court. See 11 U.S.C. § 1509. That is because if the U.S. bankruptcy court denies recognition, chapter 15 empowers it to “issue any order necessary to prevent the foreign representative from obtaining comity or cooperation from courts in the United States.” 11 U.S.C. § 1509(d). Similarly, looking to the legislative history, the HFOTCO Court found that chapter 15 was enacted to “provide effective mechanisms for dealing with cases of cross-border insolvency.” “‘Central to Chapter 15 is comity’ and the facilitation of cooperation between multiple nations. To affect these goals, the statutory provisions ‘concentrat[e] control of these questions in one court.’” There is simply “no other mechanism” to provide comity to a foreign insolvency proceeding. The “only sensible solution,” according to the HFOTCO Court, would be for MS Constantin S to ensure that its foreign representative, ostensibly Mr. Schwierholz, apply for recognition in a U.S. bankruptcy court.
Point-Counterpoint: The Moyal Civil Action
On February 1, 2019, Mr. David Moyal commenced the New York Action seeking damages from MGKG for breach of a distribution agreement. Due to a lack of financial resources to defend itself, MGKG did not answer the complaint. Mr. Moyal, therefore, moved for a default judgment and an inquest was commenced on the amount of damages.
On March 11, 2021, prior to the entry of a judgment, MGKG commenced an insolvency proceeding in Germany and an insolvency administrator was appointed to liquidate MGKG’s assets. Pursuant to the German Code of Civil Procedure, the commencement of the insolvency proceeding automatically stayed all previously filed actions against MGKG—at least in Germany. As a result, MGKG’s U.S. counsel filed a notice of the insolvency proceeding and a motion seeking to dismiss or stay the New York Action. Thereafter, the insolvency administrator informed MGKG’s U.S. Counsel that by operation of German law, the U.S. Counsel’s mandate to represent MGKG was terminated. MGKG’s U.S. counsel subsequently moved to withdraw as counsel.
Unsurprisingly, Mr. Moyal opposed the dismissal of the New York Action. In his opposition, Mr. Moyal argues that chapter 15 provides the exclusive means to recognize a foreign insolvency proceeding and stay actions within the United States. Specifically, Mr. Moyal relied upon the express language of Bankruptcy Code section 1509(a), which provides “[a] foreign representative may commence a case under section 1504 by filing directly with the court a petition for recognition of a foreign proceeding. . . .” And, without recognition, a foreign representative does not have the capacity to sue and be sued in the United States. See 11 U.S.C. § 1509(b).
In response, MGKG first argued that chapter 15 is only a remedy available to a foreign representative and because the insolvency administrator was not a party to the New York Action, recognition was irrelevant. Second, MGKG argued chapter 15 relief was unnecessary because any judgment for damages by Mr. Moyal would still be subject to a proceeding in Germany to enforce the judgment. Third, MGKG argued that chapter 15 does not preempt comity.
On May 17, 2021, the Moyal Court entered its Opinion and Order (the “Moyal Opinion”) dismissing the New York Action. The Moyal Court found that comity requires the dismissal of the New York Action. Specifically, “[d]eference to a foreign bankruptcy proceeding is appropriate where ‘the foreign proceedings are procedurally fair and . . . do not contravene the laws or public policy of the United States.’” Id. at *6. And, that MGKG had shown that the German insolvency proceeding was procedurally fair, providing for an equitable distribution of assets and making no distinction between foreign and domestic creditors. The Moyal Court rejected the notion that a chapter 15 proceeding is required to stay or cause the dismissal of the New York Action, finding such argument to be “absurd and would fly in the face of comity principles because courts regularly grant comity on the request of a party other than a foreign representative.” Moyal Opinion at 6 n.1
Chapter 15 Replaced an Ad Hoc Comity Analysis for Recognition of a Foreign Law
Here, in both cases, the debtor attempted to create a distinction between it and a foreign representative for purposes of comity and chapter 15 recognition. This argument and reasoning, however, does not take into account how a chapter 15 case protects foreign debtors, entities who already are under the control of foreign representatives, for the purpose of chapter 15 commencement. No chapter 15 case can be commenced by a representative that does not have control over a foreign debtor for such purposes—either by easily ascertainable statutory law or by a specific order of a foreign court naming the representative. See 11 U.S.C. § 1515.
For example, while it is true that MGKG’s insolvency administrator was not literally substituted as a named party for MGKG in the New York Action, under German insolvency law, the insolvency administrator was in charge of MGKG’s assets and the administration of claims against MGKG. Thus, in effect, MGKG’s insolvency administrator, a person appointed to liquidate the debtor’s assets or affairs (i.e., the eligible MGKG foreign representative under 11 U.S.C. § 101(24)), through the MGKG’s U.S. counsel, sought the assistance of a foreign court to protect and maximize the value of a German debtor’s assets for the benefit of all creditors in a German insolvency proceeding. See 11 U.S.C. § 1501(a)(3)-(4). The Moyal Court, however, did not address the key question—whether the insolvency administrator needed to act as the foreign representative and commence a chapter 15 to obtain enforcement of key aspects of the German insolvency law in the United States; to wit, the dismissal of the debtor from a U.S. action, the recognition of the German moratorium, and claims reconciliation process in Germany.
In HFOTCO, the court clearly answered this key question in the affirmative. To obtain the benefit of a stay and related relief doing comity under German insolvency law, (in HFOTCO the dismissal of the U.S. proceeding), a foreign representative must first seek recognition of the German insolvency proceeding. This is the precise business of chapter 15—a law designed to provide a clear, simple, statutory standard on when courts should apply comity to a foreign insolvency proceeding and the collective remedy sought in that proceeding.
The fact that, in extending comity, the Moyal Court considered many of the same factors as a bankruptcy court can in ordering specific relief for a foreign debtor under Bankruptcy Code section 1507, including whether the German insolvency proceeding provided “protection of claim holders in the United States against prejudice and inconvenience in the processing of claim in such foreign proceeding,” does not obviate the need for prior chapter 15 recognition. As the HFOTCO Court made clear, comity “is not a rule of law, but one of practice” and chapter 15 provides the exclusive statutory framework and venue for a court to engage in the “factual determination with respect to recognition before principles of comity come into play.” Recognition is the finding that comity should be applied to a foreign collective remedy and ensures that U.S. claimants will be treated equitably in the foreign proceeding. It is the key predicate to any U.S. federal court acting as an ancillary to a foreign court in bankruptcy.
Moreover, the Moyal Opinion’s application of comity rested primarily on cases decided prior to the enactment of chapter 15 under repealed Bankruptcy Code section 304, which vested substantial discretion in bankruptcy courts to determine when to support a foreign insolvency process. Congress enacted chapter 15 to expressly avoid the results of the Moyal Opinion. As the HFOTCO Court stated, Congress intended chapter 15 recognition to be mechanistic, and there is simply no other statutory process available to a U.S. federal court, other than a bankruptcy court to grant such relief. All other courts are “powerless to grant” recognition of a foreign insolvency proceeding.
Indeed, the legislative history confirms that “chapter 15 is intended to be the exclusive door to ancillary assistance to foreign proceedings” and that “[t]he goal [of Section 1509] is to concentrate control of these questions in one court. That goal is important in a federal system like that of the United States with many different courts, state and federal, that may have pending actions involving the debtor or the debtor's property.” H.R.Rep. No. 109–31, at 110–11 (2005). The House Report goes on to note that under prior law, some courts had:
granted comity suspension or dismissal of cases involving foreign proceedings without requiring a[ ] petition or even referring to the requirements of that section. Even if the result is correct in a particular case, the procedure is undesirable, because there is room for abuse of comity. Parties would be free to avoid the requirements of this chapter and the expert scrutiny of the bankruptcy court by applying directly to a state or Federal court unfamiliar with the statutory requirements.
Id.; see also Guide to Enactment at 21 (“[a]pproaches based purely on the doctrine of comity or on exequatur do not provide the same degree of predictability and reliability”).
Moreover, the Moyal Court’s reliance on the notion that courts regularly provide comity to foreign insolvency proceedings without chapter 15 recognition seems to conflate recognition of a foreign insolvency-related judgment with recognition of a foreign insolvency proceeding. As the HFOTCO Court recognized, where a party requests a U.S. court to “accord it the same right[s]” it has under foreign law, recognition of such legal rights would be tantamount to formally recognizing a foreign proceeding. That is because recognition of a foreign law implicitly assists in the administration of a foreign insolvency proceeding by conferring some benefit on the debtor and its estate. On the other hand, courts that have provided assistance in aid of a foreign insolvency, without chapter 15 recognition, usually have done so only when enforcing an insolvency-related judgment—not a statutory right. Essentially, in such a context, the U.S. court is simply giving preclusive effect to a specific factual and legal finding made by a foreign court. 8 Collier on Bankruptcy ¶ 1509.02 (16th ed. 2021).
Accordingly, even though arguably the result in MGKG’s case was correct—the dismissal of the New York Action in light of the pendency of the German insolvency proceeding and Mr. Moyal’s ability to interface with German courts over the reconciliation of his claim—the Moyal Opinion “is undesirable” because of the precedent it sets (i.e., that “parties would be free to avoid the requirements” of chapter 15 relief). H.R.Rep. No. 109–31, at 110–11 (2005). HFOTCO represents the approach followed by the majority of U.S. courts in requiring chapter 15 process as the exclusive gatekeeper to comity to foreign insolvency proceedings. Practically, while it is tempting to seek a quick dismissal under Moyal, there is a significant risk that such a dismissal-based strategy will fail and the movant will have to organize a chapter 15, having increased the foreign debtor’s transaction costs in administering its case in the United States.
The Moyal case is likely to remain an outlier given the clear and mandatory requirements of chapter 15, as confirmed by HFOTCO and a majority of other cases. Further, reliance on an ad hoc analysis will be of little use to complex foreign debtors who need to control multiple stakeholder interests and subject a large U.S. collective of claims and rights to a foreign collective remedy. Ad hoc informal comity in multiple U.S. courts is an inefficient and expensive way to bind creditors to a liquidation or restructuring of assets; chapter 15 process is the value-optimizing, efficient process to facilitate complex international restructuring in the United States.
This article has been updated from its original publication in the September 2021 edition of The Banking Law Journal.
This article is one in a series of articles written for Blank Rome's MAINBRACE: December 2021 edition.
 HFOTCO LLC v. Zenia Special Mar. Enter., No. CV H-19-3595, 2021 WL 2834687 (S.D. Tex. July 7, 2021).
 Moyal v. Münsterland Gruppe GmbH & Co. KG, 2021 WL 1963899 (S.D.N.Y. May 17, 2021).
 HFOTCO LLC, No. CV H-19-3595, 2021 WL 2834687 at *2.
 Id. at *3.
 See Defendant’s Reply in Further Support of its Motion to Dismiss or Stay this Action, Case No. 19-cv-04946, Doc No. 114, at 6 (Apr. 27, 2021, S.D.N.Y.) (citing Trikona Advisers, Ltd. v. Chugh, 846 F.3d 22, 31 (2d Cir. 2017) (“11 U.S.C. § 1515 does not apply generally to parties, but, by its terms, requires only ‘foreign representatives’ to apply for recognition of a foreign judgment in bankruptcy.”)).
 Id. at 7 (citing JP Morgan Chase Bank v. Altos Hornos de Mex., S.A. de C.V., 412 F.3d 418, 424 (2d Cir. 2005) (Second Circuit has “repeatedly held that U.S. courts should ordinarily decline to adjudicate creditor claims that are the subject of a foreign bankruptcy proceeding.”)).
 Id. at 6.
 A German moratorium is akin to the U.S. automatic stay, a key feature of American bankruptcy and collective remedies thereunder. Compare Section 240 of the German Code of Civil Procedure (“[i]n the event of insolvency proceedings being opened against a party, [all other] proceedings shall be interrupted to the extent they concern the insolvent estate until they can be resumed in accordance with the rules applying to the insolvency proceedings, . . .”) with 11 U.S.C. 362(a) (“[a] petition filed . . . operates as a stay, applicable to all entities, of— (1)the commencement or continuation, . . ., of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case . . . .”); See generally, In re Onouli-Kona Land Co., 846 F.2d 1170, 1174 (9th Cir. 1988) (“automatic stay is at the essence of bankruptcy as a procedural forum; the automatic stay makes possible the collective proceeding which sorts out non-bankruptcy entitlement”).
 UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation, January 2014 (the “Guide to Enactment”), at 28 (https://uncitral.un.org/sites/ uncitral.un.org/files/media-documents/uncitral/en/1997-model-law-insol-2013-guide-enactment-e.pdf ) (“One of the key objectives of the Model Law is to establish simplified procedures for recognition of qualifying foreign proceedings that would avoid time-consuming legalization or other processes and provide certainty with respect to the decision to recognize.”).
 HFOTCO LLC, No. CV H-19-3595, 2021 WL 2834687 at *3.
 Id. at *4.
 For example, in EMA GARP Fund v. Banro Corporation, No. 18 CIV. 1986 (KPF) (S.D.N.Y. Feb. 21, 2019), the U.S. District Court dismissed an action, on comity grounds, based on a foreign insolvency judgment that released all claims asserted in the action pending in the U.S. District Court. See Michael B. Schaedle & Evan J. Zucker, "Enforcement of an Insolvency-Related Judgment Does Not Require Recognition under Chapter 15," Pratt’s Journal of Bankruptcy Law (Vol. 16, Feb./Mar. 2020).