US: The High Burden to Satisfy the ‘Manifestly Contrary to Public Policy’ Standard of Chapter 15

Chapter 15 of Title 11 the United States Bankruptcy Code (the Bankruptcy Code) enables a representative of a company in an insolvency proceeding outside the United States to obtain recognition of the foreign proceeding and certain other relief from a US bankruptcy court with respect to the debtor's assets and creditors in the United States. Chapter 15 is intended to give a great deal of comity to foreign courts and foreign proceedings, but, as this chapter discusses, comity has a limit. The limit is embodied in section 1506 of the Bankruptcy Code, which permits a US bankruptcy court to 'refus[e] to take an action governed by . . . chapter [15] if the action would be manifestly contrary to the public policy of the United States'.¹ This chapter discusses the exceptionally high burden parties must overcome to prove that requested relief is manifestly contrary to public policy, and in fact, bankruptcy courts make such findings only in extraordinarily rare circumstances.

Recognition of foreign insolvency proceedings in the United States

Chapter 15 was enacted in 2005 to 'incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency', and to facilitate cooperation between the courts and other competent authorities of the United States and of foreign countries in cross-border insolvency cases.² Chapter 15's adoption of the Model Law replaced section 304 of the Bankruptcy Code. Courts have noted that while section 304 relief was 'largely discretionary . . . , Chapter 15 improved predictability by mandating recognition when a foreign proceeding' meets certain statutory criteria.³ This mandatory recognition 'fosters comity and predictability, and benefits bankruptcy proceedings in the United States that seek to administer property located in foreign countries that have adopted the Model Law'.⁴

Comity has been defined as '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'.⁵ Courts have noted that comity is 'central' to and a 'principal objective' of Chapter 15.⁶

To commence a Chapter 15 case, a foreign representative⁷ authorised to administer a foreign debtor's assets must file a petition for recognition of a foreign proceeding in a US bankruptcy court.⁸ After notice and a hearing, and subject only to the public policy exception, section 1506 of the Bankruptcy Code, the bankruptcy court must issue an order recognising the foreign proceeding if the following criteria set forth in section 1517 of the Bankruptcy Code are established: (i) the foreign proceeding for which recognition is sought is a foreign main proceeding or foreign non-main proceeding;⁹ (ii) the foreign representative applying for recognition is a person or body; and (iii) the petition for recognition meets requirements of section 1515.¹⁰

Upon recognition of a foreign proceeding under Chapter 15, the foreign representative is entitled to seek substantive relief in a bankruptcy court,¹¹ some of which is mandatory and some of which is discretionary. The relief available includes, among other things, 'the ability to sue and be sued in United States courts, to apply directly to a United States court for relief, to commence a non-Chapter 15 case, and to intervene in any United States case to which the debtor is a party'.¹² Importantly, like recognition of the foreign proceeding itself, the ability to obtain relief under Chapter 15 remains subject to section 1506.

The public policy exception

The public policy exception of section 1506 provides an exception to the presumption in favour of comity. Although the Bankruptcy Code does not define what 'manifestly contrary' to United States public policy means, legislative history and case law construe this language narrowly, and relief has been granted under section 1506 in only four cases to date (as discussed below in more detail).

In considering the exception, courts have noted that, while not dispositive, a 'prerequisite to applying section 1506 is that there exist[s] a conflict between foreign and U.S. law'.¹³ The public policy exception does not, however, extend to all United States laws. While there is no statutory definition, '[t]he word “manifestly” in international usage restricts the public policy exception to the most fundamental policies of the United States.'¹⁴

The public policy analysis generally focuses on two factors, including 'whether the foreign proceeding was procedurally unfair', and whether granting the requested relief pursuant to Chapter 15 would seriously impact the value and significance of a US statutory or constitutional right, and hinder bankruptcy courts' abilities to carry out the fundamental purposes of such statutory or constitutional right.¹⁵

Examples of successful application of section 1506 in the context of recognition

Those who oppose the recognition of a proceeding under Chapter 15 'generally bear the burden of proof on applying public policy exceptions'.¹⁶ This burden was successfully satisfied to avoid recognition of a foreign proceeding under Chapter 15 only two times in US history – In re Toft¹⁷ and In re Gold & Honey, Ltd.¹⁸

In the first case, In re Toft, the Bankruptcy Court for the Southern District of New York refused to recognise a German insolvency proceeding as a foreign main proceeding, because the foreign representative initiated the Chapter 15 proceeding for the sole purpose of gaining access to a German debtor's email accounts stored on US servers. The Court found that:

[T]he relief sought by the Foreign Representative is banned under U.S. law, and it would seemingly result in criminal liability . . . for those who carried it out. The relief sought would directly compromise privacy rights subject to a comprehensive scheme of statutory protection, available to aliens, built on constitutional safeguards incorporated in the Fourth Amendment as well as the constitutions of many States.¹⁹

Furthermore, the Court found that the foreign representative was seeking powers beyond those afforded to bankruptcy trustees under US law, as 'a trustee in bankruptcy is not entitled to a search warrant under the Federal Rules of Criminal Procedure.'²⁰

In the case In re Gold & Honey, Ltd, the Bankruptcy Court for the Eastern District of New York refused to recognise an Israeli receivership proceeding based on the section 1506 exception. The petitioners asserted, among other things, that they were co-receivers for named debtors that were already in Chapter 11 proceedings pending before the Bankruptcy Court.²¹ The Court ruled that the petitioners were appointed as receivers in violation of the automatic stay as to the Chapter 11 debtors, and therefore, '[r]ecognition of the Israeli Receivership Proceeding as a foreign proceeding would be manifestly contrary to the public policy of the United States because such recognition would reward and legitimize . . . violation of both the automatic stay and this Court's Orders regarding the stay.'²²

Examples of successful application of section 1506 in the context of further relief

The only two additional cases where the public policy exception was applied were in the context of a foreign representative seeking specific Chapter 15 relief subsequent to recognition of a foreign main proceeding. In the case In re Vitro SAB de CV, the Court of Appeals for the Fifth Circuit affirmed a decision of the US Bankruptcy Court for the Northern District of Texas that refused, pursuant to sections 1521, 1507 and 1506 of the Bankruptcy Code, to enforce a Mexican plan of reorganisation that extinguished objecting creditors' guarantee claims under an indenture issued in the US against non-debtor subsidiaries of the debtor, holding that such relief was not warranted under those sections.²³ The Court also held that the protection of third-party claims in an insolvency proceeding (or in other words, the policy against non-consensual, non-debtor releases or discharge) is a fundamental public policy of the US, and that because the Mexican plan does not recognise such rights, the 'plan is manifestly contrary to such policy of the United States and cannot be enforced here'.²⁴

In the case In re Qimonda AG Bankr Litig,²⁵ a foreign representative of an already recognised foreign main proceeding, filed a motion for relief under section 1521(a) of the Bankruptcy Code to modify a supplemental order of the Virginia Eastern Bankruptcy Court that made section 365 of the Bankruptcy Code (which governs the assumption or rejection of an executory contract by a debtor) applicable to the foreign proceeding. The foreign representative sought to eliminate the applicability of section 365(n) to rejections of contracts made in accordance with the German Insolvency Code, which would allow him to reject patent cross-licences without providing the licensee the option to retain its rights under the licence as provided under section 365(n).²⁶ After parties to cross-licences with the debtor objected to such relief, the Bankruptcy Court ruled, among other things,²⁷ that failure to apply section 365(n) 'under the circumstances of this case and this industry would “severely impinge” an important statutory protection accorded licensees of U.S. patents and thereby undermine a fundamental U.S. public policy promoting technological innovation.'²⁸ The Fourth Circuit affirmed the Bankruptcy Court's decision based on its analysis of section 1522(a), not section 1506. However, the Fourth Circuit stated that 'by affirming the bankruptcy court's application of § 365(n) following its balancing analysis under § 1522(a), we also indirectly further the public policy that underlies § 365(n).'²⁹

The four cases described above are examples of extraordinary sets of facts that led to the application of the public policy exception. Even when enforcing the public policy exception, however, courts have limited the refusal to grant requested relief, and therefore, the refusal to grant comity, only to the extent the requested relief violates the public policy exception, and have also found that the public policy exception applies 'where the procedural fairness of the foreign proceeding is in doubt or cannot be cured by the adoption of additional protections'.³⁰ When procedural problems can be cured, the court will continue to extend comity.³¹ For example, in the case In re Ephedra Prods Liab Litig,³² the US District Court for the Southern District of New York found that an order approving a claims resolution procedure in Canada had certain provisions implicating important due process rights. However, upon the District Court's request, the foreign representative submitted amendments to the order curing those issues, which the Bankruptcy Court then recognised.³³

However, as demonstrated by the decision granting recognition in the Chapter 15 case In re Takata Corp, Case No. 17-11713 (BLS) in the US Bankruptcy Court for the District of Delaware (the Court), as well as other cases where public policy arguments failed, courts are reluctant to apply the section 1506 exception without extraordinary circumstances.³⁴

In re Takata Corp

On 26 June 2017, Takata Corporation and two Japanese affiliates (collectively, the debtors) commenced civil rehabilitation proceedings under the Civil Rehabilitation Act of Japan before the Tokyo District Court (the Japanese proceedings). On 9 August 2017, Takata Corporation, asserting a capacity as the authorised foreign representative of the debtors (the foreign representative), filed Chapter 15 petitions and sought recognition of the Japanese proceedings as foreign main proceedings.

On 22 September 2017, plaintiffs in a litigation pending against the debtors in a different US court (the MDL plaintiffs) filed an objection to recognition of the Japanese proceedings on the grounds that recognition would be manifestly contrary to US public policy under section 1506 of the Bankruptcy Code.³⁵

The MDL plaintiffs argued that recognition of the Japanese proceedings would constitute an unconstitutional denial of due process for US-based creditors in the Japanese proceedings.³⁶ Specifically, the MDL plaintiffs argued that their constitutional due process rights were violated because (i) the claims bar date in the Japanese proceedings was set for 60 days after the insolvency filings, (ii) the notice of the claims bar date was inadequate, (iii) US creditors were required to file proofs of claim in Japanese, and (iv) under Japanese law, if a claim is disapproved by the debtors and then also disallowed by the Japanese insolvency court upon review, the only available recourse to claimants is filing complaints seeking reexamination, the filing of which is subject to fees under Japanese law.³⁷ By this time, the MDL plaintiffs' class action claims were disapproved by the debtors, but the MDL plaintiffs had not yet sought the Japanese's court determination on their class action claims. The MDL plaintiffs requested that these issues could be remedied by conditioning recognition on the allowance of their asserted class action claims.³⁸

The foreign representative disputed that the Japanese proceedings prejudiced the MDL plaintiffs.³⁹ Furthermore, the foreign representative argued that Japanese bankruptcy law has been consistently 'upheld in the United States as bearing strong similarities to Chapter 11 cases and meeting U.S. fundamental standards of fairness'.⁴⁰The foreign representative pointed out that every one of the MDL plaintiffs actually received notice of the bar date, and was able to file a timely claim.⁴¹ Furthermore, the foreign representative argued that the MDL plaintiffs' objections to the requirement that the claims had to be in Japanese is without merit because they were unable to offer any case law indicating that there was a requirement that foreign jurisdictions allow filing proofs of claims in English.⁴²

With respect to the notice period, the foreign representative pointed to provisions of Japanese law that allowed late-filed claims where the delay in filing was not due to the creditor's fault.⁴³ The foreign representative also addressed the MDL plaintiffs' argument regarding fees for filing complaints for re-examination in case of disallowance, arguing that because there are US laws that require bonds with respect to certain filings, there is no fundamental disagreement between the US and Japanese laws.⁴⁴

Finally, the foreign representative argued that there is no fundamental US policy requiring acceptance of class action claims, and, in fact, that such claims are prohibited as a matter of law in certain jurisdictions in the US.⁴⁵ The foreign representative argued that by objecting to recognition, the MDL plaintiffs were merely seeking to avoid having to defend their claims, which had already been disapproved, in Japanese court.⁴⁶

Ruling

The Bankruptcy Court for the District of Delaware overruled the MDL plaintiffs' objection and entered an order recognising the Japanese proceedings as a foreign main proceeding.⁴⁷ The court stressed that it 'is obliged, as reflected in the mandatory nature of [s]ection 1517, to err on the side of finding recognition, subject only to what . . . is treated uniformly in the case law as a narrow exception'.⁴⁸ Furthermore, the Court found that 'recognition is not manifestly contrary to U.S. public policy',⁴⁹ and that it is not willing to condition recognition on the allowance of the MDL plaintiffs' class proofs of claim.⁵⁰

Discussion of the arguments during the hearing

The Bankruptcy Court found during the hearing that with respect to the various due process concerns, there were no fundamental differences between Japanese and US law. With respect to the 'timeline, the sufficiency of notice, and the process of providing notice to claimants', the Court pointed out that nearly identical objections are brought before the Court in other cases under US law, and that in some cases, the language of the Japanese law actually offers more protection to creditors that US law does, because the Bankruptcy Code only requires 21 days' notice of the claims bar date, as opposed to the 60-day Japanese law requirement.⁵¹ Similarly, with respect to MDL plaintiffs' complaint regarding the Japanese-language filing requirement, the Court pointed out that just as a claimant in Japan has to file a claim in Japanese, a claim filed in the US would have to be translated into English, and so there is no conflict between the laws of the two countries.⁵²

With respect to the MDL plaintiffs' argument that may be deprived of a right to a class action claim under Japanese law, the Court agreed with the foreign representative that a right to a class action is not a fundamental right, also stating, '[a] class action is not in the bill of rights.'⁵³

Conclusion

As demonstrated in Takata, the burden to overcome the presumption in favour of recognition of a foreign proceeding based on the public policy exception in section 1506 of the Bankruptcy Code is difficult to meet, even when the issues at stake are due process or litigation rights. It is not enough that a creditor may get a different result under US law. It is also not enough that a US law is in conflict with the foreign law in question. The only cases where this burden was met included elements of egregiousness and lack of fundamental fairness that cannot be easily demonstrated by creditors under the section 1506 public policy exception.

* The authors would like to thank Weil associate Alex Lewitt for providing valuable contributions to this chapter.