Third Circuit Updates Its Standard for Granting Comity to Foreign Bankruptcy Proceedings
"Comity" is a principle of jurisprudence whereby, under appropriate circumstances, one country recognizes within its borders the legislative, executive, or judicial acts of another nation. Many recent court rulings have examined the indispensable role of comity in the context of foreign bankruptcy or insolvency proceedings that have been "recognized" by U.S. courts during the two decades since the enactment of chapter 15 of the Bankruptcy Code. However, U.S. courts have a long history of granting comity to foreign laws or tribunals (including bankruptcy courts) in cases outside the scope of cross-border bankruptcy cases filed under chapter 15.
A decision recently handed down by the U.S. Court of Appeals for the Third Circuit is emblematic of how comity is typically deployed in U.S. federal courts in the non-chapter 15 context. In Vertiv, Inc. v. Wayne Burt PTE, Ltd., 92 F.4th 169 (3d Cir. 2024), the Third Circuit vacated a U.S. district court ruling dismissing litigation against a company that was a debtor in liquidation proceedings in Singapore because the Third Circuit concluded that the district court had misapplied the standard for "adjudicatory" comity under relevant, albeit outdated, precedent. In so ruling, the Third Circuit "updated" its nearly three-decades-long guidance regarding deference under principles of comity to a foreign bankruptcy proceeding and articulated a "refreshed" standard for adjudicatory comity.
International Comity
Even if a U.S. court has jurisdiction over a lawsuit involving foreign litigants, the court may conclude that a foreign court is better suited to adjudicate the dispute because the U.S. court concludes that it should defer to the foreign court as a matter of international 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" (or "adjudicatory") comity, or "comity among courts." In re Vitamin C Antitrust Litig., 8 F.4th 136, 144 n.7 (2d Cir. 2021) (citing Maxwell Comm'n Corp. v. Société Générale (In re Maxwell Comm'n Corp.), 93 F.3d 1036, 1047 (2d Cir. 1996); Cooper v. Tokyo Elec. Power Co. Holdings, Inc., 960 F.3d 549, 566 (9th Cir. 2020).
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), aff'd, 640 B.R. 604 (S.D.N.Y. 2022).
Adjudicatory comity 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; accord Mujica v. AirScan, Inc., 771 F.3d 580, 599 (9th Cir. 2014) (under the doctrine of adjudicatory comity, the court considers whether it should "decline to exercise jurisdiction over matters more appropriately adjudged elsewhere") (citation and internal quotation marks omitted). Adjudicatory comity comes into play only if a matter before a U.S. court is either pending in, or has resulted in a final judgment from, a foreign court. See Gross v. German Found. Indus. Initiative, 456 F.3d 363, 393 (3d Cir. 2006); Spencer v. Kugler, 454 F.2d 839, 847 n.17 (3d Cir. 1972).
Stated differently, there must be a "parallel" (i.e., duplicative) foreign proceeding. Arcapita, 575 B.R. at 238 (citing Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff), 2016 Bankr. LEXIS 4067, at *32 (Bankr. S.D.N.Y. Nov. 21, 2016), vacated and remanded, 917 F.3d 85 (2d Cir. 2019), and vacated and remanded, 12 F. 4th 171 (2d Cir. 2021); Royal & Sun Alliance Ins. Co. of Canada v. Century Int'l Arms, Inc., 466 F.3d 88, 92–97 (2d Cir. 2006)). U.S. courts typically consider adjudicatory comity in considering whether: (i) to abstain from exercising jurisdiction (akin to abstaining under the doctrine of forum non conveniens) in deference to a pending foreign proceeding; (ii) to enforce a foreign court's judgment in the United States; or (iii) to preclude re-litigation of a claim or issue previously adjudicated by a foreign court. See Diorinou v. Mezitis, 237 F.3d 133, 139–40 (2d Cir. 2001) (citing cases).
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, foreign bankruptcy proceedings are one category of foreign litigation that generally mandates dismissal of parallel U.S. court litigation under adjudicative comity. Canada Southern Railway Co. v. Gebhard, 109 U.S. 527, 532, 537–40 (1883); Royal and Sun Alliance Ins. Co. of Canada v. Century Int'l Arms, 466 F.3d 88, 92–93 (2d Cir. 2006); Stonington Partners, Inc. v. Lernout & Hauspie Speech Products N.V., 310 F.3d 118, 126 (3d Cir. 2002), as amended (Nov. 12, 2002).
In this context, deference to the foreign court is warranted "so long as the foreign proceedings are procedurally fair and … do not contravene the laws or public policy of the United States." 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). For example, courts in the Second Circuit 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).
A pair of rulings handed down by the U.S. Court of Appeals for the Third Circuit address what courts should examine in deciding whether to abstain on comity grounds in deference to a foreign bankruptcy proceeding. In the first, Remington Rand Corp. Del. v. Bus. Sys. Inc., 830 F.2d 1260 (3d Cir. 1987), the Third Circuit emphasized that comity is generally warranted if the foreign country's bankruptcy laws share the "fundamental principle" of U.S. bankruptcy law "that assets be distributed equally among creditors of similar standing." Id. at 1271. It also cautioned that U.S. courts must "guard against forcing American creditors to foreign proceedings in which their claims will be treated in some manner inimical to this country's policy of equality." Id. (citation omitted).
The Third Circuit provided additional guidance on this issue in Philadelphia Gear Corp. v. Philadelphia Gear de Mexico, S.A., 44 F.3d 187 (3d Cir. 1994). In that case, guided by Remington, the court ruled that a party seeking a stay of U.S. litigation based on comity to a foreign bankruptcy proceeding must make a prima facie showing that: "the foreign bankruptcy law shares our policy of equal distribution of assets," and "the foreign law mandates the issuance or at least authorizes the request for the stay." Id. at 193.
In the event of such a prima facie showing, the court must determine "whether according comity to the [foreign] proceedings would be prejudicial to the interests of the United States." Id. at 194. In making that inquiry, a court should assess, "along with any other issues it finds relevant," the following four issues (the "Philadelphia Gear test"): (i) whether the foreign court presiding over the bankruptcy proceedings is a duly authorized tribunal; (ii) whether the foreign bankruptcy law provides for equal treatment of creditors; (iii) whether a stay of U.S. litigation would be "in some manner inimical to this country's policy of equality"; and (iv) whether the party opposing comity would be prejudiced by a stay of the U.S. litigation. Id.
Vertiv
Vertiv, Inc. and two affiliates (collectively, "Vertiv") are Delaware corporations headquartered in New Jersey. In January 2020, Vertiv sued Wayne Burt PTE Ltd. ("Burt"), a Singaporean corporation, and Cetex Petrochemicals LTD ("Cetex") in the U.S. District Court for the District of New Jersey (the "N.J. district court") seeking to collect on a defaulted loan secured by Burt's approximately 47% equity ownership interest in Cetex. Shortly afterward, the N.J. district court signed a consent order awarding Vertiv nearly $30 million in damages and declaring that the Cetex stock was now owned by Vertiv.
In September 2020, Vertiv filed a nearly identical action in the N.J. district court against Burt and a Burt affiliate, Wayne Burt Petro Chemical Private Ltd. ("Burt Petro"). The court entered a consent judgment against the defendants in that case in November 2020.
Burt moved to vacate both judgments in February 2021 claiming that: (i) liquidation proceedings had been filed against Burt in Singapore before Vertiv sued Burt and Burt Petro in the N.J. district court; (ii) the Burt officers who agreed to the consent judgments entered in the litigation lacked the authority to act on Burt's behalf because such authority was vested under Singapore law solely in Burt's court-appointed liquidator; (iii) the loans upon which those judgments were based never existed; and (iv) Burt's liquidators had not intervened in the N.J. district court litigation sooner because they did not have notice of the proceedings.
The N.J. district court vacated both judgments in July 2021, finding substantial and compelling evidence that the loans were fraudulent. Two months afterward, Vertiv filed an amended complaint against Burt in the now consolidated actions seeking a judgment on the same claims as well as a breach-of-contract claim against one of Burt's directors who had allegedly guaranteed the loan.
Burt then sought dismissal of the N.J. district court litigation either on international comity grounds in deference to the Singapore liquidation proceeding or because the court lacked personal jurisdiction over Burt.
The N.J. district court ruled that dismissal of the litigation was warranted as an exercise of comity. Although the parties disputed which test should apply, the court concluded that comity was appropriate under both the Philadelphia Gear test and the similar four-factor test applied in Austar Int'l Ltd. v. AustarPharma LLC, 425 F. Supp. 3d 336 (D.N.J. 2019), which considers whether: (i) a foreign country has jurisdiction over the action; (ii) the foreign and U.S. proceedings are "parallel" or "duplicative"; (iii) "extraordinary circumstances" exist justifying a stay or dismissal of the U.S. litigation; and (iv) U.S. public policy militates against a stay or dismissal of the U.S. litigation. Id. at 363.
Vertiv appealed the N.J. district court's ruling to the Third Circuit.
The Third Circuit's Ruling
A three-judge panel of the Third Circuit vacated the N.J. district court's order dismissing Vertiv's amended complaint and remanded the case below for further proceedings.
After examining Third Circuit precedent, U.S. Circuit Court Judge Arianna J. Freeman noted that "[i]t has been nearly three decades since we addressed this topic and updated guidance is warranted." Vertiv, 92 F.4th at 178. The Third Circuit panel therefore articulated a "refreshed Philadelphia Gear test" to govern adjudicatory comity with respect to foreign bankruptcy proceedings. Id. at 182.
As a "threshold matter," Judge Freeman explained, U.S. courts consider extending adjudicatory comity only to a pending "parallel" proceeding. However, she emphasized, whether two actions are "parallel" normally arises in the context of a request that a federal court abstain from resolving a dispute that is also pending before another court, and it requires that the two actions involve the same parties or claims. According to the Third Circuit panel, this analysis would be inapposite in the context of a motion for a U.S. court to abstain under principles of comity in deference to a foreign bankruptcy proceeding.
Instead, the Third Circuit reasoned, in determining whether a proceeding is "parallel" in the context of foreign bankruptcy proceedings, guidance can be found in the analysis employed by U.S. bankruptcy courts in assessing whether a civil action is "related to" a bankruptcy case and therefore within the court's "non-core" jurisdiction. Id. at 179.
28 U.S.C. § 157(b) provides a non-exclusive catalog of matters that fall with a bankruptcy court's "core" jurisdiction, including, among other things, matters concerning estate administration, the allowance or disallowance of claims against the estate, bankruptcy financing requests, avoidance proceedings, confirmation of bankruptcy plans, and orders approving the sale, use, or lease of estate property.
A matter or action is "non-core," but "related to," a bankruptcy case, the Third Circuit explained, if it "invoke[s] a substantive right provided by title 11" or "by [its] nature could arise only in the context of bankruptcy case." Id. at 179 n.7 (citing In re Resorts Int'l, Inc., 372 F.3d 154, 163 (3d Cir. 2004)). Stated differently, "[a]n action … is 'related to' a bankruptcy proceeding if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and [if the outcome] in any way impacts upon the handling and administration of the bankrupt estate." Id. at *5 (internal quotation marks omitted) (citing Nuveen Mun. Tr. ex rel. Nuveen High Yield Mun. Bond Fund v. WithumSmith Brown, P.C., 692 F.3d 283, 294 (3d Cir. 2012)). In a non-core related proceeding, unless the parties agree otherwise, a bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court" to resolve the dispute. See 28 U.S.C. § 157(c).
According to Judge Freeman, relying on the broad definition for "related" proceedings is appropriate "because of the wide variation in how foreign bankruptcy proceedings and their associated legal systems operate." Vertiv, 92 F.4th at 179.
The Third Circuit accordingly concluded that a civil action in a U.S. court is "parallel" to a foreign bankruptcy proceeding when: (i) the foreign bankruptcy is ongoing in a duly authorized foreign tribunal while the action is pending in a U.S. court; and (ii) the outcome of the U.S. action can have an effect (flexibly interpreted) on the foreign debtor's estate. Id.
The Third Circuit ruled that the N.J. district court litigation was parallel to Burt's Singapore insolvency proceedings because there was no dispute that: (i) in addition to being a defendant in the U.S. litigation, Burt was subject to ongoing liquidation proceedings in Singapore in a duly authorized court with jurisdiction over the proceedings; (ii) Burt was a "necessary party" to the U.S. litigation; and (iii) if Vertiv prevailed in the U.S. litigation, a nearly $30 million judgment against Burt would "plainly affect" Burt's liquidation estate. Id. at 183.
The Third Circuit did not fault the district court's findings that Burt had made a prima facie showing that adjudicatory comity was appropriate under the Philadelphia Gear test because: (i) Singapore law shares the U.S. policy of equality of distribution of assets among similarly situated creditors; and (ii) Singapore law authorizes a stay or dismissal of the U.S. litigation and prohibits any action against a debtor in a liquidation proceeding without leave of the court, which was not obtained in this case.
However, the Third Circuit vacated the district court's ruling and remanded the case below because the district court failed to apply the remainder of the Philadelphia Gear test. Finally, the court of appeals declined to address Burt's claim that the district court lacked personal jurisdiction over him, noting that the district court was not constrained on remand to resolve the dispute on international comity grounds. Id.
Outlook
The concept of international comity is an important part of U.S. jurisprudence, both before and since the United States adopted the UNCITRAL Model Law on Cross-Border Insolvency in 2005 as chapter 15 of the Bankruptcy Code. Comity is an integral element of chapter 15 and its rules and procedures governing a U.S. bankruptcy court's "recognition" of foreign bankruptcy and insolvency cases. In Vertiv, the Third Circuit recognized that chapter 15 jurisprudence provides useful guidance in assessing whether a non-U.S. bankruptcy court should grant comity to a foreign bankruptcy proceeding. For instance, the court noted that both chapter 15 of the Bankruptcy Code and its predecessor, section 304 of the Bankruptcy Code, indicate that comity is strongly favored in cross-border bankruptcy proceedings and that chapter 15 provides for a stay of creditor collection efforts against a foreign debtor and its U.S. assets if a foreign bankruptcy proceeding is recognized by a U.S. bankruptcy court. Vertiv, 2024 WL 371924, at *4 (citing 11 U.S.C. § 1520(a)(1)).
As demonstrated by the relative increase in cross-border cases involving chapter 15, the purpose of chapter 15 is to provide a U.S. bankruptcy court with the statutory framework to provide assistance to a foreign tribunal or a foreign debtor by recognizing a foreign bankruptcy proceeding in the United States. Such recognition extends, in some cases, to enforcing the foreign court's orders or the terms of a foreign debtor's restructuring or liquidation proceeding. Despite the robust chapter 15 structure and growing precedent, for practical or other reasons, it may not be necessary to commence a chapter 15 proceeding to aid a foreign debtor or tribunal. In Vertiv, a U.S. court looked to apply the same core comity principles outside chapter 15 to help facilitate a Singapore liquidation proceeding and avoided all the attendant procedural requirements of chapter 15.
It should be noted that courts disagree as to whether, once enacted in 2005, chapter 15 recognition of a foreign bankruptcy or insolvency proceeding became the exclusive mechanism for a U.S. court under principles of comity to recognize the foreign proceeding and to enforce a foreign court's orders or the terms of a restructuring plan. Compare In Moyal v. Munsterland Gruppe GmbH & Co., 539 F. Supp. 3d 305, 309 n.1 (S.D.N.Y. 2021) (dismissing litigation against a German company and ruling that, under principles of comity, U.S. litigation against a German company was stayed by operation of German law when the company filed for bankruptcy in Germany, and deeming "absurd" the notion that Chapter 15 recognition should be a prerequisite to seeking relief as it would "fly in the face of comity principles"); and In EMA Garp Fund v. Banro Corp., 2019 WL 773988, at *5 (S.D.N.Y. Feb. 21, 2019) (dismissing litigation against a Canadian company and its former CEO, finding that, under principles of comity, the lawsuit was barred by Canadian court orders approving the company's Canadian bankruptcy proceeding and releasing all claims against the defendants, and stating that "the fact that Defendants did not file a recognition proceeding in [a] U.S. court" was "irrelevant" to its comity determination"), with Halo Creative & Design Ltd. v. Comptoir Des Indes Inc., 2018 WL 4742066 (N.D. Ill. Oct. 2, 2018) (denying a motion for a stay of U.S. litigation in light of the pendency of the defendant's Canadian bankruptcy proceeding because a U.S. bankruptcy court had not recognized the Canadian bankruptcy under chapter 15). See also In re Silicon Valley Bank (Cayman Islands Branch), No. 24-10076 (MG), 2024 WL 734735, at *13 n.17 (Bankr. S.D.N.Y. Feb. 22, 2024) ("While section 1509(f) permits a foreign debtor to sue in a U.S. court to collect or recover on a claim involving property of the debtor even in the absence of recognition, a broader question exists whether comity applies to allow courts to recognize foreign judgments in insolvency cases absent Chapter 15 recognition. It remains an unsettled question …").
Courts subscribing to the approach that chapter 15 recognition is the exclusive mechanism for granting comity to foreign bankruptcy proceedings sometimes rely on section 1509 of the Bankruptcy Code. Section 1509(b) provides that, if the U.S. bankruptcy court recognizes a foreign proceeding, the foreign representative may apply directly to another U.S. court for appropriate relief, and a U.S. court "shall grant comity or cooperation to the foreign representative." Section 1509(c) accordingly specifies that a request for comity or cooperation from another U.S. court "shall be accompanied by a certified copy of an order granting recognition" under chapter 15. If a U.S. bankruptcy court denies a petition for recognition of a foreign proceeding, section 1509(d) authorizes the court to "issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation" from U.S. courts. Finally, section 1509(f) provides that the failure of a foreign representative to obtain chapter 15 recognition does not preclude the representative from suing in a U.S. court to collect or recover on a claim owned by the foreign debtor.
Section 1509 and its legislative history have been interpreted to reflect lawmakers' intention that chapter 15 be the "exclusive door to ancillary assistance to foreign proceedings," with the goal of controlling such cases in a single court. Collier on Bankruptcy ¶ 1509.03 (16th ed. 2024) (quoting H.R. Rep. No. 109-31(I), 110 (2005) ("Parties would be free to avoid the requirements of [chapter 15] and the expert scrutiny of the bankruptcy court by applying directly to a state or Federal court unfamiliar with the statutory requirements…. This section concentrates the recognition and deference process in one United States court, ensures against abuse, and empowers a court that will be fully informed of the current status of all foreign proceedings involving the debtor.")).
Even so, despite the enactment of chapter 15, U.S. courts continue to grant recognition to foreign bankruptcy court orders, particularly if the party seeking recognition is not a "foreign representative," in which case chapter 15 recognition is not necessary. See generally Collier at ¶ 1509.02 (noting that "courts regularly rule that chapter 15 recognition is not a prerequisite to grant comity to foreign proceedings on the request of a party other than a foreign representative"). See, e.g., Trikona Advisers Ltd. v. Chugh, 846 F.3d 22 (2d Cir. 2017) (affirming a district court ruling giving collateral estoppel effect to the findings of a foreign insolvency court, even though no chapter 15 petition had been filed on behalf of the foreign debtor seeking recognition of its Cayman Islands winding-up proceeding, and noting that, because the party seeking such relief was not a "foreign representative" under chapter 15, the provisions of chapter 15 simply did not apply); Barclays Bank PLC v. Kemsley, 44 Misc. 3d 773 (N.Y. Sup. 2014) (chapter 15 recognition was not necessary to enforce, at the request of an individual debtor, a discharge order in a UK bankruptcy proceeding, even though a U.S. bankruptcy court previously denied the UK bankruptcy trustee's petition for chapter 15 recognition of the bankruptcy, because chapter 15's plain language applies only to a "foreign representative" such as a trustee).
The Third Circuit's decision in Vertiv adds another chapter to the debate. The refreshed guidance it provides illustrates that, notwithstanding chapter 15, there may be other comity avenues for foreign debtors or tribunals to utilize to centralize restructuring-related claims and issues in a foreign restructuring proceeding. At a minimum, the updated comity guidance provided by the Third Circuit is also instructive for analyzing whether to extend comity to judgments in non-insolvency proceedings taking place abroad.
