Tag Archives: Bankruptcy

Case of the Day: In re Fairfield Sentry Ltd.

The case of the day is Morning Mist Holdings, Ltd. v. Kenneth Krys (In re Fairfield Sentry Ltd.) (2d Cir. 2013). Sentry was a British Virgin Islands company and the largest “feeder fund” that had the misfortune to invest with Bernard L. Madoff Investment Securities LLC. Sentry had invested 95% of its assets, or more than $7 billion, with Madoff. Talk about diversification to reduce management risk! Sentry’s registered office, registered agent, secretary, and corporate documents were in the BVI. The fund was managed by Fairfield Greenwich Group in New York. Sentry’s three directors, Walter Noel Jr., Jan Naess, and Peter Schmid, lived in New York, Oslo, and Geneva.

After Madoff’s arrest, Naess and Schmid suspended all share redemptions (Noel, who was a principal of Fairfield Greenwich Group, was recused). Naess and Schmid wound down the business, during which time they participated in many board meetings held by teleconference but initiated by the registered agent in the BVI. They communicated with shareholders on letterhead with Sentry’s BVI address. Sentry’s assets were primarily in Ireland, the UK, and the BVI: its other assets were choses in action.

In 2009, Morning Mist Holdings, a shareholder, brought a shareholder derivative action in the New York Supreme Court against Sentry’s directors, managers, and service providers, alleging a breach of fiduciary duty. Meanwhile, other shareholders in the BVI applied for appointment of a receiver, and the High Court of Justice of the Eastern Carribean Supreme Court entered an order commencing liquidation proceedings under BVI law and appointing Kenneth Krys as liquidator. Krys then filed a petition in the Bankruptcy Court in New York for recognition of the BVI proceedings under Chapter 15 of the Bankruptcy Code. The judge granted recognition, which had the effect, under § 1520 of the Bankruptcy Code, of automatically staying Morning Mist’s derivative action. Morning Mist appealed to the District Court, which affirmed. Morning Mist then appealed to the Second Circuit, which affirmed.

Chapter 15, based on the UNCITRAL Model Law on Cross-Border Insolvency, permits recognition of a foreign proceeding if it is a “foreign main proceeding,” which is defined by 11 U.S.C. § 1502 as a “foreign proceeding pending in the coutnry where the debtor has the center of its main interests.” 1 Under § 1517, the bankruptcy court is required to recognize a foreign main proceeding, subject to certain exceptions, “if it is pending in the country where the debtor has the center of its main interests.” Section 1506 of the Bankruptcy Code provides for an exception to the rule of recognition if recognition “would be manifestly contrary to the public policy of the United States.”

Chief Judge Jacobs construed § 1517, which uses present tense verbs, to focus the inquiry on where the debtor had its COMI on the date of the Chapter 15 petition. This is the majority rule, and also the rule of the only other appellate decision on point, In re Ran, 607
F.3d 1017 (5th Cir. 2010). Judge Jacobs looked to the EU Council Regulation on Insolvency Proceedings (the EU’s insolvency convention provided the concept of a center of main interests for UNCITRAL, according to the judge), which also uses the present tense and which emphasizes the importance of ensuring that a business’s center of main interests is “ascertainable by third parties.” See, e.g., In re Eurofood IFSC Ltd., Case No. C-341/04, 2006 E.C.R. I-3813 (E.C.J. 2006) (focusing on “objective and ascertainable” criteria for determining a center of main interests). The judge also reasoned, contrary to Morning Mist’s contentions, that any relevant activities, including a firm’s activities in liquidating itself, could be considered in determining the COMI of the debtor. (The basic rule of the statute, though, is simple: there is a rebuttable presumption that the place of the debtor’s registered office is the COMI). The court affirmed the bankruptcy judge’s findings of fact and thus the conclusion that the BVI was indeed Sentry’s COMI as of the petition date.

The court also rejected Morning Mist’s public policy challenge. The claim was that because the BVI insolvency proceedings were confidential and under seal, recognition of the proceedings would violate US public policy relating to open access to court records. Chief Judge Jacobs observed, first, that the statute requires not just that recognition be contrary to public policy but that it be manifestly contrary to public policy. The public policy exception applies only in “exceptional circumstances concerning matters of fundamental importance for the enacting State.” Second, the judge noted that public summaries of the proceedings had been made available and that under BVI law, “any non-party may apply to the court for access to sealed documents.” Third, the judge noted that even in the United States, “the right to inspect and copy judicial records is not absolute.” The right can “easily give way” to privacy interests or “other considerations.” In short, Morning Mist had not pointed to a violation of an “exceptional and fundamental value.” I think the decision was correct given the narrowness of the public policy exception, though I would have liked a more full-throated defense of the value of public access to court records.


  1. The statute also permits recognition of foreign non-main proceedings, but I leave that to the side.

Case of the Day: Collins v. Oilsands Quest

The case of the day is Collins v. Oilsands Quest, Inc. (S.D.N.Y. 2012). Oilsands Quest is an Alberta business that sought bankruptcy protection from the Alberta Court of Queen’s Bench. Collins, on behalf of a putative class, had sued the company and several officers and directors on securities claims. Ernst & Young, which was Oilsands Quest’s bankruptcy monitor and authorized foreign representative, sought recognition of the Alberta proceedings in New York under Chapter 15 of the Bankruptcy Code and an order enforcing the Alberta court’s stay of the proceedings, including the proceedings against individual officers and directors (such a stay is typical in Canadian bankruptcy cases).

On recognition of the Canadian proceedings, the only point in dispute was whether Oilsands Quest’s center of main interests was in Canada. If not, then under 11 U.S.C. § 1517(b)(1), then the US court could not recognize the proceedings. Under § 1516(c) of the Code, the debtor’s registered office is the presumptive center of a debtor’s main interests, and here Oilsands Quest’s registered office was in Colorado. But the judge found that Oilsands Quest’s headquarters and management were located in Alberta; that Oilsands Quest did not have a US place of business or employees in the US; that all decisionmaking took place in Alberta; and that all employees and principal assets were located in Alberta. The company’s principal creditors were also in Canada. The plaintiffs pointed to a putative US class action against the company in New York He therefore found that Oilsands Quest had overcome the presumption and that its center of main interests was in Canada. Thus the judge found that the Canadian proceedings were entitled to recognition as foreign main proceedings.

The remaining question was whether to give effect to the Canadian order and stay the actions against the individual officers and directors. The automatic stay under US law would not bar such claims, and the plaintiffs suggested that Oilsands Quest had filed in Canada rather than the United States precisely in order to receive the benefit of the broader Canadian stay. Under 11 U.S.C. § 1509, the court is to grant comity or cooperation to the foreign representative once a foreign main proceeding is recognized, but that “does not mean that the Court must enforce every order entered into by the Alberta Court, for, under the plain terms of the statute, the Court must also consider any limitations that the court may impose consistent with the policy of chapter 15.” But this means only that the court should not enforce orders contrary to the “most fundamental policies of the United States,” as long as the foreign proceedings are fair and impartial. Here, while US policy favors investor protection and the regulation of the capital markets, a temporary stay of the plaintiff’s action was not drastically contrary to US policy. Thus the judge enforced the Canadian court’s stay.

Case of the Day: In re Vitro

The case of the day is In re Vitro S.A.B. de C.V. (Bankr. N.D. Tex. 2012). Vitro, a Mexican glass manufacturer, was in reorganization proceedings in Nuevo León, Mexico under the Ley de Concursos Mercantiles. In 2011, Vitro began a Chapter 15 bankruptcy proceeding in the Northern District of Texas and sought to enjoin lawsuits by its creditors against the guarantors of its debt, who were not themselves in insolvency proceedings. The bankruptcy judge denied Vitro’s motion for an injunction, and the creditors sued the guarantors (which were Vitro subsidiaries) in the New York Supreme Court. The New York court entered a declaratory judgment in favor of the creditors declaring that Vitro’s reorganization proceeding would not affect the creditors’ rights against the guarantors. The New York court also enjoined the guarantors from assenting to the Mexican reorganization plan for which Vitro was seeking approval. But Vitro asked the Texas bankruptcy judge to enjoin the creditors from seeking injunctive relief in the New York state courts, and the Texas judge agreed. Thus the guarantors ultimately were able to vote on the Mexican reorganization plan. Unsurprisingly, they voted in favor: the plan “not only modifies the debts owed by Vitro SAB to the noteholders under various indentures, it also novates and extinguishes the guarantees, effectively discharging the obligations of Vitro SAB’s non-debtor subsidiary guarantors to the noteholders.”

The Mexican court approved the reorganization plan, but the creditors continued to take various collection actions against the Vitro subsidiaries/guarantors. Vitro asked the Texas bankruptcy judge to recognize and enforce the Mexican judgment approving the plan and thus to enjoin the creditors’ collection activities on the grounds that the guarantors’ obligations had been extinguished in the Mexican proceedings, even though the guarantors were not themselves in insolvency proceedings.

The bankruptcy judge refused to recognize and enforce the Mexican court’s decision extinguishing the claims against the guarantors, relying primarily on public policy considerations; Section 1506 of the Bankruptcy Code provides:

Nothing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.

The judge noted: “Generally speaking, the policy of the United States is against discharge of claims for entities other than a debtor in an insolvency proceeding, absent extraordinary circumstances not present in this case.” The judge reached this conclusion even though he was not persuaded by the doomsday arguments the creditors advanced, which claimed that a decision in favor of Vitro would damage the United States financial markets.

While the judge ultimately ruled in favor of the creditors, I’d like to note that he rejected the corruption argument the creditors made about Mexico’s judiciary. The creditors’ expert witness testified persuasively about corruption in Mexico generally, but the court found no evidence that the Vitro proceedings themselves had been corrupted.

The Vitro case is being closely watched by the bankruptcy bar, so I expect we will have more news to report as the case winds its way through the appeal process.