Case of the Day: Kumkang Valve Manufacturing Co. v. Enterprise Products

The case of the day is Kumkang Valve Manufacturing Co. v. Enterprise Products Operating LLC (Tex. Ct. App. 2014). Enterprise purchased 1,000 high-pressure valuves from Kumkang, a Korean firm, for use in its gas-processing plants in Colorado and Wyoming. The valves failed, and Enterprise paid $11 million to replace them. Enterprise sued Kumkang in 2007 for breach of warranty in the Texas state court. In 2009, while the case was pending, Kumkang sought protection under Korean bankruptcy law, and it then filed a Chapter 15 petition in a bankruptcy court in the Southern District of Texas seeking recognition of the Korean main proceeding. The bankruptcy court recognized the Korean proceeding, which had the effect of staying the Texas litigation.

Enterprise did not appear in the Korean bankruptcy case, and it was not included on the list of creditors in the Korean proceeding, or mentioned in the plan of reorganization the Korean court approved. Kumkang did not inform the US bankruptcy court of the approval of the plan in Korea, and Kumkang’s US lawyer informed the US bankruptcy court that he had been unable to communicate with his client and had no information about the status of the Korean proceedings. The US bankruptcy court, after providing a final opportunity for the US lawyer to obtain information from his client, dismissed the Chapter 15 case and lifted the stay.

In the main case, the parties stipulated that Enterprise had suffered $11 million in damages due to breach of express warranty and breach of the warranty of fitness for a particular purpose, and Kumkang moved for summary judgment on the affirmative defense of discharge in bankruptcy. Enterprise cross-moved for summary judgment. The trial court gave judgment for Enterprise, and Kumkang appealed.

The case raises interesting questions. Is Chapter 15 the sole means by which a US court can recognize a foreign bankruptcy discharge, or do ordinary principles of comity apply (it’s clear that statutes such as the UFCMJRA do not apply because the judgment is not a money damages judgment)? What effect does the US recognition of the Korean proceeding as a main proceeding have here?

On the first question, the court held that whether to recognize the Korean bankruptcy discharge was not a matter of Texas law to be decided under ordinary comity principles, but rather a matter of federal law, since Congress has vested exclusive jurisdiction over core proceedings such as Chapter 15 proceedings in the bankruptcy courts and enacted Chapter 15, a comprehensive statute, to deal with the problem of recognition of foreign main proceedings. The court’s discussion was very brief, but its conclusion seems sensible.

On the second question, the court distinguished between recognition of the foreign main proceeding under Chapter 15 and the recognition and enforcement of a foreign bankruptcy court’s specific orders:

Recognition of a proceeding under Chapter 15 is merely a precondition for obtaining substantive relief from the United States bankruptcy court, such as recognition and enforcement of specific orders or decrees previously granted in a foreign bankruptcy proceeding. Chapter 15’s provisions do not prevent modification or termination of recognition if it is shown that the grounds for granting it were fully or partially lacking or have ceased to exist.

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An interim Chapter 15 recognition order that a foreign bankruptcy is a main proceeding is not, standing alone, evidence that the eventual judgment resulting from the foreign bankruptcy proceeding discharged a creditor’s claims.

(Citations and internal quotation marks omitted). Since Kumkang never informed the US bankruptcy court of the Korean bankruptcy judgment, and since it did not ask the US bankruptcy court for relief from Enterprise’s claim before the Chapter 15 case was dismissed, the US bankruptcy court never recognized the Korean judgment, and the trial court correctly granted summary judgment for Enterprise.

There is a lesson here—while Chapter 15 is often brought into play in order to obtain the benefit of the automatic stay of US litigation pending the foreign bankruptcy proceeding, it’s important for US counsel and the foreign debtor to coordinate closely if they want the eventual foreign bankruptcy orders to have effect in the United States.

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