March 29 Class Readings

Privy Council Appeal No 46 of 2005

Cambridge Gas Transport Corporationv.The Official Committee of Unsecured Creditors(of Navigator Holdings PLC and others)

Appellant

Respondent

FROM

THE HIGH COURT OF JUSTICE OF THEISLE OF MAN

-----------------

JUDGMENT OF THE LORDS OF THE JUDICIALCOMMITTEE OF THE PRIVY COUNCIL

Delivered the 16th May 2006

Present at the hearing:-

Lord Bingham of CornhillLord Hoffmann

Lord HuttonLord Rodger of Earlsferry

Lord Carswell

[Delivered by Lord Hoffinann]

In 1997 four European businessmen decided to invest in a shipping business. The leadappears to have been taken by a Mr Giovanni Mahler, a Swiss resident who had about 10% ofthe equity. The investors borrowed some US$300m on the New York bond market and orderedfive gas transport vessels with which they commenced trading at the beginning of 2001.Unfortunately the venture was a failure. Freight rates were lower than expected and the shipsnever earned enough to cover even the interest on the loans. At the end of 2003 the investors ranout of credit. The business was heavily insolvent. They petitioned for relief in New York underChapter I 1 of the US Bankruptcy Code, which allows insolvent companies, under supervision ofthe court and cover of a moratorium, to negotiate a plan of reorganisation with their creditors. InMarch 2004 the Federal Bankruptcy Court for the Southern District of New York confirmed aplan approved by virtually all the outside creditors and ordered that it be carried into effect.Essentially, the plan was for the assets to be taken over by the creditors.

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This is a simple enough story, though unhappy, and the only complications arise out ofthe corporate structure adopted by the investors. The business was, as is frequently the case, heldthrough offshore companies incorporated in various jurisdictions. The ships, registered inLiberia, were owned and managed by a group of Isle of Man companies, each ship owned by aseparate subsidiary of a management company and all the shares in the management companyheld by a holding company, Navigator Holdings plc. It will be convenient to refer to the group as"Navigator" and the shares in the holding company as the shares in Navigator.

Navigator was in turn held through a web of companies incorporated in other off-shorejurisdictions, of which it is for present purposes necessary to mention only two: Cambridge GasTransport Corporation ("Cambridge"), a Cayman company which owns, directly or indirectly, atleast 70% of the issued share capital of Navigator, and Vela Energy Holdings Ltd ("Vela"), aBahamian company which (through an intermediate wholly owned Bahamian subsidiary) ownsall the issued share capital in Cambridge. Mr Mahler is a director of Vela, Cambridge, theNavigator companies and various other associated off-shore companies....

The mechanism which the plan used to vest the assets in the creditors was to vest theshares in Navigator in their representatives. That would enable the creditors to control theshipping companies and implement the plan. So clause 22 provided:

"Immediately upon entry of this confirmation order, title to the old common stock[of Navigator] shall automatically vest in the interim shareholders [the creditors'committee] without any further act by any person or under any applicable law,regulation, order or rule. The Interim shareholders shall then, in their capacities asshareholders of [Navigator], take all necessary steps under the laws of the Isle ofMan or otherwise to implement [the plan]"

The New York court was of course aware that such a provision could not automaticallyhave effect under the law of the Isle of Man. The order confirming the plan therefore recordedthe intention of the court to send a Letter of Request to the High Court of Justice of the Isle ofMan, asking for assistance in giving effect to "the plan and the confirmation order". Such aletter was duly sent....

The Committee of Creditors then petitioned the High Court for an order vesting theshares in their representative. They were met by a cross-petition by Cambridge, the whollyowned Cayman subsidiary of Vela in which, it will be remembered, most of the shares inNavigator were vested, asking the court not to recognize or enforce the terms of the plan. Thebasis of the cross-application was that Cambridge, as a separate legal entity registered in theCayman Islands, had never submitted to the jurisdiction of the New York court. An order of thatcourt could therefore not affect its rights of property in shares in the Isle of Man.

The English common law has traditionally taken the view that fairness between creditorsrequires that, ideally, bankruptcy proceedings should have universal application. There should bea single bankruptcy in which all creditors are entitled and required to prove. No one should havean advantage because he happens to live in a jurisdiction where more of the assets or fewer of the

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creditors are situated. For example, in Solomons v Ross (1764) 1 H Bl 131n a firm inAmsterdam was declared bankrupt and assignees were appointed. An English creditor broughtgarnishee proceedings in London to attach £1200 owing to the Dutch firm but Bathurst J, sittingfor the Lord Chancellor, decreed that the bankruptcy had vested all the firm's moveable assets,including debts owed by English debtors, in the Dutch assignees. The English creditor had tosurrender the fruits of the garnishee proceedings and prove in the Dutch bankruptcy....

Their Lordships consider that these principles are sufficient to confer upon the Manxcourt jurisdiction to assist the committee of creditors, as appointed representatives under theChapter 11 order, to give effect to the plan. As there is no suggestion of prejudice to any creditorin the Isle of Man or local law which might be infringed, there can be no discretionary reason forwithholding such assistance....

In the present case it is clear that the New York creditors, by starting proceedings to windup the Navigator companies and then proposing a scheme of arrangement under section 152 ofthe Companies Act 1931, could have achieved exactly the same result as the Chapter 1 I plan.The Manx statute provides:

"(1) Where a compromise or arrangement is proposed between a company and itscreditors...the court may on the application of the company or any creditor or member ofit or, in the case of a company being wound up, of the liquidator...order a meeting of thecreditors...to be summoned in such manner as the court directs.

(2) If a majority in number representing three-fourths in value of the creditors...agreeto any compromise or arrangement, the compromise or arrangement, if sanctioned by thecourt, is binding on all creditors...and also on the company and, in the case of a companyin the course of being wound up, on the liquidator and contributories of the company."

The jurisdiction is extremely wide. All that is necessary is that the proposed schemeshould be a "compromise or arrangement" and that it should be approved by the appropriatemajority. Why, therefore, should the Manx court not provide assistance by giving effect to theplan without requiring the creditors to go to the trouble of parallel insolvency proceedings in theIsle of Man?...

...Their Lordships therefore consider that the Court of Appeal was right to order itsimplementation.

They will humbly advise Her Majesty that the appeal should be dismissed with costs.

3LISC/4243772. I

Chapter 15 of the Bankruptcy Code

Daniel M. Glosband Honorable Allan Gropper March 29, 2012

©2011. Goodwin Procter LLP

2

§ 1509. Right of Direct Access

• (a) A foreign representative may commence a case under section 1504 by filing directly with the court a petition for recognition of a foreign proceeding under section 1515.

• (b) If the court grants recognition under section 1517, and subject to any limitations that the court may impose consistent with the policy of this chapter –

• (3) a court in the United States shall grant comity or cooperation to the foreign representative.

3

Wanachek Mink Ranch v. Alaska Brokerage (W.D. Wash. 2009)

• Defendant a debtor in administration (reorganization) in London Sought stay of U.S. litigation based on comity to U.K.

proceeding Plaintiffs opposed, arguing that chapter 15 was sole avenue

to relief • Court denied stay, acknowledged that chapter

15 recognition was a pre-requisite to granting comity Defendant can file a petition for recognition If recognition is granted, court can then fashion appropriate

relief

4

In re Reserve International Liquidity Fund, Ltd.

(S.D.N.Y. 2010) • Reserve Fund filed interpleader action in U.S.

District Court to make final distribution of assets

• BVI Liquidators sent letter to court saying they had replaced Fund’s directors and should act for the Fund

Requested stay of interpleader action, asserted that BVI law terminated directors’ powers and that Liquidators displaced the directors

5

• While Liquidators were negotiating a protocol with the Fund, without notice they sought to freeze assets in the Cayman Islands

BVI court directed Liquidators to stop work on the protocol and pursue the Cayman assets

• Chapter 15 requires that the Liquidators obtain recognition before they can avail themselves of the federal courts

6

• Liquidators disagree, assert they are not seeking comity or cooperation but instead are appearing as the Fund

• Allowing Liquidators to appear as the Fund would constitute tacit recognition and would short-circuit the necessary bankruptcy court determination of whether BVI proceedins should be recognized

7

§ 305. Abstention

• (a) The court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at any time if—

• (1) the interests of creditors and the debtor would be better served by such dismissal or suspension; or

• (2)(A) a petition under section 1515 for recognition of a foreign proceeding has been granted; and

• (B) the purposes of chapter 15 of this title would be best served by such dismissal or suspension.

• (b) A foreign representative may seek dismissal or suspension under subsection (a)(2) of this section

8

J.P. Morgan Chase v. Altos Hornos de Mexico, S.A. (2d Cir. 2005)

(decided before effective date of chapter 15)

• Altos Hornos, Mexican steel producer, borrowed $330 million from bank group Granted security interest in receivables from three

customers Defaulted on loan and filed suspension of

payment proceeding (reorganization) in Mexico Bank filed in SDNY for declaration that it owned

$4 million in collection account

9

• District Court dismissed Principles of international comity require deference to bankruptcy

court in Mexico

• Banks asserted “Koreag” exception: disputes over bona fide questions of whether debtor owns property under local law can be decided by local court without deferring to foreign proceeding

Koreag not apply where creditor has obligation to apply assets to same debt that is subject of foreign proceeding

Court should exercise its discretion to decline to adjudicate claims that are subject to foreign bankruptcy proceeding

10

Lehman Brothers Holdings Inc. v. BNY Corporate Trustee Services Limited

(Bankr. S.D.N.Y. 2010)

• BNY, as trustee, held collateral under a swap agreement between Lehman (as swap counterparty) and noteholders Ordinarily, amounts payable to noteholders are

subordinated to amounts payable to swap counterparty

If there is default by the swap counterparty, the priority is reversed and the noteholders have priority (called the “flip clause”)

English law governs transaction documents

11

• Lehman chapter 11 filing was a default and noteholders sued BNY in English court to obtain the collateral under the priority afforded by the “flip clause”

• While English case was proceeding, Lehman both participated in the English case and brought an action in the U.S. bankruptcy court Lehman asserted that the “flip clause” was not

enforceable under U.S. bankruptcy law and that continuation of the English litigation violated the U.S. automatic stay

12

• U.S. bankruptcy court and English courts exchanged communications regarding coordination and cooperation with respect to the litigation

• English courts, including Court of Appeal, ruled that the flip clause was valid, effective and enforceable under English law English court asked that if U.S. court concluded

that “flip clause” was unenforceable it go no further than making a declaratory judgment to that effect

13

• Bankruptcy court granted summary judgment for Lehman that “flip clause” was an unenforceable ipso facto clause and any attempt to modify Lehman’s priority violated automatic stay

Refused to grant comity to English judgment Decision left BNY trapped between contrary

decisions • Bankruptcy court decision was appealed and

the case was settled before the appeal was decided

14

Parbery; in re Lehman Brothers Australia Limited

(Federal Court of Australia 2011)

• Lehman Australia Liquidators asked Australian court to communicate with U.S. bankruptcy judge under Article 25 of Model Law, as implemented in both the U.S. and Australia, essentially asking him to lift a stay

Australian liquidation involves the same Notes as cases in the U.S. and UK which came to conflicting conclusions on “flip” clause

15

• English courts ruled that the flip clause was enforceable and collateral became subject to Noteholder priority

• U.S. court ruled that flip clause was an unenforceable ipso facto clause and enforcement also violated the automatic stay; collateral remained subject to swap counterparty priority

• UK court had engaged in limited communication with U.S. court

16

• While Australian court recognizes value of inter-court communication, it will not act on an ex parte request that would ask U.S. court to modify stay

• Court will notify U.S. court of the request by the Australian Liquidators and ask it to establish a protocol for future communications

17

Tradex Swiss (Bankr. D. Mass 2008)

• Securities firm registered in Switzerland had relocated bulk of operations and assets to Boston Swiss regulators put company into bankruptcy, appointed

liquidators Involuntary chapter 7 (liquidation) filed in U.S. Three weeks later, liquidators sought chapter 15 recognition

• Creditors asserted that Swiss proceeding was not a foreign proceeding, opposed recognition

18

• Liquidators challenged commencement of chapter 7, sought consolidation with chapter 15

• Court concluded that Swiss proceeding qualified as an administrative proceeding in a foreign country under a law relating to insolvency Swiss regulator qualified as a “foreign court” as an authority

competent to supervise a foreign proceeding Liquidators unable to prove that COMI is in Switzerland Swiss proceedings recognized as a foreign non-main

proceeding

19

• Dismissal of chapter 7 not warranted as purposes of chapter 15 best served by permitting chapter 7 to proceed Dismissal not in best interests of creditors;

chapter 7 trustee collecting assets; Swiss proceeding in limbo pending an appeal

20

Cambridge Gas Transport v. Creditors Committee of Navigator Gas Transport

(House of Lords 2006)

• Chapter 11 of Navigator group of companies resulted in reorganization plan Plan eliminated former owners, proposed to vest

stock of operating companies in creditors Problem: operating company owned by Isle of

Man subsidiary whose stock was held by a Cayman subsidiary

Manx court assistance required to transfer stock Cayman subsidiary opposed

21

• House of Lords discussed English common law traditional view: “fairness between creditors requires that, ideally, bankruptcy proceedings should have been universal application” These principles suffice to confer jurisdiction on

Manx court to assist in giving effect to chapter 11 plan

This decision has been edited for teaching purposesand does not contain the full text of the original

In re LEHMAN BROTHERS HOLDINGS INC., et al., Debtors.Lehman Brothers Special Financing Inc., Plaintiff,

v.BNY Corporate Trustee Services Limited, Defendant.

422 B.R. 407 (Bankr. S.D.N.Y. 2010)

MEMORANDUM DECISION GRANTING MOTION FOR SUMMARY JUDGMENTAND DECLARING APPLICABLE PAYMENT PRIORITIES

JAMES M. PECK, Bankruptcy Judge.Introduction

This is a matter arising out of a complex financial structure that includes an added layer ofcomplexity due to the pendency of parallel and potentially conflicting legal proceedings in thisCourt and the United Kingdom. At issue both here and in the English Courts is the priority ofpayment to beneficiaries (one a noteholder and the other a swap counterparty) that hold compet-ing interests in collateral securing certain... notes. The swap counterparty is Lehman BrothersSpecial Financing Inc. ("LBSF"), one of the Lehman entities whose chapter 11 case is before thisCourt.

The English Litigation was filed in the High Court by Perpetual Trustee Company Limited("Perpetual"), as holder of various...notes, against BNY Corporate Trustee Services Limited("BNY") seeking priority payment pursuant to so-called "Noteholder Priority" (as defined be-low) under the terms of certain swap agreements

LBSF intervened in the English Litigation and has participated both in the English Litigationand in this adversary proceeding. After a trial, the High Court issued a judgment in which itheld, inter alia, that LBSF's interest in the collateral securing the Swap Agreements (the "Collat-eral") was "always limited and conditional," and, therefore, payment pursuant to Noteholder Pri-ority did not violate the so-called "anti-deprivation principle" under English law....

During the pendency of the English Litigation in the High Court, on May 20, 2009, LBSF(collectively with LBHI and its affiliated debtors, the "Debtors") commenced this action by fil-ing a two-count complaint {the "Complaint") against BNY. Count I of the Complaint seeks a de-claratory judgment that the provisions in the Swap Agreements that modify LBSF's payment pri-ority upon an event of default constitute unenforceable ipso facto clauses that violate BankruptcyCode sections 365(e)(l) and 541(c)(l)(B), thereby enabling LBSF to retain its right to receive apriority payment under the Swap Agreements ("Swap Counterparty Priority"). Count II seeks a

L1 BC/3970752.1

declaratory judgment from this Court that any action to enforce the provisions purportedly modi-fying LBSF's right to priority of payments as a result of its bankruptcy filing violates the auto-matic stay under Bankruptcy Code section 362(a).

The interplay between this litigation and the English Litigation has been obvious from thestart, and both this Court and the English Courts have been aware of the potential for conflictingrulings due to differences in the law being applied by each tribunal to the underlying dispute....

LBSF filed a notice of appeal of the High Court's judgment on August 17, 2009. On No-vember 6, 2009, the Court of Appeal issued a unanimous judgment in which it affirmed the hold-ing of the High Court...

Throughout these proceedings, the parties have kept the Court apprised of the progress of theEnglish Litigation. In addition, the Court has exchanged various communications with the HighCourt regarding coordination of and cooperation with respect to the litigation here and in Lon-don. Most recently, this Court received a letter from the High Court (i) explaining that "[t]heEnglish court has confined itself to making a declaration that the relevant contractual provisionsare `valid, effective and enforceable as a matter of English law as the proper law of such con-tracts, so as to give effect to Noteholder Priority,' " and (ii) requesting that if this Court con-cludes that "the relevant provisions are void or otherwise unenforceable under U.S. bankruptcylaw" it "go no further at that stage than to make a declaratory judgment to that effect." ...

It is in this context that the Court has evaluated the motions for summary judgment and hasdecided to grant LBSF's motion for summary judgment and to deny the cross motion of BNY.This Court concludes that the relevant provisions purporting to reverse the priority of paymenton account of the occurrence of a default due to commencement of a case under the BankruptcyCode are unenforceable and violate the ipso facto provisions of the Bankruptcy Code....

Pursuant to the terms of the Transaction Documents, the rights of LBSF in the Collateral or-dinarily take priority ("Swap Counterparty Priority") over those of Perpetual. However, if anevent of default occurs on the part of LBSF under a Swap Agreement, the Transaction Docu-ments call for a reversal of priorities so that Perpetual would then be entitled to priority overamounts otherwise payable to LBSF ("Noteholder Priority")....

Motions for Summary Judgment

In its motion for summary judgment, LBSF argues that the contractual provisions in theTransaction Documents that modify the scheme for payment priority are unenforceable ipsofacto clauses that inappropriately modify a debtor's interest in a contract solely because of abankruptcy filing in violation of Bankruptcy Code sections 365(e)(1) and 54l(c)(I)(B). LBSFalso maintains that any attempt to modify its payment priority violates the automatic stay, in vio-lation of Bankruptcy Code section 362(a)(3), because it improperly seeks to exercise control overthe property of LBSF's estate. Finally, LBSF argues that the so-called "safe harbor" provisions of

LCBC/3970752.1

the Bankruptcy Code do not protect the purported modification of the payment priority.

In its motion, BNY argues that because the Transaction Documents are to be governed byand construed in accordance with English law, this Court must defer to the determination by boththe High Court and the Court of Appeal that Noteholder Priority and subordinated payment un-der Condition 44 became effective automatically on September 15, 2008....

The English Courts authoritatively have interpreted the Transaction Documents in accor-dance with applicable English law. The Court, while respecting that determination as valid andbinding between the parties, is not obliged to recognize a judgment rendered by a foreign court,but instead may choose to give res judicata effect on the basis of comity.... In deciding whetherto recognize the decision of the English Courts in relation to the determination that Perpetual isentitled to a distribution based on Noteholder Priority, this Court will evaluate whether the Eng-lish Courts, in rendering their respective decisions sufficiently considered the applicability andimpact of section 365 of the Bankruptcy Code. It appears that the English Courts did not takeinto account principles of United States bankruptcy law and understood, as did the parties them-selves, that the outcome of the dispute might well be different in this Court. Indeed, BNY hasbeen concerned from the very outset of this litigation about the prospect of being caught in themiddle between conflicting decisions as to the rights of Perpetual and LBSF to the Collateral.From BNY's perspective, consistent guidance from courts of competent jurisdiction on both sidesof the Atlantic would be highly desirable and would avoid the unwanted result of conflictingjudgments as to which party is entitled to the Collateral....

Importantly, neither of the English Courts purported to bind this Court in any respect, and theHigh Court explicitly declined to "preclude any request or other application made by the ... U.S.Bankruptcy Court." Therefore, the English Courts have been most gracious in allowing room forthis Court to express itself independently on matters of importance to the administration of theLBHI and LBSF bankruptcy cases. In applying the Bankruptcy Code to these facts, this Courtrecognizes that it is interpreting applicable law in a manner that will yield an outcome directly atodds with the judgment of the English Courts.

Despite the resulting cross-border conflict, the United States has a strong interest in having aUnited States bankruptcy court resolve issues of bankruptcy law, particularly in a circumstancesuch as this where the relevant provisions of the Bankruptcy Code provide far greater protectionsthan are available under applicable provisions of foreign law...

The Court finds that the provisions in the Transaction Documents purporting to modifyLBSF's right to a priority distribution solely as a result of a chapter 11 filing constitute unen-forceable ipso facto clauses. Moreover, any attempt to enforce such provisions would violate theautomatic stay. The stay is triggered upon the filing of a bankruptcy petition, and it operates toprevent "any act to obtain possession of property of the estate or of property from the estate or toexercise control over property of the estate." 11 U.S.C. 362(a)(3). Thus, any attempt by anyparty to enforce Noteholder Priority or subordinated payment under Condition 44 would violate

LIBCI3970752.1

the automatic stay because it would deprive LBSF and its creditors of a valuable property inter-est....

Conclusion

The Court finds that there is no material undisputed fact with respect to unenforceability ofNoteholder Priority and subordination under Condition 44 and that LBSF is therefore entitled tojudgment as a matter of law. The Court will enter a declaratory judgment that (i) the provisionsin the Swap Agreements that seek to modify LBSF's payment priority upon an event of defaultconstitute unenforceable ipso facto clauses that violate Bankruptcy Code sections 365(e)(1) . and541(c)(1)(B) and (ii) any action to enforce such provisions as a result of LBSF's bankruptcy fil-ing violates the automatic stay under Bankruptcy Code section 362(a). LBSF is directed to sub-mit a draft order consistent with this decision for the Court's consideration....

This decision places BNY in a difficult position in light of the contrary determination of theEnglish Courts confirming that Noteholder Priority applies to claims made against it in Englandby Perpetual. This is a situation that calls for the parties, this Court and the English Courts towork in a coordinated and cooperative way to identify means to reconcile the conflicting judg-ments. The Court directs that the parties attend a status conference to be held on the next avail-able omnibus hearing date in the Debtors' cases for purposes of exploring means to harmonizethe decisions of this Court and the English Courts.

SO ORDERED.

LIBC/3970752. I

This decision has been edited for teaching purposes anddoes not contain the full text of the original

In re TRADEX SWISS AG, DebtorIn re Tradex Swiss AG, Debtor.

384 B.R. 34 (Bankr. D. Mass. 2008)

JOEL B. ROSENTHAL, Bankruptcy Judge.

These cases came before the Court for a continued evidentiary hearing on various pleadingsby which the self-styled "foreign representatives" challenge the commencement of the involun-tary Chapter 7 case and seek consolidation of the involuntary case with the Chapter 15 proceed-ing while the petitioning creditors in the involuntary case ("Petitioning Creditors") seek to denyrecognition of a foreign proceeding. The crux of the dispute is whether the proceeding com-menced against Tradex Swiss AG by the Swiss Federal Banking Commission ("SFBC") is a"foreign proceeding" within the meaning of the United States Bankruptcy Code, 11 U.S.C. S101et seq., and if so, whether the foreign proceeding is a "foreign main proceeding" or a "for-eign non-main proceeding." The Debtor has not responded to any of the pleadings and did notparticipate in the hearing.

The material facts are largely undisputed. On July 3, 2007 the SFBC appointed Dr. PeterLutz and Romeo Da Rugna to investigate the activities of Tradex Swiss AG ("Tradex"), andSwiss Garant AG ("Garant"). The SFBC is the chief Swiss regulatory authority for banks andsecurities brokers....[A]ppeals from decisions of the SFBC may and have been taken to the Fed-eral Administrative Court... Appeals from the Federal Administrative Court may be taken to theFederal Supreme Court.

Tradex...has been described as a... "(supposed) foreign exchange trading [company] on anInternet-based trading platform." The foreign exchange trading, or at least some portion of it, isbelieved to be "virtual" or in the words or the Petitioning Creditors, akin to a "video game" only,as the client transactions were not always executed and not fully and continually hedged, if at all.The allegations are that money collected from investors was used by one or more individuals atTradex for personal enrichment.

...Tradex maintained an office in Feusisberg, Switzerland as well as one in Boston, Massa-chusetts. ...Over the years, Tradex's operations were transferred to the Boston office; as thenumber of employees decreased in the Feusisberg location, the number in Boston increased. Op-erations and employees, including the director of trading, were located in Boston. At the time ofthe trial, only Mr. van Rensburg, a woman identified as his girlfriend, and a cleaning person wereemployed in the Swiss operation. In contrast, approximately 18 employees were located in Bos-ton.

LIBCI4247493.1

At the time of the filing of the involuntary petition, Tradex had approximately $7.1 million inbank accounts located in the United States. Its putative liabilities are approximately $15 million.At least a plurality of the creditors in number and the majority in amount are located in theUnited States.

In or about August 2007 Craig Karlis and others, including some of the Petitioning Creditors,commenced lawsuits in the Massachusetts Superior Court against Tradex and Bank of Americato freeze Tradex funds held in Bank of America accounts and to require Tradex to pay the Bos-ton-based employees' salaries. Although the foreign representatives participated in the state courtproceeding, they did not file their petition for recognition until November 26, 2007, almost threeweeks after the Chapter 7 petition was filed.

...On November 1, 2007 the SFBC issued its decree initiating bankruptcy proceedingsagainst Tradex, Garant, and Mr. Van Rensburg and appointing the investigators as the bank-ruptcy liquidators.

The Petitioning Creditors assert that the Swiss proceeding is not a foreign proceeding...as theDebtor has no "establishment" in Switzerland. "Establishment," as defined in the Code, is, ac-cording to the Petitioning Creditors, a predicate to any foreign proceeding, whether main or non-main. But even if the Court were to recognize a foreign proceeding, the Petitioning Creditors al-lege that Tradex's "center of main interests" is in the United States, specifically in Boston. There-fore they urge that the most the SFBC proceeding is entitled to is recognition as a foreign non-main proceeding.

They further claim that dismissal of the Chapter 7 case under 11 U.S.C. § 305 is not in thebest interest of creditors. Moreover they assert that if the Chapter 7 case goes forward, and if theCourt determines that the Swiss proceeding is a foreign proceeding, the Chapter 15 should bedismissed as Chapter 15 will automatically be applicable in the Chapter 7 proceeding.

The purported foreign representatives urge the Court to recognize the SFBC's proceeding as aforeign main proceeding. They claim there is no need for the Chapter 7 case but if it goes for-ward, it should be consolidated with the Chapter 15 case. The expectation apparently is that theChapter 7 will survive but that all of Tradex's U.S. assets and claims will come under the aus-pices of the foreign representatives.

Discussion

A `foreign proceeding" is a necessary predicate to the application of Chapter IS.

...As the Court noted in its oral decision, although sympathetic to equitable arguments raisedby both sides, the determination of whether there is a foreign proceeding calls for strict applica-tion of the definitional terms set out in the Bankruptcy Code..

LIBC/4247493. l

Whether Dr. Lutz and Mr. Da Rugna had the right to file the Chapter 15 petition, that is,whether they are truly foreign representatives, depends on whether they have been appointed in aforeign proceeding. Although the Petitioning Creditors argue that the SFBC proceeding is not aforeign proceeding, and indeed the Court had concerns about the authority of the SFBC over un-authorized banks and brokers and the status of the Swiss bankruptcy as in "limbo" during thependency of the appeal, the language of the Bankruptcy Code establishes that it is. Section101(23) defines a foreign proceeding as

a collective judicial or administrative proceeding in a foreign country, includingan interim proceeding, under a law relating to insolvency or adjustment of debt inwhich proceeding the assets and affairs of the debtor are subject to control or su-pervision by a foreign court, for the purpose of reorganization or liquidation.(Emphasis added).

...Even if the decree of the SFBC were not subject to appeal to the Swiss Federal Adminis-trative Court, and then the Swiss Federal Supreme Court, the SFBC itself comes within the defi-nition of a foreign court. Thus the SFBC proceeding is a foreign proceeding and Dr. Lutz andMr. Da Rugna are the foreign representatives.

This 'foreign proceeding" is either a main or non-main proceeding.

A foreign proceeding, as defined by Chapter 15, can be one of three types: a main proceeding, anon-main proceeding, or simply a foreign proceeding that is neither main nor non-main. Thecritical distinction between a foreign proceeding that is neither main nor non-main and a main ornon-main proceeding is that the former lacks a debtor's "establishment," that is "any place of op-erations where the debtor carries out a nontransitory economic activity." 1 I U.S.C. S 1502(2).

The burden then rested upon the foreign representatives to show, by a preponderance of theevidence, that the COMI was in Switzerland. Although there is evidence of some presence inSwitzerland, it is not enough to show that the principal place of business was in Feusisberg....Although the Court is sympathetic to the burden placed on foreign representatives in liquida-tion proceedings such as the instant one where the former employees may be less than coopera-tive in producing evidence of the allegedly fraudulent scheme or the business activities, the for-eign representatives still must establish the COMI by a preponderance of the evidence. Thus theforeign representatives have failed to carry their burden. The SFBC proceeding is recognized asa non-main foreign proceeding.

Dismissal of the Chapter 7 petition.There is no impediment to maintaining a Chapter 7 case in connection with the Chapter 15

one. In fact, § 303(b)(4) contemplates that a foreign representative may file an involuntary peti-tion and authorizes the foreign representative to do so. Although the Petitioning Creditors argue

LIBC/4247493. [

that the Chapter 7 petition should not be dismissed under § 305(a)(1) because dismissal is not inthe best interest of the creditors, it is § 305(a)(2) that applies. Section 305(b) expressly grants aforeign representative standing to seek dismissal or suspension of an involuntary proceeding ifthe conditions of § 305(a)(2),. That subsection provides for dismissal or suspension if

(A) a petition under section 1515 for recognition of a foreign proceeding has been granted; and

(B) the purposes of chapter 15 of this title would be best served by such dismissal or suspen-sion.

The Court concludes that dismissal is not warranted as the purposes of Chapter 15 are bestserved by permitting the Chapter 7 to go forward. The Chapter 7 trustee has begun collecting as-sets and should be permitted to go forward with the administration of the case, especially if theSwiss proceedings are "in limbo" until a decision is made in the pending appeal. The vast major-ity of creditors are located outside Switzerland; indeed a great number are here in the UnitedStates.

For the foregoing reasons, an order for relief has entered in the Chapter 7 case. An order ofrecognition has entered in the Chapter 15 case. The motion to consolidate was denied withoutprejudice.

LIBC14247493. ]


JP MORGAN CHASE BANK, Plaintiff Appellant,v.

ALTOS HORNOS DE MEXICO, S.A. DE C.V.412 F.3d 418 (2d Cir. 2005)

Before: WALKER, Chief Judge, CARDAMONE and HALL, Circuit Judges.

CARDAMONE, Circuit Judge.

J.P. Morgan Chase Bank (J.P. Morgan, bank, or appellant) filed a complaint in the United StatesDistrict Court for the Southern District of New York before Judge Harold Baer seeking a judg-ment declaring that certain funds held in a collection account in the bank belonged to it. AppelleeAltos Hornos de Mexico, S.A. de C.V. (Altos Hornos, debtor, or appellee), a Mexican steelmanufacturer, had borrowed $330 million from a consortium of banks led by J.P. Morgan, whichalso managed the collection account for receiving the loan payments. Three Altos Hornos cus-tomers made payments directly into this collection account at the bank. Matters proceeded in thenormal course until Altos Hornos filed for bankruptcy in Mexico, at which point the funds in thecollection account became the subject of the instant litigation. The debtor moved to dismiss thebank's complaint on grounds of international comity, asking the federal court in New York todefer to the bankruptcy court in Mexico. The district court granted that motion to dismiss. J.P.Morgan appeals.

The Loan and Security Agreements

On April 11, 1997 appellee Altos Hornos de Mexico, S.A. de C.V.-one of Mexico's largest steelproducers-concluded a loan agreement with J.P. Morgan and a consortium of 27 other banks un-der which the banks agreed to loan Altos Hornos a total of $330 million to pay off a preexistingloan by J.P. Morgan to Altos Hornos and to fund Altos Hornos' ongoing operations.

According to the terms of the loan agreement, J.P. Morgan established the collection account inits own name at its office in New York. It had exclusive power to withdraw funds from the ac-count, but only for specified purposes in the following priority: (1) to cover its own expenses andfees, (2) to pay interest and principal on the loan to itself and other consortium members, and (3)to refund any surplus funds to Altos Hornos...

The parties entered into a security agreement on the same day they concluded the loan agree-ment. Under the security agreement, Altos Hornos assigned its right to payment from three of itscustomers-Thyssen Handelsunion AG, Kloeckner & Co. AG, and Ferrostaal AG-to J.P. Morganfor deposit in the collection account. These payments were "collateral security for the prompt

LIBC14243734.1

payment in full when due ... of the Secured Obligations," ...

Altos Hornos Enters Suspension De Pagos

Altos Hornos defaulted on its loan in April 1999, and the following month it filed for suspensionde pagos (suspension of payments) (SOP) in a Mexican civil court. Much like Chapter 11 reor-ganization in the United States, SOP is a judicial order authorized under Mexican law that allowsa debtor to suspend payments to its creditors and continue normal operations until such time asthe debtor and creditors, under the auspices of the court, reorganize the debt. The Mexican courtgranted Altos Hornos' petition and issued the SOP order.. T.P. Morgan, for itself and on behalf ofthe other consortium banks, appeared before the Mexican court to acknowledge its claim as se-cured creditors for the remaining balance on the loan, which included $225,355,617.25 in princi-pal and $1,912,330.78 in interest....To date, Altos Hornos continues to operate in suspension depagos and has not resumed payment on its debt....

During the summer of 1999, following the Mexican court's SOP declaration, the three customersof the debtor that had agreed to pay directly into the collection account continued to do so. Theirpayments totaled approximately $4.7 million, from which the bank withdrew $880,708 for pay-ment of its legal fees and expenses in connection with its participation in the SOP proceeding.According to the record before us, no further payments or deductions have been made and theaccount has been inactive since January 2003...

Proceedings Below

On March 18, 2003 the bank filed suit in the Southern District of New York seeking a declara-tion that it owned the funds in the collection account. Altos Hornos moved to dismiss because,inter alia, principles of international comity counsel a U.S. court to abstain from deciding suchquestions and to defer to a pending foreign bankruptcy proceeding.... The district court grantedthe debtor's motion to dismiss.... The district court found the issue of who owns the collectionaccount "was implicitly raised by Altos Hornos" before the Mexican court and that Mexican law"does not dictate one way or the other where the dispute must be decided It further ruled that thechoice of law and forum selection clauses in the loan agreement would not control where inter-national comity warranted abstention. And, it concluded that because the issue had been raisedbefore the Mexican court, and that court had jurisdiction to decide the question, internationalcomity required the district court to abstain and allow the issue to be resolved in the Mexicanproceedings. J.P. Morgan appeals from this order.

Standard of Review

Declining to decide a question of law on the basis of international comity is a form of abstention,and we review a district court's decision to abstain on international comity grounds for abuse ofdiscretion... .

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International Comity

A Brief Review of Its Origins

International comity has been described by the Supreme Court as "the recognition which one na-tion allows within its territory to the legislative, executive or judicial acts of another nation, hav-ing due regard both to international duty and convenience, and to the rights of its own citizens orof other persons who are under the protection of its laws." Hilton v. Guyot,159 U.S. 113, 164,16 S.Ct. 139, 40 L.Ed. 95 (1895)....

Whatever its precise contours, international comity is clearly concerned with maintaining amica-ble working relationships between nations, a "shorthand for good neighbourliness, commoncourtesy and mutual respect between those who labour in adjoining judicial vineyards."...

Justice Joseph Story introduced the doctrine to American jurisprudence, primarily as a means ofreconciling the competing laws of free and slave states with respect to fugitive slaves by allow-ing each state a principled way to accommodate (and, if necessary, avoid) the law of the others.Story opined that comity between nations is appropriate due to "mutual interest and utility," Jo-seph Story, Commentaries on the Conflict of Laws § 35 (8th ed. 1883), even if it is an "imperfectobligation" that " `cannot be reduced to any certain rule.' " Id. §§ 28, 33

International Comity and Foreign Bankruptcy Proceedings

International comity, as it relates to this case, involves not the choice of law but rather the discre-tion of a national court to decline to exercise jurisdiction over a case before it when that case ispending in a foreign court with proper jurisdiction. See Maxwell Communication Corp. v. So-ciete Generale (In re Maxwell Communication Corp.),93 F.3d 1036, 1047 (2d Cir.1996). Wehave repeatedly held that U.S. courts should ordinarily decline to adjudicate creditor claims thatare the subject of a foreign bankruptcy proceeding. "Since `[t]he equitable and orderly distribu-tion of a debtor's property requires assembling all claims against the limited assets in a singleproceeding,' American courts regularly defer to such actions."...In such cases, deference to theforeign court is appropriate so long as the foreign proceedings are procedurally fair and (consis-tent with the principles of Lord Mansfield's holding) do not contravene the laws or public policyof the United States...

Fairness of the Mexican Proceedings

It is well established that we defer to foreign bankruptcy proceedings on international comitygrounds only if those proceedings "do not violate the laws or public policy of the United Statesand ... abide[ ] by `fundamental standards of procedural fairness.' "...Nothing in the record be-fore us suggests that the actions taken by the Mexican bankruptcy court are not approved or al-

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lowed by American law....

The Forum Selection and Choice of Law Clauses

Finally, appellant avers that the district court erred in refusing to consider the loan agreement'schoice of law and forum selection clauses, under which Altos Homos agreed that the loanagreement would be governed by New York law, agreed to submit any dispute to the UnitedStates District Court for the Southern District of New York or any New York State court in NewYork City, and "irrevocably waive[d], to the fullest extent permitted by applicable law, anyclaim that any action or proceeding commenced by the Facility Agent ... should be dismissed orstayed by reason, or pending the resolution, of any action or proceeding commenced by [debtor]relating in any way to this Agreement whether or not commenced earlier."

Appellant contends that under these clauses, Altos Hornos agreed not to seek dismissal of J.P.Morgan's action in the Southern District of New York and agreed to allow the consortium to suefor collection of the debt in New York, regardless of the pendency of bankruptcy proceedings inanother country. The bank's reading of the loan agreement is defensible, and Altos Hornos maywell have agreed to the terms J.P. Morgan suggests. We have no cause to reach this issue, how-ever, because the fact that such clauses are in an agreement between the parties does not precludea court from deferring on grounds of international comity to a foreign tribunal where deference isotherwise warranted. In other words, regardless of the parties' pre-litigation agreement, once aparty declares bankruptcy in a foreign state and a foreign court asserts jurisdiction over the dis-tribution of assets, U.S. courts may defer to the foreign bankruptcy proceeding on internationalcomity grounds. Consequently, J.P. Morgan's reliance on the loan agreement's forum selectionand choice of law clauses is unavailing.

CONCLUSION

We have considered appellant's remaining arguments and find them all to be without merit. Forthe foregoing reasons, the district court's order granting appellee's motion to dismiss appellant'scomplaint is affirmed, and appellant's motion for voluntary dismissal of its appeal is denied.

LET3C/4243734.1

This decision has been edited for teaching purposes and doesnot contain the full text of the original

Citation:

Judge:

Parbery; in the matter of Lehman Brothers AustraliaLimited (in liq) [2011] FCA 1449 (Federal Court ofAustralia, 2011)JACOBSON J

REASONS FOR JUDGMENT

Introduction

Last week, Stephen Parbery and Marcus Ayres, the liquidators of Lehman Brothers

Australia Limited (in liquidation) ("LBA") (together "the Liquidators") applied to me ex

parte to exercise my powers under the Cross Border Insolvency Act 2008 (Cth) (the "Cross

Border Insolvency Act") to communicate directly with the Honourable Judge James M Peck

of the United States Bankruptcy Court for the Southern District of New York.

Judge Peck is the designated bankruptcy judge with overall responsibility for

administering the insolvencies of the Lehman Brothers Group of Companies (the "Lehman

Group") in the United States. His Honour is also the docket judge for a proceeding in the

United States, the outcome of which has a bearing on the ability of the Liquidators of LBA to

carry out their statutory responsibilities to collect and realise the assets of LBA for the benefit

of creditors.

The assets in question are securities for certain obligations arising under various series

of note issues made pursuant to a programme for the issue of a form of collateralised debt

obligations. The programme is known as the Dante Programme. LBA holds notes issued in

five different series of note issues made pursuant to the Dante Programme. The notes held by

LBA in the Dante Program have a face value of nearly $A9 million.

The Liquidators of LBA rely on Articles 25 and 27 of the Model Law on Cross-

Border Insolvency of the United Nations Commission on International Trade Law (the

"Model Law") which is given the force of law in Australia under ss 6 and 8 of the Cross

Border Insolvency Act.

Article 25 of the Model Law empowers this Court to communicate directly with or

request information and assistance from a foreign court. Article 25 has been implemented in

L1BC/4242243.1

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the Unites States in §1525 of the United States Bankruptcy Code 11 USC (2011) (the "US

Bankruptcy Code").

Whether or not Article 25 of the Model Law is wide enough to permit me to seek the

assistance of Judge Peck in the manner sought by the Liquidators, I do not consider that I

should do so at the present time. The reasons why I have come to this view emerge largely

from the decision of Henderson J in Perpetual Trustee Co Ltd v BNY Corporate Trustee

Services Ltd [2010] 2 BCLC 237 ("Perpetual No 2").

Perpetual No 2 addressed a similar question to the one which is raised before me. The

issue before Henderson J was whether he should send a letter of request to Judge Peck

proposing an allocation of functions between the English Court and the American Court in

relation to the question of priorities between the Noteholders and LBSF.

In Perpetual No 2, Henderson J agreed to send a letter of request to Judge Peck but he

did so in much narrower terms than were sought by the claimant. The importance of the

decision for present purposes is that it points against the utility of the request which the

Liquidators of LBA have asked me to make to Judge Peck.

There are a number of other reasons why I consider it inappropriate to accede to the

request. Some of them are of a procedural nature but a question of comity also arises because

it seems to me that the extent of the assistance which is sought may impinge upon the

sovereignty of the United States.

The securities for the Notes were described as the "Collateral" in the relevant

documentation. The Collateral was vested in BNY under cl 5 of the Supplemental Trust

Deed. Under that clause, the issuer of the Notes charged the Collateral in favour of the

Trustee which held it as trustee for itself, the Noteholders and LBSF as Swap Counterparty.

The critical clause is cl 5.5 which is known colloquially as the "flip clause". It

provided for Swap Counterparty priority unless an Event of Default occurred under the Swap

Agreement. In that event, Noteholder priority was to apply.

The decisions of the English Courts

The validity and effect of the flip clause has been determined in England at first

instance and on appeal in proceedings brought by Perpetual Trustee Co Limited on behalf of

the Noteholders of a number of series of Notes in the Dante Programme.. .

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In Perpetual No 1, the Chancellor, Sir Andrew Morritt, held that the provisions for

Noteholder priority under the flip clause did not offend against English public policy or

against the principle of anti-deprivation in insolvency law. He therefore held that cl 5.5 was

effective to confer Noteholder priority and that the Collateral held by BNY was to be realised

and distributed for the benefit of the Noteholders...

The United States Proceedings

In proceedings brought by LBSF against BNY in the US Bankruptcy Court for the

Southern District of New York, Judge Peck delivered a Memorandum of Decision on 25

January 2010 in which he took a different view of the effect of the flip clause from that which

had been taken in England: see Lehman Brothers Special Financing Inc v BNY Corporate

Trustee Services Limited (United States Bankruptcy Court, Southern District of New York,

Case No 08-13555, Adversary Proceeding No 09-01242, 25 January 2010) (the "US

Perpetual Notes Proceeding").

Judge Peck came to the view in the US Perpetual Notes Proceeding that the flip clause

was contrary to the "ipso facto" and "automatic stay" provisions of the US Bankruptcy Code.

As is apparent from the above, Judge Peck was well aware of the contrary decisions of the

English Courts.

The United States District Court for the Southern District of New York granted a

motion brought by BNY for leave to appeal against the decision in the US Perpetual Notes

Proceeding. However, the appeal did not proceed because a settlement was reached between

BNY and LBSF in respect of the Notes held by Perpetual which were the subject of that

proceeding.

Henderson J's decision in Perpetual No 2 was handed down before Judge Peck's

decision was delivered in the US Perpetual Notes Proceeding. It is important to bear that

context in mind when addressing the issues in the present application.

In Perpetual No 2, the application was made by Perpetual because, as was pointed out

at [21] Perpetual feared that in the US Bankruptcy Court:

LBSF is trying in some way to steal a march and pre-empt the orderlyresolution of the conflict issues which may arise if Judge Peck decides theunderlying question of US bankruptcy law in favour of LBSF.

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Henderson J pointed out that both the English Court and the US Bankruptcy Court

were fully aware of the desirability of avoiding a conflict between the two jurisdictions with

respect to the underlying question of priority over the Collateral. He also pointed out that

steps had already been taken to establish a protocol for communication between the

Chancellor and Judge Peck. Indeed, there had already been communication between the

Chancellor and Judge Peck when the application was made to Henderson J....

Ultimately, Henderson J found the question of whether or not to send a letter to be

finely balanced but he concluded that the arguments in favour of sending a request

outweighed the arguments against it. However, the letter which he agreed to send was less

prescriptive than that which Perpetual had sought. In particular, he said the letter should

invite Judge Peck not to make any order which would require BNY to act in a particular way

or deal in any particular way with the collateral or its proceeds until further communication

had taken place between the English and American courts as envisaged by the protocol

established between Judge Peck and the Chancellor.

Consideration

I accept the view that inter-court communication can have a vital role to play in major

cross-border insolvencies. Also, so far as possible, I would try to endorse the efforts of the

Liquidators of LBA to seek to minimise the possibilities of conflicting orders: see Re T & N

Ltd [2005] BCC 982 at [27] ("Re T & Al").

However, I cannot accede to the request in its present form. There are a number of

reasons for this.

First, the effect of the draft letter is to request Judge Peck to lift the stay of the US

LBA Notes proceeding, or at least, not to extend it when the stay expires on 20 January 2012.

It seems to me that a request in those terms may pre-empt the consideration of the

matter by Judge Peck when the US LBA Notes Proceeding comes before him. It would

therefore impinge upon the principle of comity which is based on common courtesy and

mutual respect. Indeed, it may be seen by Judge Peck as an unwarranted interference by me

in the US LBA Notes Proceeding...

Second, unlike the application in Perpetual No 2, the present application is made ex

paste...

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Third, cooperation between this Court and any foreign court will generally occur

within a framework or protocol that has previously been approved by the Court, and is known

to the parties in the particular proceeding: see Federal Court of Australia, Practice Note Corp

2 - Cross-Border Insolvency: Cooperation with Foreign Courts or Foreign Representatives

at [5].

Reference should also be made to the Guidelines Applicable to Court-to-Court

Conununication in Cross-Border Cases published by the American Law Institute and the

International Insolvency Association.

No protocol has been established in the present case. I note that a form of protocol

appears to have been established between the Chancellor and Judge Peck in relation to the

issues arising out of Perpetual No I and the US Perpetual Notes Proceeding.

It seems to me that any protocol would need to provide for notice of the proposed

communication to be given to the parties directly affected, in particular BNY and LBSF.

Fourth, it is clear from the history of the proceedings in England and in the United

States that Judge Peck is acutely aware of the conflict between the authorities on either side

of the Atlantic....

Fifth, the application in Perpetual No 2 was made within the framework of

proceedings that were on foot in England and the United States with respect to the issue of

the validity and effect of the flip clause. There is no such proceeding before me...

There may be a question as to whether notice of an application under Article 25 ought

to be given to the parties to that proceeding.

Conclusion

For the reasons set out above, I do not propose to send a letter to Judge Peck in or to

the effect of the terms of the draft submitted by LBA.

Nevertheless, the authorities to which I have referred indicate that inter-court

communications in cross-border insolvencies should be encouraged so long as this can be

done without going beyond the principle of comity.

It seems to me that, in light of what I have said about the reasons for refusing the

application, the most that I can do is to communicate with Judge Peck to inform him of the

L[F3C14242243. i

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present application. I do not think it would be discourteous to Judge Peck to ask him whether

he would be prepared to establish a protocol for future communications so long as the

necessary parties are consulted about the terms of any communication with him....

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APPENDIX

Dear Judge Peck,

I am a judge of the Federal Court of Australia and am now the docket judge for matters

arising in the liquidation or Lehman Brothers Australia Ltd (in lid) (' l..BA''). an Australian

company which is a member of the Lehman Brothers Group.

I assumed responsibility as docket judge last month, having taken over the tile from Justice

Races of this Court who ordered the winding up of LBA on 2 October 2009.

The Liquidators of LBA have applied to me, ex parte. to seek your assistance under Article

25 of the Model Law on Cross-Border insolvent;v of life United Nations C'ommis.vion an

International Trade Law. The Model Law has been adopted in Australia under the Cross-

Border insolvency Act 2008 (Cth) and, as I know you are aware. in the United States under

Ch 15 el' the United States Jtankrnptct' Code.

The reason why the Liquidators of LBA made application to me is that LBA is a Note holder

of Synthetic Portfolio Notes issued under the Dante Programme. The Notes have a face value

of nearly SA9m. The Liquidators of LBA have a duty under the Cor porotions Ict 2001 (Cth)

of Australia to collect and realise the assets of LBA for the benefit of creditors. The assets

include the Notes held by LBA in five series of the Dante Programme. The Liquidators are

concerned about conflicting decisions by the English Courts and your Court about rights of

priority over collateral securities held under the terms of the Dante Programme.

In the application that was made to me, I was taken to your Memorandum of Decision dated

25 January 2010 in Lehman Brothers Special Financing Inc v 13NY C'oi7wrare "1'rrcetee

Services Lid. I was also taken to the details of subsequent developments in your Court in

relation to an adversary proceeding No 10-03545 brought by Lehman Brothers Special

Financing Inc ("LBSF ").

I am aware that the adversary proceeding brought by I..BSF has been stayed until 20 January

2012 and that you declined LI3A's objection to the stay on the ground that LBA had no

standing in the proceeding, but without prejudice to LBA's right to re-tile its motion after the

expiration of the stay.

L1BC14242243.1

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I was also taken in the course of the application to the decision of Sir Andrew lrlorritt. the

Chancellor of the English High Court of Justice in Perpetual 'Trustee Co Lid v 13NY

Corgi orate ''trustee Services 120091 E\V1-1C 1912 (Ch) and the decisions of the Court of

Appeal and the Supreme Court which affirmed the Chancellor's decision.

The basis upon which the Liquidators of LBA have asked me to seek your assistance is that

the conflict between the decisions of the English Courts and your decision given on 25

January 2010 exposes I3NY Corporate Trustee Services Limited ("I3NY`') to the possibility of

conflicting orders from Courts in England and the United States. This may affect the ability

of the Liquidators to collect the proceeds of the Notes held by I,BA. The Liquidators of L13A

seek to overcome that difficulty by. if possible. appealing from your decision.

I have come to the view that l ought not to accede to LI3A's request. The reasons for this are

set out in my judgment dated 15 December 2011. A copy of my judgment is attached.

Nevertheless. it seems to me that it may be appropriate to establish a protocol for

communication between us in the Nature. 1 am therefore writing to you to enquire whether

you would be agreeable to establishing such a protocol, provided that we can agree upon its

terms. In particular, the terms of the protocol would need to provide for notice of any

proposed communication to be given to I3NY and 1.13SF to enable them, it' they wish, to be

heard on the question of any letter of request that I may be asked to send to you.

I am aware that Mr Justice Henderson of the High Court of Justice in England gave a

judgment on 17 November 2009 in an application brought by € erpetual Trustee Co Ltd

against 13NY and L13SF. He rctcrred to a protocol established between you and the

Chancellor. I am not sure whether that protocol is still in place. I am also aware that in his

judgment, Henderson J said he was prepared to send a letter to you asking you, inter truer. not

to make any order which would require BNY to deal in a particular way with the collateral or

its proceeds pending tiu•ther communication between the High Court and the US Bankruptcy

Court.

L113C14242243.I

I do not know whether that request was made or whether it is still in force. However, if it is,

it would be particularly relevant to the terms of any protocol that may be established between

us.

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WESTERN DISTRICT OF WASHINGTONAT SEATTLE

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WANECHEK MINK RANCH and SMITHMINK RANCH CORPORATION, on behalf ofthemselves and all others similarly situated,

Plaintiffs,

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ALASKA BROKERAGE INTERNATIONAL,INC., et al.,

Defendants.

CASE NO. C06-089RSM

ORDER ON DEFENDANT'S MOTIONTO STAY PROCEEDINGS

This matter is before the Court for a ruling on Defendant Fein & Company's motion to stay

proceedings pending foreign insolvency proceedings. Dkt. # 184. Plaintiffs have opposed the motion.

After careful consideration of the parties' memoranda and relevant law, the Court has determined that

the motion should be denied.

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On October 19, 2009, defendant Fein & Co., a foreign entity based in London, United Kingdom,

filed a voluntary petition for administration (a proceeding analogous to a Chapter 11 reorganization in

the United States). Dkt. # 184, Exhibit A. Defendant contends that comity requires that this Court

recognize the administration proceedings and stay the case as it would, had defendant tiled for

bankruptcy in the United States. Plaintiffs, in opposition to the motion, argue that Chapter 15 of the

United States Bankruptcy Code is the exclusive means by which a debtor in a foreign insolvency

ORDER ON MOTION TO STAYPROCEEDINGS -

proceeding may obtain relief, including a stay. in the United States district courts. To resolve this

dispute. the Court must turn to the history and effect of Chapter 15. 1 1 U.S.C. § 1501 cat seq.

In 2005, Congress adopted Chapter 15 of the Bankruptcy Code. which is based on the Model

Law on Cross-Border Insolvency promulgated in 1997 by the United Nations Commission on

International Trade Law. 11 U.S.C. § 1501. The purpose of the statute is to "provide effective

mechanisms for dealing with cross-border insolvency," with the objectives of cooperation, greater legal

certainty, fair and efficient administration, protection of the debtor's assets, and facilitation of the rescue

of financially troubled businesses. Id.

Chapter 15 replaced former Section 304 of the Bankruptcy Code, which originally provided the

statutory framework for cases filed in the United States that are ancillary to insolvency proceedings filed

in foreign countries. The philosophies underlying former Section 304 were deference to the foreign

proceeding and the prevention of the piecemeal distribution of the debtor's estate. See Bank of New York

^r JCPL Leasing Corp. v. Treco (In re Treco), 240 F.3d 148, 153-54 (2d Cir. 2001) (citing In re Koreag,

Controle et Revision S.A. v. Refco F/X Assocs., Inc., 961 F.2d 341, 358 (2d Cir.1992) (In re Koreag);

Cunard SS. Co. Ltd v. Salen Reefer Servs. AB, 773 F.2d 452, 455 (2d Cir. 1985)). Former Section 304

provided a bankruptcy court with broad discretion in fashioning an appropriate remedy in a particular

case. Id. at 154-55. The section outlined several factors, including comity, that a court should consider

before granting a foreign representative any type of relief. I 1 U.S.C. § 304(c) (repealed by Pub.L. 109-

8, title VII, § 802(d)(3), April 20, 2005),

With the advent of Chapter 15, the courts have been divested of much of this discretion and are

instead directed by objective statutory guidelines. In re Bear Stearns High-Grade Structured Credit

Strategies Master Fund, 389 B.R. 325, 333 (S.D.N.Y. 2008). Under Chapter 15, in order for a petition

for recognition of a foreign proceeding to be granted, it must meet several requirements:

(1) the foreign proceeding for which recognition is sought is a foreign main proceeding or

foreign non main proceeding within the meaning of § 1502;

(2) the foreign representative applying for recognition is a person or body; and

(3) the petition meets the requirements of § 1515.

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1 1 U.S.C. § 1517(a). In order to meet the requirements of § 1515, the foreign representative must tile a

petition for recognition, must establish that a foreign proceeding exists, and must demonstrate that the

petitioner has been appointed as the foreign representative. 1 1 U.S.C. § 1515(b); In re Gold & Honed.

Ltd., 410 B.R. 357, 366 (Bankr.E.D.N.Y. 2009).

These objective requirements are statutory prerequisites to recognition. However, once the

foreign proceeding has been recognized, "flexible and pragmatic" considerations, including "subjective

factors that embody principles of comity" are considered in fashioning appropriate relief. In re Bear

Stearns, 389 B.R. at 333-34. Thus, while Chapter 15 replaced Section 304 as the Bankruptcy Code's

operative provision for dealing with cross-border insolvencies, many of the principles underlying

Section 304 remain in effect. As stated by one district court,

Significantly, chapter 15 specifically contemplates that the court should be guided by principlesof comity and cooperation with foreign courts in deciding whether to grantthe foreign representative additional post-recognition relief. This is evidenced by thepervasiveness with which comity appears in chapter 15's provisions. For example,§ 1509 specifically requires that if the court grants recognition under § 1517, it"shall grant comity or cooperation to the foreign representative." 1 I U.S.C. § I 509(b)(3).In addition, § 1507 also explicitly directs the court to consider comity in granting additional

assistance to the trustee.

In re Atlas Shipping A/S, 404 B.R. 726, 738 (Bankr. S.D.N.Y. 2009).

Once a case is recognized as a foreign main proceeding, Chapter 15 specifically contemplates

that the court will exercise its discretion consistent with principles of comity. There is a logical reason

for this. "Deference to foreign insolvency proceedings will often facilitate the distribution of the debtor's

assets in an equitable, orderly, efficient, and systematic manner, rather than in a haphazard, erratic, or

piecemeal fashion." In re Artimm, S.r.L., 335 B.R. 149, 161 (Bankr.C.D.Cal.2005). Chapter 15

"mandate[s] that the court cooperate to the maximum extent possible' with a foreign court or

representative . . . " Id. at 159. Thus, "while Chapter 15 replaced § 304 and provided a more structured

framework for recognizing foreign proceedings, Congress specifically granted courts discretion to

fashion appropriate post-recognition relief, consistent with the principles underlying § 304." In re Atlas

Shipping, 404 B.R. at 739.

In Chapter 15, Congress has provided a specific procedure for addressing cross-border


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insolvencies, together with appropriate remedies. 11 U.S.C. § 1501. Nowhere has defendant Fein & Co.

either shown or argued that it could not file a petition for recognition of the foreign insolvency

proceedings under Chapter 15. Should it do so, and should recognition be granted, this Court may then

exercise its discretion to fashion appropriate relief. Until that time, the Court declines to stay these

proceedings.

Defendant's motion to stay is accordingly DENIED, without prejudice to renewal at an

appropriate time.

DATED this 2"d ¶1ay of December 2009.

RICARDO S. MARTINEZUNITED STATES DISTRICT JUDGE

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RESERVE INTERNATIONAL LIQUIDITY FUND, LTD2010 WL 1779282 (S.D.N.Y. 2010)

MEMORANDUM OPINION AND ORDER

PAUL G. GARDEPHE, District Judge.

On October 27, 2009, the Reserve International Liquidity Fund (the "Fund") filed this in-terpleader action seeking to bring about a final distribution of Fund assets...

On January 20, 2010, this Court received a letter from ...counsel to Nicholas Carter andDavid A.K. Walker of Price Waterhouse Coopers (the "Liquidators"), who were appointed liqui-dators of the Fund by the Honorable Justice Edward Bannister QC of the Commercial Divisionof the British Virgin Islands Eastern Caribbean Supreme Court (the "BVI Court") on January 18,2010. The Liquidators claim to have displaced the Fund's Board of Directors and to now be in aposition to direct and control the Fund, including in its role as Interpleader Plaintiff in this action.

Based on the hearings held in this matter and on the written submissions, and for the reasonsset forth below, this Court has determined that (1) the Liquidators do not have standing to as-sume the position of the Fund's Board in this action, and (2) the Fund has brought a proper inter-pleader action that will be permitted to proceed...

BACKGROUND

The International Fund is "an offshore, money-market type fund" organized under BritishVirgin Islands law. The Fund is managed by a Board of Directors... Reserve ManagementCompany, Inc. ("RMCI") serves as the investment adviser to the Fund, and Reserve Partners,Inc. serves as distributor. Id....

This action arises from the unprecedented collapse of the Reserve Funds, including the Inter-national Fund... Because of their holdings in Lehman paper, on September 15, 2008, the ReserveFunds faced a flood of redemptions...

Over the past sixteen months, the Fund has distributed most of its remaining assets to share-holders...

The Fund's interpleader action seeks to bring about a final distribution of Fund assets similarto the pro rata distribution approved and implemented by the Court in connection with the Re-serve Primary Fund.

L1BC/4244242.1

I. THE LIQUIDATORS DO NOT HA VE STANDING IN THIS ACTION

A. Background

On January 20, 2010, the Liquidators appointed by the BVI Court requested a stay of this ac-tion while they undertook to "inform themselves and formally take a position" as to whether ornot this action should continue. The Liquidators stated that under BVI law they had "displacedthe Fund's board of directors" and "now direct and control the Fund." The Liquidators claimedthat Section 175 of the BVI Insolvency Act of 2003 granted them "custody and control of theassets" of the Fund and dictated that the Fund's "directors and other officers ... cease to have anypowers, functions or duties other than those required or pennitted under this Part or authorisedby the liquidator." BVI Insolvency Act of 2003, § l75(1)(a), (b).

The Fund opposed the Liquidators' request for a stay and contended that the appointment ofthe Liquidators had no legal effect in the United States. The Fund argued that in order to be rec-ognized by this Court, the Liquidators must petition for and obtain recognition of the BVI liqui-dation proceeding pursuant to Chapter 15 of the Bankruptcy Code. Id.

On February 23, 2010, the Liquidators and the Fund jointly submitted a Proposed Cross-Border Protocol, outlining terms under which they might cooperate in the distribution of Fundassets. The Protocol required the Liquidators and the Fund to seek approval of the Protocol bythis Court and the BVI Court by February 24, 2010.

While these negotiations were ongoing, however, the Liquidators-without notice to the Fund-asked two Cayman Islands banks to freeze $20 million in Fund assets. On March 2, 2010, whilethis Court was considering the Proposed Cross-Border Protocol, one of the Cayman Islandsbanks alerted Fund counsel to the fact that the Liquidators would be seeking recognition in aCayman Islands court in an effort to bring an action to seize the funds being held in the CaymanIslands.

In an Order dated March 3, 2010, but not entered until March 12, 2010, the BVI Court di-rected the Liquidators to "spend no further time in seeking approval" of the Cross-Border Proto-col. In the Matter of the Reserve Int'l Liquidity Fund Ltd., BVIHCV 2009/322, Order: 3 March2010. The BVI Court directed the Liquidators to "prosecute their application to the Court ofGrand Cayman" with "diligence." On March 5, 2010, the Liquidators informed this Court thatthey no longer supported the Proposed Cross-Border Protocol.

Because the Liquidators have asserted that they now speak for the Fund-although they havenot stated what their position is concerning this litigation-it is necessary for this Court to deter-mine whether the Liquidators should be recognized by this Court.

I-IBC/4244242.1

B. The Liquidators Must Seek Recognition Under the Bankruptcy Code

Chapter 15 of the Bankruptcy Code was enacted in 2005 to "provide effective mechanismsfor dealing with cases of cross-border insolvency." 11 U.S.C. § 1501(a)(1)-(5). The statute re-quires that a "foreign representative" must obtain recognition pursuant to ,11 U.S.C. § 1517-typically by petitioning a bankruptcy court-before he or she "may apply directly to a court in theUnited States for appropriate relief in that court" and before "a court in the United States shallgrant comity or cooperation to the foreign representative." 11 U.S.C. § 1509(a), (b)(2), (b)(3)."Foreign representative" is defined as "a person or body, including a person or body appointedon an interim basis, authorized in a foreign proceeding to administer the reorganization or theliquidation of the debtor's assets or affairs or to act as a representative of such foreign proceed-ing." 11 U.S.C.§101(24). The Liquidators fall within this definition.

Chapter 15 makes clear that recognition is required before a foreign representative may availthemselves of the federal courts. "A request for comity or cooperation by a foreign representativein a court in the United States other than the court which granted recognition shall be accompa-nied by a certified copy of an order granting recognition under section 1517." 11 U.S.C. §1509(c). Moreover, should a foreign representative's petition for recognition under Chapter 15 bedenied, "the court may issue any appropriate order necessary to prevent the foreign representa-tive from obtaining comity or cooperation from courts in the United States." 11 U.S.C. §1509(d).

The Liquidators argue that they are not required to seek Chapter !5 recognition in order to as-sume control of this litigation because, in their view, they are not asking for "comity or coopera-tion" from this Court. This Court disagrees.

There is little case law addressing the issue of whether a "foreign representative" may requesta stay of U.S. court proceedings involving the entity subject to liquidation in the foreign proceed-ing. What case law there is, however, makes clear that foreign representatives must be recog-nized under Chapter 15 in order to seek a stay from a federal court. United States v. J.A. JonesConstr. Group, LLC, 333B.R.637,639 (E.D.N.Y.2005) (finding that the court had "no author-ity" to consider stay request made by an interim receiver appointed by a Canadian court "in theabsence of recognition under [C]hapter 15"); see also Andrus v. Digital Fairway Corp., No.3:08-CV-119-0(ROC), 2009WL 1849981,at *2-3 (N.D.Tex. June26, 2009) (denying defen-dant's motion to stay proceedings while a bankruptcy hearing in Canada proceeded because thefact that there "might be a Chapter 15" proceeding and "there then might be a request for thisCourt to suspend its proceedings" provided inadequate cause for a stay).

The Liquidators contend that they may circumvent Chapter 15 by simply appearing as theFund in this action. To allow such a maneuver would eviscerate Chapter 15's requirements. Afederal court's recognition of representatives appointed in the course of a foreign bankruptcy orliquidation proceeding is a matter of comity-it is an acknowledgement of the validity of the for-eign proceeding....If this Court were to allow the Liquidators to take the place of the Fund

L[BC/4244242. I

Board, such an action would constitute a tacit recognition that the BVI liquidation proceeding isvalid and, as a result, the Liquidators are in control of the Fund. This is precisely the kind of de-termination that must be made in a Chapter 15 proceeding. See 11 U.S.C.^$ 1501, 1509.

Chapter 15's legislative history confirms that this Court's recognition of the Liquidatorswould be inconsistent with the statute. The House Report states that "chapter 15 is intended to bethe exclusive door to ancillary assistance to foreign proceedings" and that "[t]he goal [of Section1509] is to concentrate control of these questions in one court. That goal is important in a Federalsystem like that of the United States with many different courts, state and federal, that may havepending 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 requir-ing a[ ] petition or even referring to the requirements of that section. Even if the result is cor-rect in a particular case, the procedure is undesirable, because there is room for abuse of com-ity. Parties would be free to avoid the requirements of this chapter and the expert scrutiny ofthe bankruptcy court by applying directly to a state or Federal court unfamiliar with the statu-tory requirements.

Id.

If this Court were to acknowledge the Liquidators as in control of the Fund, such recognitionwould short-circuit any bankruptcy court determination as to whether the BVI liquidation pro-ceeding should be recognized under Chapter 15. It would also set a precedent that Liquidatorsappointed in the BVI are "free to avoid the requirements" of Chapter 15. See id. Such a result isincompatible with Congress' intent in enacting Chapter 15.

Accordingly, before the Liquidators can appear in this action, seek a stay, or intervene on be-half of the Fund, they must obtain recognition under Chapter 15.

LI BC/4244242.1

March 29, 2012

Chapter 15 of the Bankruptcy Code

Daniel M. Glosband, Honorable Allan Gropper

Access to courts

11 U.S.C. §§1509 - 1514:

Direct access to seek recognition, then recognition asgatekeeper; foreign creditors' rights, notice entitlement; commencement of full cases

Wanachek Mink Ranch, et al v. Alaska Brokerage International, Inc. et al, (W.D. Wash.1212109), Case No. C06-089RSM. Recognition under chapter 15 a prerequisite toseeking comity to a foreign proceeding

Reserve International Liquidity Fund, Ltd. v. Caxton International Limited, 2010 WL1779282 (S.D.N.Y. 2010): Liquidators cannot circumvent chapter 15 recognitionrequirement by appearing as the debtor whose board of directors they replaced; note alsoattempt to obtain pre-emptive relief in foreign proceeding in contrast to cooperation andcoordination

J.P. Morgan Chase Bank v. Altos Hornos de Mexico, 412 F.3d 418 (2d Cir. 2005):Comity, dismissal of U.S. case seeking assets generated after commencement of a foreignproceeding

Assigned questions

Cooperation, Communication and Coordination; Comity in Practice

11 U.S.C.§§ 1525-1532

11 U.S.C §305

Break

LI13C14247136.1

In re Lehman Brothers Holdings, Inc., et al, 422 B.R. 407 (Bankr. S.D.N.Y. 2010);Parbery; in the matter of Lehman Brothers Australia Limited (in liq.) [2011] 1449(Federal Court, Australia, 2011). Conflicting rulings of U.S. British courts on priority ofrights in collateral; highlights inability to reconcile differences in substantive law,communication issues under Australian version of Model Law.

In re Tradex SwissAG, 384 B.R. 34 (Bankr. D. Mass 2008): Court declines to dismisschapter 7 proceeding; purposes of Chapter 15 best served by allowing chapter 7 toproceed in tandem with chapter 15 of foreign non-main proceeding

Cambridge Gas Transport Corporation v. The Official Committee of Unsecured Creditors(of Navigator Holdings PLC and others), [2006] UKPC 26, W.L.R.689, 2006 WL 1546603 (P.C. 2006): Deference to U.S. case by U.K.

Cross-Border Insolvency Protocol, Nortel Networks Inc., et al (Ontario and Delaware)

U.S., Canadian Courts OK Major Nortel Asset Deals, Law 360, December 4, 2009

Reprise of the four classes, Q&A

LWBC14247 136.1

Question for 3/29/12 Class

After years of double digit returns, Last Tranche Fund Ltd.(“LTF”) saw its bubble burst in 2008. LTF and its investment advisor, Pollyanna Securities, LLC (a DE LLC) were sued in NY by investors for misrepresenting the nature and, quality of LTF’s investments. LTF went into liquidation in its country of registration, the Cayman Islands. The Liquidators want to stay the actions against LTF and to intervene in the securities action that continues against Pollyanna, since determinations in that action could affect LTF. The Liquidators also want to (a) repatriate LTF’s NY bank account to the Cayman Islands, (b) sue Pollyanna for damages for breach of fiduciary duty for conducting grossly inadequate diligence and (c) to avoid as fraudulent transfers and to recover the huge management fees paid to Pollyanna. The Liquidators also want to sue Pollyanna’s principal, who was the ultimate recipient of the fees that LTF paid to Pollyanna, as a subsequent transferee of the fraudulent transfers and for aiding and abetting Pollyanna’s breach of fiduciary duties.

What actions would the Liquidators consider taking in which courts to accomplish their goals? Can the Funds, in the persons of the Liquidators whose powers include those of LTF’s Board of Directors, intervene in the securities action without obtaining chapter 15 recognition if initially they only wish to observe and receive notices but not seek relief? What issues would the courts face in deciding whether they could grant the Liquidators’ requests?

4271508-1

March 29 Class Readings

Documents

issued share capital

lehman brothers holdings

alaska brokerage international

maxwell communication corp

foreign exchange trading

international trade law

navigator holdings plc

united nations commission