Enforcement of an Insolvency-Related Judgment Does Not Require Recognition under Chapter 15

Michael B. Schaedle and Evan Jason Zucker

In EMA GARP Fund v. Banro Corporation1 (the “U.S. Action”), the U.S. District Court for the Southern District of New York dismissed a lawsuit filed by shareholders of an insolvent Canadian company, Banro Corporation (“Banro”), and its former CEO, finding that, under the principles of comity, an approved Canadian plan of reorganization released all claims against the defendants. In so ruling, the court summarily rejected a longstanding principle that recognition of a foreign bankruptcy proceeding under chapter 15 of the U.S. Bankruptcy Code is a prerequisite to the enforcement by a U.S. court of a judgment entered in a foreign bankruptcy proceeding.

The Banro Insolvency Proceeding

Banro was a public corporation headquartered in Canada and incorporated under Canadian law. Banro was involved in the exploration, development, and mining of gold in the Democratic Republic of the Congo. Banro faced liquidity challenges in 2017, eventually becoming insolvent and in need of additional liquidity to fund operations. On December 22, 2017, under the Canadian Companies’ Creditors Arrangement Act (“CCAA”), Canada’s equivalent to chapter 11 of the U.S. Bankruptcy Code, Banro initiated a restructuring proceeding (the “CCAA Proceeding”) in the Ontario Superior Court of Justice (Commercial List) (the “Canadian Court”). On that same date, trading in Banro’s securities on the New York Stock Exchange was suspended.

Thereafter, Banro sought and obtained an order setting March 6, 2018, as the deadline for the filing of certain claims against Banro and its officers and directors. On March 5, 2018, one day prior to the deadline, the plaintiffs in the U.S. Action, EMA GARP Fund, L.P. (“EMA”), a U.S. private equity investment fund, commenced the U.S. Action asserting claims against Banro and its former CEO under the U.S. Securities and Exchanges Act. EMA did not file any claim in the CCAA Proceeding—notwithstanding its knowledge of the CCAA Proceeding.

Banro’s counsel responded a few days later, advising EMA that a plan of reorganization had already been approved by the creditors and that a motion to obtain Canadian Court approval had been scheduled. Additionally, Banro indicated that it would specifically request a finding by the Canadian Court that the claims at issue in the U.S. Action had been released and discharged. EMA, however, did not appear in the Canadian Proceeding and did not object to the inclusion of the language releasing Banro and its former CEO from any claims. On March 27, 2018, the Canadian Court approved the plan and issued an order that included the requested language releasing all the claims asserted in the U.S. Action. On May 3, 2018, Banro’s insolvency monitor (the equivalent of a bankruptcy trustee), filed a certificate with the Canadian Court confirming that the plan had been implemented.

On May 18, 2018, Banro moved to dismiss the U.S. Action on international comity grounds, under Federal Rule of Civil Procedure 12(b)(1). In seeking dismissal, Banro first argued that U.S. courts have ordinarily declined to adjudicate creditor claims that are the subject of a foreign bankruptcy proceeding if that proceeding abided by fundamental standards of procedural fairness and does not violate the public policy of the United States. Second, Banro argued that chapter 15 does not require a foreign entity or representative of a foreign bankruptcy to file a petition in the United States under any circumstances; rather, it permits foreign courts or representatives to seek assistance from U.S. courts in order “to provide effective mechanisms for dealing with cases of cross-border insolvency.” 11 U.S.C. § 1501(a), (b). Additionally, it contended that the enactment of chapter 15 was not intended to overrule well-established principles of international comity. Therefore, since Banro had limited assets in the United States, it determined that there was no need for the assistance of a U.S. court to administer its assets and that a chapter 15 proceeding solely for the purpose of defending itself in the U.S. Action was unnecessary.

In response, EMA argued comity cannot be extended to the CCAA Proceeding because Banro failed to establish that the claims in the U.S. Action were subject to the CCAA Proceeding and that the Canadian Court had jurisdiction over EMA.

The U.S. District Court rejected EMA’s arguments, granted Banro’s motion to dismiss, and enforced Banro’s plan of reorganization under the principles of comity.

Enforcement of Insolvency-Related Judgments

“Comity” is “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” Hilton v. Guyot, 159 U.S. 113, 164 (1895). In determining whether a foreign proceeding warrants comity, courts should undertake a multifactor analysis to determine whether the foreign court satisfies fundamental standards of procedural fairness. Factors that establish procedural fairness include: “(1) whether creditors of the same class are treated equally in the distribution of assets; (2) whether the liquidators are considered fiduciaries and are held accountable to the court; (3) whether creditors have the right to submit claims which, if denied, can be submitted to a bankruptcy court for adjudication; (4) whether the liquidators are required to give notice to the debtors’ potential claimants; (5) whether there are provisions for creditors’ meetings; (6) whether a foreign country’s insolvency laws favor its own citizens; (7) whether all assets are marshalled before one body for centralized distribution; and (8) whether there are provisions for an automatic stay and for the lifting of such stays to facilitate the centralization of claims.” Allstate Life Ins. Co. v. Linter Grp. Ltd., 994 F.2d 996, 999 (2d Cir. 1993). If the foreign proceeding is procedurally fair, then courts must determine whether affording comity would “violate any laws or public policies” of the United States.

Prior to the enactment of chapter 15 of the Bankruptcy Code in 2005, U.S. courts regularly recognized foreign insolvency judgments as a matter of comity. An ancillary proceeding was not required, as section 304 of the Bankruptcy Code (the precursor to chapter 15) was not the exclusive remedy. The enactment of chapter 15, which adopted the Model Law on Cross-Border Insolvency (the “CBI Model Law”) promulgated by the United Nations Commission on International Trade Law (“UNCITRAL”),2 changed the requirements for recognition and enforcement of insolvency judgments. Under chapter 15, after a foreign proceeding is recognized, a U.S. court “shall grant comity or cooperation to the foreign representative.” 11 U.S.C. § 1509(a). And, section 1509(c) specifies that any request for comity or cooperation from another U.S. court “shall be accompanied by a certified copy of an order granting recognition” under chapter 15.

These provisions reflected the intention that chapter 15 was to be the “exclusive door to ancillary assistance to foreign proceedings.” Collier on Bankruptcy ¶ 1509.03 (16th ed. 2018) (quoting H.R. Rep. No. 109031(I), 110 (2005) (“This section concentrates the recognition and deference process in one United States court.”). After its enactment, a majority of courts held that the requirements of chapter 15 must be complied with before a foreign debtor can seek the assistance of a U.S. court to enforce a judgment.3

approving Banro’s reorganization plan because Canadian insolvency proceedings have been held to be procedurally fair, the terms of Banro’s plan were fair and reasonable, EMA had notice of the CCAA Proceeding, and EMA “could have and should have pursed their claims” in the CCAA Proceeding. Instead, EMA engaged in forum shopping. In extending comity to the CCAA Proceeding, the U.S. District Court determined that the fact that Banro did not file a petition under chapter 15 of the Bankruptcy Code was “irrelevant” to the comity standard and related multifactor analysis. As a result, Banro was “under no obligation to file anything in U.S. courts in order to earn [comity] for the Canadian courts.” In coming to its conclusion, the U.S. District Court principally relied on caselaw prior to the enactment of chapter 15 of the Bankruptcy Code and summarily rejected the belief that chapter 15 of the Bankruptcy Code changed the comity standard.

Instead, the U.S. District Court implicitly accepted Banro’s argument that chapter 15 serves a limited purpose and is necessary only when assistance is needed to administer a foreign debtor’s assets in the United States. Here, Banro had limited assets in the United States and did not need the assistance of a U.S. court with respect to those assets. To the contrary, Banro was only seeking to use the plan of reorganization defensively to dismiss a claim, not to administer assets. Accordingly, using a chapter 15 case solely as a defense mechanism would have been, in Banro’s view, an inefficient use of estate assets and inconsistent with the purpose of chapter 15 of the Bankruptcy Code.

Implications

The U.S. District Court’s decision highlights an alternative method to recognize and enforce an insolvency-related judgment. While chapter 15 continues to be the prevailing method, it is not necessarily the exclusive means where a party is seeking to use an insolvency-related judgment defensively rather than offensively to recover assets for an insolvent’s estate.

Indeed, other countries, including the United Kingdom, have recognized that the CBI Model Law is not the appropriate statutory scheme for recognizing and enforcing an insolvency-related judgment; it is instead a means of facilitating cross-border cooperation. As a result, UNCITRAL has recently promulgated a new model law on the recognition and enforcement of insolvency related judgments. This new model law is designed to complement the CBI Model Law and provides a simplified, cost-effective means to recognizing and enforcing insolvency-related judgments, including defensively.


  1. No. 18 CIV. 1986 (KPF), 2019 WL 773988 (S.D.N.Y. 21 February 2019).
  2. UNCITRAL was established by the United Nations in 1966 and plays an important role in developing that framework in pursuance of its mandate to further the progressive harmonization and modernization of the law of international trade by preparing and promoting the use and adoption of legislative and non-legislative instruments in a number of key areas of commercial law. The CBI Model Law has been adopted by 44 countries.
  3. See generally, In re Millennium Glob. Emerging Credit Master Fund Ltd., 458 B.R. 63, 81 (Bankr. S.D.N.Y. 2011), aff’d, 474 B.R. 88 (S.D.N.Y. 2012) (noting that “[t]he clear implication of failure to obtain any recognition, borne out by the case law, is that without an order of recognition the foreign representative cannot be heard in any court in the United States.”); In re Loy, 380 B.R. 154, 165 (Bankr. E.D. Va. 2007) (holding that Chapter 15 recognition is required before a foreign representative seeks to enlist the comity or cooperation of a court in the United States).