Non-U.S. Liquidation Proceeding Recognized by U.S. Court; Public Policy Bar Rejected

Non-U.S. Liquidation Proceeding Recognized by U.S. Court; Public Policy Bar Rejected

 

By Louis M. Solomon

In re: Fairfield Sentry Limited, et al., 10 Civ. 7311 (S.D.N.Y. Sept. 2011) [enhanced version available to lexis.com subscribers], is an appeal to the District Court of a ruling by the Bankruptcy Court that recognized the liquidation proceeding of Fairfield pending in the British Virgin Islands (BVI) as a "foreign main proceeding" under the U.S. Bankruptcy statute and stayed appellants derivative as well as most other actions involving Sentry.  We do not often post on bankruptcy litigation, given the special statutory structure.  Fairfield however discusses two international litigation practice issues that arise in general contexts as well.  Fairfield is related to the Madoff insolvencies.

First, as with arbitral rulings and awards subject to the New York Convention (which we discuss in our e-book, International Practice: Topics and Trends), many of the bankruptcy regimes around the world have rules allocating priority and responsibility to one court or another.  Non-primary courts then are to give comity and deference to the main or primary court with only limited exceptions.  In the statutory regime enacted in various countries and recognized by the U.S., the main proceeding is one that is defined as a "foreign main proceeding", which exists if the proceeding is "pending in the country where the debtor has the center of its main interests" (also known as the COMI).  An important question arises as of when is that centrality tested.  Fairfield holds that for an entity that is actively in business prior to commencement of the bankruptcy case, the activities of a debtor's liquidators are both "relevant and important to the COMI determination".

Second, the U.S. Bankruptcy Code, along with many others across the globe, permit a court to refuse to recognize a non-U.S. bankruptcy if the action taken "would be manifestly contrary to the public policy of the United States".  This analysis in turn requires examination of the specific procedures and substantive laws of the relevant jurisdiction.  The principal complaint about BVI proceedings was that they were "cloaked in secrecy".   The District Court rejected that as a grounds for determining that the proceeding was contrary to U.S. public policy.  Said the Court:  "the mere fact of conflict between foreign law and U.S. law, absent other considerations, is insufficient to support the invocation of the public policy exception".

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