Relying on the principle of international comity embodied in Chapter 15 of the United States Bankruptcy Code, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) recently vacated Rule B attachments previously granted by the United States District Court for the Eastern District of Louisiana (the “Louisiana District Court”) on the vessel M/V DAEBO TRADER (the “Vessel”) in In re DAEBO International Shipping Co., LTD., 543 B.R. 47 (Bankr. S.D.N.Y. 2015).

In February, 2015, Daebo International Shipping Co. LTD. (“Daebo”) applied for rehabilitation under the Republic of Korea’s Debtor Rehabilitation and Bankruptcy Act (“DRBA”). Daebo listed the Vessel as a “tangible asset” of itself and Shinhan Capital Co. (“Shinhan”) as a secured creditor. As provided by DRBA, the South Korean court issued a stay order which prevented creditors from “enforcing a judgment, attaching assets or taking other actions to collect a claim” against Daebo. In March, 2015, following the formal commencement of Daebo’s rehabilitation proceeding, the foreign representative filed a Chapter 15 petition in the Bankruptcy Court seeking recognition of the Korean rehabilitation as a foreign main proceeding.

Between February 14, 2015, and March 13, 2015 (and after the Korean court issued its stay order), five of Daebo’s creditors (the “Claimants”) began maritime attachment proceedings against the Vessel in the Louisiana District Court. The Claimants asserted that Daebo’s sale of the Vessel to Shinhan, and its subsequent leaseback to Daebo, was fraudulent because (1) Daebo retained all indicia of ownership, (2) Shinhan was actually the alter ego of Daebo, and (3) Shinhan and Daebo operated as a single business entity. Based on these allegations, the Claimants sought to attach the Vessel – for which the Claimants had not provided services or necessaries – in order to provide a source of payment to the Claimants for Daebo’s failure to perform under other maritime charter contracts. The Louisiana District Court found that the Claimants had made sufficient allegations to demonstrate that the Vessel was Daebo’s property and issued the Rule B attachments.

The motion to vacate the attachments

Following recognition of Daebo’s Korean proceedings, Daebo sought relief from the Bankruptcy Court to vacate the Rule B attachments. The Bankruptcy Court held an evidentiary hearing on Daebo’s motion to vacate the attachments on October 27, 2015 and thereafter considered post-hearing submissions.

In reaching its ultimate decision to vacate the Rule B attachments, the Bankruptcy Court first considered the DRBA’s extraterritorial effect and the Korean court’s jurisdiction to issue a stay that would be recognized worldwide (including by the Bankruptcy Court in the United States). Relying on declarations summarizing Korean law, the Bankruptcy Court determined, pursuant to Rule 44.1 of the Federal Rules of Civil Procedure, that as a matter of law the Korean stay order was intended to have worldwide effect and that the Bankruptcy Court would enforce the Korean stay order pursuant to 11 U.S.C. § 1521 (stating court had discretion to grant additional post-recognition relief to protect a debtor’s assets as long as creditor’s rights are sufficiently protected). The Bankruptcy Court concluded that the Claimants were equally protected by the Korean stay order because the Claimants had filed claims against Daebo in the Korean proceedings. Therefore, to the extent the Bankruptcy Court determined the previously issued Rule B attachments were actually issued against Daebo (and not Shinhan), then the Rule B attachments had to be vacated.

The Bankruptcy Court next turned to the Claimants’ argument that Daebo’s sale and leaseback of the Vessel was a fraudulent transaction and the Vessel was Daebo’s property under a secured financing with Shinhan. The Bankruptcy Court determined, and the Claimants’ conceded at trial, that the “lease recharacterization” argument did not support maintaining the Rule B attachments. As the Bankruptcy Court noted, accepting this argument required the acknowledgment that the Vessel would be considered Daebo’s property and would be protected by the Korean court’s worldwide stay order. The Bankruptcy Court also concluded that the Claimants’ alternate theories – which sought to hold Shinhan directly liable for Daebo’s debts on the basis that Shinhan participated in an allegedly fraudulent transaction – were nothing more than recharacterizations of the failed “lease recharacterization” argument. Specifically, the Bankruptcy Court found that Claimants failed to satisfy (or even plead) the necessary requirements for a fraudulent transfer or alter ego claim. Finally, the Bankruptcy Court concluded that Daebo’s custodian had the exclusive right to pursue the lease recharacterization claim for the benefit of all creditors and that the Korean court had exclusive jurisdiction over that process.

Based on the above analysis, the Bankruptcy Court entered an order vacating the Rule B attachments and directing the Claimants to dismiss the related proceedings pending in the Louisiana District Court.

The subsequent motion for a stay pending an appeal

On February 4, 2016, the Bankruptcy Court entered an order staying its earlier decision pending appeal by one of the original Claimants, SPV1, LLC (“SPV”). In re DAEBO International Shipping Co., Ltd., Case No. 15-10616 (MEW), 2016 WL 447655 (Bankr. S.D.N.Y. Feb. 4, 2016). The Bankruptcy Court analyzed SPV’s request under the Second Circuit standard: (1) whether the movant will suffer irreparable injury absent a stay, (2) whether a party will suffer substantial injury if a stay is issued, (3) whether the movant has shown “a substantial possibility, although less than a likelihood, of success” on appeal, and (4) how public interests may be affected.” The Bankruptcy Court concluded that SPV had not met its burden with respect demonstrating a likelihood of success on appeal; none of SPV arguments in its motion to stay challenged the Bankruptcy Court’s prior rulings. The Bankruptcy Court reiterated that a ruling by the Louisiana District Court on the status of SPV’s otherwise unsecured claim would violate principles of international comity and deprive the Korean court of its exclusive jurisdiction over the claims already filed by SPV against Daebo in the Korean rehabilitation proceeding. Nevertheless, the Bankruptcy Court issued a stay of its December, 2015, decision on the ground that Daebo/Shinhan had not alleged any prejudice from a stay and that SPV’s appellate rights could be mooted absent a stay during the pendency of SPV’s appeal.

SPV’s appeal, captioned In re Daebo International Shipping Co. LTD., Case No. 16-00389 (S.D.N.Y.), was dismissed with prejudice on July 28, 2016, following the parties’ entry into a settlement agreement. The settlement, which received approval from both the Korean court and Judge Sweet of the United States District Court for the Southern District of New York, provided that SPV would receive $84,534.69 and permission to assert claims in the Korean proceeding (subject to Daebo’s right to dispute any claims) in exchange for mutual releases arising out of the Vessel’s attachment and dismissal with prejudice of SPV’s Rule B attachment. No other party appealed the Bankruptcy Court’s order vacating the Vessel’s attachment.