A recent decision by the United States Bankruptcy Court for the Western District of Texas in In re Sanjel (USA) Inc. is a reminder that in a chapter 15 case, the U.S. bankruptcy court will not always apply the law of the foreign jurisdiction to U.S. creditors and U.S.-based claims. Specifically, the case adds a wrinkle to caselaw addressing the domestic application of foreign stays through chapter 15, and in particular whether it is appropriate for a bankruptcy court to modify or limit a foreign stay through changes to its recognition order (i.e., the order that gives a foreign stay effect in the United States).

The decision involves Sanjel (USA) Inc. and its related entities (collectively a multi-national energy services provider), which had originally commenced reorganization proceedings in Canada pursuant to the Companies’ Creditor Arrangement Act, or “CCAA.” The Canadian court granted the debtors certain protections, which included a broad stay of any actions against their directors and officers (as is permitted under Canadian law). Soon after, at the debtors’ request, the United States bankruptcy court recognized the CCAA proceedings under chapter 15 of the Bankruptcy Code and entered a recognition order extending the reach of the Canadian stay to the United States.

For readers in need of a refresher on the basic chapter 15 mechanics, a key premise is that, standing alone, foreign insolvency courts have no jurisdiction in the United States (hence, a stay issued by a Canadian court would have no effect in the in the United States). Historically, bankruptcy courts may have honored foreign law under former Bankruptcy Code section 304 and through the nebulous, common law doctrine of “comity”. However, with the enactment and codification of chapter 15 in 2005, the former scheme was replaced with a statutory framework based on the internationally recognized Model Law on Cross Border Insolvency (drafted by the United Nations Commission on International Trade Law). Among other things, chapter 15 provided bankruptcy courts with a means to “recognize” foreign insolvency proceedings and, through section 1521, use its jurisdiction to “grant any appropriate relief.”

As mentioned, the Sanjel bankruptcy court entered a recognition order that, among other things, gave domestic force to the Canadian stay of legal proceedings against the debtors’ directors and officers. Affected claimants included certain of the debtors’ U.S.-based employees who wanted to pursue claims arising under the United States Fair Labor Standards Act, or “FLSA.” (The FLSA creates a statutory cause of action allowing employees to seek damages (and, in some cases, attorneys’ fees) against corporate officers and directors on account of unpaid minimum wages or overtime.) Importantly, the statute of limitations on FLSA claims may continue to run during the pendency of a chapter 15 case, meaning that the continued imposition of the automatic stay could extinguish the employees’ claims. For this reason, two employees sought to modify the Canadian stay granted in the recognition order.

They met vigorous opposition from the debtors, who contended that the recognition order was not prejudicial to the employees because they could seek relief before the Canadian court, and that any modification would be prejudicial to the debtors whose limited personnel would be distracted from their restructuring efforts. The debtors’ arguments appeared solid, as identical points had won the day in In re Nortel Corp. in a dispute involving the same issues (though different claims) before the United States Bankruptcy Court for the District of Delaware, and again on appeal to the district court. The Nortel bankruptcy court had ultimately concluded that, if parties believed they were prejudiced by the stay imposed by the Canadian courts and given effect in the United States by a recognition order, the proper course of action was to seek relief from the Canadian court – not to modify that stay vis-à-vis the recognition order.

The Sangel bankruptcy court, notably, disagreed with the Nortel decision – at least on the facts presented. Section 1522(a) of the Bankruptcy Code permits courts to modify a recognition order so long as “the interests of the creditors and other interested entities, including the debtor, are sufficiently protected.” Following other courts, the bankruptcy court surmised that if the balance of hardships lie with the movant, the recognition order should be modified, but if the balance lay with the debtor (or other interested parties), the order should not. Under the circumstances, the court concluded that the hardships of the employees carried the greatest weight and, accordingly, modified the recognition order (and, thus, the reach of the Canadian stay in the United States) to permit the employees to bring and continue their FLSA claims. The court emphasized that, under the plain language of section 108(c) of the Bankruptcy Code, the statute of limitations for the FLSA claims would continue to run during the proceeding because the automatic tolling provisions only apply to actions against debtors. Without relief from the stay, the movants would not be able to argue this tolling point before the district court that would hear their statutory claims, leaving open the risk of an unfavorable decision after it was too late to take corrective measures. The court also noted that although the debtors’ alleged harms from modification of the recognition order were legitimate, they simply did not counterbalance movants’ risk of entirely losing their statutory claims. Notably, the court declined to follow Nortel for the general rule that litigants should request relief from foreign orders from foreign courts, finding that it would be exceedingly burdensome for the movants to appear in Canadian court to “pursue claims in Colorado based wholly on a statutory right created by United States law to protect employees within the United States.”

Although the facts before the Sanjel bankruptcy court could be cast in a very specific – and unique – light, the implications of this decision remain uncertain. Where debtors restructuring in foreign courts may have once taken comfort by the Nortel bankruptcy and district court decisions (which, if followed as a rule, would have channeled disputes over the U.S. application of foreign stays to the foreign courts that entered them), the varying decisions have created uncertainty on the issue. As such, foreign debtors are now at an increased risk that foreign stays may be subject to change in the United States. For U.S. creditors of foreign companies, however, the Sanjel decision could spare them the hassle of having to travel abroad to seek to protect certain of their rights.