In ABN Amro Bank N.V. v. Parmalat Finanziara S.p.A. (In re Parmalat Finanziara S.p.A.),1 the United States District Court for the Southern District of New York affirmed the Bankruptcy Court’s entry of an injunction pursuant to former section 304 of the Bankruptcy Code (the precursor to current chapter 15, applicable in crossborder insolvency proceedings), which prevented the beneficiary of a guaranty governed by New York law from asserting its guaranty claim against Italian debtor (and guarantor) Parmalat S.p.A. (“Parmalat”) in the United States. Rather, the injunction relegated the creditor to avenues of relief in Parmalat’s bankruptcy case pending in Italy.

The District Court’s ruling is particularly noteworthy because the Italian bankruptcy court applied principles of Italian evidentiary law to the documentation submitted in support of the creditor’s claim, notwithstanding that the underlying guaranty agreement included a New York choice of law provision. In applying Italian evidentiary law, the Italian bankruptcy court determined that the creditor failed to prove the existence of the guaranty in accordance with applicable Italian legal standards. As a result, the Italian bankruptcy court found the guaranty claim to be unenforceable against Parmalat.

On appeal by the creditor from the Bankruptcy Court’s entry of an injunction under section 304 of the Bankruptcy Code, the District Court affirmed the Bankruptcy Court’s ruling that the creditor’s claim received “just treatment” in the Italian bankruptcy proceeding under the standard of section 304 of the Bankruptcy Code. In so ruling, the Bankruptcy Court determined that the application of Italian evidentiary standards to the guaranty agreement did not violate fundamental notions of U.S. public policy and fairness, and that the Italian proceeding provided for an orderly review and the adjudication of the creditor’s claim.

Brief Factual Overview

The facts underlying the Parmalat decision involve a promissory note and a guaranty issued by certain Parmalat entities in 2003, ultimately endorsed in favor of creditor ABN Amro Bank N.V. (“ABN”). The documentation comprising the note stated that it had been issued by Wishaw Trading (“Wishaw”), a Uruguayan entity 16% owned by Parmalat, and guaranteed by Parmalat. With respect to the guaranty documentation, the guaranty appeared to have been signed by then-Chairman of Parmalat, Calisto Tanzi, and certified by a major Italian financial institution. The guaranty included a New York choice of law provision.

Following Wishaw’s failure to pay the principal when due under the terms of the note, ABN commenced a lawsuit against Wishaw in New York state court seeking to recover the full amount due and owing to it. In January 2004, while the state court proceeding was pending, Parmalat and certain of its affiliates commenced insolvency proceedings in Parma, Italy. Shortly after the commencement of Parmalat’s bankruptcy cases in Italy, Parmalat and certain of its affiliates (not including Wishaw) commenced ancillary cases in the United States Bankruptcy Court for the Southern District of New York pursuant to section 304 of the Bankruptcy Code, seeking to facilitate the Italian proceeding by enjoining a wide range of creditor actions in the United States and abroad. Upon Parmalat’s request, the Bankruptcy Court entered a preliminary injunction staying a wide range of creditor actions in the United States, including, but not limited to, any further enforcement of ABN’s guaranty claim against Parmalat.

In July 2006, the Bankruptcy Court entered a permanent injunction under section 304 of the Bankruptcy Code (over the objection of, among others, ABN). The permanent injunction required ABN to prosecute its guaranty claim against Parmalat in the Italian bankruptcy case.

ABN’s Objection to the Permanent Injunction Under Section 304

In opposing Parmalat’s request for entry of the permanent injunction, ABN asserted that although the guaranty agreement by its terms identified New York as the governing law, the Italian bankruptcy court had unfairly applied Italian principles of evidentiary law in its consideration of ABN’s guaranty claim. ABN contended that, as a result of refusing to apply New York law, the Italian court had found the guaranty claim to be unenforceable due to the failure of the guaranty to comply with Italian evidentiary requirements, resulting in direct prejudice to ABN.

Specifically, ABN took issue with the Italian bankruptcy court’s application of the Italian evidentiary requirement (created by the Italian statute) referred to as “data certa” – a requirement that the party seeking to enforce the obligation of a third party (in this case, Parmalat, on account of its guaranty of the note issued by Wishaw) to comply with certain standards of proof as a prerequisite to enforcement of the underlying obligation. In effect, the data certa requirement of Italian law imposes a high burden of proof upon the party seeking to establish the existence of the debt obligation. Among other things (and as the Bankruptcy Court and District Court noted in their decisions, as discussed below), the Italian statutory language includes a “catch-all,” whereby a creditor seeking to prove the existence of the third-party obligation may seek to establish the existence of the obligation by any “alternate means of proof.” Pursuant to the data certa doctrine, if the evidentiary standard of proof is not met, the third-party obligation cannot be enforced.

As of the Bankruptcy Court’s entry of the permanent injunction under section 304 in July 2007, the Italian bankruptcy court had determined that ABN’s guaranty claim failed to comport with the high standard of proof of data certa, thus rendering the claim unenforceable against Parmalat.

Former Section 304 – An Overview

The Bankruptcy Court overruled ABN’s objection to entry of the section 304 injunction which, as noted above, would have the effect of “channeling” ABN’s guaranty claim against Parmalat. to the Italian proceeding. In reaching its determination, the Bankruptcy Court considered ABN’s objection in light of the relevant factors enumerated in section 304 of the Bankruptcy Code. For context, a brief overview of the statutory construct is below.

Former section 304 of the Bankruptcy Code permitted a foreign representative to file a petition in a bankruptcy court instituting a case ancillary to a foreign proceeding. 11 U.S.C. § 304(a) (repealed 2005).2 Parmalat commenced an ancillary proceeding in the United States in 2004, seeking a broad injunction to facilitate the centralization of creditor claims in Parmalat’s Italian bankruptcy case. Indeed, pursuant to section 304(b), the Bankruptcy Court would then be empowered to “enjoin the commencement or continuation of (A) any action against (i) a debtor with respect to property involved in such foreign proceeding.” 11 U.S.C. § 304(b). Former section 304(c) listed six factors which guided courts in deciding whether to grant an injunction, including:

(1) just treatment of all holders of claims against or interests in such estate;

(2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;

(3) prevention of preferential or fraudulent dispositions of property of such estate;

(4) distribution of proceeds of such estate substantially in accordance with the order prescribed by this title;

(5) comity; and

(6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.

11 U.S.C. § 304(c).

District Court Analysis of Bankruptcy Court Ruling

ABN’s objection to entry of the section 304 injunction implicated the provisions of section 304(c) relevant to the fairness (or lack thereof) of the Italian court’s treatment of ABN’s guaranty claim, namely sections 304(c)(1), (2), and (5). As discussed below, the Bankruptcy Court determined that the Italian court’s treatment of ABN’s claim comported with fundamental notions of public policy and due process, and that the Italian court’s application of data certa to ABN’s guaranty claim should not be undermined.

Upon appeal of the Bankruptcy Court’s issuance of an injunction, ABN argued that the Bankruptcy Court failed to properly analyze the section 304(c) factors. In particular, with respect to section 304(c), subsections (1), (2), and (5), ABN asserted that the application of the data certa statute to the guaranty, and the failure to apply New York state law, demonstrates that (i) the Italian court had not provided just treatment of all creditors, (ii) U.S. creditors are prejudiced by such application, and (iii) the rulings of Italian courts on this matter should not be recognized under principles of comity. The District Court determined that the Bankruptcy Court did not abuse its discretion in determining that the Italian proceeding was deserving of comity under section 304 in light of the totality of the Bankruptcy Court’s analysis of the relevant section 304(c) factors.

Specifically, in upholding the issuance of the injunction by the Bankruptcy Court, the District Court stated that the “just treatment” factor is satisfied upon a showing that the applicable law “provides for a comprehensive procedure for the orderly and equitable distribution of [the debtor]’s assets among all of its creditors.”3 The District Court reasoned that this was satisfied in the Italian bankruptcy case because ABN and all other claimants were afforded a generally comprehensive procedure for claims processing subject to a right of appeal. It noted that no showing had been made that the data certa statute had been applied inconsistently to favor one group of claimants. The District Court very briefly noted that the prejudice argument under section 304(c)(2) was without merit because ABN, an international financial institution, could not show any significant logistical “inconvenience” in having to litigate its claim in Parma, Italy. Finally, the District Court addressed the issue of comity, which is the “ultimate consideration in determining whether to provide relief under § 304.”4 The court noted that comity is appropriate where “the foreign proceedings do not violate the laws or public policy of the United States and if the foreign court abides by fundamental standards of procedural fairness.”5

Furthermore, the District Court noted that comity does not require that foreign proceedings afford a creditor identical protections to those available under U.S. bankruptcy law.

Interestingly, in analyzing the Bankruptcy Court’s analysis of ABN’s objection, the District Court looked to how courts within the United States would apply their own jurisdictions’ rules of evidentiary proof with respect to a contract including a foreign choice of law provision. The District Court noted that U.S. courts often apply foreign law in commercial transactions. However, it noted that, normally, the law of the jurisdiction of the adjudicating court applies with respect to the standard of proof for an obligation, regardless of the jurisdiction whose substantive law governs the terms of the obligation. Thus, the District Court concluded that “there is nothing antithetical to fundamental notions of due process of law as applied in the courts of this nation in applying the law of the forum to the manner in which an obligation is proven, even if some other jurisdiction’s substantive law is applicable to that obligation.”6

The District Court went on to state that the data certa statute is intended to avoid a backdated obligation, which is a legitimate concern in the insolvency context. Moreover, the statute bears only on the issue of proof of the agreement, not on the interpretation of its terms. Thus, the District Court found it important that no principle of Italian law had actually been used to interpret any term of the agreement. While the District Court acknowledged that ABN may have strong arguments that the date of execution of the guaranty is proven by extraneous evidence, such as emails, testimony of witnesses and other circumstances, it noted that those arguments would be considered only in the remaining avenues for appellate review in the foreign proceedings, and not in courts in the United States.

Implications and Conclusion

Although the Parmalat decision concerns former section 304 of the Bankruptcy Code, as opposed to current chapter 15, it is relevant to all parties conducting business in the global marketplace, especially in the current distressed environment. Indeed, the decision serves as a reminder that parties conducting business with foreign entities need to understand applicable foreign legal requirements and enforcement proceedings, including basic evidentiary principles applied by foreign courts. The mere inclusion of a domestic choice of law provision in underlying documentation does not necessarily insulate a creditor from the uncertainties attendant to a foreign court’s adjudication of its claim.

Even under circumstances in which the evidentiary standards of a foreign insolvency proceeding are significantly different than those applied by U.S. courts sitting in a jurisdiction whose substantive law governs a contract, and when application of these evidentiary standards leads to a drastically different result than would the application of the standards of the U.S. jurisdiction, such a disparate result may not, in and of itself, present a sufficient reason to overcome a channeling injunction, whether in the form of a section 304 injunction, or, under the revised Bankruptcy Code, recognition of a foreign insolvency proceeding. As a result, creditors may find themselves needing to meet evidentiary burdens of a foreign court despite having bargained for a domestic choice of law provision in an agreement.