On January 18, 2017, the U.S. Court of Appeals for the Second Circuit issued an opinion in the case of Trikona Advisers Limited v. Chugh, No. 14-975-cv, 2017 WL 191936 (2d Cir. Jan. 18, 2017), thwarting an attempt to expand the scope of Chapter 15 of Title 11 of the United States Code (the “Bankruptcy Code”). Specifically, the Second Circuit held, among other things, that Chapter 15 does not prevent a U.S. District Court from giving preclusive effect to the findings of a foreign court presiding over an insolvency proceeding where the action pending in the U.S. is not connected to the foreign insolvency proceeding.

Facts

Trikona involved the demise of Trikona Advisers, Ltd. (“TAL”), an investment advisory company formed in the Cayman Islands in 2006 by Rakshitt Chugh (“Chugh”) and Aashish Kalra (“Kalra”) to assist foreign investors seeking to invest in Indian real estate and infrastructure. 2017 WL 191936, at *1. Chugh and Kalra each held a fifty percent (50%) equity stake in TAL through entities owned by them: (i) Chugh through ARC Capital LLC (“ARC”) and Haida Investments (“Haida”); and (ii) Kalra through Asia Pacific Investments, Ltd. (“Asia Pacific”). Id. The 2008 economic crisis took its toll on TAL, however, and as a result of pressure from shareholders to sell TAL’s assets and a series of failed transactions with a German fund manager, among other things, the relationship between Chugh and Kalra soured. Id., at *1-*2. Eventually, TAL ceased to function as a going concern, Chugh was removed as a director without notice and Kalra proceeded to treat TAL and its assets as his own. Id., at *2.

Procedural History

On February 13, 2012, ARC and Haida filed a petition in the Grand Court of the Cayman Islands, seeking to “wind up” TAL under the Cayman Islands Companies Law. 2017 WL 191936, at *2. Asia Pacific opposed the petition by asserting affirmative defenses that Chugh had breached his fiduciary duty to TAL in several ways and that his removal from TAL’s board was justified. Id. After seven days of trial in January of 2013, the Cayman court granted Chugh’s petition and rejected each of Kalra’s affirmative defenses, finding that they had “no merit whatsoever.” Id., at *3. Kalra appealed the judgment to two separate courts in the Cayman Islands, each of which affirmed the original judgment. Id.

Two months before the commencement of the Cayman wind-up proceeding, Kalra, through Asia Pacific, had sued Chugh, ARC, and other related corporate entities (collectively, the “Chugh Defendants”) in the U.S. District Court for the District of Connecticut (the “District Court”) alleging, among other things, breach of fiduciary duty and aiding and abetting breach of fiduciary duty. 2017 WL 191936, at *3. The claims “substantially reprised the allegations” that Kalra had asserted as affirmative defenses in the Cayman proceeding. Id.

In January of 2013, the Chugh Defendants moved for summary judgment in the District Court under the theory of collateral estoppel based on the Cayman judgment. 2017 WL 191936, at *3. Specifically, the Chugh Defendants argued that because the Cayman court already had made findings of fact in Chugh’s favor with respect to TAL’s collapse, Kalra was collaterally estopped from relitigating those factual disputes. Id. On March 6, 2014, the District Court granted the Chugh Defendants’ motion for summary judgment. Id. The District Court also denied a motion for reconsideration filed by TAL (which eventually replaced Asia Pacific as plaintiff), stating that because the affirmative defenses made by Kalra in defending the wind-up petition were “fundamentally the same” as the factual assertions made in the underlying complaint in the District Court, collateral estoppel applied and summary judgment was appropriate. Id.

Insolvency Principles

Although TAL made five separate arguments on appeal, its assertion regarding Chapter 15 of the Bankruptcy Code is relevant for bankruptcy practitioners to note. Specifically, TAL asserted that Chapter 15 precluded the District Court from applying collateral estoppel to the findings of fact from the wind-up proceeding. 2017 WL 191936, at *4. In other words, TAL argued that because an application for recognition of the “foreign proceeding” (i.e., the Cayman proceeding) was not made or pending in the U.S., it was impermissible for the District Court to “recognize” the judgment of the Cayman court. Id. The Second Circuit disposed of this argument swiftly, stating that “the requirements of Chapter 15 do not apply here.” Id.

The Second Circuit’s discussion of Chapter 15 began by explaining that the “primary purpose” of Chapter 15 is to “facilitate the consolidation of multinational bankruptcy into one single proceeding.” 2017 WL 191936, at *4 (citing In re ABC Learning Centres Ltd., 728 F.3d 301, 305-06 (3d Cir. 2013)). It then identified the four circumstances under which Chapter 15 applies, which are specifically set forth in section 1501(b) of the Bankruptcy Code: (i) assistance sought in the U.S. by a foreign court or a foreign representative in connection with a foreign proceeding; (ii) assistance sought in a foreign country in connection with a case under the Bankruptcy Code; (iii) a foreign proceeding and a case under the Bankruptcy Code with respect to the same debtor are pending concurrently; or (iv) creditors or other interested persons in a foreign country have an interest in requesting the commencement of, or participating in, a case or proceeding under the Bankruptcy Code. The Second Circuit noted that inherent in those scenarios, however, is the assumption that (i) the U.S. court is being asked either to assist in the administration of a foreign liquidation proceeding itself; or (ii) a foreign court is being asked to assist in administration of a liquidation proceeding in the U.S. Id., at *5 (citing 11 U.S.C. § 1501(b)). Moreover, the court noted that a Chapter 15 case must be initiated by a “foreign representative” (as defined in section 101(24) of the Bankruptcy Code). 2017 WL 191936, at *5; see also 11 U.S.C. § 101(24).

In Trikona, however, the proceeding in the District Court did not stem from any of the enumerated circumstances set forth in section 1501(b) of the Bankruptcy Code, and the action was not commenced by a “foreign representative” of a foreign proceeding. 2017 WL 191936, at *5. Accordingly, the Second Circuit held that “Chapter 15 does not apply when a court in the U.S. simply gives preclusive effect to factual findings from an otherwise unrelated foreign liquidation proceeding,” especially because the District Court proceeding was a “non-bankruptcy action, brought in the District of Connecticut and governed by Connecticut law.” Id.

Notably, the Second Circuit stated in a footnote that if the case involved an attempt to enforce an order entered in a foreign insolvency proceeding, rather than simply to give such an order a preclusive effect, as was done in the District Court, arguably Chapter 15 would have been implicated. 2017 WL 191936, at *5 n.2. Moreover, in response to TAL’s argument that Chapter 15 of the Bankruptcy Code preempts the state law doctrine of comity, the Second Circuit explained that such a conclusion could not have been the intent of Congress given “the very narrow purpose of Chapter 15.” Id., at *8.

Implications

Although the Second Circuit declined to expand the scope of Chapter 15 beyond its intended purpose, it did create some uncertainty by stating in a footnote that Chapter 15’s precepts may apply in situations where a party to a U.S. proceeding seeks to enforce an order entered by a foreign court presiding over an insolvency proceeding. Parties involved in U.S. litigation should be reminded, however, that the court strictly applied the language of Chapter 15 by stating that an application for recognition under section 1515 of the Bankruptcy Code must be brought by a “foreign representative,” and that the section does not apply “generally to parties.” 2017 WL 191936, at *5. TAL, therefore, acted inappropriately by attempting to invoke Chapter 15 in a “non-bankruptcy action . . . unconnected to any foreign or United States bankruptcy proceeding.” Id.