District court holds that a bankruptcy court has jurisdiction to protect the interests of a non-U.S. creditor in a foreign bankruptcy proceeding, but that comity prevents it from inquiring whether a specific creditor's interests were sufficiently protected in a specific foreign proceeding, so long as creditors' interests are adequately protected generally under the law of that jurisdiction.  

SNP Boat Service S.A., v. Hotel Le St. James, No. 11-cv-62671-KMM (S.D. Fla. Apr. 18, 2012)

Debtor-Appellant SNP Boat Service S.A. ("SNP"), a French corporation, and Appellee Hotel Le St. James ("St. James"), a Canadian corporation, entered into a contract pursuant to which SNP received a trade-in of a ship owned by St. James, in exchange for €2.5 million.  SNP claimed the condition of the vessel upon receipt violated the terms of the contract and refused to pay St. James, and the two parties both sued each other in the their respective jurisdictions. 

During the pendency of the two proceedings, SNP filed for bankruptcy in France -- a so-called sauvegarde proceeding.  The French courts have interpreted the sauvegarde proceeding to impose an automatic stay on all proceedings initiated by creditors anywhere in the world.  St. James submitted an unsecured claim in the sauvegarde proceeding.  However, the Canadian proceeding progressed during the pendency of the sauvegarde action.  SNP’s motion to dismiss for lack of both personal jurisdiction and subject matter jurisdiction were denied by the Canadian court.  SNP subsequently withdrew, and a default judgment in excess of C$4 million was entered against SNP by the Canadian court. 

St. James subsequently domesticated the Canadian court judgment in Broward County, Florida upon learning that SNP had assets in that state.  As a result, the Broward County Sheriff's office seized two of SNP's vessels pursuant to a writ of execution issued by the state court.  Before the vessels could be sold to satisfy St. James' judgment, however, the French Commercial Court designated an administrator for SNP, who filed a Chapter 15 Petition in U.S. Bankruptcy Court seeking recognition of the sauvegarde proceeding as a "foreign proceeding" pursuant to 11 U.S.C. § 1515.  The bankruptcy court recognized the sauvegarde proceeding as a foreign main proceeding on April 28, 2010.  The bankruptcy court also ordered a stay with respect to the sale of any SNP property located in the United States, and prohibited the removal of the vessels from the Southern District of Florida. 

SNP moved the U.S. bankruptcy court to enter an order finding that one of the vessels was subject to the jurisdiction of the French court in the sauvegarde proceeding, a so-called Entrustment Motion.  St. James opposed.  Shortly thereafter, to complicate matters, the French court entered a declaratory judgment finding SNP not liable to St. James for the €2.5 million. 

In the context of the U.S. bankruptcy proceeding, St. James sought discovery from SNP, including all documents filed in the sauvegarde proceeding, as well as the depositions of several SNP representatives, in part because it intended to argue to the U.S. bankruptcy court that it had not been afforded due process in the sauvegarde proceeding.  SNP objected to discovery based on the French blocking statute which, according to SNP, made discovery in France not pursuant to the Hague Convention a criminal act.  SNP further objected to discovery on the grounds that St. James was attempting to re-litigate the sauvegarde proceedings in the U.S. bankruptcy court, which was improper as St. James had already filed an appeal with the French Appellate Courts.  Further, St. James had an opportunity to obtain discovery in the sauvegarde proceedings, and SNP argued that St. James was barred by res judicata, collateral estoppel and principles of comity. 

SNP moved for a protective order in the U.S. bankruptcy proceeding to quash St. James’ discovery requests, while St. James moved for sanctions against SNP for failing to comply with discovery.  The bankruptcy court, citing to U.S. Supreme Court precedent, held that the French blocking statute did not deprive the bankruptcy court of its power to compel discovery.  The bankruptcy court thus denied SNP’s motion for a protective order, denied SNP’s Entrustment Motion, and granted in-part and denied in-part St. James’ motion for sanctions. 

SNP appealed to the district court, asking the district court to hold that the bankruptcy court erred by insisting on discovery to determine whether St. James was afforded due process in the sauvegarde proceeding, that it erred in concluding that the French blocking statute did not pose an obstacle to compelling depositions of SNP representatives and that it erred by dismissing the proceeding as a sanction. 

The Bankruptcy Code is explicit in allowing bankruptcy courts to allow a foreign representative to distribute property in a foreign bankruptcy proceeding so long as it is satisfied that the interests of U.S. creditors are sufficiently protected.  Here, the creditor -- St. James -- was a Canadian company, and so the district court had to consider whether the statute allowed the bankruptcy court to consider whether the interests of a foreign creditor were sufficiently protected by the foreign proceeding.  In so doing, the district court reviewed the Model Law on Cross-Border Insolvency, upon which Chapter 15 of the bankruptcy code is based.  While the Model Law focuses on protecting local interests and local creditors, it does not actually preclude the court from satisfying itself that foreign creditors’ interests are also sufficiently protected.  The court noted that this was consistent with the broad authority granted to the bankruptcy court to grant “any appropriate relief.”  The district court thus held it was within the district court’s discretion to ensure St. James was sufficiently protected before granting SNP’s Entrustment Motion. 

The district court held, however, that even if the bankruptcy court had the statutory authority to protect the interests of foreign creditors, comity prohibited it inquiring whether a specific foreign proceeding provided the foreign creditor with due process.  To that end, the district court considered Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709 (2d Cir. 1987), where the Second Circuit considered to what degree principles of comity require a U.S. court to defer to a foreign bankruptcy proceeding.   In that case, the Second Circuit recognized the need to extend comity to foreign bankruptcy proceedings.  The Second Circuit looked at whether the “foreign laws” at issue comported with due process, not whether the specific individual proceeding afforded due process.  The district court here thus stated that “inquir[ing] into a specific foreign proceeding is not only inefficient and a waste of judicial resources, but more importantly, undermines the equitable and orderly distribution of a debtor's property.”  The court held, therefore, that the bankruptcy court was without jurisdiction to inquire whether St. James’ interests were sufficiently protected by this specific sauvegarde proceeding. 

The court found, however, that the bankruptcy court did not abuse its discretion in disregarding the French blocking statute, since discovery was proper for the purposes of determining whether comity should be extended to the bankruptcy laws of France or to the laws of Canada, and the court was basically being asked to choose between the two.  Moreover, the court held that it was well-settled that the French blocking statute does not deprive the U.S. court of power to compel discovery.

Finally, the court considered SNP's argument that dismissal of the case as a sanction was inappropriate.  The court acknowledged that SNP's conduct was not ideal, but also recognized that there was only one discovery order entered in the case, and that SNP did begin to comply with discovery after the entry of that order.  Therefore, the court determined that dismissal of the case was inappropriate and the bankruptcy court had abused its discretion.