Must a foreign debtor's insolvency representative obtain permission from a United States bankruptcy court before exercising the debtor's rights as shareholder to remove and replace directors and officers of a US corporation? The Bankruptcy Appellate Panel (BAP) of the Ninth Circuit recently held not, provided that the representative does not require judicial assistance to exercise these rights.1

Katsumi Iida, a Japanese citizen, was declared bankrupt under applicable Japanese law on August 6, 2004. A trustee was appointed in the Japanese bankruptcy proceeding to liquidate the debtor's assets, including the debtor's stock in two Hawaii corporations. These corporations directly or indirectly held several valuable property interests, including substantial ownership interests in two limited partnerships that owned and operated the Kahala Mandarin Oriental Resort and the Kona Village Resort, two luxury hotels in Hawaii. Prior to the bankruptcy, Iida and his wife were officers and directors of the Hawaii corporations.

After his appointment as trustee, and without objection from the Iidas, the trustee exercised his authority as sole shareholder of the Hawaii corporations to remove the Iidas as directors and officers of the Hawaii corporations and to remove all other directors and officers except one Henry Fong, who was appointed sole director and officer of each. The trustee's actions were consistent with the Hawaii corporations' articles of incorporation and by-laws and applicable Hawaii law. In September 2005, the trustee obtained an order from the Japanese court authorizing the trustee to sell the Kahala Mandarin Oriental Resort and to exercise all rights as the sole shareholder of the Hawaii corporations.

The Iidas filed a complaint in April 2006 in Hawaii state court against the trustee seeking a declaratory judgment recognizing the debtor as the sole shareholder of the Hawaii corporations, reinstating the Iidas as directors and officers and requiring shareholder meetings. The Iidas also sought an injunction enjoining the trustee from distributing the proceeds of the sales of assets of the Hawaii corporations.

In June 2006, the trustee filed a petition under chapter 15 of the Bankruptcy Code for recognition of the Japanese bankruptcy as a foreign main proceeding and for ancillary relief. The debtor opposed the petition, acknowledging that the Japanese bankruptcy proceeding was a foreign main proceeding but arguing that recognition should be denied because it would be manifestly contrary to US public policy. Specifically, the debtor contended that the trustee was required to obtain permission from the US bankruptcy court under chapter 15 or under its predecessor section 304 before removing the Iidas as directors and officers of the Hawaii corporations.

The US bankruptcy court nonetheless entered an order recognizing the Japanese proceeding as a foreign main proceeding and authorized the trustee to seek ancillary relief under chapter 15. Thereafter, the trustee removed the Iidas' declaratory relief action to the US bankruptcy court. On the trustee's motion to dismiss the action, the court granted summary judgment in favor of the trustee, finding that the trustee had been duly authorized by the Japanese court to act as shareholder of the Hawaii corporations, that comity impelled the Bankruptcy Court to respect the Japanese court's orders, and that the trustee had complied with Hawaii law and the Hawaii corporations' bylaws in exercising shareholder rights. The bankruptcy court held that nothing in either the Bankruptcy Code or Hawaii state law required the trustee first to obtain a federal or state court order recognizing his authority to act in his capacity as trustee in the Japanese proceeding.

The Iidas appealed to the Ninth Circuit BAP, which concurred with the Bankruptcy Court that neither the Bankruptcy Code nor Hawaii state law requires the trustee to obtain a further order from a US court recognizing his authority as such before exercising ownership rights. In particular, the BAP found that while chapter 15 permits a foreign representative to seek recognition of the foreign insolvency proceeding to obtain comity or cooperation from the bankruptcy court or other courts in the US, the absence of recognition does not prevent the foreign representative from taking action when no judicial assistance is required.

The BAP noted that the trustee did not require any judicial assistance until the Iidas commenced the declaratory judgment action. At that time, the trustee complied with the requirements of chapter 15 by seeking and obtaining recognition of the Japanese proceeding as a foreign main proceeding. Finding no merit in the Iidas' assertion that the trustee had taken action manifestly contrary to US public policy, the BAP affirmed the bankruptcy court's judgment.

US courts are exploring the reach of the relatively new provisions of chapter 15. Insolvency representatives of foreign debtors should take comfort from the BAP's opinion that chapter 15 ordinarily will be interpreted as facilitating, rather than hindering, the exercise of their duties.