The Ninth Circuit Bankruptcy Appellate Panel has held that a bankruptcy trustee appointed in a non-U.S. bankruptcy case did not need authority from a U.S. court to take possession and control of a foreign debtor’s assets located in the United States, and transfer them.

In In re Iida, 377 B.R. 243, 2007 WL 3086034 (9th Cir. BAP, Sept. 26, 2007), Katsumi Iida and his wife, citizens and residents of Japan, were declared bankrupt under Japanese law in a Japanese court. Junichi Kitahara was appointed the trustee of the Iidas’ bankruptcy estate. Many of the Iida’s substantial assets were located outside of Japan. These included ownership of controlling equity interests in various Hawaiian corporations that controlled several major Hawaiian resort hotels. Kitahara took control over the assets through a foreign representative, who implemented

the necessary steps to elect new officers and directors for each of the HawaiInian corporations as replacements for the Iidas and their affiliates. The trustee’s actions conformed to Hawaiian law and the articles and by-laws of the various corporations. Kitahara did not initiate legal action in the United States, either in state or federal court.

Mandarin Oriental Sale

Under the authority of the new officers and directors, Kitahara effected the sale of one of the properties, the Mandarin Oriental Resort. The sale was approved in the Japanese bankruptcy court.

Several months after the sale, and long after the election of the new officers and directors, the Iidas filed a complaint in Hawaii state court seeking a declaratory judgment establishing that they, not the persons put in place by Kitahara, were still in fact the only lawful officers and directors of the Hawaiian corporations.

In response, Kitahara filed a petition under chapter 15 of the U.S. Bankruptcy Code in federal bankruptcy court in Hawaii. The petition was opposed by the Iidas, who claimed that the petition should have been filed before Kitahara took any action, and that any action he had taken should have been subject to review and approval by the bankruptcy court.

The bankruptcy court overruled the objection and granted the chapter 15 petition. Kitahara immediately removed the Hawaii state court declaratory relief action to bankruptcy court, and moved to dismiss it on the grounds that it did not state a claim upon which relief could be granted.

The bankruptcy court treated that motion as one for summary judgment and granted it. The court held that contrary to the Iidas’ contentions, Kitahara had the authority to remove and replace the directors and officers without obtaining the prior consent of a U.S. court. The Japanese bankruptcy court’s orders authorized Kitahara as trustee to act as he did, and nothing under U.S. or Hawaiian law required Kitahara to obtain authority from a court in Hawaii to act, the court concluded.

Ninth Circuit Review

On review, the Ninth Circuit BAP held that the determinations of the Japanese bankruptcy court deserved “full faith and credit,” and conferred on Kitahara the authority to take action. The new chapter 15 of the Bankruptcy Code provides federal courts with the flexibility to recognize the authority and needs of fiduciaries appointed in foreign insolvency proceedings. Chapter 15 provides, when necessary, a uniform federal mechanism for obtaining judicial assistance in the administration of assets in the United States, and the prevention of a scramble for such assets by local creditors.

The BAP noted that while Kitahara could avail himself of the provisions of chapter 15 to obtain assistance in carrying out his duties, it was not necessary for him to file a petition under chapter 15, provided he could carry out his duties without judicial assistance from the bankruptcy court. Kitahara’s authority arose from his appointment by the Japanese bankruptcy court. Thus, he was fully authorized to take action to replace the officers and directors of the Iidas’ companies to take control of the assets of the Japanese bankruptcy estate.

The Iidas also argued that Hawaiian state law precluded Kitahara from acting in Hawaii without seeking the authority of a Hawaiian court.

The BAP rejected this claim, too. Thus the BAP concluded there was no material issue that precluded entry of summary judgment against the Iidas on their declaratory relief complaint, and rejected their claim that litigation over the propriety of their removal as officers and directors must be conducted in a U.S. court.

Judicial Assistance Optional

While action taken by a foreign bankruptcy fiduciary may result in disputes that require judicial assistance in the United States to resolve, in many cases that judicial intervention will not be necessary. Taking control of bank accounts, stocks, bonds and brokerage accounts can be accomplished merely by presenting the credentials of the foreign fiduciary to the holder of the property, together with an appropriate demand. Control over registered property, such as title to real estate, and large items of personal property can be obtained by filing appropriate notices with the authorities.

Because in many cases no U.S. court action is needed, the Iida decision exemplifies the internationalization of insolvency proceedings by recognizing the authority of the foreign-appointed insolvency fiduciary to administer the assets of foreign debtors when those holdings may be international in scope.

Below follows commentary in In re Iida and related insolvency issues from firm lawyers in Hong Kong, London, Munich, Paris and the United Arab Emirates.

Comment: Hong Kong

The re-emphasis of the recognition of the rights and remedies of properly appointed foreign creditors’ representatives to take action in respect of U.S.-situated assets of foreign bankrupts without the risk of getting tied up in litigation in the United States is welcome.

It means that the process of realising from Asia certain assets in the States can be as effective in some cases as if those assets were in the bankrupt’s jurisdiction, and makes the risks and the timeframe for Asian banks and other creditors of an enforcement in the United States more palatable than in certain other jurisdictions. It highlights the international nature of insolvency practice.

- Andrew Brown

Comment: London

In re Iida is a welcome decision, affirming the right of a representative duly appointed in foreign main proceedings to control the debtor’s assets in the United States, without formal recognition under chapter 15. The case will assist foreign representatives to efficiently fulfill their duties to administer assets in the United States.

The case also is likely to have wider positive implications as an international precedent assisting the courts in other jurisdictions that have adopted the UNCITRAL Model Law to dispose of unnecessary procedural and substantive objections to the local use of a foreign representative’s powers.

Countries that have adopted the Model Law include:

  •  Colombia, Great Britain and New Zealand (2006) 
  • British Virgin Islands, overseas territory of the United Kingdom of Great Britain and Northern Ireland, and the United States (2005)
  • Serbia (2004) 
  • Poland and Romania (2003) 
  • Montenegro (2002) 
  • Eritrea, Japan, Mexico and South Africa (2000) Canada and Brazil are reported to have plans to adopt the Model Law as well.

- Mark J. Parkhouse

Comment: Munich

The principles of the recent decision by the BAP in In re Iida apply more or less respectively if the case had taken place in Germany—for example, if the companies controlling the hotel resorts had been German corporations and the hotels had been located in Germany as separate legal entities. In this scenario, the administrator also would have been able to replace the directors of these companies and cause the new directors to sell the real estate.

Apparently, only the shares in the companies owned by the Iidas were subject to the insolvency proceeding. The insolvency proceeding in Japan therefore has no immediate influence on the assets owned by these companies in Germany as long as these companies themselves do not become insolvent. As a consequence, the management of these companies is not restricted in disposing over these assets.

It is hard to imagine a scenario in which, under German law, Mr. and Mrs. Iida would have been entitled to challenge any of the actions the insolvency administrator initiated and implemented. Rather, German law gives the administrator tools to challenge activities initiated by the debtor that could affect the funds distributable to the creditors.

It also should be mentioned that there are rules for primary and secondary insolvency proceedings under German and European law.

A primary insolvency proceeding usually is opened in the state where the debtor physically is located, i.e., Japan in In re Iida. A secondary insolvency proceeding now can be initiated in principle in any country where assets of the debtor are located. The rules of European insolvency law apply in principle if insolvency proceedings are opened in one member state of the European Union, and the assets of the debtor are located in one or more other European member states. In such cases, the European Rules apply throughout the respective member states (apart from Denmark) overruling in principle the national laws of the respective jurisdictions. The German rules could apply if the primary insolvency proceeding is opened outside of the European Union and the debtor owns assets located in Germany. In this example, there would have been the option to initiate a secondary insolvency proceeding in Germany if the hotels had not been owned by separate legal entities in Germany, but as branches of a Japanese corporation. German creditors doing business with the branch would have been entitled, according to German insolvency law, to initiate a secondary insolvency proceeding in Germany in order to secure their claims.

On the other hand, the Japanese administrator also would have been entitled to request the opening of a secondary insolvency proceeding. This proceeding is run according to German law, so that this option offers some choice as to the insolvency law most suited for individual purposes and interests.

- Dr. Stefan Kugler, Dr. Etienne Richthammer & Robert Alan Heym

Comment: Paris

French law provides a somewhat contrary conclusion to the ruling rendered in In re Iida. Unless provided otherwise in International Conventions, a foreign trustee appointed through a bankruptcy judgment issued by a foreign jurisdiction, which is not a European Member State, has limited powers in France if the foreign judgment is not recognised through a French court procedure called the “exequatur.”

A bankruptcy judgment issued in a jurisdiction that is not a European Member State will essentially serve as evidence of the appointment of the trustee and enable him to act in French courts as a plaintiff or as a defendant. To take possession and control of and transfer the assets of the foreign debtor located in France, the trustee will need to proceed with the exequatur procedure and obtain a decision recognising the foreign judgment in France.

When obtained, the French decision will have a retroactive effect to the day that the foreign judgment was issued, and thereby protect the foreign debtor’s French assets from creditors.

Amongst most of the European Member States, including France, the powers of a trustee are dealt with differently. European Regulation on Insolvency Proceedings (EC 1346/2000), which entered into force 31 May 2002, states:

“any judgment opening insolvency proceedings handed down by a court of a Member State shall be recognised in all other Member States from the date it becomes effective in the State of the opening of the proceedings”….

“The [judgment] opening the proceedings shall, with no further formalities, produce the same effects in any other Member State as under the law of the State of the opening of the proceedings”...

“The liquidator appointed by a court… may [exercise] all the powers conferred on him by the law of the State of the opening of the proceedings in another Member State …. He may in particular remove the debtor’s assets from the territory of the Member State in which they are situated”.

- Anker Sorensen

Comment: United Arab Emirates

Insolvency law in the United Arab Emirates (UAE) is distinguished by separate jurisdictions that exist by virtue of the federal “onshore” legal system, and the more recent but fast-developing jurisdiction of the Dubai International Financial Centre (DIFC).

The DIFC, established in 2004, is a ring-fenced financial services jurisdiction subject to its own laws and regulations, and with its own court judicial structure. The DIFC Insolvency Law (Law No. 7 of 2004), as with much other legislation in the DIFC, is modeled on Western (predominantly UK) legal principles and provisions and, given its relative infancy, largely is untested in the DIFC Courts.

Reed Smith Richards Butler LLP (RSRB) is one of two firms engaged (and subsequently was the only firm retained) to apply to and appear before the DIFC courts to seek the first ever DIFC liquidation. This involved seeking compulsory liquidation of three DIFC registered companies, as part of a wider international group insolvency, and RSRB has since been retained by the court-appointed liquidators to act on behalf of all three companies in their liquidation.

Onshore, UAE insolvency law is relatively undeveloped because the UAE’s rapid expansion and the underlying wealth has resulted in an absence of recession in recent times. Indeed, there appears to be no definition of “insolvency” under UAE law. Rather, two separate UAE laws distinguish the “dissolution of companies” and the bankruptcy of “traders” (which would include both individuals and companies). The former is provided for in the UAE Companies Law, and is defined more in terms of a loss of a company’s capital assets, rather than in terms of an inability to pay debts. An inability to pay debts forms the basis of the bankruptcy provisions in the UAE Commercial Code.

Depending upon which of these two laws is used, either a liquidator or a bankruptcy trustee would be appointed. It is clear that each law regards the realisation of assets as one of the crucial roles to be performed by the liquidator or bankruptcy trustee. Whilst very few insolvencies historically have taken place in the UAE (informal restructuring is more the norm) and the DIFC, following In re Iida, it is hopeful that U.S. courts would recognise the authority of the office holders should efforts be made to realise assets in the United States.

- Julian L. Turner and Tim Watkins