Two United States Bankruptcy Judges for the Southern District of New York recently issued a joint opinion addressing common issues raised by motions to dismiss in two separate adversary proceedings – one pending before Judge Bernstein and the other before Judge Glenn (the “Adversary Proceedings”). The Adversary Proceedings were filed by the debtors in two chapter 11 cases, each involving an Anguillan offshore bank – National Bank of Anguilla (Private Banking Trust) Ltd. and Caribbean Commercial Investment Bank Ltd. (the “Debtor Banks”). In their motions to dismiss, the defendants argued that the Debtor Banks, by filing their claims in the U.S., were merely forum shopping in order to prosecute constructive fraudulent transfer claims under the U.S. Bankruptcy Code, a claim not recognized under Anguillan law. Both bankruptcy judges agreed that the cases should be stayed based on forum non conveniens and international comity, pending adjudication of issues that have been, or can be, raised in Anguilla.

The Parties

The Debtor Banks were incorporated and licensed in Anguilla and operated as commercial offshore banks (banks that operated within Anguilla, but served only non-Anguillan customers). The Debtor Banks were both wholly owned by onshore parent companies that managed their administrative and banking operations (the “Parent Banks”). The Parent Banks were regulated by the Eastern Caribbean Central Bank (“ECCB”), the monetary authority and regulator of the domestic banking systems of certain Caribbean territories. The Debtor Banks filed their complaints in the Adversary Proceedings (the “Complaints”) against the Parent Banks, the ECCB, and the National Commercial Bank of Anguilla Ltd. (“NCBA”).

The Anguillan Conservatorships and Receiverships

The 2008 global financial crisis severely stressed the Eastern Caribbean banking sector. The impact of the crisis was particularly pronounced in Anguilla, where economic activity contracted and the country continued to experience negative growth through 2012. Anguillan commercial banks uniformly realized significant declines in earnings and deterioration of capital levels. Around 2011, the ECCB began monitoring the affairs of the Parent Banks, and placed each Parent Bank into conservatorship in 2013. The principal aim of the conservatorships was to stabilize and restructure the Debtor Banks. To accomplish this aim, the ECCB removed the Parent Banks’ directors and appointed conservator directors (the “Conservator Directors”) to prepare a rescue plan and restrict the Debtor Banks’ access to the Parent Banks’ deposits.

The Complaints alleged that during the conservatorships, the Conservator Directors assumed control of the Debtor Banks and, as de facto directors, breached their fiduciary duties to the Debtor Banks by procuring or permitting the payment of each Debtor Bank’s customer deposits (the “Funds”) to the Parent Banks’ New York bank accounts. In addition, the Complaints claimed that the Parent Banks, prior to and while under the management of the Conservator Directors, upsteamed millions of dollars to the ECCB, which rendered the Debtor Banks insolvent and unable to pay their depositors.

The conservatorships continued until April 2016 when the ECCB developed a plan to resolve the Parent Banks’ financial problems and appointed a receiver of both Parent Banks. The Parent Banks subsequently ceased banking operations in Anguilla, and transferred their banking operations, including the Funds, to the NCBA (a newly-formed bank created in 2016 and wholly owned by the government of Anguilla). The NCBA then transferred the Funds from the Parent Banks’ New York bank accounts to another account under NCBA’s control, without making any provision to repay the Debtor Banks.

The Pending Anguillan Proceedings

On May 6, 2016, the Debtor Banks brought suit in the Supreme Court in the High Court of Anguilla (the “High Court”) against the Parent Banks and NCBA, and made the same essential arguments made later in the Complaints. Because the Parent Banks were in receivership at the commencement of these proceedings, a stay was in effect as to all legal proceedings against them. The Debtor Banks applied to lift the stay, but the High Court rejected the application due to the Debtor Banks’ failure to join the Conservator Directors as parties (the “Stay Order”). The High Court also explained that the dismissal was justified by the Conservator Directors’ possible immunity. The Debtor Banks appealed the Stay Order.

Additionally, on March 10, 2017, the Debtor Banks filed an application for leave to apply for judicial review against the Chief Minister of Anguilla, the Attorney General of Anguilla in his official capacity as a legal representative of the Government of Anguilla, the receiver of the Parent Banks and the ECCB (the “Judicial Review Application”). The Judicial Review Application claimed that the respondents unfairly discriminated against the Debtor Banks by guaranteeing repayment of deposits of all onshore depositors, but not of offshore depositors. The High Court stayed the Judicial Review Application until the earlier of either a final determination in the Adversary Proceedings or a final settlement agreement between the parties to the Adversary Proceedings.

Along with to the proceedings commenced by the Debtor Banks, depositors of the Debtor Banks brought an action in the High Court against the Conservator Directors. The depositors alleged the same set of facts as in the Complaints, but asserted that the claims belonged to the Debtor Banks’ depositors rather than the Debtor Banks. On February 22, 2017, the High Court issued its judgement finding that the defendants had acted ultra vires. The defendants appealed the High Court’s judgement.

The Insolvency Proceedings

On February 22, 2016, the High Court entered an order placing the operations of the Debtor Banks in administration. The High Court appointed a foreign representative as administrator of the Debtor Banks (the “Foreign Representative”), and specifically authorized him to commence or continue, without further order of the High Court, any foreign proceeding necessary to fulfill his duties and obligations. Pursuant to this authority, the Foreign Representative filed chapter 15 petitions in the Bankruptcy Court for the Southern District of New York on behalf of the Debtor Banks. The Bankruptcy Court granted the petitions, thereby recognizing the Anguillan administrations as foreign main proceedings and the Foreign Representative as the Debtor Banks’ foreign representative. The same Foreign Representative in the chapter 15 cases subsequently filed the chapter 11 cases. The chapter 11 cases were filed for the ostensible purpose of filing federal avoidance actions against the defendants, as section 1521(a)(7) of the U.S. Bankruptcy Code does not permit avoidance claims under specific sections of the Bankruptcy Code to be brought in a chapter 15 case, and, as freely admitted by the Debtor Banks, Anguillan law does not recognize constructive fraudulent transfer claims.

The Motions to Dismiss

While the defendants sought to dismiss the Adversary Proceedings on several grounds, each of the defendants asserted that the Adversary Proceedings be dismissed on grounds of forum non conveniens and international comity. In response, the Debtor Banks argued that dismissal was not warranted because many of the transfers at issue occurred in New York, and because the High Court specifically authorized the Debtor Banks to commence actions in foreign jurisdictions and issued a stay of the Judicial Review Application pending the outcome of the Adversary Proceedings. In addition, the Debtor Banks urged denial of the motions to dismiss precisely because Anguillan law does not recognize a claim based on a constructive fraudulent transfer.

The Court’s Decision

In analyzing the motions to dismiss, the Bankruptcy Court applied the three-step process used in the Second Circuit to determine whether to dismiss an action under forum non conveniens. Iragorri v. United Techs. Corp., 274 F.3d 65, 73–74 (2d. Cir. 2001). The first step is to determine the degree of deference properly accorded to the Debtor Banks’ choice of forum. The Bankruptcy Court found that the Debtor Banks’ choice of forum was not entitled to deference, largely because the choice of a New York venue was an exercise in forum shopping. The Debtor Banks commenced the Adversary Proceedings only after the High Court issued the Stay Order, stymying their efforts to recover on substantially similar claims. The High Court refused to lift the stay to allow the Debtor Banks to proceed against the Parent Banks based on their failure to join the Conservator Directors, and the plaintiffs then commenced the Adversary Proceedings in the U.S. rather than join the Conservator Directors in the Anguillan proceedings.

The second step is to determine whether an adequate alternative forum exists. The parties did not contest, and the Bankruptcy Court previously found, that the Anguillan courts are competent to adjudicate disputes. Additionally, although Anguillan law does not recognize a claim to avoid and recover a constructive fraudulent transfer, this does not render the Anguillan forum inadequate. In fact, other causes of action asserted by the Debtor Banks in the Anguillan proceedings provide the same remedy that the Debtor Banks sought in the U.S. – the recovery of the upstreamed Funds and transferred property. Therefore, the Bankruptcy Court held that Anguilla was an adequate alternate forum for the litigation.

The final step is to evaluate factors involving the private interests of the parties in maintaining the litigation in the U.S. as well as the public interests at stake. As to private interests, the Bankruptcy Court noted that all of the Conservator Directors and the ECCB’s actions took place in Anguilla or the Eastern Caribbean, and their availability, the ability to compel their attendance, and the relative ease and access to proof weighed heavily in favor of the Anguillan forum. The public interest factors also favored dismissal as parallel litigations were pending in Anguilla and the Adversary Proceedings related to the bailout of two Anguillan banks, which were authorized, directed and controlled by the ECCB, an arm of the Anguillan State. As the legality of the actions taken by the Conservator Directors must be determined in accordance with the ECCB Act and applicable Anguillan law, the Bankruptcy Court concluded that Anguilla had an overwhelming interest in determining the legality of the Conservator Directors’ actions and the extent of the defendants’ liability.

The Court further held that the Adversary Proceedings should be stayed on the basis of international comity. Comity consists of two doctrines: comity among nations and comity among courts. Comity among nations is a cannon of construction that limits the reach of a statute such that it does not govern conduct that is subject to the jurisdiction of foreign countries. This doctrine limits the reach of the U.S. Bankruptcy Code avoidance provisions to transfers that are subject to U.S. law. Comity among courts involves a discretionary authority of a national court to decline to exercise jurisdiction over a case when the case is also pending in a foreign court with proper jurisdiction.

The Court held that comity among courts required that the U.S. Adversary Proceedings be stayed because the Anguillan court had proper jurisdiction and the Anguillan proceedings did not prejudice the rights of U.S. citizens or violate U.S. domestic public policy.

Rather than dismiss the Adversary Proceedings, however, the Court stayed them pending the outcome of the litigation in Anguilla, since a stay is an alternative that should normally be considered before dismissal on comity grounds and allows the Court a narrow window for intervention, if required.

Lessons Learned

Every case should be approached with a plan designed to enhance its ultimate success; this is essential, however, for complex, multi-jurisdictional insolvency cases. Choice of the initial venue may be a critical component of the overall likelihood of success. A bad initial choice, may not be easily avoided.

Read the opinion »