Proskauer Rose International Practice Guide Proskauer Rose LLP |
      Proskauer on International Litigation and Arbitration:
       Managing, Resolving, and Avoiding Cross-Border Business or Regulatory Disputes
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  1. Because many foreign insolvency regimes do not contain the same level of creditor protections and “checks and balances” as a U.S. Chapter 11 proceeding, creditors may attempt to use the Involuntary Chapter 11 process as a creditor rights remedy and to compel the restructuring of a foreign debtor in accordance with U.S. law.
    1. In order to file an involuntary petition under the bankruptcy code, a creditor must first determine if the debtor is eligible for relief under the U.S. Bankruptcy Code.
      1. Any person may be a debtor (defined as an individual, corporation, or partnership) under the Bankruptcy Code so long as there are sufficient minimum contacts with the U.S. through either:
        1. Residence or Domicile;
        2. Place of Business; or
        3. Property Located within the U.S. – a bank account used by debtor containing more than a de minimus amount of funds may be sufficient.
      2. What constitutes minimum contacts with the U.S.?
        1. Transact business in the U.S.;
        2. Do some business act in the U.S.;
        3. Cause an effect in the U.S. by an act done elsewhere.
      3. Practice Tip: Foreign debtors have argued, irrespective of their technical eligibility for Chapter 11 relief, that their minimal contacts with the U.S. makes the exercise of U.S. jurisdiction inappropriate.
    2. The Involuntary Petition:
      1. Where debtor has 12 or more creditors, involuntary petition may be filed by three or more creditors each of which is a holder of a non-contingent, undisputed claim against the debtor, where the claims of the petitioning creditors aggregate at least $13,475.
      2. Can be filed against a company under Chapter 11 or Chapter 7; the filing of an involuntary Chapter 11 petition does not constitute an order for relief.
      3. The debtor can consent to the entry of an order for relief, and has the right to convert an involuntary case filed under Chapter 7 into a voluntary Chapter 11 reorganization.
      4. If the debtor contests the involuntary petition, an order for relief may be entered only if, after trial, the bankruptcy court finds that the debtor is generally not paying its debs as such debts become due unless such debts are the subject of a bona fide dispute.
      5. If the involuntary petition is dismissed, other than by consent of the debtor, the bankruptcy court may grant the debtor costs, reasonable attorneys’ fees or damages caused by the appointment of a bankruptcy trustee; if the petitioner filed the petition “in bad faith,” the court may award the debtor damages caused by such filing or punitive damages.
      6. During the “involuntary gap” period between the filing of a petition and the entry of an order for relief, the debtor may continue to operate its business and to dispose of its property as if the petition had not been filed, except to the extent the bankruptcy court orders otherwise.
    3. Examples of where an involuntary proceeding was initiated against a foreign debtor include the Multicanal case discussed in Part II above.
  2. Direct Causes of Action Available to Creditors Against Non-Debtor Parties
    1. Piercing the Corporate Veil (Cause of Action Against Corporate Parents or Shareholders) – 3 Elements:
      1. Defendants must have been in control, which is not merely majority or stock control, but complete domination, not only of the finances, but of policy and business practices with respect to the questioned transaction.
      2. Breach of duty. The control was used to commit a fraud or a wrong, to perpetrate the violation of a statutory or other positive legal duty, or to commit a dishonest or unjust act in contravention of the plaintiff’s legal rights.
        1. Practice Tip: It is not necessary to show actual fraud. The undercapitalization of a company or the stripping of a company’s assets can be used as circumstantial evidence of improper purpose or reckless disregard for the rights of others
      3. plaintiff must show is that the control and the breach of duty proximately caused the injury or unjust loss.
    2. Breach of Fiduciary Duties -- Officers and Directors
      1. The primary duties of the officers and directors of a solvent company are the duties of care and loyalty to the company and its shareholders
      2. When insolvent officers and directors also owe fiduciary duties to creditors and have a duty to maximize value for all creditors
      3. Examples of when a claim of breach of fiduciary duty may arise include when officers and directors:
        1. favor the interests of shareholders over creditors,
        2. engage in insider transactions,
        3. prefer one creditor over another creditor with an equally valid claim (i.e. make "preferential payments"), or
        4. continue the business longer than is justified, thereby "wasting" the remaining corporate assets
    3. Breach of Fiduciary Duties – Shareholders
      1. This is a hybrid of a veil piercing and breach of fiduciary duty claims
      2. Aiding, abetting and inducing Breach of Fiduciary duty – Shareholders, Officers and Directors
      3. Tortious Interference - Shareholders
  3. Advantages of Direct Causes of Action Against Non-Debtor Parties
    1. These alternative causes of action will help creditor actions from becoming stayed by the automatic stay available to foreign debtors under Chapter 15 of the Bankruptcy Code.
    2. Even were a foreign debtor to file for Chapter 15 protection in an attempt to stay an action against a non-debtor, such relief would likely fall into the category of “additional assistance” which, as is discussed in Part II.G above, implements the former section 304 factors.

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