Restructuring

Contributed by Elizabeth Hendee
As we have discussed previously, the international waters are currently afloat with reorganization plans for shipping companies.  In a recent decision out of the Southern District of Florida regarding a shipping reorganization with a uniquely international flavor, SNP Boat Serv. S.A. v. Hotel Le St. James, the district court found that the bankruptcy court abused its discretion in not properly granting comity to a foreign reorganization proceeding.
Background
SNP Boat Service S.A. is a French corporation that designs luxury boats and provides brokerage, charter, and boat management services.  In May of 2008, SNP contracted with Hotel Le St. James to accept a trade-in of a vessel owned by St. James and to credit St. James upon delivery.  Although the vessel was delivered, SNP contended that it was not delivered in good condition and refused to credit St. James for the trade-in.  A trans-Atlantic duel ensued – with SNP initiating an action against St. James in France, and St. James initiating a separate action against SNP in Canada.
While the Canadian and French actions were pending, in April, 2009, a French sauvegarde reorganization proceeding was approved for SNP.  Approval of a sauvegarde proceeding is comparable to a case under chapter 11 of the Bankruptcy Code and imposes an automatic stay similar to the stay imposed by section 362 of the Bankruptcy Code.  The French Supreme Court has held that this stay has an international effect.  St. James submitted an unsecured claim in the French proceeding for the price of the vessel it had delivered to SNP.
In October, 2009, months after the proceeding was approved and the corresponding stay took effect, the Superior Court of Quebec entered a judgment on the contract dispute in favor of St. James and against SNP.  To satisfy the judgment, St. James sought a writ of execution in a Florida state court against two of SNP’s vessels (neither of which was the vessel that was the subject of the parties’ dispute) docked in Florida.
Shortly thereafter, the sheriff’s office in Florida seized the vessels pursuant to the writ of execution.  After the vessels were seized, but before they could be sold to satisfy St. James’s Canadian judgment, SNP’s French administrator filed a chapter 15 petition in the United States Bankruptcy Court for the Southern District of Florida seeking formal recognition of the French sauvegarde proceeding as a foreign main proceeding.  The bankruptcy court ordered a stay with respect to the sale of any SNP property located in the United States, and released one of the two seized vessels (the M/Y Sixty Five) into the custody of the French administrator.  The bankruptcy court, however, prohibited the M/Y Sixty Five from leaving the area and ordered that any sale or transfer of that vessel was subject to prior court approval.  SNP then sought an order from the bankruptcy court finding that the M/Y Sixty Five would be subject to the French proceeding and entrusting the vessel to the French administrator.  Complicating matters, before the bankruptcy court was able to rule on the motion, however, the French Commercial Court determined that SNP was not liable for the price of the vessel at issue in its dispute with St. James.
The bankruptcy court was left to decide to whom the M/Y Sixty Five vessel belonged. Over the next few months, fights ensued over multiple issues, including whether or not St. James’s interests, as a creditor, had been “sufficiently protected” in the sauvegard proceeding and whether the bankruptcy court had the authority to determine whether St. James was afforded due process in the French proceedings.  SNP argued that the bankruptcy court lacked the authority to inquire as to whether St. James had received due process in the sauvegarde proceeding, but the bankruptcy court disagreed. Ultimately, the bankruptcy court entered an order dismissing SNP’s entrustment motion with prejudice, directing the U.S. Marshalls to take possession of the M/Y Sixty Five from the French administrator and transfer the vessel to the sheriff’s office.  SNP appealed.
District Court Decision
The United States District Court for the Southern District of Florida held, among other things, that the bankruptcy court lacked the ability to determine whether individuals received due process under the foreign proceeding.  The district court noted that chapter 15 of the Bankruptcy Code directs courts to be guided by principles of comity.  Relying on the Second Circuit’s decision in Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., the district court found that, when determining whether or not to grant comity to a foreign ruling, United States courts can look at foreign laws generally to see if the laws themselves comport with due process but cannot look at whether specific individual proceedings afforded due process.
According to the district court, “[t]o inquire into a specific foreign proceeding is not only inefficient and a waste of judicial resources, but more importantly, necessarily undermines the equitable and orderly distribution of a debtor’s property by transforming a domestic court into a foreign appellate court where creditors are always afforded the proverbial ‘second bite at the apple.’”  The district court then vacated bankruptcy court’s order, finding that the bankruptcy court abused its discretion when it looked into the issue of whether St. James’s interests were sufficiently protected in the French proceeding and when it dismissed the entrustment motion.
The district court’s opinion shows that, although chapter 15 is a welcome harbor for distressed international shipping companies, it cannot be used to overrule the findings made by courts in foreign reorganization proceedings.