Restructuring

Contributed by Yvanna Custodio
In a chapter 15 decision, In re Daebo International Shipping Co., Judge Michael E. Wiles tackles the issue of the worldwide enforceability of a stay order issued by a foreign court pursuant to the foreign jurisdiction’s bankruptcy statute and offers insight into how a bankruptcy court determines the scope of a foreign court’s order.  The question posed to the bankruptcy court was whether maritime attachments made against a shipping vessel docked in Louisiana should be vacated, on the ground that the stay order issued by the Korean court prior to the issuance of such attachments barred attachments on the foreign debtor’s property and other efforts to enforce creditor claims.  Ruling in favor of the foreign representative and concluding that the attachments should be vacated, the bankruptcy court analyzed the foreign statute and the declarations submitted by the foreign debtor showing that the stay order was intended to apply to all creditors of the foreign debtor, to all actions such creditors might take, and, by the terms of the stay order itself, to all “rehabilitation creditors,” regardless of location. 
Background
Daebo International Shipping Co., Ltd., a debtor organized under the laws of the Republic of Korea, is a shipper of dry bulk cargo and the owner of M/V DAEBO TRADER, a shipping vessel docked in Louisiana.  In February 2015, the debtor applied for rehabilitation under the Debtor Rehabilitation and Bankruptcy Act of the Republic of Korea.  That statute “permits a court to issue a stay order that prevents any creditor from enforcing a judgment, attaching assets or taking other actions to collect a claim against the entity being rehabilitated.”  The Korean court issued the stay order and one month later entered the order formally commencing the debtor’s rehabilitation proceeding.  The debtor’s chief executive officer, appointed to take custody of the debtor’s assets and conduct its business, then filed a chapter 15 petition for recognition before the United States Bankruptcy Court for the Southern District of New York, which the court granted.
Over the course of several weeks after the Korean court issued its stay order, certain creditors (referred to as “Rule B Plaintiffs” in the bankruptcy court decision) filed maritime attachment proceedings pursuant to Rule B of the Supplemental Rules for Certain Admiralty and Maritime Claims of the Federal Rules of Civil Procedure in the United States District Court for the Eastern District of Louisiana.  Among other things, the Rule B Plaintiffs alleged that the attachments and their claims were actually being asserted against Shinhan Capital Co., the purported lessor of the vessel in a 2007 sale-leaseback transaction between the debtor and Shinhan.
Relying on the sale-leaseback transaction, the Rule B Plaintiffs asserted that the vessel was not an asset of the debtor’s estate and that Shinhan was the real owner of the vessel.  After what the court observed was “an unexplained delay,” the debtor moved to vacate the attachments.
Bankruptcy Court’s Holding
In determining the scope of the Korean stay order, the bankruptcy court began its analysis by pointing to section 1521 of the Bankruptcy Court (which sets forth the relief that a bankruptcy court may grant upon recognizing a foreign proceeding).  The court observed that it has broad discretion to “grant any appropriate relief that would further the purposes of chapter 15 and protect the debtor’s assets and the interests of creditors.”
The bankruptcy court considered the declarations submitted by the debtor in support of its contention that the stay order is intended to apply to all creditors worldwide, and noted the parties’ pre-hearing stipulation that the Korean court’s stay order “prevented ‘any creditor from taking any enforcement, attachment or other action against the [debtor’s] assets.’”  Moreover, the bankruptcy court stated that, at the start of the evidentiary hearing, the Rule B Plaintiffs had agreed the Korean court had “worldwide jurisdiction” over the debtor’s assets.
Holding in favor of the foreign representative, the bankruptcy court parsed through the Korean bankruptcy statute, the declarations submitted by the debtor, and the terms of the stay order itself, observing that their clear intent was to have the stay order “apply to all creditors of Daebo and to all actions they might take.”
Interestingly, the bankruptcy court had occasion to discuss Rule 44.1 of the Federal Rules of Civil Procedure, which is made applicable to bankruptcy cases via Rule 9017 of the Federal Rules of Bankruptcy Procedure.  The issue arose because the Rule B Plaintiffs sought to include an additional declaration in a post-trial submission.  The debtor objected to its late-inclusion because the evidence had already been closed.  In considering the Rule B Plaintiffs’ post-trial submission, the court explained that Rule 44.1 “provides that a determination of foreign law is a question of law (not a question of fact) and that the materials a Court may consider are not limited to materials that would be admissible as evidence.”  The court clarified that determining the scope of the Korean stay order was a question of law, and the court would not exclude the post-trial submission by the Rule B Plaintiffs.
Although the Daebo decision is straightforward, it does highlight the necessity of understanding the scope of a foreign court’s order in foreign rehabilitation or bankruptcy proceedings and the rationale behind the bankruptcy court’s expansive view of the scope of the foreign court’s stay order.  The decision also touches upon the interplay between the Federal Rules of Civil Procedure and the Bankruptcy Rules, particularly with regard to Rule 44.1, a procedural rule on foreign law with which bankruptcy practitioners may not be intimately familiar.
Yvanna Custodio is an Associate at Weil Gotshal & Manges, LLP in New York.