Restructuring

Contributed by Joshua Nemser
CT Investment Management Co., LLC (“CTIM”) will be heading to Mexico, but it can leave the sunscreen behind.  Counsel for CTIM won’t get much beach time from this trip; they will be spending their days before the Third District Court for the State of Quintana Roo, with the hope that they can reach the $8-9 million USD that has been frozen in a New York account for several years.  Why couldn’t they reach the account with a domestic US court order?  Read on, because this story is a comity.
Background
Cozumel Caribe, S.A. de C.V. (“Cozumel Caribe” or “Debtor”) is a Mexican hospitality company that owns and operates various vacation properties, including the Hotel Park Royal Cozumel.  On July 10, 2010, the Debtor commenced insolvency proceedings under Mexican bankruptcy law, the Ley de Concursos Mercantiles.  Ten days later, the Debtor’s foreign representative commenced a chapter 15 proceeding in the United States Bankruptcy Court for the Southern District of New York.  US Bankruptcy Judge Martin Glenn granted an order (the “Recognition Order”) recognizing the Mexican proceeding as a Foreign Main Proceeding, and further prohibiting any party from expatriating funds in a certain New York Cash Management Account.  Months earlier, the Debtor had already obtained an ex parte order (the “Mexican Order”) from the Quintana Roo court, disallowing any party from taking collection actions against the Cash Management Account.  After discovering that the entire foreign proceeding had been “suspended,” CTIM, the special servicer of the account in question, commenced an adversary proceeding with the bankruptcy court, seeking a declaratory judgment that the funds are not property of the Debtor.  The issue was whether CTIM could maintain an adversary proceeding to recover funds despite the Mexican Order that the funds not be touched.
Chapter 15 and Comity
Before we discuss the court’s analysis, a quick overview of chapter 15.  In 2005, the United States removed section 304 from the Bankruptcy Code and replaced it with chapter 15, based on the United Nations Commission on International Law’s Model Law (the “Model Law”) on Cross-Border Insolvency.  The Model Law, and chapter 15, “focuses on authorizing and encouraging cooperation between jurisdictions.”
After a debtor commences insolvency proceedings in a foreign country, the debtor’s representative may seek “recognition” from a United States Bankruptcy Court.  Recognition then opens the door to availability of certain familiar relief provided by the Bankruptcy Code, such as the automatic stay.
Chapter 15, the Model Law, and the texts related to their enactment often discuss, but infrequently define, comity.  Our comity laws have largely developed from a nineteenth century United States Supreme Court case where it was described as “[t]he extent to which the law of one nation, as put in force within its territory, whether by executive order, by legislative act, or by judicial decree, shall be allowed to operate within the dominion of another nation. . . .” Hilton v. Guyot, 159 U.S. 113, 163 (1895).  In the judicial sphere, comity is the principle by which a court in one nation respects and enforces the decisions of a court in another nation.
Application of Comity
Back to the case of Cozumel Caribe, the Debtor was benefiting from both the Mexican Order and the Recognition Order prohibiting CTIM from reaching the funds; with the Mexican proceeding suspended, reaching the account seemed like a dubious task.  Making matters more arduous for CTIM, it had separately attempted, and failed, to recover funds through the Debtor’s guarantors.  Relying on section 1509, the United States District Court for the Southern District of New York (the “District Court”) granted nearly unconditional comity to the Mexican Order, noting that after recognition, “it is mandatory that U.S. courts extend comity to a foreign representative’s request for a grant of comity unless granting such request would contravene U.S. public policy.”
Judge Glenn began his inquiry by parting ways with the District Court, noting that “nothing in section 1509 commands that comity shall be given to all orders entered by a foreign court in a foreign insolvency proceeding.”  Discussing a case on which the District Court relied, the court noted:

[If] comity is required to be given to any foreign law, court order or judgment that is not manifestly contrary to U.S. public policy, there would be no point in having the foreign representative “apply” to a U.S. court for discretionary relief.  The only issue left open would be whether the requested relief is manifestly contrary to the public policy of the United States in violation of section 1506, leaving no room for the exercise of discretion; nothing about Chapter 15 supports such an interpretation.

The court’s analysis is interesting because it departs from prior holdings finding a mandatory grant of comity; instead, it has armed itself with a more discretionary, permissive view towards granting comity.
On one hand, the Debtor was enjoying relief not dissimilar to what is provided by the Bankruptcy Code.  Through the Mexican Order, creditors are merely prevented from accessing funds while the Debtor is given an opportunity to reorganize.  On the other hand, as the court notes, if the automatic stay is applicable, so should be the notion of adequate protection.  Finding that, for at least the time being, CTIM is “sufficiently protected,” the court granted comity to the Mexican Order.
Takeaway
The court granted comity, but only after a thorough analysis of the underlying facts.  Even then, the court imposed firm time limits on how long the funds can be restricted.  Within 60 days, the parties must begin to litigate the issues in Mexico.  If the Quintana Roo court fails to hear and decide the issues within 180 days, the US bankruptcy court will revisit its decision in the adversary proceeding.
The decision drives home the point that comity is not a rubber stamp exercise.  Whether other courts go down this road will be an interesting issue, and one which we at the Bankruptcy Blog will be following closely.