Southern District of New York Dismisses Securities Law Claims on Grounds of International Comity; No Chapter 15 Proceeding Required

The Bottom Line

Recently in Ema Garp Fund v. Banro Corp., Case No. 18-01986 (S.D.N.Y. Feb. 21, 2019), the District Court for the Southern District of New York dismissed the plaintiffs’ claims against defendants Banro Corporation ("Banro") and former Banro CEO John Clarke on grounds of international comity. Among the various grounds for applying general principles of international comity, the court held that a Chapter 15 proceeding was not required for a plan approved in a Canadian CCAA proceeding to release claims in a pending litigation in the United States.

What Happened?

In December 2017, Banro, a Canadian corporation, commenced a reorganization proceeding in Canada. Companies’ Creditors Arrangement Act ("CCAA") courts issue a claims procedure requiring creditors with claims against either the debtor or its directors and officers to file proofs of claim by a specified date ("Bar Date"), or the potential claims may be extinguished. Under the CCAA, the court will then hold a creditor meeting where a proposed plan of compromise or arrangement must be approved by a vote. The court in Banro’s Canadian proceeding (the "CCAA Court") issued a Bar Date deadline of March 6, 2018.

The plaintiffs, who are Banro shareholders, knew of the Canadian proceeding but did not file any claims by the March 6 Bar Date, nor did they otherwise participate in that proceeding. Instead, on March 5, 2018, the plaintiffs filed a complaint in the District Court for the Southern District of New York alleging that Banro and Mr. Clarke committed securities violations. Subsequent to the Bar Date, the CCAA Court considered a proposed reorganization plan that exchanged secured debt for equity, extinguished the interests of Banro’s current equity holders, and granted releases in favor of the Banro debtors and their directors and officers. Banro’s creditors approved the plan, and on March 27, 2018, the CCAA court issued a “sanction order” approving the plan and releasing all equity claims. The CCAA court extinguished the plaintiffs’ claims against Banro as pre-petition equity claims and their claims against Mr. Clarke as “barred ... because of non-compliance with the Claims Procedure Order.”

In May 2018, the defendants moved to dismiss the action filed in district court on the basis of comity, and the district court granted the defendants’ motion. The district court relied on the Second Circuit decision in Allstate Life Insurance Co. v. Linger Group Limited, 994 F.2d 996 (2d Cir. 1993), to determine whether a dismissal based on international comity was appropriate. As an initial matter, the party seeking dismissal bears the burden of proving that comity is appropriate. Citing Allstate Life Insurance, the district court stated that in determining whether a foreign bankruptcy proceeding warrants comity, courts should undertake a multifactor analysis to determine whether the foreign court satisfies fundamental standards of procedural fairness. If it does, then courts should ask whether affording comity would “violate any laws or public policies” of the U.S. The district court concluded that the Canadian proceeding satisfied fundamental standards of procedural fairness because it “treat[ed] creditors equally within separate classes; provide[d] for a Monitor, satisfying the fiduciary requirement; permit[ted] creditors to submit claims and appeal denials of those claims; provide[d] for creditors’ meetings; ... provide[d] a court-imposed stay” and, furthermore, provided public notice of the proceedings. The district court found that the Canadian proceeding was fair to the plaintiffs specifically because the plaintiffs had ample knowledge of the proceeding, the stay, the applicable claims and plan objection procedures, and the hearing on the sanction order.

The district court rejected the plaintiffs’ various arguments against dismissal. The district court found that the Canadian proceeding was a parallel proceeding because it was “a forum in which Plaintiffs could have and should have pursued their claims.” Also, the district court found that whether the CCAA Court had jurisdiction over the plaintiffs was irrelevant to its comity determination, as was the fact that defendants did not file a recognition proceeding in the U.S. because defendants were under no obligation to do so. The district court rejected the plaintiffs’ argument that they would be prejudiced by a dismissal of their claims, stating that it was the plaintiffs’ own choice not to participate in the Canadian proceeding. Moreover, the equities favored the defendants because the plaintiffs had engaged in forum shopping by filing the action in the district court. Finally, the district court held that the standard for dismissal based on comity was not whether “exceptional circumstances” existed, stating that that standard is not applicable when the foreign proceeding is a foreign bankruptcy proceeding.

Having found that the Canadian proceeding satisfied fundamental standards of procedural fairness, the district court then found that dismissing the claims would not contravene U.S. law or public policy. The district court noted that the fact that the plaintiffs’ claims arose under U.S. securities law, as opposed to the U.S. Bankruptcy Code, did not alter the analysis. The Canadian proceeding was an adequate forum for the plaintiffs to raise the claims asserted in the complaint.

The district court likewise dismissed the claims against Mr. Clarke, finding that the CCAA Court had established procedures for filing claims against Mr. Clarke, and the plan included a release of those claims. To allow the claims to proceed would “interfere with” the outcome of the Canadian proceeding and defeat the purpose of granting comity. The fact that Mr. Clarke is a former CEO of Banro and not the current CEO did not change the court’s analysis because it is his status at the time of the alleged misconduct that matters. The plaintiffs had argued that because Mr. Clarke was not a party to and did not appear in the Canadian proceeding, there was no parallel proceeding in Canada for the claims asserted against him. The district court was not persuaded by this, stating that permitting the claims to proceed would “undoubtedly interfere with the implementation of the CCAA reorganization plan because that plan encompassed a release of claims against Clarke.”

Why This Case Is Interesting

The district court clearly states that the standard in the Second Circuit for determining whether to extend international comity to foreign bankruptcy proceedings is not the “exceptional circumstances” standard but is the approach set forth in Allstate Life Insurance. If the Allstate Life factors are satisfied, it is irrelevant whether the debtor has filed enforcement or recognition proceedings in the United States. The absence of a Chapter 15 proceeding will not bar enforcement of a discharge given in a foreign bankruptcy proceeding. The decision underscores that while Chapter 15 is typically viewed as a means of implementing relief from foreign insolvency proceedings (e.g., a “foreign main proceeding” in the parlance of Chapter 15) in the United States, it is not the exclusive means to do so; principles of international comity may still be applied.