Opinion ID: 724999
Heading Depth: 2
Heading Rank: 3

Heading: True Conflict

Text: 52 We move next to plaintiffs' argument that the use of the doctrine is improper because there is no conflict between the Bankruptcy Code and English law. International comity comes into play only when there is a true conflict between American law and that of a foreign jurisdiction. Hartford Fire, 509 U.S. at 798, 113 S.Ct. at 2910; Societe Nationale, 482 U.S. at 555, 107 S.Ct. at 2561-62 (Blackmun, J., dissenting) (existence of a true conflict is a threshold question). Plaintiffs maintain there is no true conflict between American and English avoidance rules because English law does not require conduct that violates American law. They insist, in addition, that the English courts' decision not to enjoin the debtor's estate from bringing the instant avoidance action against Barclays suggests there is no conflict between the two countries' laws. These propositions are unpersuasive. We believe there is a true conflict necessitating the application of comity principles to ascertain the compass of the Code. 53 In Hartford Fire, 509 U.S. at 798-99, 113 S.Ct. at 2910-11, the Supreme Court held that international comity provided no basis for limiting a district court's employment of American antitrust law against boycotting activities undertaken by British reinsurers doing business in the United Kingdom. The Court reasoned that although the reinsurers' conduct--alleged to violate the Sherman Act--was consistent with comprehensive regulations established by the British Parliament, this difference between the two laws did not amount to a conflict. Id. Instead, what was required to establish a true conflict was an allegation that compliance with the regulatory laws of both countries would be impossible. Id. at 799, 113 S.Ct. at 2910-11. 54 The conclusion that American and British avoidance law conflict comports with Hartford Fire. As we have previously noted, Hartford Fire recognized that other concerns might be implicated if the context were different. Sterling Drug, Inc. v. Bayer AG, 14 F.3d 733, 747 (2d Cir.1994) (citing Hartford Fire, 509 U.S. at 799, 113 S.Ct. at 2910-11). In Sterling Drug those other concerns were present in the context of a dispute over the scope of an extraterritorial injunction under the Lanham Act. The instant dispute over the applicability of the avoidance provision of the Bankruptcy Code is also significantly different from the circumstances confronting the Supreme Court in Hartford Fire, a Sherman Act case. This difference compels a different conclusion. 55 There are several reasons for this. First, avoidance rules do not regulate conduct in the same fashion as do prohibitions against anti-competitive conspiracies. Avoidance rules do not criminalize transfers of property, nor do they impose liability automatically for any such transfer. Instead, such rules, in adjusting the allocation of assets once held by the debtor, require courts to scrutinize a debtor's actions prior to its bankruptcy filing and, under certain circumstances, to nullify those actions. Liability for a transfer is contingent on the subsequent commencement of insolvency proceedings. Thus, it may be seen that although avoidance rules unquestionably aim to influence pre-petition conduct, see, e.g., Union Bank v. Wolas, 502 U.S. 151, 161, 112 S.Ct. 527, 533, 116 L.Ed.2d 514 (1991), a conflict between two avoidance rules exists if it is impossible to distribute the debtor's assets in a manner consistent with both rules. Second, although our allusions to English law should not be understood as an attempt to prejudice the outcome of any future litigation on that subject in British courts, the parties in the present actions have assumed that the intent requirement in the English law would dictate a different distributional outcome than would United States law. Consequently, it is not possible to comply with the rules of both forums and the threshold requirement of a true conflict exists for purposes of comity analysis. 56 Nor is it relevant in this regard that Justice Hoffman--in a decision affirmed on appeal--refused to issue an anti-suit injunction prohibiting the administrators from instituting the present action against Barclays. Plaintiffs seize on his finding that there is nothing oppressive about the difference between the American and English avoidance laws. Contrary to plaintiffs' assertion, this finding did not imply that there is no conflict between the two laws--it meant simply that the conflict was not so severe as to warrant the extraordinary remedy of an anti-suit injunction. Moreover, the High Court proceeded on the assumption that the American court would evaluate the strength of the American connection to the alleged transfers. Homan, [1992] BCC at 767. Such an approach is in substance the same as the international comity doctrine described in this opinion.III Propriety of Dismissal by the Bankruptcy Court A. Standard of Review 57 Having established that the doctrine of comity applies, we now explain why we think dismissal was warranted, that is to say, why the statute was properly construed not to reach the pre-petition fund transfers to the defendant banks. The district court reviewed the bankruptcy court's ruling on the comity issue for abuse of discretion. See Maxwell II, 186 B.R. at 822. Because the doctrine in theory is relevant to construing a statute's reach, one might expect that de novo review of the bankruptcy court's decision would have been in order. See, e.g., Koreag, 961 F.2d at 347-48 (review of statutory interpretation is a matter of law). The banks declare, however, that under Allstate Life Ins. Co. v. Linter Group Ltd., 994 F.2d 996, 999 (2d Cir.), cert. denied, 510 U.S. 945, 114 S.Ct. 386, 126 L.Ed.2d 334 (1993), the bankruptcy court's application of the comity doctrine is reviewed for an abuse of discretion. Although plaintiffs do not dispute this, the examiner contends that we must decide anew whether the bankruptcy court applied the correct legal standard, that is, whether the comity doctrine applied in the first place. 58 Ascertaining the relevant standard need not detain us overly long. It was appropriate as a matter of law to analyze the Bankruptcy Code in light of international comity. Moreover, even though plaintiffs apparently concede that an abuse-of-discretion standard applies once the doctrine's threshold requirements have been satisfied, we nonetheless would hold that dismissal on comity grounds was appropriate even were our review of this case de novo. We need not on this appeal decide therefore which standard applies. Regardless of the applicable standard, we agree with the lower courts that English law governs resolution of this litigation. B. Primacy of English Law 59 England has a much closer connection to these disputes than does the United States. The debtor and most of its creditors--not only the beneficiaries of the pre-petition transfers--are British. Maxwell was incorporated under the laws of England, largely controlled by British nationals, governed by a British board of directors, and managed in London by British executives. These connecting factors indicated what the bankruptcy judge called the Englishness of the debtor, which was one reason for recognizing the administrators--who are officers of the High Court--as Maxwell's corporate governance. Maxwell I, 170 B.R. at 817 n. 23. These same factors, particularly the fact that most of Maxwell's debt was incurred in England, show that England has the strongest connection to the present litigation. 60 Although an avoidance action concededly affects creditors other than the transferee, because scrutiny of the transfer is at the heart of such a suit it is assuredly most relevant that the transfers in this case related primarily to England. The $30 million received by Barclays came from an account at National Westminster in London and, while it was routed through Barclays' New York branch like all payments received in U.S. dollars, it was immediately credited to an overdraft account maintained in England. Plaintiffs claim no particular United States connection to the other alleged transfers to Barclays, all of which were denominated in the amended complaint in pounds sterling. Similarly, the transfers to National Westminster and Societe Generale were made to and from accounts maintained in Great Britain. 61 Further, the overdraft facilities and other credit transactions between the transferee banks and the debtor resulted from negotiations that took place in England and were administered primarily there. English law applied to the resolution of disputes arising under such agreements. We recognize that some of the money transferred to the banks came from the proceeds of the sale of Maxwell subsidiaries in the United States, which is a subject we discuss in a moment. In almost all other respects, however, the credit transactions were centered in London and the fund transfers occurred there. 62 C. Relative Interests of Forum and Foreign States 63 Given the considerably lesser American connection to the dispute, the bankruptcy court believed its forum's interests were not very compelling. Maxwell I, 170 B.R. at 818. Virtually the only factor linking the transfers to the United States--that the sale of certain Maxwell subsidiaries in the United States provided the source of some of the funds--is not particularly weighty because those companies were sold as going concerns. Hence, the potential effect that such sales might have had on local economies is not here implicated. 64 The examiner warns that dire consequences would result from a failure to enforce the Code's avoidance provision. The first one he mentions is that such a course ignores § 103(a) of the Code. This contention is one we have already addressed and rejected. The examiner next urges that the purposes underlying § 547 and § 502(d) would be thwarted unless both of these provisions were applied in all Chapter 11 proceedings. Although the non-application of these or other Bankruptcy Code provisions certainly might detract from the Code's policies in other cases, here the negative effects are insubstantial. The principal policies underlying the Code's avoidance provisions are equal distribution to creditors and preserving the value of the estate through the discouragement of aggressive pre-petition tactics causing dismemberment of the debtor. Wolas, 502 U.S. at 161, 112 S.Ct. at 533. These policies are effectuated, although in a somewhat different way, by the provisions' British counterpart. See Maxwell I, 170 B.R. at 818. 65 In the present case, in which there is a parallel insolvency proceeding taking place in another country, failure to apply § 547 and § 502(d) does not free creditors from the constraints of avoidance law, nor does it severely undercut the policy of equal distribution. All avoidance laws are necessarily limited in scope because time limits and other conditions are imposed on the voidability of transactions. Although a different result might be warranted were there no parallel proceeding in England--and, hence, no alternative mechanism for voiding preferences--we cannot say the United States has a significant interest in applying its avoidance law. Moreover, as noted, international comity is a policy that Congress expressly made part of the Bankruptcy Code, and a decision consistent with comity therefore furthers the Code's policy. 66 Because of the strong British connection to the present dispute, it follows that England has a stronger interest than the United States in applying its own avoidance law to these actions. Its law implicates that country's interest in promoting what Parliament apparently viewed as the appropriate compromise between equality of distribution and other important commercial interests, for instance, ensuring potentially insolvent debtors' ability to secure essential ongoing financing. In addition, although complexity in the conduct of transnational insolvencies makes choice-of-law prognostication imprecise, we agree with the lower courts that English law could have been expected to apply. See Maxwell II, 186 B.R. at 823; Maxwell I, 170 B.R. at 818; see also Canada S. Ry. v. Gebhard, 109 U.S. 527, 537-38, 3 S.Ct. 363, 370, 27 L.Ed. 1020 (1883) (domestic creditors of foreign bankrupts presumed to have contracted with a view to ... laws of th[e] [foreign] government). 67 The administrators further declare that the English court's decision vacating the ex parte anti-avoidance suit order established that the application of our preference law by the Southern District courts would not violate the law of nations, and that American courts should not use comity as a reason to decline to assert jurisdiction under section § 547. The decision in the English court implied nothing of the kind. Instead, that court ruled that Barclays could not obtain an injunction because an expression of the principle of comity that relied on the good sense of the bankruptcy court outweighed the risk that it would assume jurisdiction in violation of international law. Homan, [1992] BCC at 762. 68 Rather than take a confrontational posture by enjoining this litigation and prejudice the cooperation which has thus far prevailed between the Chapter 11 and the English administration, id. at 767, the High Court left the merits of the question for the American courts to decide. Thus, the English court's decision affords no basis for concluding that England's interests are insubstantial.D. Cooperation and Harmonization: Systemic Interest 69 In addition to the relative strength of the respective jurisdictional interests of England and the United States, there is a compelling systemic interest pointing in this instance against the application of the Bankruptcy Code. These parallel proceedings in the English and American courts have resulted in a high level of international cooperation and a significant degree of harmonization of the laws of the two countries. The affected parties agreed to the plan and scheme despite differences in the two nations' bankruptcy laws. The distribution mechanism established by them--beyond addressing some of the most obvious substantive and procedural incongruities--allowed Maxwell's assets to be pooled together and sold as going concerns, maximizing the return to creditors. And, by not requiring a creditor to file its claim in both forums, the arrangement eliminated many of the inefficiencies usually attendant in multi-jurisdiction proceedings. 70 Taken together, these accomplishments--which, we think, are attributable in large measure to the cooperation between the two courts overseeing the dual proceedings--are well worth preserving and advancing. This collaborative effort exemplifies the spirit of cooperation with which tribunals, guided by comity, should approach cases touching the laws and interests of more than one country. See Societe Nationale, 482 U.S. at 543 n. 27, 107 S.Ct. at 2555 n. 27 (1987). Where a dispute involving conflicting avoidance laws arises in the context of parallel bankruptcy proceedings that have already achieved substantial reconciliation between the two sets of laws, comity argues decidedly against the risk of derailing that cooperation by the selfish application of our law to circumstances touching more directly upon the interests of another forum. 71 It should be remembered that the interest of the system as a whole--that of promoting a friendly intercourse between the sovereignties, Hilton, 159 U.S. at 165, 16 S.Ct. at 144--also furthers American self-interest, especially where the workings of international trade and commerce are concerned. See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 629, 105 S.Ct. 3346, 3355, 87 L.Ed.2d 444 (1985) (international policy favors deferral to transnational tribunals); Wildenhus's Case, 120 U.S. 1, 12, 7 S.Ct. 385, 387, 30 L.Ed. 565 (1887) (interest in promoting commerce produced rule that law of nation to which vessel belonged generally governed conduct aboard ships). 72 We recognize that forbearance and goodwill in the conduct of international bankruptcies is an ideal not easily achieved in the near-term. Many commentators advocate centralized administration of each insolvency under one country's laws, which could require a multi-lateral treaty or, even, a greater degree of harmonization of the commercial laws throughout the world. See, e.g., Douglass G. Boshkoff, Some Gloomy Thoughts Concerning Cross-Border Insolvencies, 72 Wash.U.L.Q. 931, 931-36 (1994). In the meanwhile, bankruptcy courts may best be able to effectuate the purposes of the bankruptcy law by cooperating with foreign courts on a case-by-case basis. Congress contemplated this approach when it provided for ancillary proceedings under 11 U.S.C. § 304. Although comity analysis admittedly does not yield the commercial predictability that might eventually be achieved through uniform rules, it permits the courts to reach workable solutions and to overcome some of the problems of a disordered international system. Given that the scheme and plan in this case did not clearly address the choice-of-law and choice-of-forum questions that have generated this litigation, resort to comity and choice-of-law principles should naturally have been foreseen. Consequently, the interests of the affected forums and the mutual interest of all nations in smoothly functioning international law counsel against the application of United States law in the present case. 73 IV Denial of Distributions Under 11 U.S.C. § 502 74 The final issue to be resolved is the plaintiffs' contention that even if the pre-petition transfers to the banks may not be recovered under § 547 for comity reasons or otherwise, the administrators are nevertheless entitled under § 502(d) to deny distributions to the banks as unsecured creditors. Section 502(d) provides in relevant part that the court shall disallow any claim of any entity ... that is a transferee of a transfer avoidable under section ... 547 of this title. 75 The district court turned this challenge aside on two separate grounds. It held that § 502 is inapplicable because § 547 does not govern the avoidance action by the administrators and the transfers are therefore not avoidable under § 547. Maxwell II, 186 B.R. at 824. Further, it stated that the banks have not filed claims under § 502(d) because they have never submitted themselves to the bankruptcy court's jurisdiction. Defendants declare that this argument was waived because it was not submitted to the bankruptcy court. We nonetheless exercise our appellate discretion to entertain the issue because it is one of law, it was clearly presented in the adversary complaints, it was argued before and decided by the district court, and the transcript of hearing on the Rule 12(b)(6) motions indicates the bankruptcy court was quite aware of the relevant statute. 76 We hold that § 502(d) does not apply, but for reasons slightly different than those expressed by the district court. The plaintiffs strongly urge that the district court conflated § 547 and § 502(d) by reading the words transfer avoidable in the latter to mean any transfer that actually could be recovered by the estate under the former. They rely on cases holding that disallowance is required under § 502(d) even where a transfer may not affirmatively be recovered because the limitations period for such recovery has expired. See, e.g., United States Lines, Inc. v. United States (In re McLean Indus.), 184 B.R. 10, 16 (Bankr.S.D.N.Y.1995), aff'd, 196 B.R. 670 (S.D.N.Y.1996). 77 The rule that § 502(d) disallowance is not precluded by the expiration of the limitations period governing recovery under § 547, however sound it may be, does not control in this case. Where a transfer could be avoided under § 547 but for the running of the statute of limitations, disallowance may be warranted because the substantive provisions of § 547, as opposed to the time-limit set forth in § 546(a), still apply to the transfer at issue. See McLean, 184 B.R. at 15 (§ 502(d) refers to § 547, not § 546). But in the present case, the doctrine of comity leads to the conclusion that § 547 does not apply to the pre-petition transfers at all. Consequently, the transfers cannot in any way be included among the transfers avoidable listed in § 502(d). In addition, because § 502(d) and § 547 apply to the same types of transfers and serve similar purposes, the former is inapplicable to the present case for the reasons discussed in Part III of this opinion. 78 With respect to the district court's alternative ground for denying relief under § 502(d), we must agree with the administrators that the banks' decision to lodge notices of claim in England, rather than filing proofs of claim with the bankruptcy court, cannot be construed to mean that they have not submitted claims for purposes of the Bankruptcy Code. To be eligible for distributions under the plan, the banks had to submit claims, which must be allowed. See 11 U.S.C. § 726(a). 79 As observed in our discussion of res judicata, Part I supra, by requiring the administrators to pass along to the bankruptcy court notices of claim filed in England, the plan and scheme comply with the Code's requirement that a proof of claim be filed with the bankruptcy court. Such claims are allowed under the Code, see § 502(a), if they are accepted without objection by the administrators or liability is established by adjudication in the appropriate court, which may be the bankruptcy court or the English court depending upon the circumstances. We are therefore unable to agree with the district court's conclusion that § 502(d) is inapplicable because the banks have not submitted claims.