Opinion ID: 764897
Heading Depth: 2
Heading Rank: 4

Heading: The New Jersey Bankruptcy Proceeding (The Interpool Litigation)

Text: 58 In early 1986, certain of KKL's U.S. creditors filed complaints in the U.S. District Court for the District of New Jersey seeking writs of maritime attachment against KKL's freights. Three KKL creditors filed a Chapter 7 involuntary bankruptcy petition against KKL in the U.S. District Court for the Central District of California. All cases were consolidated and transferred to the U.S. District Court for the District of New Jersey. See Interpool, Ltd. v. Certain Freights of M/V Venture Star, 102 B.R. 373 (D.N.J. 1988), appeal dismissed, 878 F.2d 111 (3d Cir. 1989). Southern Cross was a named party in the consolidated action, because its assets were attached by KKL's other creditors, and TIP was a KKL creditor. 59 In February 1986, the Australian liquidator brought an 11 U.S.C. § 304(a) proceeding ancillary to a foreign proceeding in New Jersey Bankruptcy Court, seeking to enjoin the U.S. creditors from proceeding against KKL's U.S. assets and to remit those assets to Australia for administration in the liquidation there. The § 304 proceeding was transferred and consolidated with the other pending proceedings. The District Court entered an interim order enjoining the U.S. creditors from proceeding against KKL's assets and later ordered that KKL's freights should be distributed among the liquidator and the creditors. In February 1988, the liquidator moved to dismiss the pending involuntary Chapter 7 petition and thereby administer all KKL assets in Australia. On October 14, 1988, Judge Politan denied the motion and held that KKL's U.S. assets should be administered in a Chapter 7 bankruptcy case. He reasoned that the Australian liquidation proceedings (1) were already underway and (2) were being conducted ex parte, which under the circumstances made it highly unlikely that the rights of U.S. creditors would be properly respected. He therefore authorized the appointment of a Chapter 7 trustee. 60 We quote Judge Politan's opinion at length, because it is vital to our resolution of this appeal: 61 On November 26, 1983, KKL executed a Heads of Agreement, assuming the business of Karlander. KKL also agreed to pay off Karlander's creditors. In turn, Karlander transferred its rights in the Weyerhauser arbitration to KKL in January 1984. KKL received a loan of $6 million from a Wah Kwong subsidiary, and in exchange, KKL assigned its rights in the Weyerhauser arbitration to Wah Kwong. The repayment method to Wah Kwong for this loan was unclear. According to the Heads of Agreement, it was to be on demand. However, according to a letter dated November 26, 1983, repayment was to be by mutual agreement. Again, on January 11, 1984, a letter was sent to KKL from a Wah Kwong subsidiary, stating that unless outstanding debts exceeded $10,122,000, repayment of the loan would be by mutual agreement. 62 The relationship between Wah Kwong and KKL was described as a joint venture agreement. Wah Kwong corporate individuals were considered to be partners for the purpose of earnings or distribution of earnings of KKL. On March 2, 1984, KKL assigned its earnings to Wah Kwong through another Wah Kwong subsidiary. In addition, by letter dated March 3, 1984, the parties agreed to take care to ensure that day to day liner service operations will be maintained without any interruption. By agreement, dated October 8, 1984, KKL and Wah Kwong agreed to require joint signatures on all KKL checks. 63 In January 1986, a vessel was arrested in L.A., and Wah Kwong issued a press release saying KKL owed[it] $10 million. Wah Kwong blocked payments to creditors who in turn shortened their credit terms and forced a shortage of funds from KKL. Soon after, KKL ceased doing business and Wah Kwong also went into receivership. 64 On May 14, 1986, an agreement (Deed) was consummated between the Liquidator, KKL, Karlander, and several Wah Kwong subsidiaries which concerned the prospective proceeds of the Weyerhauser arbitration pending in San Francisco, California between Karlander and Weyerhauser Co. (Weyco). Karlander had previously assigned its rights in the arbitration outcome on January 10, 1984 to KKL. KKL, in turn, assigned its rights in the arbitration outcome to a Wah Kwong subsidiary, as security for repayment of the $6 million loan. Under the terms of the Deed, any proceeds from Weyco claims would be paid to the Liquidator. The Liquidator, in turn, agreed to distribute the first $6 million to a Wah Kwong subsidiary in satisfaction of the loan. Following distribution of some other monies, the rest of the proceeds would be held by the Liquidator for the purposes of administering KKL while in bankruptcy. 65 A second agreement, dated May 14, 1986, also entitled Deed, stated that the shipowners had suffered damages as a result of a breach by KKL of the terms and conditions of its charters. There is a disagreement as to whether this was true, with KKL asserting that Wah Kwong was in breach by milking it of funds and Wah Kwong asserting that KKL could not meet its obligations and therefore [that Wah Kwong] was entitled to the funds. Both Deeds were submitted to the Australian Courts and were approved. 66 Since, in this case, the creditors were not notified prior to the date the Court ratified the agreement between the Liquidator and Wah Kwong, and in addition, were not notified of the original § 304 filing, this Court finds that the procedural protections available to creditors in the United States were not given to the United States creditors in Australia. This is a serious omission. 67  . . . . Wah Kwong's loan was made payable either on demand or by mutual agreement; Wah Kwong's president sat on the Board of Directors of KKL; and someone from Wah Kwong was required to co-sign checks prior to issuance. Additionally, it was Wah Kwong who allegedly overdrew on monies held by KKL which hampered its ability to pay creditors and led to the involuntary petition being brought against KKL. On its face there appear to be substantial allegations of insider machinations . . . . 68 Both the laws and the public policy of the United States will be violated if the case is permitted to proceed under Australian law. The claims of the creditors may have already been prejudiced by the dealings between the Liquidator and Wah Kwong, and this Court does not intend to stand idly by while United States[ ] citizens and creditors are harmed. Interpool, 102 B.R. at 375-76, 379, 380. 69 On April 5, 1988, the U.S. bankruptcy trustee entered into a settlement with MSI. The settlement included a full release by the trustee of KKL's claims against MSI, Wah Kwong, and all other Wah Kwong subsidiaries that had dealt with KKL. It also included an agreement that MSI would fund prosecution of KKL's arbitration claim against the Weyerhauser Company, which the trustee regarded as KKL's principal asset. The settlement also recognized MSI as a KKL creditor and agreed to share proceeds of the Weyerhauser claim. The settlement was approved by the District Court.