Heads I win, tails you lose:

Discovery disputes in Euro-US cross-border bankruptcy

Read our article in the Cayman Financial Review Magazine, eversion 

It is a natural human tendency to believe that “our” way is better than “their” way, but closer international connections today prompt us to keep this tendency in check.

The growing trend toward cooperation in cross-border bankruptcy is a shining example of international efforts to reduce xenophobia and increase sensitivity to acceptable foreign difference. 

Two recent cases, however, suggest that US Bankruptcy Courts are still battling with parochialism. In an odd coincidence, these two cases from distant courts conclude that the unique US approach to information “discovery” trumps European approaches, both offensively and defensively.

The first case presents a classic battle between the infamously intrusive US procedure of information discovery and the much more restrained approach in Europe, especially France. From the very first days of a dispute, litigants in US courts enjoy an extraordinary procedure for “discovery” of information from the opposing side.

With no advance control from the court, parties can make extremely expansive and intrusive demands for production of documents and compel people to testify under oath in hours-long interrogations (depositions).

Though parties in other countries have gained expanded rights to information discovery in recent years, most court systems outside the US regard this litigant-driven free-for-all as unseemly and inappropriate.

Consequently, when a Canadian creditor attempted to enforce a Canadian judgment against the French shipping firm SNP Boat Service SA, it had the great fortune of seizing an asset, a boat called the M/X Sixty Five, in the United States.

The French court presiding over SNP’s sauvegarde reorganisation case had concluded that the Canadian judgment was invalid, so SNP’s insolvency representative asked a Florida Bankruptcy Court to order the release of the M/X Sixty Five for administration in the French proceedings.

Normally, such a request would be granted pursuant to the compelling policy of cooperation with foreign proceedings under Chapter 15 of the US Bankruptcy Code, especially in a case like this, where the only connection to the United States is the situs of one minor asset.

The Canadian creditor, however, asserted that its entitlement to a fair airing of its claims (“due process”) had been violated in the French proceedings.

To substantiate its assertion, the creditor invoked the liberal US discovery rules, demanding that SNP’s foreign representative turn over the French court file and subject an SNP representative to a sworn deposition interrogation. SNP’s insolvency representative resisted these invasive demands, in part on the basis of a French “blocking statute” designed to protect French parties from what the French regard as objectionably expansive US discovery procedures.

Offended by this affront to US procedures, the Florida Bankruptcy Court refused to extend the statutorily required cooperation to SNP’s representative1. It glibly concluded that the “wisdom” of cooperating with a foreign insolvency representative “becomes questionable” when US discovery procedures are resisted.

Noting only that cooperation might be available “as a matter of comity”, the court failed to cite, much less follow, the law that directs that “a court in the United States shall grant comity or cooperation to the foreign representative2.”

While the statute contains an exception for cooperation that would be “manifestly contrary to the public policy of the United States3”, the court neither cited nor relied on this exception.

This case seems to have misconstrued fundamentally the nature of cooperation expected of US Bankruptcy Courts with foreign insolvency representatives, not as a matter of vague comity, but of unambiguous statute. Like with most discovery disputes, an appeal will likely be not worth the effort or expense, and SNP’s representative will be bullied into complying with the discovery demands or literally abandoning ship.

The second case illustrates that US bankruptcy courts can turn on a dime when resistance to discovery runs in the opposite direction. It will be the rare case when a foreign discovery order is more broad than US law would allow, but the cross-border bankruptcy case of German orthopedic surgeon Jürgen Toft is just such a case. Dr Toft had allegedly hidden his assets and absconded to parts unknown, so the representative of Dr Toft’s German insolvency case sought emails that might indicate the location of Dr Toft’s assets (or Dr Toft himself).

In accordance with German discovery procedure, the German court had issued a mail interception order, which also applied to electronic mail. A London court had earlier recognised this order, and the German insolvency representative asked a New York Bankruptcy Court to grant comity under Chapter 15 to the German and English orders and cooperate with the investigation by ordering US internet service providers to turn over Dr Toft’s email correspondence.

Like in the SNP case, the Bankruptcy Court refused to cooperate with the foreign representative, though at least this time, the court cited appropriate statutory authority. The New York Bankruptcy Court concluded that complying with the interception order would violate a variety of US privacy protection laws that represent fundamental US public policy.

In a very thorough and thoughtful opinion4, the New York Bankruptcy Court recognised its duty under Chapter 15 to cooperate, even with foreign procedures that conflict with those in the US, but it nonetheless concluded that “this is one of the rare cases in which relief . . . must be denied under § 1506 of the Bankruptcy Code as manifestly contrary to the public policy of the United States.”

Respectable as the reasoning and result of the Toft case might be, that case stands in stark contrast to the Florida Bankruptcy Court’s judgment in the SNP case. The SNP court refused mandatory statutory cooperation where no US interests were implicated other than the sanctity of a widely criticised discovery procedure.

Then, when the tables were turned in the Toft case, US law again trumped European discovery procedures sanctioned by both German and English courts. It is hard to avoid the conclusion here that some pigs are indeed more equal than others.

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Jason Kilborn

Professor Jason Kilborn teaches business and commercial law at John Marshall Law School in Chicago.  His primary focus is on the comparative analysis of insolvency systems for individuals, though his interest extends to international bankruptcy as well. He recently co-authored a book on international co-operation in cross-border insolvency cases, published by Oxford University Press.

Jason Kilborn
Professor of Law
John Marshall Law School, Chicago
315 S. Plymouth Court
Chicago, IL 60604
USA

T: +1 (312) 386 2860+1 (312) 386 2860
E: jkilborn@jmls.edu
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