Comity In Chapter 15 - And Its Limits

A pair of rulings recently handed down by Delaware and New York bankruptcy courts have contributed to the ongoing debate about the role of "comity" (the recognition that one sovereign nation extends within its territory to the legislative, executive, or judicial acts of another sovereign, with due regard for the rights of its own citizens) in cross-border bankruptcy cases under chapter 15 of the U.S. Bankruptcy Code. Recourse to chapter 15 generally, and the utilization of section 363 of the Bankruptcy Code in chapter 15, can be especially valuable in cases where the representative of a foreign debtor wants to monetize assets located in the U.S. and the foreign insolvency scheme involved does not provide for "free and clear" sales or may be limited in jurisdiction. However, these tools are not without limits.

Coming down on the side of broad access, the court in In re Elpida Memory, Inc., 2012 BL 302570 (Bankr. D. Del. Nov. 16, 2012), ruled that both the express language of chapter 15 and its legislative intent permit the representative of a foreign debtor to use chapter 15 and section 363 to sell assets located in the U.S. free and clear of all claims, liens, and other competing interests. By contrast, in In re Fairfield Sentry Limited, 2013 BL 8090 (Bankr. S.D.N.Y. Jan. 10, 2013), the court sounded a cautionary note, emphasizing the pre-eminent role of comity in chapter 15 and concluding that plenary review under section 363 of a sale transaction approved by a foreign tribunal was not appropriate.

ELPIDA

On February 27, 2012, Elpida Memory, Inc. ("Elpida"), a manufacturer of dynamic random-access, or DRAM, products, commenced reorganization proceedings under the Japanese Corporate Reorganization Act (Kaisha Kosei Ho) in a Japanese court. Thereafter, the foreign representatives of Elpida sought and obtained from the Delaware bankruptcy court an order recognizing the Japanese proceeding as a foreign "main proceeding" under chapter 15.

After an auction was conducted in Japan, Elpida's bankruptcy trustees determined that Micron Technology, Inc. ("Micron") would serve as the sponsor for Elpida's plan of reorganization. In connection with the sponsor agreement, the trustees also sought authority to enter into various technology transfer agreements between Elpida and Micron, as well as agreements with Rambus Inc. to sell certain Elpida patents and to continue to cross-license others (collectively, the "Agreements"). Each of the Agreements was approved by the Japanese court.

However, each of the Agreements contemplated a sale of Elpida property located in the U.S. Accordingly, Elpida's foreign representatives sought U.S. bankruptcy court approval under sections 363 and 1520 of the Bankruptcy Code of that portion of the Agreements involving the sale of U.S. assets. A group of Elpida's bondholders objected.

Although all parties agreed that section 363 was available to Elpida as a means of effecting a sale of U.S. assets, it was unclear how the provision should be applied and, in particular, what standard should be employed by the bankruptcy court in ruling on Elpida's request. Therefore, the court considered whether it should decide the issue on the basis of principles of comity (i.e., by deferring to the Japanese court's approval of the transaction)...