Sanjel (USA) Inc. – Chapter 15 Creditors May Challenge Reach of Stay in Recognition Order

A recent decision by the United States Bankruptcy Court for the Western District of Texas in In re Sanjel (USA) Inc., et al., Case No. 16-50778-CAG (Bankr. W.D. Tex. July 29, 2016) explains that in a Chapter 15 case, the U.S. bankruptcy court will not always apply the law of the foreign jurisdiction to U.S. creditors and U.S.-based claims. Specifically, the case addresses whether it is appropriate for a bankruptcy court to modify or limit a foreign stay through changes to its Chapter 15 recognition order.

Sanjel (USA) Inc. and its related entities (multi-national energy services provider) originally commenced Canadian reorganization proceedings. The Canadian court granted the debtors a broad stay of any actions against their directors and officers. The United States bankruptcy court recognized the Canadian proceedings under chapter 15 of the Bankruptcy Code and entered a recognition order extending the reach of the Canadian stay to the United States.

The recognition order among other things gave domestic force to the Canadian stay of legal proceedings against the debtors' directors and officers. Claimants at issue included certain of the debtors' U.S.-based employees who wanted to pursue claims arising under the United States Fair Labor Standards Act, or "FLSA." The statute of limitations on FLSA claims may continue to run during the pendency of a chapter 15 case, meaning that the continued imposition of the automatic stay could extinguish the employees' claims. Thus, two employees sought to modify the Canadian stay granted in the recognition order.

The Debtors contended that the recognition order was not prejudicial to the employees because they could seek relief before the Canadian court, and that any modification would be prejudicial to the debtors whose limited personnel would be distracted from their restructuring efforts. Similar arguments made by debtors were successful in In re Nortel Networks Corp., et al., Case No. 09-10164-KG (Bankr. D. Del. Mar. 10, 2010) in a dispute involving the similar issues before the United States Bankruptcy Court for the District of...