Chapter Five Litigation in Chapter 15 Cases

• Jurisdiction: United States

Chapter Five Litigation in Chapter 15 Cases

A chapter 15 case often proceeds in phases, with recognition acting as the first battleground in the U.S. courts where the issues that U.S. creditors have against a foreign debtor are litigated, which is often followed by a second phase, the foreign representative's request for appropriate relief or additional assistance. In certain instances, the foreign representative seeks to recover assets within the territorial jurisdiction of the U.S., which may often include pursuit of causes of action or collection of evidence against U.S.-based parties. The insolvency system in the U.S. is an adversarial court-based system that resolves issues through the parties in interest presenting competing evidence and argument to a bankruptcy judge, who then decides disputes on a case-by-case basis as guided by legal precedent and experience. This process can result in fast-paced and expensive litigation with respect to a variety of issues. In this chapter, we examine how U.S. courts have addressed litigation in these various phases of a chapter 15 case.

A chapter 15 petition is filed in a U.S. bankruptcy court, which are specialized courts that form a unique division of the federal district courts. The procedure in bankruptcy cases is governed by the Federal Rules of Bankruptcy Procedure. Bankruptcy Rule 1018 sets forth the procedure for a contested petition for recognition and makes applicable various provisions that apply to adversary proceedings, including provisions relating to pre-trial conferences to schedule and manage the litigation related to recognition, discovery, deposition, production of documents and other litigation-related proceedings.²⁸⁵ Once the case is recognized, the Bankruptcy Rules provide that other matters should be presented to the court by motion and are treated as "contested matters" in which certain rules relevant to adversary proceedings apply.²⁸⁶ Additionally, the Federal Rules of Evidence apply in a chapter 15 case, and the Rules of Civil Procedure govern the bankruptcy court's determination of foreign law.²⁸⁷

From a general standpoint, petitions for chapter 15 are often supported by declarations of both the foreign representative and foreign counsel involved in the foreign proceeding for which recognition is sought, with the foreign representative attesting to facts and procedural background and foreign counsel providing an overview of foreign insolvency statutes, frequently with copies of the relevant foreign law attached to a written declaration. While courts differ, many prefer that any individual that offers a sworn declaration in support of a chapter 15 petition appear in court to be cross-examined by any objecting party or to answer questions of the court. While some courts will take testimony from foreign-based witnesses either by telephone or video, which can require coordination through the specific judge's chambers to whom a chapter 15 case is assigned and through the clerk's office's technical staff, some courts will not consider declarations or testimony from witnesses by telephone, and thus it may be necessary for witnesses to prepare to travel to the court where the chapter 15 case is filed for hearings, especially for the hearings on recognition, as this will be the first time that the court will have the opportunity to assess the parties to the case.

With regard to other contested matters, the courts generally conduct hearings based on the normal procedures in which they conduct their respective courts, with parties seeking relief via written motions. Parties that oppose the relief sought in a motion must object to that motion by a certain date, after which the court will usually conduct a hearing. Often, with respect to a contested motion, a party may notice depositions or demand production of documents in order to obtain admissible evidence for use at the hearing. In the context of a chapter 15 case, issues of foreign law frequently arise, leading to competing expert testimony on that foreign law. A party who intends to raise an issue of foreign law must give notice in its papers filed with the court or in some other writing.²⁸⁸

Bankruptcy courts are, however, able to "consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence."²⁸⁹ The court's determination must be treated as a ruling on a question of law.²⁹⁰ This gives bankruptcy courts great flexibility in addressing questions of foreign law, including permitting them to review legislative history of foreign law.²⁹¹ The courts often craft creative cost- or time-saving measures to permit consideration of issues of foreign law. For example, in a recent matter in which one of the authors was involved, a bankruptcy court permitted parties to submit competing statements of foreign law, drafted with the aid of foreign counsel, and then allowed that foreign counsel to be admitted pro hac vice in the U.S. bankruptcy court so that foreign counsel could argue from the podium at the hearing on the specific contested matter. This bankruptcy court permitted this procedure in order to avoid the costs associated with presentations by foreign counsel of expert style reports and the parties' U.S. legal counsel from having to take depositions of the foreign counsel as experts.

Under these procedures, parties have sought discovery against and depositions of foreign representatives in various settings, explored below. From the discussion, it appears apparent that a foreign representative that elects to file a chapter 15 should expect to have to travel to the U.S. to be deposed or to testify at the recognition hearing. The question of whether a foreign representative is subject to a suit in the U.S. or enjoys a form of immunity is also one that is of keen interest to foreign representatives and will be discussed after an examination of the cases that deal with discovery in the context of petitions for recognition and contested matters.

I. Discovery Against the Foreign Representative

A. Discovery in the Context of a Petition for Recognition

The issue of whether the foreign representative must appear for a deposition in the judicial district where the chapter 15 was filed was litigated in the MtGox Co. Ltd. chapter 15 case filed in Dallas. MtGox was a Japanese corporation in Tokyo that operated a bitcoin exchange through its website.²⁹² In February 2014, MtGox suspended trading on its network after it discovered missing bitcoins from what the company thought was the result of a security compromise to its network in which bitcoins had been stolen.²⁹³ On Feb. 28, 2014, MtGox commenced a civil rehabilitation proceeding under Japanese law in Tokyo, obtained orders staying actions against MtGox, and appointed a supervisor and examiner of MtGox's busi-ness.²⁹⁴ MtGox stated in its pleadings to the U.S. court that this supervisor and examiner did not displace MtGox's management, that he must consent to MtGox's agreement with any third party, and that the supervisor and examiner consent to (1) MtGox hiring a law firm to act as counsel in the chapter 15 case and (2) MtGox's sole director and chief executive officer, Gregory Karpeles, acting as the foreign representative in the chapter 15.²⁹⁵ On March 9, 2014, MtGox filed its chapter 15 case, seeking recognition of its Japanese proceeding as a foreign main proceeding, and also filed an emergency motion for provisional relief, which the bankruptcy court granted.²⁹⁶

Two creditors that were plaintiffs in a class action lawsuit pending against MtGox and related individuals (including Mr. Karpeles) and companies in Chicago (the "Class Action") began to evaluate whether to contest MtGox's petition for recognition, and in furtherance of that goal sought discovery of the foreign debtor, and Mr. Karpeles specifically.²⁹⁷ According to the discovery motion and the affidavit of counsel attached to that motion, the class action plaintiffs had several telephone calls with MtGox's counsel in an effort to resolve discovery issues, including when the deposition of the foreign representative might occur (the class action plaintiffs offered to pay for the foreign representative's travel costs to the U.S. for a deposition). MtGox was willing to make the foreign representative available for a deposition in Taipei, Taiwan, but opposed a separate trip to the U.S. for a deposition.²⁹⁸ This arrangement was not acceptable to the class action plaintiffs, and they filed a discovery motion to compel the foreign representative, Mr. Karpeles, to appear for a deposition in the U.S., arguing that it was unreasonable for three different groups of lawyers to fly to Taipei or participate by video in a deposition that may have technical or language-translation complexities.²⁹⁹

MtGox objected to the discovery motion on a number of grounds, including technical and practical grounds, arguing namely that the class action plaintiffs were seeking an overly broad deposition and were relying on the wrong procedural footing, and that since the foreign representative was planning on attending the final hearing on recognition, he should not have to travel twice — once for the deposition and once for the hearing. One of the main factual bases for the foreign representative's objection, however, was that the class action plaintiffs had sued the foreign representative in his individual capacity and that the court in Chicago had issued an expedited discovery order that empowered the class action plaintiffs to depose the foreign representative, Mr. Karpeles, in his individual capacity.³⁰⁰ Thus, MtGox argued that under Bankruptcy Rule 1018, the facts relevant to final recognition were limited and that a Bankruptcy Rule 2004³⁰¹ examination, which permits broad discovery, was the improper rule. From this point, the foreign representative argued that discovery should be narrower, namely requiring the class action plaintiffs to...