Stonington Partners v. Lernout Hauspie , 310 F.3d 118 ( 2002 )

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit
11-4-2002
Stonington Partners v. Lernout Hauspie
Precedential or Non-Precedential: Precedential
Docket No. 01-3636
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2002
Recommended Citation
"Stonington Partners v. Lernout Hauspie" (2002). 2002 Decisions. Paper 697.
http://digitalcommons.law.villanova.edu/thirdcircuit_2002/697
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2002 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
PRECEDENTIAL
Filed November 4, 2002
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-3636
STONINGTON PARTNERS, INC.;
STONINGTON CAPITAL APPRECIATION 1994
FUND, L.P.; STONINGTON HOLDINGS, L.L.C.,
Appellants
v.
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.;
DICTAPHONE CORP;
L&H HOLDINGS USA INC.
*OFFICIAL COMMITTEE OF UNSECURED CREDITORS,
Intervenor in Bankruptcy Court
(*AMENDED per clerk’s order of 2/8/02)
On Appeal from the United States District Court
for the District of Delaware
(D.C. Civil No. 01-cv-00594)
District Judge: Honorable Joseph J. Farnan, Jr.
Argued June 13, 2002
Before: ROTH, RENDELL, and ROSENN, Circuit Jud ges
(Filed: November 4, 2002)
Alan S. Goudiss, Esq. [ARGUED]
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Brendan L. Shannon, Esq.
Young, Conaway, Stargatt & Taylor
P. O. Box 319
1000 West Street
Brandywine Building, 17th Floor
Wilmington, DE 19899
Counsel for Appellants
Stonington Partners, Inc.;
Stonington Capital Appreciation
1994 Fund, L.P.; Stonington
Holdings, L.L.C.
Luc A. Despins, Esq. [ARGUED]
Milbank, Tweed, Hadley & McCloy
One Chase Manhattan Plaza
New York, NY 10005
Francis A. Monaco, Jr., Esq.
Walsh, Monzack & Monaco
1201 North Orange Street
400 Commerce Center
Wilmington, DE 19899
Counsel for Appellees
Lernout & Hauspie Speech
Products N.V.
Ira S. Dizengoff, Esq. [ARGUED]
Akin, Gump, Strauss, Hauer & Feld
590 Madison Avenue
New York, NY 10022
Counsel for Appellees
Dictaphone Corp;
L&H Holdings USA Inc.
2
OPINION OF THE COURT
RENDELL, Circuit Judge:
Lernout & Hauspie Speech Products, N.V., ("L&H") filed
for relief under the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware on November
29, 2000. One day later, it filed a second plenary insolvency
proceeding under the laws of Belgium, its place of
incorporation. Perhaps predictably, conflicts arose
thereafter as to the applicable laws and appropriate
jurisdiction for resolving certain issues. The District of
Delaware resolved those issues in favor of the debtor and
against appellant, Stonington Partners, Inc., et al. The
District Court affirmed.
We conclude that the order preventing Stonington from
pursuing the issue of the priority, treatment, and
classification of its claims in the Belgian proceedings and
ordering that these issues be determined exclusively by the
Delaware Bankruptcy Court in accordance with the
Bankruptcy Code was issued without consideration of all
relevant legal principles. Accordingly, we will reverse and
remand for further proceedings consistent with this
opinion.
I. Jurisdiction and Standard of Review
The District Court had jurisdiction under 28 U.S.C.
S 158(a) and we have jurisdiction based on 28 U.S.C.
S 158(d). Because the District Court sat as an appellate
court, we apply plenary review to its judgment and thus
apply the same standards that it applied. In re Professional
Ins. Mgmt., 285 F.3d 268, 282 (3d Cir. 2002). Accordingly,
"we review the Bankruptcy Court’s legal determinations de
novo, its factual findings for clear error, and its exercises of
discretion for abuse thereof." Id. at 282-83. We review the
extension or denial of comity for abuse of discretion, see
Remington Rand Corp. v. Business Sys. Inc., 830 F.2d 1260,
1266 (3d Cir. 1987), and have applied an abuse of
discretion standard to entry of an anti-suit injunction as
3
well, see Compagnie des Bauxites de Guinea v. Insurance
Co. of N. America, 651 F.2d 877, 887 (3d Cir. 1981), aff ’d
on other grounds, 456 U.S. 694 (1982). "A bankruptcy court
abuses its discretion when its ruling is founded on an error
of law or a misapplication of law to the facts." In re O’Brien
Envtl. Energy, Inc., 188 F.3d 116, 122 (3d Cir. 1999).
II. Facts and Procedural History
As is usual in complex bankruptcy proceedings such as
these, an understanding of the facts is essential to our
ruling. Of the plethora of known facts surrounding the
matter before us, the following are those most relevant to
our reasoning.
Stonington is an ERISA fiduciary that manages
institutional capital on behalf of various public and private
entities, including pension funds, private endowments, and
financial institutions. It purchased Dictaphone Corporation
in 1995 and, according to Stonington, "built it into the
healthcare area’s leading provider of dictation, transcription
and patient information management solutions."
L&H, a corporation that specializes in speech recognition
technology and related products, was incorporated in
Belgium and has headquarters in Burlington,
Massachusetts, and Ieper, Belgium. L&H acquired
Dictaphone from Stonington in mid-2000. In November
2000, Stonington filed an action in Delaware Chancery
Court against L&H and several former L&H officers and
directors alleging that L&H’s acquisition of Dictaphone from
Stonington was in exchange for worthless L&H stock and
was procured by fraud ("the Delaware Fraud Action"). The
officer and director defendants were ultimately arrested and
jailed in Belgium on charges of securities fraud, and the
Delaware Fraud Action was later removed to federal court
and is now an adversary proceeding in the Delaware
bankruptcy case of L&H. On November 28, 2000, the day
after Stonington filed the Delaware Fraud Action,
Stonington sought and obtained a Belgian court order
directing L&H to turn over its shares of Dictaphone to a
court-appointed trustee.
4
On November 29, 2000, L&H filed a Chapter 11 petition
in the United States District Court for the District of
Delaware. The next day, L&H filed for bankruptcy
protection in Belgium by filing a Petition for Concordat
under Belgian law. There were, and have been, dual
insolvency proceedings (or perhaps we could say,"dueling"
proceedings) in the two jurisdictions. Stonington filed
claims against L&H in both proceedings arising out of the
Dictaphone merger based on L&H’s fraudulent activities
and misrepresentations in connection with the transaction
(the "Dictaphone Merger Claims"). Although L&H challenged
Stonington’s claims in the Belgian proceeding, the Belgian
court allowed the claims.
The present dispute centers on the treatment of the
Dictaphone Merger Claims. Stonington asserted the right to
pursue allowance and treatment of these claims in
Belgium, where they would be treated as unsecured claims,
on a parity with other unsecured creditors, and where they
would not be subject to subordination, as would be called
for under section 510 of the Bankruptcy Code. It is clear
that L&H desired that section 510(b) should be applied to
Stonington’s claims, and seems that the amount of
Stonington’s claims -- estimated to be $500 million --
would, in combination with the other 510(b) claims, dwarf
the unsecured claims if not subordinated.1
Both the Delaware Bankruptcy Court and the Belgian
court have expressed views on this issue. In May 2001, in
the Delaware bankruptcy proceedings, L&H sought a
declaratory judgment that any claim asserted by Stonington
in the Delaware Bankruptcy Court would be subject to
mandatory subordination under section 510(b).2 In granting
L&H the declaratory relief it requested, the Bankruptcy
Court ruled:
_________________________________________________________________
1. At the August 2001 oral argument, L&H’s attorney indicated that
Stonington claimed $500 million, and that the 510(b) claims totaled two
or three billion dollars, overwhelming the approximately $500 million
dollars of non-510(b) claims.
2. L&H pursued this relief by filing an amended complaint and a motion
for partial judgment on the pleadings or, alternatively, partial summary
judgment, on its fourth cause of action, seeking subordination under
510(b).
5
The claims asserted by Stonington in the Delaware
Chancery Court Action . . . are hereby determined to be
pre-petition claims that are subject to mandatory
subordination under section 510(b) of the Bankruptcy
Code, such that, should Stonington ever file a proof of
claim in these Bankruptcy Cases . . . based upon these
claims, the claims asserted therein would have the
same priority as the common stock of L&H.
The Bankruptcy Court reasoned that Stonington’s claims
arose "from recission of a purchase or sale of a security of
the debtor" and that even Stonington’s breach of conflict
claims were encompassed in the category of claims"for
damages arising from the purchase or sale of such a
security." Stonington did not appeal this ruling. The
Bankruptcy Court disclaimed any intention of "dictating in
any way to the Belgian court what their application of
Belgian law might be," and left open the possibility that the
Belgian court would "rule that under Belgian law the plan
as proposed cannot be confirmed," leaving debtors in a
"Catch-22."
The Belgian court appears to have done exactly that. In
the Belgian court, L&H sought to confirm a reorganization
plan that would have subordinated Stonington’s claims, but
the Belgian court rejected the plan based on principles of
Belgian bankruptcy law that required equal treatment,
rather than subordination, of such claims. In its order of
June 20, 2001, rejecting the plan, the Belgian court held
that "[t]here is no legal justification for the distinction made
within the category of general secured and unsecured
creditors as it is not based on general and objective
criteria." L&H did not appeal this ruling in Belgium. On
Sept. 18, 2001, the Belgian court apparently again rejected
an American-style plan proposed by L&H.
It was thus apparent that L&H and Stonington were"at
odds" over a "true conflict" between Belgian and United
States law. In fact, Stonington’s Belgian counsel suggested
that L&H dismiss its Chapter 11 case because of the
"impossible mission" of "combin[ing] the irreconcilable
requirements of Belgian and of U.S. law." L&H did not
follow this advice.
6
After various proceedings, whose details are not crucial
here, L&H then filed a second amended complaint against
Stonington, and moved for partial judgment on the
pleadings or partial summary judgment on a newly added
sixth cause of action, the so-called "Forum Selection
Claim." In this cause of action, L&H maintained that there
was a "true conflict" between Belgian and U.S. law and
that:
It is Stonington’s position that it can --
notwithstanding its filing of proofs of claim in and
acknowledged submission to the equitable jurisdiction
of this Court -- pursue allowance of the Dictaphone
Merger Claims solely in Belgium. If it is allowed to do
so, it will avoid the effects of this Court’s determination
that those claims should be subordinated to the level
of L&H common stock, and potentially obtain payment
of those claims pari passu with the rest of L&H’s
general unsecured creditors.
The L&H Group, by contrast, maintains that the fact
that the relevant relationship between Stonington and
L&H is centered exclusively in the U.S. requires that all
matters relating to the Dictaphone Merger Claims,
including the priority, allowance, and treatment
thereof, be adjudicated by this Court under the
Bankruptcy Code.
L&H had specifically sought declaratory relief, as opposed
to injunctive relief, in its motion and as to this particular
cause of action in its second amended complaint, although
it also included a general prayer for any other relief the
Court deemed appropriate. In the memorandum
accompanying its motion, L&H argued that the
requirements for declaratory relief had been satisfied. It did
not seek injunctive relief, or claim to have met the
requirements for entry of an injunction, or even address the
applicable standards for granting injunctive relief.
In relation to the merits, L&H urged the Court to decide
whether the treatment of the Dictaphone Merger Claims
should be "determined exclusively by this Bankruptcy
Court in accordance with the Bankruptcy Code" based on
whether there was "repugnance" between Belgian and U.S.
7
law. If there was no repugnance, L&H contended, the Court
should determine which country was the "center of gravity"
of the transactions.
The Bankruptcy Court heard oral argument on L&H’s
motion and issued a ruling from the bench. It defined the
"crux of the argument" as "whether principles of
international comity should operate to preclude this Court
from imposing the impact of [its May 2001 determination
that Stonington’s claims were subject to subordination].
And, to allow Stonington to continue to pursue in Belgium,
not only the assertion of its claim, but also the matter of its
treatment under any Belgian Concordat reorganization
process [sic]." Citing Maxwell Communication Corp. v.
Societe Generale (In re Maxwell Communication Corp.) , 93
F.3d 1036 (2d Cir. 1996), the Court determined that there
was a "true conflict" and that the United States was the
"center of gravity." Its response was to grant"not only
declaratory relief but injunctive relief against Stonington,
directing Stonington not to pursue the argument in the
Belgian Concordat proceedings."
After the hearing, L&H submitted a proposed order--
whose language the Court ultimately adopted --
acknowledging in the accompanying letter that the order
provided for both a declaration and an injunction. The
Bankruptcy Court entered the order, which read as follows:
1. The motion is hereby granted in its entirety.
2. The priority, treatment, and classification of the
Dictaphone Merger Claims (as defined in the Motion)
are matters to be determined exclusively by the
Bankruptcy Court in accordance with the Bankruptcy
Code.
3. Stonington is hereby immediately enjoined from
further prosecuting the issue of the priority, treatment,
and classification of the Dictaphone Merger Claims in
Belgium under Belgian law.
The District Court affirmed this order essentially for the
reasons given by the Bankruptcy Court, and Stonington
filed a timely appeal.
8
III. Discussion
We note at the outset that the task facing a court in this
factual and legal setting is, to say the least, difficult. In
fact, it has been called a "Herculean task" to do what is
required here -- namely, to "accommodat[e] conflicting,
mutually inconsistent national regulatory policies while
minimizing the amount of interference with the judicial
processes of other nations." Laker Airways Ltd. v. Sabena,
731 F.2d 909, 214 (D.C. Cir. 1984). We undertake our
analysis with a degree of empathy for courts called upon to
make decisions in complex proceedings such as these, in
an amorphous area of the law such as this one, and
especially in high stakes, fast moving bankruptcy
proceedings.
On appeal, Stonington argues primarily that the
Bankruptcy Court entered an "anti-argument" injunction
that impermissibly interfered with foreign proceedings, and
that the Bankruptcy Court inappropriately applied to this
situation the choice-of-law analysis employed by the Court
of Appeals for the Second Circuit in Maxwell
Communication Corp. v. Societe Generale (In re Maxwell
Communication Corp.), 93 F.3d 1036 (2d Cir. 1996). In
response, L&H endorses the application of Maxwell to these
circumstances and contends that the Bankruptcy Court
correctly determined that there is a "true conflict" and that
the United States is indeed the "center of gravity" of the
transactions. It further argues that, even if this were an
anti-suit injunction, it was appropriately entered here to
protect the Bankruptcy Court’s jurisdiction and the
important public policies underlying United States
bankruptcy law.
Despite the parties’ and the courts’ focus on a"choice-of-
law" analysis and their reliance on Maxwell , we conclude
that the fashioning of relief in this situation does not
merely call for a choice between United States and Belgian
law as applicable to the priority of Stonington’s claims in
the Delaware bankruptcy proceedings. It requires more. In
our view, the Bankruptcy Court did not simply make a
"choice-of-law determination," but also imposed an "anti-
suit injunction," calling for the application of specific legal
precepts developed by our court. We will address each
9
aspect of its ruling in turn, first addressing the anti-suit
injunction, and then considering whether the Bankruptcy
Court employed the proper choice-of-law analysis.
A. Anti-Suit Injunction
The portion of the Bankruptcy Court’s order enjoining
Stonington "from further prosecuting the issue of the
priority, treatment, and classification of the Dictaphone
Merger Claims in Belgium under Belgian law" amounts to
an anti-suit injunction. It ordered Stonington to pursue the
key issues relevant to the allowance of its claim, and
impacting directly the amount it would be paid, in Delaware
Bankruptcy Court, and not to pursue them in Belgium. We
have often said that enjoining a party from resorting to a
foreign court is equivalent to enjoining foreign proceedings.
See, e.g., Compagnie des Bauxites de Guinea v. Insurance
Co. of N. America, 651 F.2d 877, 887 (3d Cir. 1981) (finding
"no difference between addressing an injunction to the
parties and addressing it to the foreign court itself ").3
Further, although the Bankruptcy Court and Stonington
urge us to consider it an "anti-argument" injunction rather
than an "anti-suit" injunction,4 we view this as a distinction
without a difference in the factual setting presented.
A number of our opinions address the standards
governing entry of an anti-suit injunction. They typically
have arisen in the international arena, where
considerations of comity come into play. Based on a
"serious concern for comity," we have adopted a restrictive
_________________________________________________________________
3. L&H attempts to distinguish Compagnie des Bauxites on the ground
that there we acknowledged the district court’s power to issue such
injunctions. But, while true, it is beside the point. We have
acknowledged the district court’s power to enjoin foreign actions, but
this says nothing about the standards that guide courts when they
exercise that power, nor does it indicate whether enjoining a party is the
equivalent of enjoining a foreign proceeding.
4. The Bankruptcy Court differentiated between whether Stonington
could file a proof of claim and participate in the Belgian proceedings,
which it had previously stated Stonington could do, and whether
Stonington could litigate the treatment of its claim. It disclaimed any
"attempt to control [the Belgian Concordat] or an attempt to trump the
decisions made in that forum."
10
approach to granting such relief. General Elec. Co. v. Deutz
AG, 270 F.3d 144, 161 (3d Cir. 2001). And, we have
described international "comity" as the "recognition which
one nation extends within its own territory to the
legislative, executive, or judicial acts of another . . . [that]
should be withheld only when its acceptance would be
contrary or prejudicial to the interest of the nation called
upon to give it effect." Somportex Ltd. v. Philadelphia
Chewing Gum Corp., 453 F.2d 435, 440 (3d Cir. 1972); see
also Hilton v. Guyot, 159 U.S. 113, 163-64 (1895). The
principles of comity are particularly appropriately applied in
the bankruptcy context because of the challenges posed by
transnational insolvencies and because Congress
specifically listed "comity" as an element to be considered
in the context of such insolvencies, albeit in relation to
ancillary proceedings. See 11 U.S.C. S 304; Maxwell
Communication Corp. v. Societe Generale (In re Maxwell
Communication Corp.), 93 F.3d 1036, 1048 (2d Cir. 1996);
Remington Rand Corp. v. Business Sys. Inc., 830 F.2d 1260,
1271 (3d Cir. 1987).
These principles animate our jurisprudence in this area.
In General Electric Co. v. Deutz AG, the district court had
enjoined the defendant "from applying to English courts to
enforce the alleged right to arbitration." 270 F.3d 144, 148
(3d Cir. 2001). On appeal, we noted that the federal courts
of appeals had developed two different standards, one
"liberal" and the other "restrictive," for determining when to
enjoin foreign proceedings, and we concluded that our
jurisprudence endorsed the restrictive approach. 5 Id. at
160-61; see also Republic of the Philippines v. Westinghouse
_________________________________________________________________
5. In General Electric, we contrasted the"lax" or "liberal" approach of the
courts of appeals for the Fifth, Seventh, and Ninth Circuits with the
"restrictive" approach adopted by the courts of appeals for the Second,
Sixth, and District of Columbia Circuits. Compare Kaepa, Inc. v. Achilles
Corp., 76 F.3d 624, 626-28 (5th Cir. 1996) ("lax" standard); Allendale
Mut. Ins. Co. v. Bull Data Sys., Inc., 10 F.3d 425, 431-32 (7th Cir. 1993)
(same); and Seattle Totems Hockey Club, Inc. v. Nat’l Hockey League, 652
F.2d 852, 855-56 (9th Cir. 1981) (same); with Gau Shan Co. v. Bankers
Trust Co., 956 F.2d 1349, 1354-58 (6th Cir. 1992) ("restrictive"
approach); China Trade & Dev. Corp. v. M.V. Choong Yong, 837 F.2d 33,
36 (2d Cir. 1987) (same); and Laker Airways, 731 F.2d at 937-45 (same).
11
Elec. Corp., 43 F.3d 65, 76 (3d Cir. 1994) (the power to
enjoin a foreign action should "be exercised only in rare
cases, and must be premised on a thorough analysis of the
interests at stake"). Applying this approach, we reversed the
grant of injunctive relief.
Likewise, in Compagnie des Bauxites de Guinea v.
Insurance Co. of North America, 651 F.2d 877 (3d Cir.
1981), the district court had enjoined a party from
maintaining an action filed in England. We reversed,
reasoning that "[r]estraining a party from pursuing an
action in a court of foreign jurisdiction involves delicate
questions of comity and therefore ‘requires that such action
be taken only with care and great restraint’." Id. at 887
n.10 (quoting Canadian Filters (Harwich) Ltd. v. Lear-
Siegler, Inc., 412 F.2d 577, 578 (1st Cir. 1969)). We
concluded that neither duplication of issues nor delay in
filing justified such an injunction, and further noted that
even the fact that a foreign action was "harassing and
vexatious" would not, by itself, warrant injunctive relief.6 Id.
at 887; see also Gau Shan Co. v. Bankers Trust Co., 956
F.2d 1349, 1357 (6th Cir. 1992) (if duplication were enough
to justify an anti-suit injunction, "parallel proceedings
would never be permitted because by definition such
proceedings involve the same claim and therefore the same
parties and issues").7
_________________________________________________________________
6. Here it would be difficult to say that the second action was "harassing
and vexatious" as L&H pursued both actions.
7. In General Electric, the injunction at issue prevented the party from
filing proceedings and, in Compagnie des Bauxites, it prevented a party
from maintaining a proceeding that had already been filed. Here, in
contrast, the two courts have issued conflicting rulings. There may be a
difference between pre- and post-judgment anti-suit injunctions. See,
e.g., Laker Airways, 731 F.2d at 926-27 ("[P]arallel proceedings on the
same in personam claim should ordinarily be allowed to proceed
simultaneously, at least until a judgment is reached in one which can be
pled as res judicata in the other."); cf. Ingersoll Milling Mach. Co. v.
Granger, 833 F.2d 680, 684 (7th Cir. 1987) (noting the importance of
procedural posture in the anti-suit injunction context). See generally
BORN, GARY B., INTERNATIONAL CIVIL LITIGATION IN UNITED STATES C
OURTS 489
(3d ed. 1996). But neither party argues that the May 2001 order of the
Bankruptcy Court or the Belgian court’s rejection of L&H’s proposed
12
Courts that, like us, adopt the restrictive approach to
enjoining foreign proceedings acknowledge that courts may
enter an anti-suit injunction on the rare occasions when
needed "to protect jurisdiction or an important public
policy." General Elec., 270 F.3d at 161; see also Laker
Airways, 731 F.2d at 927. They have interpreted these
exceptions narrowly. In Laker Airways, for instance, the
Court of Appeals for the District of Columbia Circuit
approved an anti-suit injunction where the foreign
defendants initiated the foreign proceeding for the"sole
purpose of terminating the United States claim" and where
the foreign court had enjoined parties from pursuing an
action in the United States. Id. at 915. The foreign
proceeding threatened United States jurisdiction in that it
"attempt[ed] to carve out exclusive jurisdiction over
concurrent actions." Id. at 930.
Few cases have addressed a situation in which an anti-
suit injunction has been appropriately entered to protect
important public policy, but the courts that take a
restrictive approach have referenced this exception as being
narrowly drawn. In Gau Shan Co., the Court of Appeals for
the Sixth Circuit noted that "there is very little case law on
the magnitude of the importance of public policy
considerations to the decision whether to permit an antisuit
injunction," but concluded that "only the evasion of the
most compelling public policies of the forum will support
the issuance of an antisuit injunction" and that the state-
law treble damages remedy at issue there did not rise to
that level. 956 F.2d at 1357. Notably, the policies that the
Laker Airways court found to justify an anti-suit injunction
_________________________________________________________________
plan can be pled as res judicata in the other proceeding. Stonington
contends that "neither court has actually issued an order directing the
disposition of the estate’s assets," and L&H states that "the Belgian
Court never was presented with or ruled upon the question of the law
properly applicable to the ‘treatment’ of Stonington [sic] claims." Further,
in the May 2001 hearing, debtor’s counsel stated that "I don’t think we’ll
argue that [an order that Stonington’s claims be subordinated] is res
judicata. I don’t think we can argue that." So, we consider our cases that
address the standards for enjoining on-going proceedings to be
appropriately applied in this situation.
13
were not those motivating United States antitrust laws --
the substance of the dispute -- but instead "that United
States judicial functions have been usurped, destroying the
autonomy of the courts." Laker Airways, 731 F.2d at 939.
This is significant because, rather than focus on the public
policies furthered by the substantive law, which
presumably are always present, at least to some degree, the
court focused on what made this case unusual -- namely,
the degree of foreign interference with properly invoked
United States concurrent jurisdiction.
L&H urges us to find that the situation before the
Bankruptcy Court fit into either or both of these narrow
exceptions. Clearly jurisdiction is not implicated in the way
it was in Laker Airways. Not only is there no indication that
the Belgian proceeding’s sole purpose was to deprive the
United States court of its jurisdiction,8 but also L&H, rather
than Stonington, had initiated the foreign proceeding. L&H
tries to sidestep this problem by claiming that the basis of
the Bankruptcy Court’s jurisdiction is in rem , a
circumstance in which courts have been willing to enjoin
foreign proceedings. E.g., Gau Shan Co. , 956 F.2d at 1356.
L&H relies on an opinion of the Court of Appeals for the
Ninth Circuit that interpreted 28 U.S.C. S 1334(e) as giving
district courts in which bankruptcy cases are brought
"exclusive in rem jurisdiction over all of the property in the
estate." In re Simon, 153 F.3d 991, 996 (9th Cir. 1998). If
this is a controlling principle, it would seem that anti-suit
injunctions would always be appropriate in the bankruptcy
context, which surely is not consistent with our anti-suit
injunction jurisprudence or the acknowledged importance
of comity concerns in transnational insolvencies.
L&H also argues that an anti-suit injunction is warranted
to protect the "integrity of the U.S. claims allowance and
distribution scheme" embodied in section 510(b). Again,
_________________________________________________________________
8. One of the reasons given by the Court of Appeals for the D.C. Circuit
for approving the anti-suit injunction entered in Laker Airways was that
the suits were not "parallel proceedings" because the parties filed the
foreign suit not to establish concurrent proceedings on the same dispute,
but rather simply to terminate the U.S. action. In contrast, here the two
insolvency proceedings are parallel in the normal sense of the term.
14
this is an argument for the Bankruptcy Court to consider
on remand, but we note that, if indeed Stonington was
induced to take equity through fraud, this might dilute
L&H’s argument that subordinating Stonington’s claims
promotes an important public policy. Nothing before us
indicates that the Dictaphone Merger Claims, although they
resulted from the sale of equity and have been ruled to be
technically subject to 510 subordination, are not in fact
valid, cognizable claims that some public policy might
support treating pari passu with trade creditors.
In addition to its arguments based on our anti-injunction
cases, Stonington further challenges the entry of an
injunction on several more fundamental grounds. It objects
that Federal Rule of Civil Procedure 65’s irreparable injury
requirement was not complied with. In response, L&H
urges that the Bankruptcy Court appropriately exercised its
discretion under section 105(a) of the Bankruptcy Code, 11
U.S.C. S 105(a), and complied with the relevant
requirements. In our cases considering anti-suit
injunctions, we have not specifically evaluated irreparable
injury and other Rule 65 requirements, but instead reached
only the threshold requirements unique to anti-suit
injunctions, namely comity concerns, which we view as
more restrictive than the general requirements of Rule 65.
See, e.g., Compagnie des Bauxites, 651 F.2d 877; Laker
Airways, 731 F.2d 909. But see Kaepa, Inc. v. Achilles
Corp., 76 F.3d 624, 628 (5th Cir. 1996) (analyzing the grant
of the anti-suit injunction and whether there was
compliance with Rule 65). We think that if the requirements
for an anti-suit injunction are met, these supplant the need
for proof under Rule 65. Here, the requirements of neither
were shown.
Stonington further argues that the Bankruptcy Court
erred in issuing injunctive relief absent a request by the
debtor. As we noted above, L&H’s motion requested
declaratory relief only and there was no discussion of the
standards for granting such injunctive relief in the briefing
before the Bankruptcy Court. We view the fact that the
debtor appears to have requested only declaratory relief,
and never an injunction, to significantly undermine the
basis for entry of the order.
15
Given that our case law unequivocally directs courts to
exercise restraint in enjoining foreign proceedings, we are
skeptical as to whether an anti-suit injunction can be
found to be appropriate in these circumstances. Judge
Rosenn believes that it cannot. Nonetheless, we believe it
appropriate for the Bankruptcy Court to consider in the
first instance the application of the principles we have
discussed and the interplay of the various comity concerns
that were not previously the focus of its attention. We are
privy to only a snapshot of the bankruptcy case and believe
that the type of qualitative analysis we advocate would be
best conducted from the more expansive vantage point of
the bankruptcy judge. Further, the parties have focused on
certain facts, and there may be others not known to us that
could impact on this ruling. Accordingly, we will remand for
the Bankruptcy Court to apply the approach to anti-suit
injunctions that has been developed in our court and to
consider comity concerns in deciding whether this is one of
the rare situations in which such relief is appropriate.
Before leaving this subject, we note that we cannot agree
with L&H or the Bankruptcy Court that Maxwell is
controlling on this issue. In Maxwell, the Court of Appeals
for the Second Circuit affirmed the dismissal of the action
before it in favor of the English court. To reach its decision,
the court determined which law should be applied to the
particular question.9 It concluded that there was a "true
conflict" between English and United States law regarding
the "debtor’s ability to set aside pre-petition transfers to
certain creditors," and then evaluated the connection of
England to the disputes, the relative policy interests of the
United States and England, and, finally, the systemic
interest in a coordinated and harmonious distribution of
assets. Maxwell, 93 F.3d at 1049-53. Because it concluded
that English law applied, it affirmed dismissal in favor of
the English proceedings.
_________________________________________________________________
9. We refer to Maxwell’s analysis primarily as a "choice of law" analysis
because most of the opinion is devoted to determining whether English
or United States law should apply. But the lines between choice of law
and choice of forum are not always easily drawn. The court
acknowledged that both choice-of-law and choice-of-forum questions
generated the litigation, and, by affirming the dismissal of the case in
favor of the English courts, the court effectively chose the forum.
16
Notwithstanding each party’s reliance on the Maxwell
case, all that was determined in Maxwell was that the
district court had not abused its discretion in dismissing
the debtor’s complaint for avoidance of preferential
transactions in deference to the courts and the laws of
England. There was no suggestion that, had the court been
unwilling to dismiss the complaint, it would, in addition,
have enjoined the parties or party from pursuing claims in
England. Although both implicate comity concerns, there is
a difference between staying or dismissing one’s own
proceedings because of a foreign proceeding or judgment,
and enjoining those foreign proceedings. Cf. Laker Airways,
731 F.2d at 931 (stating that "[e]njoining participation in a
foreign lawsuit in order to preempt a potential judgment is
a much greater interference with an independent country’s
judicial processes" than refusing to enforce a judgment);
Gau Shan Co., 956 F.2d at 1355 (distinguishing between
the analysis of a motion for dismissal on forum non
conveniens grounds, which might appropriately include
consideration of "vexatiousness," and a motion for a foreign
anti-suit injunction). Maxwell does the former after
engaging in a choice-of-law analysis. This is simply not a
good "fit" with the injunction context here, to which our
anti-suit injunction case law discussed above most
appropriately applies.
B. Choice-of-Law Analysis
Maxwell also served as the fulcrum for the Bankruptcy
Court’s choice-of-law analysis. Insofar as the Court was
being called upon to determine which law applied to
Stonington’s claims in Delaware, deciding whether, for
purposes of the Plan of Reorganization in the Delaware
bankruptcy proceedings, subordination of those claims, or
no subordination of those claims, is the rule,10 it
_________________________________________________________________
10. Technically, preventing Stonington from pursuing its claims "in
Belgium under Belgian law" may leave open the possibility that it could
pursue its claims in Belgium under United States law. And in some
ways, the order does force the Belgian court to apply U.S. law to the
treatment of Stonington’s claims through the anti-suit injunction.
However, in granting L&H’s motion, the Bankruptcy Court specifically
said that it was not dictating the law the Belgian court should apply in
the Belgian proceedings. Further, L&H specifically disclaimed any
intention of having the Bankruptcy Court "dictate how claims will be
treated in the Belgian Proceeding" and, in fact, said that the Bankruptcy
Court lacked the power to do so.
17
appropriately applied the choice-of-law considerations
outlined in Maxwell. However, we fear the Bankruptcy
Court’s "center of gravity" analysis falls short of what is
required in this factual setting, and what Maxwell teaches,
given the notions of comity that must be considered. As in
Maxwell, the Court here determined that there was a "true
conflict"11 and then examined the transactions at issue and
the connections of the parties in order to assess the most
"connected" locale or jurisdiction. Here, based upon the
transactions leading to the Dictaphone Merger Claims, that
jurisdiction was found to be Delaware. In Maxwell, it was
found to be England.
However, that is not, and was not in Maxwell, the end of
the analysis. Rather, the heart of the inquiry in Maxwell
involved the court’s assessment of the nature of the
respective countries’ policies and the principles animating
the laws, so as to determine which country actually had a
stronger interest in its policy’s being advanced. The court
considered the strength of the policies underlying the
Bankruptcy Code’s avoidance provisions and concluded
that the policies of "equal distribution to creditors and
preserving the value of the estate" were effectuated by the
English equivalent. Maxwell, 93 F.3d at 1052. To make this
determination, it relied on the detailed exposition of the two
countries’ laws and policies in the bankruptcy court
opinion below. The court also noted that the strong English
connection to the transactions implied England’s strong
interest in applying its law, and also suggested that it was
foreseeable that English law would be applied. Id. Finally,
it examined which choice of law would further the"systemic
_________________________________________________________________
11. Stonington urges that there was not, or at least not yet, a "true
conflict" that would trigger a comity analysis, but we agree with the
Bankruptcy Court that a true conflict existed. See Maxwell, 93 F.3d at
1050 ("[A] conflict between two avoidance rules exists if it is impossible
to distribute the debtor’s assets in a manner consistent with both
rules.").
Some language in the Bankruptcy Court’s oral opinion suggests that
the relevant conflict is between the parties rather than between the laws.
As the relevant conflict is between United States and Belgian law, this
issue may need to be revisited and clarified on remand.
18
interest" in "smoothly functioning international law." Id. at
1053.
The type of examination, then, requires more than an
analysis of contacts. It requires, in addition, a qualitative
assessment that can only occur if there is some
understanding, and explication, of the way in which the
allowance, or subordination, of the claims at issue would
advance or detract from each nation’s policy regarding
insolvency proceedings and distributions to creditors. For
instance, the Bankruptcy Court should consider the
strength of the United States’ interest in applying its
bankruptcy laws and, specifically, its subordination rules in
these circumstances. The policies generally furthered by
subordination may be less compelling here if Stonington
was induced to enter a merger agreement, and become an
equity holder, by fraud. The Bankruptcy Court should also
consider the countervailing Belgian subordination rules and
underlying policies, which are mentioned, but not
developed, in the record. This discussion was not present in
the Bankruptcy Court’s consideration here and should be
undertaken when the Bankruptcy Court engages in a
choice-of-law determination.
C. Law of the Case, Waiver, and Estoppel
Stonington makes several additional arguments on
appeal: that the Bankruptcy Court’s order violates the law
of the case and that L&H’s argument that U.S. law governs
distribution in the Belgian proceeding is estopped and
waived.
Stonington urges that the Bankruptcy Court’s order
violates the law of the case doctrine. Specifically, it
contends that the Bankruptcy Court, having repeatedly
recognized Stonington’s right to proceed in the Belgian
reorganization proceedings, file a proof of claim, and
otherwise participate, cannot now order that Stonington
should not be permitted to do so. We recognize, however,
that the Bankruptcy Court’s previous reflections on
Stonington’s ability to pursue its claims were not uttered in
the same context as the ruling we review.12 Accordingly, we
_________________________________________________________________
12. In December 2000, the Bankruptcy Court said that Stonington was
"absolutely right in the -- contention that[it] must be permitted to
19
do not think that the Bankruptcy Court’s previous
references to Stonington’s right should serve as an
automatic bar, or law of the case, regarding its
consideration of an anti-suit injunction and conflict of laws
issue.
Further, Stonington argues that the debtor’s failure to
appeal the allowance of Stonington’s claims in the Belgian
proceeding and the Belgian court’s rejection of the debtor’s
proposed plan (which contained a subordination provision)
constitute a waiver of its right to assert that Stonington
should not be allowed to pursue its claims in Belgium
under Belgian law. Stonington also urges that L&H has
taken the position that Stonington can pursue all pre-
petition claims other than "penalties" in the Belgian
proceeding.13 While we do not view this conduct as creating
a bar, nonetheless we would urge that the Bankruptcy
Court, as a court of equity, consider L&H’s conduct in its
overall assessment of the issues before it. Especially
relevant are the facts that: the debtor sought relief in the
Belgian court; pursued a plan in that court; and, when
faced with an adverse ruling, did not appeal it, but instead
sought refuge from the Belgian court in the United States.
To the extent that the Bankruptcy Court views these
aspects as having bearing on the equities, it should include
them in its ruling.
_________________________________________________________________
participate in the Belgian reorganization proceedings." The Court made
this statement while deciding the effect of the automatic stay on the
Belgian order to deposit Dictaphone shares with a court-appointed
trustee. It reiterated that Stonington was specifically permitted to file its
pre-petition claims in Belgium and that to preclude it "would be
problematic" in the context of the April 2001 hearing on a motion to
enjoin Stonington from pursing penalties in Belgium. Even in the
hearing on the motion that gives rise to this appeal, the Bankruptcy
Court repeated its prior statement that Stonington could participate in
the Belgian Concordat.
13. As noted above, the Belgian court had ordered L&H to deposit the
Dictaphone stock with a court-appointed trustee. It imposed penalties for
each day that L&H failed to comply with this order. In seeking an order
from the Delaware Bankruptcy Court enjoining Stonington from
pursuing these penalties in Belgium, L&H stated that"Stonington should
. . . have ‘full access’ to the Belgian Concordat Court, but only for the
purpose of proving its pre-petition claims."
20
D. Duplicate Proceedings
Situations such as this call out for coordination of the
two plenary proceedings. The parties have alluded to, and
we are aware of, the ability of courts to discuss and
ultimately agree upon an amicable resolution of these types
of issues by way of an understanding or "protocol" that
becomes a governing instrument by agreement. Maxwell
was the "poster" case for how courts can work together
when dual proceedings take place, and other courts have
followed suit. E.g., In re Ionica PLC , 241 B.R. 829 (Bankr.
S.D.N.Y. 1999); In re Commodore Int’l Ltd., 242 B.R. 243(Bankr. S.D.N.Y. 1999), aff ’d, 2000 WL 977681 (S.D.N.Y.
July 17, 2000). In Maxwell, a protocol was established -- "a
plan of reorganization and a scheme of arrangement, which
are interdependent documents and were filed by the
administrators in the United States and English courts
respectively" -- that was praised as " ‘. . . perhaps the first
world-wide plan of orderly liquidation ever achieved’."
Maxwell, 93 F.3d at 1042 (quoting Jay Lawrence
Westbrook, The Lessons of Maxwell Communication, 64
Fordham L. Rev. 2531, 2535 (1996)).
The parties have indicated that such a protocol was
attempted but was not achievable in the instant situation,
although the record is somewhat sparse on this issue.14
There are references to things done or said by the Belgian
court, but no references to any specific attempt-- by the
parties or by the Bankruptcy Court -- to bridge the gap
between them. Instead, counsel complains that the debtor
faces "an impossible situation" -- that we must suggest is
of the debtor’s own making -- while the Bankruptcy Court
assumed at one point that the "Catch-22" will be worked
out through negotiation, and indicated that such
coordination should be initiated by the debtor.
We strongly recommend, in a situation such as this, that
an actual dialog occur or be attempted between the courts
of the different jurisdictions in an effort to reach an
_________________________________________________________________
14. Our request that the parties supplement the briefing on this issue
resulted only in citations to comments by counsel at various oral
arguments and to the plan L&H had submitted to the Belgian court,
which purportedly included a "protocol-like provision."
21
agreement as to how to proceed or, at the very least, an
understanding as to the policy considerations underpinning
salient aspects of the foreign laws. Maxwell provides a good
example. There, the Court of Appeals for the Second Circuit
attributed the "high level of international cooperation and a
significant degree of harmonization of the laws of the two
countries" in large part to "the cooperation between the two
courts overseeing the dual proceedings." Maxwell, 93 F.3d
at 1053. While we do not know whether the cooperation
there was initiated by the court or the parties, there is no
reason that a court cannot do so, especially if the parties
(whose incentives for doing so may not necessarily be as
great) have not been able to make progress on their own.
See generally BUFFORD, SAMUEL L., ET AL., INTERNATIONAL
INSOLVENCY 93 (Federal Judicial Center 2001) (recommending
that judges communicate with each other in transnational
cases). In Maxwell, the court suggested that"bankruptcy
courts may best be able to effectuate the purposes of the
bankruptcy law by cooperating with foreign courts on a
case-by-case basis." Id. Even if cooperation could not be
achieved, it would be valuable to communicate regarding
the policies animating a certain law so as to be better able
to perform a choice-of-law analysis. While not required by
our case precedent or any principle of law, we urge that, in
a situation such as this, communication from one court to
the other regarding cooperation or the drafting of a protocol
could be advantageous to the orderly administration of
justice.
IV. Conclusion
For the reasons above, we will REVERSE the District
Court’s judgment and REMAND to the District Court for it
to remand, in turn, to the Bankruptcy Court for further
proceedings consistent with this opinion.
22
ROSENN, Circuit Judge, Concurring:
I agree with the majority that the Bankruptcy Court’s
improvident grant of injunctive relief against Stonington
Partners, Inc. (Stonington) must be reversed. Lernout &
Hauspie Speech Products, N.V. (L&H) neither sought the
injunction, nor did it fulfil any of the procedural
requirements to obtain an injunction. I also agree with the
majority’s recommendation that the Delaware and Belgian
bankruptcy courts should engage in a dialogue in an effort
to develop a protocol for the cooperation of the two courts
in overseeing and harmonizing the dual proceedings so as
to effectuate the orderly administration of justice. I write
separately, however, because I see no basis or necessity for
remanding this proceeding to the Delaware Bankruptcy
Court.
Despite the absence of any request by L&H for injunctive
relief and even though "our case law unequivocally directs
courts to exercise restraint in enjoining foreign
proceedings," (maj. op. at 16), the majority remands the
case to the Bankruptcy Court "to apply the approach to
anti-suit injunctions that has been developed in our court
and to consider comity concerns in deciding whether this is
one of the rare situations in which such relief is
appropriate." Id. Such a remand to the Bankruptcy Court
and for such purpose is inexplicable in the circumstances
of this case and in the absence of any request by L&H for
injunctive relief and its failure to comply with injunctive
procedural requirements.
These proceedings never required a choice-of-law
analysis. The issue did not arise in the context of an
ancillary proceeding commenced in the United States in aid
of a foreign proceeding or in the context of a request to the
United States court to abstain or dismiss in deference to a
plenary foreign proceeding under 11 U.S.C. S 305. Here,
L&H, a corporation organized under the laws of Belgium,
voluntarily commenced a plenary bankruptcy
reorganization proceeding in Belgium and a separate
bankruptcy proceeding in Delaware. Both of these
bankruptcy proceedings followed on the heels of
Stonington’s action against L&H and certain of its former
officers and directors, all of whom have been arrested and
23
jailed in Belgium on charges of securities fraud, to set aside
L&H’s acquisition of the Dictaphone Corporation from
Stonington because of the perpetration of fraud. A few days
before L&H filed its bankruptcy petition, the Belgian court
ordered L&H to turn over its shares of Dictaphone to a
court-appointed trustee.
Neither the Belgian court nor the Delaware Bankruptcy
Court has declined to exercise jurisdiction over any part of
the case. Under such circumstances, it would be an abuse
of discretion for the Bankruptcy Court or the District Court
to enjoin the presentation of a claim in the court of another
sovereign. I see no factors here that justify the breach of
comity among the courts of separate sovereignties. See
Compagnie des Bauxites de Guinea v. Insurance Co. of
North America, 651 F.2d 877, 887 (3d Cir. 1981). In fact, on
December 4, 2000, the Bankruptcy Court informed counsel
for Stonington in open court that "you’re absolutely right in
the contention that you must be permitted to participate in
the Belgian reorganization proceedings."
I see nothing about this case that commands a choice-of-
law analysis, particularly in light of the Bankruptcy Court’s
acknowledgment that if it were to give direction to the
Belgian court what or what not to do, "that would be
violative of international comity principles and the like."
Yet, the majority remands this case to the Bankruptcy
Court to undertake another choice-of-law analysis to
determine whether it should enjoin Stonington from
pursuing rights granted to it under foreign law in a
proceeding that L&H initiated in the foreign court. The
reasons given for the remand are vague and lack
substance: to consider "the application of the principles"
the majority has discussed and "the interplay of the various
comity concerns" on which the Bankruptcy Court failed to
focus its attention, or to search for facts "not known to us
that could impact on the ruling." (Maj. op. at 16). These are
indeed slender reeds on which to empower another effort in
the Bankruptcy Court to enjoin Stonington’s participation
in the Belgian proceedings, especially when the record on
the issue before us is sufficient and the legal principles are
well-established.
24
The other anomaly produced by the remand to the
Bankruptcy Court is that it discourages and burdens the
loss-recovery effort of Stonington, an American ERISA
fiduciary that manages institutional capital on behalf of
public and corporate pension funds, and private
endowments, before a Belgian court that is ready and
willing to entertain its claim. Furthermore, were the
Bankruptcy Court again to issue an injunction after
another choice-of-law analysis, it would, in effect, challenge
the dignity and sovereignty of the Belgian court and the
outcome of the proceedings before it, an act of hostility
rather than comity. To rationalize that the Bankruptcy
Court’s preclusion of Stonington from presenting its claim
does not diminish the authority or jurisdiction of the
foreign court is sophistry. "[T]here is no difference between
addressing an injunction to the parties and addressing it to
the foreign court itself." 651 F.2d at 887.
L&H, a corporation organized under Belgian laws,
voluntarily sought the protection of the Belgian courts.
Stonington did not initiate these proceedings in that court;
L&H did. Stonington did not seek protection under Belgian
law; L&H did. Remanding the case to the Bankruptcy Court
for another opportunity to attempt to shore up a case for
injunctive relief is inappropriate because L&H never sought
an injunction in the first place, and it disregards the
equities of the parties and the principles of international
comity. Furthermore, it is contrary to our case law, which
"unequivocally directs courts to exercise restraint in
enjoining foreign proceedings." (Maj. op. at 16) It ignores
the majority’s skepticism, which I share, "as to whether an
anti-suit injunction can be found to be appropriate in these
circumstances." Id. It runs counter to the Bankruptcy
Court’s ruling, repeated at the hearing on April 10, 2001,
that "it was well established [on February 8th] and well
understood that Stonington could pursue its claim in the
concordat."
Therefore, this case should not be remanded to the
Bankruptcy Court for further consideration on the
appropriateness of injunctive relief.
25
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
26