Schimmelpenninck v. Byrne , 183 F.3d 347 ( 1999 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________________
No. 98-10600
__________________________
In the Matter of: RUTGER SCHIMMELPENNINCK, Curator
of the Estate of Harris Adacom Corporation B.V.;
WOUTER J.P. JONGEPIER, Curator of the Estate of
Harris Adacom Corporation B.V.
Debtors,
------------------------------
RUTGER SCHIMMELPENNINCK, Curator of the
Estate of Harris Adacom Corporation B.V.;
WOUTER J.P. JONGEPIER, Curator of the
Estate of Harris Adacom Corporation B.V.
Appellants,
versus
JAMES J. BYRNE,
Appellee.
___________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
___________________________________________________
July 29, 1999
Before JOLLY, WIENER, and PARKER, Circuit Judges.
WIENER, Circuit Judge:
This appeal presents complex issues that arise at the
confluence of a Dutch bankruptcy proceeding and a Texas state court
lawsuit. Appellants, Rutger Schimmelpenninck (“RJS”) and Wouter
J.P. Jongepier (“WJP”) are the Curators1 of Harris Adacom
Corporation, B.V. (“HACBV” or “Debtor”), the debtor in a
liquidation proceeding2 filed in Amsterdam, the Netherlands.
During administration of the estate, a creditor of HACBV, James T.
Byrne (“Byrne” or “Appellee”), filed suit in Texas state court (the
“Byrne Lawsuit”) against Harris Adacom Network Services (“HANS”),
a wholly-owned subsidiary of the Debtor, alleging, inter alia,
that, under theories of alter ego and single business enterprise,
the subsidiary, HANS, is responsible for the debts that its parent,
the Debtor, purportedly owed to Byrne. In an attempt to preserve
for the estate the value of the Debtor’s ownership interest in HANS
by preventing diminution of the subsidiary’s assets through the
execution of an improvidently granted judgment, the Curators filed
this ancillary proceeding in the United States Bankruptcy Court in
the Northern District of Texas. In it they requested declaratory
and injunctive relief to prevent Byrne from prosecuting his alter
ego and single business enterprise claims against HANS in the Byrne
Lawsuit.3
1
The office of curator in a Dutch bankruptcy is the equivalent
of a trustee in a United States bankruptcy.
2
Roughly the equivalent of a Chapter 7 proceeding in a United
States bankruptcy.
3
In addition to his indirect claims, Byrne brought direct
claims against HANS for breach of contract, fraud, and quantum
meruit. The Curators are not challenging Byrne’s pursuit of these
claims because they are direct claims for wrongs alleged to have
been committed by HANS. The Curators only seek to enjoin Byrne
from prosecuting his alter ego and single business enterprise
2
The bankruptcy court, and the district court on appeal, denied
the Curators’ request for declaratory and injunctive relief. These
courts’ analyses were grounded in their equating of Byrne’s claims
to those raised by a similarly situated creditor in S.I.
Acquisition, Inc. v. Eastway Delivery Service (In re S.I.
Acquisition).4 In S.I. Acquisition, we established a two-part,
disjunctive test for determining whether a creditor’s indirect
claim alleging alter ego against a non-bankrupt corporation
affiliated with the debtor corporation is subject to the automatic
stay provisions of the Bankruptcy Code (the “Code”): Does the
creditor’s cause of action either (1) “belong to” the corporate
debtor, or (2) seek “recovery or control of property” of the
corporate debtor. If the first question gets a “yes” answer, the
inquiry is over; but if the first is answered “no,” the second
question must be asked and answered. In S.I. Acquisition, we
answered the first question in the affirmative, holding that the
creditor’s alter ego claim against a non-bankrupt affiliate —— the
parent corporation of the bankrupt subsidiary corporation which
actually owed the debt —— “belongs to” the corporate debtor and is
therefore subject to the automatic stay. As such, we did not reach
the second, “recovery or control of property” question.
In the instant case, the bankruptcy and district courts
claims because they are indirect, derivative claims that attempt to
recover from HANS debts owed by HACBV.
4
817 F.2d 1142 (5th Cir. 1987).
3
identified what they believed to be significant factual
distinctions that removed Byrne’s claim from the S.I. Acquisition
model. Specifically, in contrast to the creditor’s efforts in S.I.
Acquisition to reach the Debtor’s parent corporation by piercing
the corporate veil (“direct piercing”), Byrne has engaged in veil-
piercing in an effort to reach the Debtor’s subsidiary, HANS
(“reverse piercing”). The district court concluded that the
underlying policy of Texas alter ego law, which deems a control
corporation liable for its affiliated corporation’s obligations
when that control entity misuses the corporate form, would be
frustrated if HACBV could pierce its own veil to rectify an abuse
that it had caused. Stated otherwise, HANS, the entity that Byrne
seeks to reach, is controlled by the Debtor, HACBV; it is not the
controlling entity that has misused the corporate form through the
entity it controlled.
Focusing narrowly on this factual difference, the bankruptcy
and district courts could discern no legal justification for
concluding that Byrne’s claims based on alter ego and single
business enterprise “belonged to” the corporate debtor, HACBV, and
therefore denied injunctive relief. In so doing, those courts
apparently failed to note the distinction between the technical
ascription of the veil-piercing cause of action as property of the
putatively abusing debtor and the actual claim of the Curators for
the benefit of the creditors, to whom no inter-corporation abuse
could be ascribed.
4
We conclude that the bankruptcy and district courts erred as
a matter of law in two respects: First, after answering the first
S.I. Acquisition question (“belongs to”) in the negative, the
district court stopped its testing, rather than proceeding to
consider the second question of the test —— whether the creditor is
seeking “recovery or control” of property of the debtor’s estate ——
as an alternative reason for granting injunctive relief. Second
and more compelling, the district court evaluated Byrne’s alter ego
and single business enterprise claims under S.I. Acquisition and
the stay provisions of the wrong Bankruptcy Code section —— section
362 —— which requires that the creditor’s claim affect “property of
the debtor’s estate” to be eligible for injunctive relief. As a
proceeding that is purely ancillary to a foreign bankruptcy,
however, this case is governed not by section 362 at all, but by
section 304 of the Code, which authorizes a court to grant
injunctive relief against actions seeking to recover property
“involved in” a foreign bankruptcy. In contrast to section 362's
effects in a full-blown, domestic bankruptcy case, section 304 of
the Code does not create the legal concept of “property of the
estate.” Additionally, section 304's threshold for enjoining
actions in foreign bankruptcies is lower than that of section 362
in domestic bankruptcies. It follows that any analysis defining
“property of the estate” is superfluous and essentially inapposite.
Even so, whether we analyze this case under section 362 and
S.I. Acquisition as did the bankruptcy and district courts, or
5
under section 304, the equitable principles of bankruptcy overarch
our inquiry. “Bankruptcy is designed to provide an orderly
liquidation procedure under which all creditors are treated
equally. A race of diligence by creditors for the debtor’s assets
prevents that.”5 The Code furthers this design by permitting a
foreign debtor to enjoin actions by U.S. creditors that seek to
collect or control property that is involved in the foreign
bankruptcy. Ultimately, the interests of all creditors, foreign
and domestic, are to be put on a level playing field, with like-
situated claimants being treated equally. If Byrne were allowed to
proceed with his alter ego and single business enterprise claims,
it would oppugn the very equitable foundation on which bankruptcy
is built. Not only would Byrne unjustly gain a first-come/first-
served preference, but the remaining creditors of HACBV (and, for
that matter, HANS) would suffer a concomitant disadvantage.
We conclude that Byrne’s alter ego and single business
enterprise claims against HANS, as asserted in the Byrne Lawsuit,
advance a general grievance of all of HACBV’s creditors (not a
personal grievance exclusive to Byrne) which must be asserted, if
at all, by the Curators for the ultimate benefit of the creditors.
Consequently, we reverse the holding of the bankruptcy court, as
affirmed by the district court, and grant the Curators’ requested
declaratory and injunctive relief, proscribing the prosecution of
5
H.R.Rep. No. 595, 1st Sess., at 340 (1977).
6
these claims and thereby limiting Byrne’s remedy to that which is
available to him in the foreign bankruptcy.
I.
FACTS AND PROCEEDINGS
The operable facts of this case arise from corporate
restructurings, asset transfers, and officer reassignments in a
large-scale communications business. In 1990, Harris Corporation
sold its data communications business to Adacom Corporation in
exchange for cash, stock, and promissory notes payable to Harris
(the “Adacom Acquisition”). Following the closing of this
transaction, Adacom changed its name to Harris Adacom Corporation
(“HAC”). When the Adacom Acquisition was consummated, Byrne, who
had previously managed Harris’s data communications business,
became an executive employee of HAC, eventually acquiring
approximately 8% of HAC’s outstanding stock as well.
In July of 1992, HAC formed HANS as a wholly-owned subsidiary.
HAC contributed its North American computer network services to
HANS in exchange for 100% of HANS’s stock. In 1993, HAC formed a
Netherlands subsidiary, HACBV, to which it transferred all of its
stock in HANS in consideration for HACBV’s assumption of the HAC
promissory notes originally owed by HAC to Harris by virtue of the
Adacom Acquisition. Following this transaction, the structure of
the companies was as follows: HAC was the parent of HACBV and, in
turn, HACBV was the parent of HANS, i.e., HANS was the wholly-owned
7
subsidiary of HACBV, which was the wholly-owned subsidiary of HAC.
Byrne maintains that, coincident with this corporate restructure,
he entered into an agreement with HAC and HACBV (the “Redemption
Agreement”) under which he exchanged his stock in HAC for stock in
HACBV, and HACBV agreed that, on any eventual sale of HANS, HACBV
would redeem Byrne’s HACBV stock for at least $2.9 million.
In June of 1994, HACBV declared bankruptcy in the Netherlands,
and the District Court of Amsterdam appointed RJS and WJP as the
curators of HACBV. While still in bankruptcy, HACBV appointed
Byrne as sole director of its subsidiary, HANS. In that capacity,
Byrne asserts, he was requested by RJS to sell HANS as quickly as
possible. According to Byrne, he reminded RJS of his (Byrne’s)
right to receive at least $2.9 million for his shares of HACBV
stock when and if HANS were sold. Byrne further contends that RJS
assured him (Byrne) that he would be “taken care of.” In contrast,
the Curators claim that, as Curator for HACBV, RJS entered into a
written agreement with Byrne which described both the services
Byrne would render in connection with the sale of HANS and the
compensation he would receive.
Nevertheless, Byrne presented the Curators with his bankruptcy
claim against HACBV for $2.9 million, conditioned on HANS being
sold, as provided in the alleged Redemption Agreement. RJS, acting
in his capacity as one of HACBV’s Curators, informed Byrne that his
claim —— if valid at all —— was, at most, an ordinary claim in the
HACBV bankruptcy.
8
In March of 1995, HANS sold all its assets for approximately
$20 million. The Curators concede that Byrne performed services in
connection with the sale, but insist that he was fully compensated
pursuant to the written agreement. Byrne asserts that once HANS
was sold, his demand for remuneration was rebuffed by HACBV and
RJS. In April of 1995, the month following the sale of HANS, Byrne
was removed by HACBV from his position as sole director of HANS.
In August of that year, Byrne filed the Byrne Lawsuit. In it
he asserted claims against HANS (HACBV’s subsidiary) for breach of
contract, fraud, and quantum meruit, and against HAC (HACBV’s
parent) for fraud, quantum meruit, tortuous interference with a
contract, and fraudulent transfer. Byrne amended his petition to
include a claim that HACBV (the Debtor), HAC (the Debtor’s parent),
and HANS (the Debtor’s subsidiary) were operated as a single
business enterprise or were each others’ alter egos, as a result of
which HANS is independently liable for HAC and HACBV’s contractual
obligations to him.
Two years later, consistent with the Code, the Curators filed
an ancillary proceeding in the United States Bankruptcy Court,
requesting: (1) a declaration that any claims against HANS or
other subsidiaries of HACBV based on a theory that HACBV is a
member of a single business enterprise with, or the alter ego of,
another person or entity, are the sole and exclusive property of
the Debtor, HACBV, and (2) a preliminary and permanent injunction
against the prosecution in this country of any action against HANS,
9
the subsidiary of the Debtor, with respect to the property of the
Debtor. After a hearing, the bankruptcy court denied the
declaratory and injunctive relief requested by the Curators and
enjoined HANS from transferring funds to HACBV until the Byrne
Lawsuit was resolved. The Curators appealed to the district court,
which affirmed the bankruptcy court’s order. Both the bankruptcy
and district courts reasoned that our decision S.I. Acquisition, in
which we concluded that an alter ego claim asserted by a creditor
against a non-bankrupt parent of its debtor subsidiary is property
of the debtor’s estate, did not apply to Byrne’s claim against
HANS. The Curators timely filed this appeal.
Meanwhile, in April of 1998, the Byrne Lawsuit proceeded to
trial in state court, in which the jury returned a verdict against
Byrne, rejecting all material issues. Specifically, the jury
failed to find that Byrne, HAC, and HACBV ever entered into the
Redemption Agreement. This pretermitted the jury’s addressing the
issue whether, pursuant to alter ego and single business enterprise
theories, HANS should be responsible for HACBV’s obligations under
the Redemption Agreement. After post-trial motions, the state
trial court rendered judgment that implements the jury’s verdict
and thus provides no recovery to Byrne. At the request of the
Curators, the bankruptcy court declared that the Byrne Lawsuit had
been “resolved” within the meaning of that court’s order that had
enjoined HANS from transferring funds to HACBV. Accordingly, the
bankruptcy court concluded that the injunction had lapsed by its
10
own terms, entitling HANS freely to transfer assets to HACBV.
Byrne’s counsel stated in open court that he intended to appeal the
state court’s judgment in the Byrne Lawsuit.
II.
ANALYSIS6
A. Standard of Review
We review a denial of declaratory or injunctive relief for
abuse of discretion.7 When such relief has been granted or denied
by a bankruptcy court, we perform the same task as the district
court: we review the bankruptcy court’s findings of fact for clear
error and issues of law de novo.8
As there are no outstanding issues of fact surrounding the
Curators’ request for declaratory and injunctive relief or the
bankruptcy and district courts’ denial of such relief, our review
6
Appellants submitted a motion, which was carried with the
case, to supplement the record on appeal with additional documents:
(1) the judgment and post-trial motions from Texas state court in
the Byrne Lawsuit, and (2) the motions and hearing to lift the
injunction from the bankruptcy court. We conclude that only the
outcome of the Byrne Lawsuit, and not its substance, is relevant to
this appeal. As the outcome is evident from the injunction
proceedings and Appellee does not object to supplementing the
record with these proceedings, we grant the motion, in part, to
allow inclusion of subsections (f) through (h), but deny the motion
with respect to subsections (a) through (e).
7
North Alamo Water Supply Corp. v. City of San Juan, 90 F.3d
910, 916 (5th Cir.), cert. denied, 519 U.S. 1029 (1996); Peaches
Entertainment Corp. v. Entertainment Repertoire Assocs., Inc., 62
F.3d 690, 693 (5th Cir. 1995); Pembroke v. Wood County, 981 F.2d
225, 228 (5th Cir.), cert. denied, 508 U.S. 973 (1993).
8
Kaepa, Inc. v. Achilles Corp., 76 F.3d 624, 626 (5th Cir.
1995), cert. denied, 519 U.S. 821 (1996).
11
is de novo. And, because the bankruptcy court’s order contained
holdings without accompanying reasons, we focus predominately on
the comprehensive analysis performed by the district court, which
affirmed the legal conclusions of the bankruptcy court.
B. Declaratory and Injunctive Relief under section 362
The Curators contend that the district court erred when it
affirmed the bankruptcy court’s denial of their request for a
declaration that the alter ego and single business enterprise
claims are property of the HACBV bankrupt estate. They insist that
the Byrne Lawsuit is functionally equivalent to the litigation
addressed in S.I. Acquisition, in which a creditor’s alter ego
lawsuit against a non-bankrupt affiliate of the debtor was deemed
property of the bankrupt estate and thus subject to the automatic
stay provisions of the Code. As the Curators, like the bankruptcy
and district courts, rely principally on S.I. Acquisition, we find
it helpful and instructive to examine the opinion closely.
1. In Re S.I. Acquisition
In S.I. Acquisition, we were required to decide whether a
creditor’s alter ego suit against the bankrupt corporate debtor’s
non-bankrupt parent was subject to the automatic stay provisions of
section 362 of the Code.9 Eastway Delivery Services, Inc.
9
Section 362(a) provides, in pertinent part:
(a) [A] petition filed under section 301, 302, or 303 of this title
. . . operates as a stay, applicable to all entities, of ——
(1) the commencement or continuation . . . of a judicial,
administrative, or other action or proceeding against the
12
(“Eastway”), a creditor of S.I. Acquisition, Inc. (“SIA”), had
filed suit against SIA for breach of contract. Eastway had also
named as defendants various companies affiliated with SIA on the
theory that these affiliates were alter egos of SIA. During
pendency of the suit, SIA filed bankruptcy and, pursuant to the
automatic stay, was severed from Eastway’s lawsuit. Eastway
continued to prosecute the suit against the non-bankrupt affiliates
debtor . . . or to recover a claim against the debtor .
. . ;
(2) . . .;
(3) any act to obtain possession of property of the
estate or of property from the estate or to exercise
control over property of the estate; . . . .
11 U.S.C. § 362(a) (1994). The section 362 automatic stay does not
apply in this case, however, because HACBV is in bankruptcy in the
Netherlands and must affirmatively seek injunctive relief under
section 304 of the Code. The district court noted that the parties
did not dispute that the section 304 injunction performs the same
function as the section 362 automatic stay, and therefore concluded
that the section 362 stay sought in S.I. Acquisition is
sufficiently analogous to the section 304 relief requested by
Appellants to apply our reasoning from that case to this one.
As will be discussed infra in more detail, this conclusion led
to fundamental errors in the district court’s analysis and the
parties’ briefs on appeal. The bankruptcy court, the district
court, and the parties throughout this litigation relied solely on
the S.I. Acquisition analysis, which interpreted section 362's
requirement that any claim affected by the automatic stay must be
“property of the estate.” This requirement, however, is not found
in the applicable subsection of section 304. As similarities
between the automatic stay in domestic bankruptcies and injunctive
relief in foreign bankruptcies have been recognized previously, we
will apply the dictates of S.I. Acquisition. See, e.g., In re
Banco Nacional, 91 B.R. 661, 664 (Bankr. S.D.N.Y 1988) (recognizing
that the injunctive relief under section 304 “is not unlike the
injunction which is automatic in a chapter 7 or 11 case pursuant to
section 362 of the Code”). Later in the opinion, however, we will
discuss the more appropriate analysis under section 304 of the
Code.
13
of SIA, but SIA argued that, because the alter ego claim was
property of the bankruptcy estate, continuation of the suit
violated the automatic stay.10
Drawing from American Nat’l Bank v. MortgageAmerica Corp. (In
re MortgageAmerica Corp.), a prior decision of ours that addressed
the effect of the automatic stay on “corporate trust fund” and
“denuding the corporation” causes of action,11 our panel in S.I.
Acquisition set forth the analytical scheme under which it would
determine whether the section 362(a)(3) automatic stay applied to
Eastway’s alter ego claims:
(1) the automatic stay applies to a cause of action that
under state (or federal) law belongs to the debtor, or
(2) the automatic stay applies to a cause of action that
seeks to recover property of the estate when the property
is held or controlled by a person or entity other than
the debtor, and
(3) in applying the above rules, a court must keep in
mind the general bankruptcy policies of securing and
preserving the debtor’s property and ensuring equal
distribution of the debtor’s assets to similarly-situated
creditors.12
Applying this legal framework, the panel determined that, under the
first prong of the analysis, “Eastway’s alter ego action is a right
of action belonging to SIA and, as such, is ‘property of the
10
S.I. Acquisition, 817 F.2d at 1143-45.
11
714 F.2d 1266 (5th Cir. 1983). The corporate trust fund and
the denuding the corporation doctrines impose personal liability on
those who use their power of control for their personal benefit
rather than that of the corporation. Id. at 1272.
12
S.I. Acquisition, 817 F.2d at 1150.
14
estate’” subject to the automatic stay.13 As noted above and as
will later be seen as important to our analysis, the S.I.
Acquisition court, by answering the first question in the
affirmative, ended the inquiry and thus (correctly) never reached
the second prong of the test.
We determined in S.I. Acquisition that, even though, under
Texas law, claims based on alter ego and other piercing-the-
corporate-veil theories are typically brought by a creditor,
nothing prevents a corporation from asserting such a claim against
its own subsidiary or affiliated companies.14 Our reasoning was
two-fold. First, we noted that the policy behind Texas veil-
piercing theories is “that the control entity that has misused the
corporation form will be held accountable for the corporation’s
obligations.” Accordingly, to meet its corporate obligations, the
corporation may pierce its own corporate veil to reach those who
have misused it.15
Second, we surmised in S.I. Acquisition that, by keeping
Eastway from asserting its veil-piercing action, the general
policies of the Bankruptcy Code would be furthered: All of SIA’s
13
Id. at 1153 (emphasis added).
14
Id. at 1152; see also In re MortgageAmerica Corp, 714 F.2d
at 1270-72 (holding that the trust fund and denuding theories of
recovery were considered to belong to the debtor corporation
because each action was created for the benefit of the corporation,
i.e., to vindicate injury to the corporation caused by improper
actions by control persons).
15
S.I. Acquisition, 817 F.2d at 1152.
15
creditors —— including but not limited to Eastway —— would benefit
from having more assets available to satisfy their claims.
Otherwise, any creditor could seek remuneration from the debtor’s
affiliates, and the multi-jurisdictional, first-come/first-served,
unequal distribution, which cuts against the policies of the Code,
would be promoted.16 For these reasons, we stayed Eastway’s state
law alter ego claim against the debtor’s affiliates.17
As we were in S.I. Acquisition, we are called on here to
decide whether Byrne, as an individual creditor of the bankrupt
corporation, HACBV, can assert his claim against an affiliate of
that debtor —— in this case, its wholly-owed subsidiary, HANS ——
that is not directly obligated to the creditor on that particular
claim. In making this decision, we must apply Texas law and
determine the extent of the Debtor’s interest in the alter ego and
16
Id. at 1153-54.
17
Id. at 1154. The Second, Fourth, and Seventh Circuits agree
with the holding in S.I. Acquisition that a creditor’s alter ego
claim belongs to the corporate debtor in bankruptcy. See Kalb,
Voorhis & Co. v. American Financial Corp., 8 F.3d 130 (2d Cir.
1993) (applying Texas law); St. Paul Fire and Marine Ins. Co. v.
PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) (applying Ohio law);
Steyr-Daimler-Puch of America Corp. v. Pappas, 852 F.2d 132 (4th
Cir. 1988) (applying Virginia law); Koch Refining v. Farmers Union
Central Exch., Inc., 831 F.2d 1339 (7th Cir. 1987), cert. denied,
485 U.S. 906 (1988) (applying both Illinois and Indiana law). The
Sixth and Eighth Circuits, however, disagree. Both courts denied
the corporation in bankruptcy the right to bring alter ego claims
on behalf of its creditors. See Spartan Tube and Steel, Inc. v.
Himmelspach (In re RSC Engineered Prods. Co.), 102 F.3d 223 (6th
Cir. 1996) (applying Michigan law); Mixon v. Anderson (In re Ozark
Restaurant Equip. Co.), 816 F.2d 1222 (8th Cir.) (applying Arkansas
law), cert. denied sub. nom., Jackoway v. Anderson, 484 U.S. 848
(1987).
16
single business enterprise claims that Byrne is seeking to assert.18
Keeping in mind the legal framework articulated in S.I.
Acquisition, we turn aside briefly to explore the treatment of
alter ego and single business enterprise claims under Texas law.
2. Alter Ego and Single Business Enterprise Theories
Texas recognizes various legal theories that facilitate
disregarding the corporate form, i.e., piercing the corporate veil,
two of which are alter ego and single business enterprise. An
alter ego remedy is available when there is an identity or unity
between a corporation and either a natural person or an affiliated
entity such that all separateness between the parties has ceased
(or never existed) and failure to disregard the corporate form
would be unjust.19 A single business enterprise remedy likewise
defeats the corporate form, but is appropriate when two or more
organizations that are separate de jure pool or integrate their
resources de facto to achieve a common business purpose. If such
commonality is established, each constituent organization may be
held liable for the debts incurred by one or more of the others in
18
To ascertain the property ownership of a foreign bankruptcy
estate, the law of the jurisdiction where the section 304
proceeding is pending determines whether the debtor has a valid
ownership interest in the property. Once the foreign debtor
establishes an interest in the property, the law of the
jurisdiction where the foreign proceeding is pending determines
whether such interest becomes property of the bankrupt estate. See
Koreag, Controle et Revision S.A. v. Refco F/X Assocs., Inc. (In re
Koreag), 961 F.2d 341, 348 (2d Cir. 1992).
19
Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex. 1986).
17
pursuit of that common business purpose.20
With this basic understanding of the state law aspects of
Byrne’s veil-piercing claims in mind, we proceed to examine the
bankruptcy facet of S.I. Acquisition’s framework. Throughout the
instant litigation, the parties and the courts have focused solely
on the first prong of the two-part test —— whether Byrne’s alter
ego and single business enterprise claims “belong to” the HACBV
estate. Although we too begin with that first prong, we do not
stop there.
3. Whether Byrne’s claims “belong to” HACBV
The Curators maintain that Byrne’s claim mirrors the alter ego
claim in S.I. Acquisition and thus “belongs to” HACBV. We
recognize the similarities between the facts in this case and those
in S.I. Acquisition, but we cannot ignore their differences. In
each case a creditor of the debtor sued a non-bankrupt affiliated
entity, insisting that the defendant’s relationship with the debtor
is such that the debtor’s corporate form should be disregarded to
allow the creditor to collect from the non-bankrupt affiliate the
debt owed by the debtor. Although Byrne’s claim followed this
general path, it was raised in a significantly different procedural
context: HACBV had filed bankruptcy in a foreign liquidation
proceeding, not in a United States proceeding, and —— after its
subsidiary was sued in Texas —— affirmatively sought injunctive
20
Old Republic Ins. Co. v. Ex-Im Services Corp., 920 S.W.2d
393, 395-96 (Tex. Ct. App. 1996).
18
relief pursuant to section 304 of the Code to protect its property
in this country.
In addition to this procedural distinction, Byrne advances
another element of his veil-piercing remedy as a distinguishing
difference that bears review. Diametrically opposed to the “direct
piercing” action instituted to reach the debtor’s parent (the
entity controlling the Debtor) in S.I. Acquisition, Byrne seeks to
pierce the corporate veil to reach the Debtor’s wholly-owned non-
bankrupt subsidiary (the entity controlled by the parent), a
variation referred to as “reverse piercing.”21 Byrne argues, and
the bankruptcy and district courts agreed, that, because HACBV is
the controlling party, the policy supporting a creditor’s right to
21
Piercing the corporate veil in “reverse” has been recognized
in many jurisdictions as an equitable doctrine used to prevent
injustice by corporate principals. See e.g. Stoebner v.
Lingenfelter, 115 F.3d 576, 580 n.4 (8th Cir. 1997) (recognizing
reverse piercing when other shareholders and creditors are not
adversely affected); Scholes v. Lehmann, 56 F.3d 750, 758 (7th
Cir.) (recognizing reverse piercing ordinarily in one-man
corporations), cert. denied, 516 U.S. 1028 (1995); McCall Stock
Farms, Inc. v. United States, 14 F.3d 1562, 1568 (Fed. Cir. 1993)
(affirming the use of reverse piercing to seek repayment of
corporate principals’ debt from refunds due to the undercapitalized
corporation); Dahl v. Gardner, 583 F. Supp. 1262, 1268 (D. Utah
1984) (collecting reverse piercing cases). Texas, in particular,
has recognized the doctrine for over thirty years. See Zahra
Spiritual Trust v. United States, 910 F.2d 240, 243-45 (5th Cir.
1990) (reverse pierce permitted to reach assets of corporation that
was the alter ego of individual who owed tax debt); Zisblatt v.
Zisblatt, 693 S.W.2d 944 (Tex. Ct. App. 1985) (wife sought to use
reverse piercing in divorce action); Dillingham v. Dillingham, 434
S.W.2d 459 (Tex. Ct. App. 1968) (same); American Petroleum Exch.,
Inc. v. Lord, 399 S.W.2d 213 (Tex. Ct. App. 1966) (judgment
creditor of shareholder sought to use reverse piercing to proceed
against corporation’s assets).
19
pierce the corporate veil —— to hold accountable those persons or
entities that controlled and misused the corporate form —— would be
undermined if we should hold that the veil-piercing claim “belongs
to” the bankruptcy estate of the Debtor.22 This argument was made
and accepted even though, like the automatic stay under the Code,
the injunctive relief available to the Debtor as the parent would
squarely block Byrne from pursuing the Debtor’s shares of HANS
stock, an asset of the parent corporation’s bankruptcy estate that
is clearly beyond the reach of the creditor, Byrne.
In response, the Curators insist that these facts present a
distinction without a difference —— and we agree. Whether, under
a veil-piercing theory, a creditor seeks repayment from the
shareholders of the debtor or from a subsidiary of the debtor ——
assuming that creditor has no direct, independent claim for
22
Appellee cites Southmark Corp. v. Crescent Heights VI, Inc.
(In re Southmark Corp.), No. 95-10849 (N.D. Tex. July 26, 1996)
(unpublished), aff’d, 95 F.3d 53 (5th Cir. 1996), for the
proposition that reverse piercing is not available to an entity
that abused the corporate form for its own benefit. We view the
facts in Southmark as clearly distinguishable from the facts at
hand. Moreover, the Southmark court specifically noted “[w]e do
not hold that a shareholder could never use the reverse piercing
doctrine under any circumstances.” The shareholder in Southmark
sought to pierce the corporate veil of its subsidiary to transfer
one of the subsidiary’s assets, a promissory note, into its estate
where the debtor could then assert a fraudulent transfer action
that arose from a purchase agreement between the subsidiary and a
third party. The court forbade Southmark’s piercing its own
corporate veil because the “particular use of reverse piercing” did
not further any equitable concerns. Such is not the case for
HACBV. HANS has no separate, direct agreement with Byrne, and by
enjoining Byrne from asserting his claims, all of HACBV’s creditors
will be protected.
20
repayment of the debt against the shareholder or subsidiary, i.e.,
no guarantee or co-signed instrument —— Byrne’s actions constitute
an “end-run,” skirting other creditors to reach the bankrupt
estate. As the Curators urge, this is precisely Byrne’s motive.
It is undisputed that HANS is not independently or directly liable
for the debt allegedly owed by HACBV to Byrne; nonetheless, Byrne
seeks to recover this debt from HANS even though the bankrupt
debtor, HACBV, is his sole obligor. By agglomerating to himself
the other creditors’ rightful pro-rata share of this asset (HANS)
of the Debtor’s estate, Byrne would obtain indirectly a very
preferential status that he cannot obtain directly —— a result that
flies in the face of bankruptcy’s structure and its equitable
concerns.
We recognize the theoretical tension implicit in the question
posed by the S.I. Acquisition court: How can Byrne’s claims “belong
to” HACBV when HACBV clearly controls the subsidiary, which it now
seeks to reach? Any pause that we may be given by the issues of
control posed by Texas law and adopted by the S.I. Acquisition
court is merely transitory, though, given our conclusion that Byrne
is seeking “recovery or control” of property of the Debtor within
the meaning of the second prong of the S.I. Acquisition test.23 In
23
Although our holding is not based on the “belongs to” prong
of the S.I. Acquisition analysis, we nonetheless briefly comment on
its applicability. Texas law clearly regards the alter ego remedy
as an equitable doctrine to “hold accountable those who have
misused the corporation (i.e., the shareholders, officers, or
directors).” Byrne insists that the right to pierce the corporate
21
reaching this conclusion, we pay particular attention to the third
“guiding principle” articulated by the S.I. Acquisition court ——
ensuring equal distribution of the debtor’s assets to similarly
situated creditors.
4. Whether Byrne’s claims seek “recovery or control” of
HACBV property
We have neither been referred to nor found independently any
case dealing directly with the second prong of S.I. Acquisition’s
disjunctive test. We therefore decipher the meaning of “recovery
or control” by turning again to S.I. Acquisition’s “guiding
principle.” Heeding our own analysis in In re MortgageAmerica, we
emphasized in S.I. Acquisition that, when considering whether a
creditor’s cause of action “belongs to” the debtor or seeks
“recovery or control” of property of the debtor, the Code’s general
veil (or veils) cannot “belong to” HACBV because it is the very
party that abused HANS’s corporate form. As HACBV is the entity
with unclean hands, he insists, it cannot avail itself of the
equitable remedy designed to rectify its own abuse.
Although initially this argument has an appealing ring, it is
cut down by the blade that creates it: Equity. The mere filing of
a bankruptcy petition creates legal consequences for both the
debtor and the creditors that are sheathed by the principles of
equity. For example, the moment that a petition for bankruptcy is
filed, the fictional “estate” passes to trustees (or Curators in
this case) for the benefit of all of the creditors. The creditors
are not only protected against fire sales by the debtor, but they
can expect to receive a pro-rata distribution of the estate’s
residuary. HACBV is currently in liquidation proceedings, and its
creditors, through the actions of the Curators, should not be
tarred with the brush of any pre-filing corporate abuses or
wrongdoings by HACBV, its officers, or directors. Stated
differently, HACBV’s alleged unclean hands should not preclude pro-
rata distribution of its property because the real parties with an
interest in HACBV’s liquidated assets —— including, notably, HANS
and its assets —— are all of its creditors.
22
policies of securing and preserving the debtor’s property and
ensuring equal distribution of that property to similarly situated
creditors should remain a paramount concern.24
The legislative history of the Code is replete with support
for this proposition. For example, a House Report reflects that
the automatic stay provision was adopted to “provide[] creditor
protection. Without it, certain creditors would be able to pursue
their own remedies against the debtor’s property. Those who acted
first would obtain payment of the claims in preference to and to
the detriment of other creditors.”25 It is pellucid from this
passage alone that Congress intended to protect all creditors.
And, to ensure adequate protection, Congress gave the trustee the
exclusive power to assert claims against the debtor’s property for
the collective benefit of creditors.26
5. General and Personal Claims
It is in this perspective that the distinction between general
and personal claims is both significant and consistent with the
24
S.I. Acquisition, 817 F.2d at 1152.
25
H.R.Rep. No. 595, 2nd Sess., at 340 (1978). We note that even
though the automatic stay provision does not apply in this case,
the injunctive relief that must be requested by the Curators
embodies the same policy concerns.
26
We do not imply that a creditor can never assert an
individual claim against the debtor. Indeed, we intend just the
opposite. Courts and commentators alike recognize differences
between a “personal” claim —— one in which an individual creditor
has been harmed —— and a “general” claim —— one in which the
creditors collectively have been harmed.
23
Bankruptcy Code. It is axiomatic that a trustee has the right to
bring actions that will benefit the estate. Such claims can either
be founded on the rights of the debtor or on the rights of the
debtor’s creditors. If the right belongs to the debtor’s creditors,
the distinction between personal and general claims takes on
significance: A trustee can assert the general claims of
creditors, but is precluded from asserting those creditor claims
that are personal. In other words, even if a claim “belongs to”
the creditor, the trustee is the proper party to assert the claim,
for the benefit of all creditors, provided the claim advances a
generalized grievance.27
We understand that characterizing an injury as personal or
general traditionally comports with notions of standing. A
bankruptcy court has correctly recognized that “[i]njury
characterization analysis should be considered as an inseparable
component of whether an action belongs to the corporation or
individual.”28 We agree with that position and conflate the injury
characterization analysis with not only the first, “belongs to,”
27
But see Ellenberg v. Walliagha (In re Mattress N More), 231
B.R. 104, 109-10 (Bankr. N.D. Ga. 1998) (recognizing that from a
policy perspective, a trustee should be able to pursue general
alter ego claims as a representative of the estate, but concluding
that no statutory basis under the Code exists for the trustee to do
so).
28
In re E.F. Hutton Southwest Properties II, Ltd., 103 B.R.
808, 812 (Bankr. N.D. Tex. 1989); see also, In re Mattress N More,
231 B.R. at 107-08 (discussing standing and whether the claim
belongs to the debtor contemporaneously).
24
prong of the S.I. Acquisition test but with the second, “recovery
or control” prong as well. Consideration of whether a claim is
general or personal should aid courts in deciding whether a claim
seeks “recovery or control” of property of the debtor. This
analysis, we find, helps to crystallize the structure for
determining when trustees can or cannot act on behalf of creditors
in pursuing claims.
To capsulize this legal framework for determining whether the
trustee or an individual creditor is the appropriate actor, we
categorize three kinds of action:
1)Actions by the estate that belong to the estate;
2)Actions by individual creditors asserting a generalized
injury to the debtor’s estate, which ultimately affects
all creditors; and
3)Actions by individual creditors that affect only that
creditor personally.
The trustee is the proper party to advance the first two of these
kinds of claims, and the creditor is the proper party to advance
the third. This construction ensures that the estate will not be
wholly or partially consumed for the benefit of one creditor, or
even a small number of creditors. Moreover, preservation of the
estate for the advantage of all creditors will (1) prevent multi-
jurisdictional rushes to judgment, (2) save judicial resources, and
(3) further the equitable principles of bankruptcy. To reiterate
our earlier observation, in S.I. Acquisition we provided two
circumstances in which the automatic stay would affect a creditor’s
25
claim against a non-debtor affiliate of the debtor: (1) when the
claim “belongs to” the debtor, or (2) when the claim seeks
“recovery or control” of property of the debtor. And again, as we
based our holding in S.I. Acquisition on the “belongs to” prong, we
never needed to question whether the claims sought “recovery or
control” of property of the debtor’s estate.
As not all claims necessarily “belong to” the debtor ——
because either by statute or common law the debtor is precluded
from asserting the action —— another mechanism must exist to
prevent individual creditors from annexing assets of the estate to
gain an advantage. Injunctive relief is therefore necessary to
prevent prosecution of actions that could lead to recovery or
control of the debtor’s property to the disadvantage of other
similarly situated creditors.
Byrne’s pursuit of his indirect claims against the non-
bankrupt, wholly-owned subsidiary of the debtor exemplifies the
need for such relief. His alter ego and single business enterprise
claims seek to collect a debt allegedly owed by the Debtor by suing
—— and hoping eventually to enforce a judgment against ——the
Debtor’s non-bankrupt subsidiary, HANS. Even if the Redemption
Agreement exists and is enforceable, it provides no direct or
independent claim against HANS. The claim is based entirely on
Byrne’s relationship with HACBV. Even though Byrne attempts to sue
HANS, a non-debtor third party, his action is grounded in a claim
26
against the Debtor only.29
We find further support in Texas law, under which the
viability of an action to reverse-pierce the corporate veil depends
on finding that the debtor and the corporation should be treated as
one entity or that one entity is a “mere tool or business conduit”
for the other entity.30 Although the creditor bears the burden of
proving the inseparable relationship, for the claim to be
characterized as personal to that creditor it must be based solely
on the interaction between the debtor and its affiliate and in no
way hinge on the creditor’s interaction with either entity.31
In his petition in the Byrne Lawsuit, Byrne alleged that “HANS
was not operated as a business entity separate from HAC or HACBV.”
He went on to explain the single business enterprise and alter ego
theories to support his theory, seeking to hold HANS liable “for
the debt of HACBV.” The relief sought by Byrne —— to ignore the
limitations of liability of HACBV and HANS as separate corporate
entities —— is not peculiar or personal to his cause, but is common
29
See In re Saunders, 101 B.R. 303, 305 (Bankr. N.D. Fla. 1989)
(“While a fraudulent transfer action may be an action against a
third party, it is also an action ‘to recover a claim against the
debtor.’ Absent a claim against the debtor, there is no
independent basis for the action against the transferee.”)
30
Zahra Spiritual Trust, 910 F.2d at 243-44 (noting that the
ultimate goal in reverse piercing is unique: The court treats the
individual and the corporation as “one and the same.”).
31
S.I. Acquisition, 817 F.2d at 1152 (“The doctrine of alter
ego does not rest upon a particular creditor’s dealings with or
reliance on the control entity, nor does the doctrine require a
showing of fraud on a particular creditor.”).
27
to all of the creditors. If the entities are proved to exist as
one, whether for failure to observe corporate formalities or as
undercapitalized shell corporations, the assets and liabilities of
the entities should be amalgamated for the benefit of all
creditors, not Byrne alone. Indeed Byrne insists that other
creditors of HACBV could institute the same kind of action as his,
which would allow them to share in the equity, i.e., this residual
asset value of HANS.
We are convinced that Byrne’s alter ego and single business
enterprise claims are general claims that ultimately seek to
recover or control property of HACBV, and that such claims are the
Curators’ to enforce or not enforce. Accordingly, we reverse the
district court’s order denying the Curators’ request for
declaratory relief, and we declare that assertion of any such alter
ego or single business enterprise claims must be initiated, if at
all, by the Curators on behalf of all creditors.
C. An Alternative: Injunctive Relief under section 304
Even if reversal based on the bankruptcy and district courts’
analyses under S.I. Acquisition and section 362 of the Code were
not indicated, reversal —— and granting of declaratory and
injunctive relief —— are mandated by proper application of section
304 of the Code. The Curators, on behalf of HACBV, filed a
petition under section 304 seeking declaratory and injunctive
relief to prevent Byrne from prosecuting his alter ego and single
business enterprise claims against HANS. Section 304(a) authorizes
28
a representative of a foreign bankruptcy estate to commence an
ancillary proceeding in the United States Bankruptcy Court.32 The
filing of a 304 petition does not create a bankruptcy “estate” that
must be administered by a court in the United States, but it does
allow the foreign debtor to prevent piecemeal distribution of its
assets in the United States while its plan is being structured in
the foreign jurisdiction.33 Although section 304 contains no
automatic stay provision, the bankruptcy court is given the
authority in subsection (b) to:
(1) enjoin the commencement or continuation of ——
(A) any actions against ——
(i) a debtor with respect to property involved
in such foreign proceeding; or
(ii) such property; or . . .
(2) order turnover of the property of such estate, or
the proceeds of such property, to such foreign
representative; or
(3) order other appropriate relief.
Subsection (b) is intended to arm the courts with maximum
flexibility in light of principles of international comity and
respect for the laws of foreign nations.34 One court has referred
to section 304's grant of judicial authority as tantamount to the
power to mold relief “in near blank check fashion.”35
32
11 U.S.C. § 304 (1994).
33
In re Koreag, 961 F.2d at 348.
34
See H.R.Rep. No. 95-595, 2nd Sess., at 324-25 (1978).
35
In re Culmer, 25 B.R. 621, 624 (Bankr. S.D.N.Y. 1982).
29
Even though injunctive relief under subsection (b) is
available to a litigant, however, it is not to be granted
automatically. Rather, the grant of such relief, being within the
court’s discretion, is guided by the six factors enumerated in
section 304(c), with the economical and expeditious administration
of the foreign estate being of paramount concern, to wit:
(1) just treatment of all holders of claims against or
interest in such estate;
(2) protection of claim holders in the United States
against prejudice and inconvenience in the
processing of claims in such foreign proceeding;
(3) prevention of preferential or fraudulent
dispositions of property of such estate;
(4) distribution of proceeds of such estate
substantially in accordance with the order
prescribed by this title;
(5) comity; and
(6) if appropriate, the provision of an opportunity for
a fresh start for the individual that such foreign
proceeding concerns.36
The Curators complain that, because Byrne’s alter ego and
single business enterprise claims are “property of the HACBV
estate,” the bankruptcy and district courts abused their discretion
in refusing to grant injunctive relief pursuant to section 304. As
both courts concluded that Byrne’s claims are not “property of the
estate,” the Curators’ argument failed. The bankruptcy and
district courts did not, however, consider subsections (b)(1) or
(b)(3) —— which provide alternative grounds for granting injunctive
relief when the property in question is not “property of the
estate.” We find the plain language in these sections compelling
36
11 U.S.C. § 304(c)(1)-(6) (1994).
30
and deserving of full review.
1. Section 304(b): Is an Injunction Available?
Subsection (b)(1) of section 304(b) permits a bankruptcy court
to enjoin actions “against the debtor with regard to property
involved in such foreign proceeding.” We note first that, in the
context of the automatic stay under sections 362(a)(1) and (a)(3),
the phrase “against the debtor” has been extended to non-debtors
when failure to enjoin the action would jeopardize the success of
the bankruptcy process or cause irreparable harm to the debtor’s
estate and its creditors.37 Generally, such a situation exists when
the debtor and the non-debtor are closely related such that the
debtor is the real party defendant and a judgement against the non-
debtor will in effect be a judgment or finding against the debtor.38
The value of HACBV’s ownership interest in HANS would be
diminished were the subsidiary’s assets seized to satisfy HACBV’s
alleged debt to Byrne. It follows that the remaining creditors of
HACBV would share pro-rata in a smaller pie. Additionally, as
HACBV and HANS are in a parent-subsidiary relationship and HACBV’s
equity in HANS is an asset that would otherwise be available to
repay creditor debt, Byrne’s obtaining and executing on a judgment
against HANS would have an effect economically indistinguishable
37
S.I. Acquisition, 817 F.2d at 1148; In re Davis, 191 B.R.
577, 586 (S.D.N.Y. 1996) (compiling citations).
38
S.I. Acquisition, 817 F.2d at 1147-48; Audio Data Corp. v.
Monus, 789 S.W.2d 281, 286 (Tex. Ct. App. 1990).
31
from his obtaining and executing on a judgment obtained post-
petition directly against HACBV —— which, of course, he cannot do.
We will therefore apply the injunction to Byrne’s action against
HANS, the non-debtor, if his alter ego or single business
enterprise claims regard or affect property involved in the foreign
proceeding.
Few courts have discussed subsection (b)(1) in detail,
particularly the conduct necessary for property such as a cause of
action to be “involved in” the foreign proceeding.39 On two
occasions, however, a New York Bankruptcy Court faced the issue,
both times in the context of actions seeking to collect insurance
funds held in trust. In re Lines40 and In re Rubin41 involved
American reinsurance companies that sued to collect insurance funds
set up by foreign reinsurance companies that had become debtors in
liquidation. In each case, the American company claimed that the
foreign debtor had no interest in the fund because the claims of
other beneficiaries exceeded the amount of the fund, leaving the
debtor with no reversionary interest. The court disagreed and held
39
Courts have noted, with curiosity, the different statutory
language used in subsections (b)(1) and (b)(2). See, e.g., In re
Koreag, 961 F.2d at 349 (recognizing that Congress permits
injunctions to be issued under subsection (b)(1) regarding property
“involved in” the foreign proceeding, but subsection (b)(2) only
authorizes turnover of “property of the estate,” leading to the
conclusion that the two sections must perform different functions).
40
81 B.R. 267 (Bankr. S.D.N.Y. 1988).
41
160 B.R. 269 (Bankr. S.D.N.Y. 1993).
32
that even if the debtor’s reversionary interest was valueless, that
interest was sufficiently connected to the debtor to be “involved
in” the foreign liquidation proceeding, thereby entitling the
debtor to injunctive relief.42
When today we apply Texas law, we come to the same conclusion.
Byrne’s argument that HACBV has no interest in his actions
grounded in alter ego and single business enterprise theories
because a control entity cannot pierce its own corporate veil to
remedy its own abuse, is not dispositive of the “involved in”
issue. Even assuming arguendo that HACBV is not the proper party
to assert the veil-piercing action, that corporation, as the sole
stockholder of HANS, nevertheless has an equity or property
interest in HANS —— not unlike a reversionary interest ——
sufficient for HANS to be “involved in” HACBV’s foreign
bankruptcy.43
Neither can we ignore the fact that Byrne filed a proof of
claim in HACBV’s foreign bankruptcy for the exact same debt that he
seeks to collect from HANS in Texas through the alter ego and
single business enterprise theories.44 It is obvious beyond
42
In re Rubin, 160 B.R. at 277; In re Lines, 81 B.R. at 271-72.
43
See also In re Davis, 191 B.R. at 577 (granting injunctive
relief under section 304(b)(1)(A) and stating “[g]iven the debtor’s
contingent liability for any judgment taken by [the creditor]
against [affiliates of the debtor], it is appropriate for any such
litigation to go forward in Canada”).
44
See In re Rubin, 160 B.R. at 277 n.11 (“[The creditor] has
already filed a proof of claim . . . in the Israeli liquidation
33
peradventure that Byrne’s own actions “involve” him in the foreign
bankruptcy. As any claim Byrne could assert successfully in the
foreign bankruptcy appeared certain to produce a lesser monetary
recovery than 100 cents on the dollar, he attempted the Texas “end
run,” targeting a solvent affiliate of the Debtor. We hold,
therefore, that Byrne’s alter ego and single business enterprise
claims are sufficiently “involved in” HACBV’s liquidation
proceedings in Amsterdam to warrant a section 304 injunction
against pursuit of these claims in the United States.45
This holding does not, however, end our inquiry. As dictated
by section 304's subsection(c), relief is appropriate only if we
conclude that it will ensure an economical and expeditious
administration of the estate. We turn therefore to the factors
enumerated in section 304(c).
2. Section 304(c): Propriety of an Injunction
Cognizant of the six factors mentioned above, we begin with
subsections (c)(1) and (c)(3), which often work in conjunction with
proceeding. By his own actions, [the creditor] has involved the
Trust in the foreign liquidation case, as have numerous other
beneficiaries/creditors.”).
45
We note in passing that subsection (b)(3) provides another
relief mechanism. Even if Byrne’s claim were not sufficiently
“involved in” the foreign proceeding to warrant injunctive relief
under (b)(1), (b)(3) gives us the authority to order “other
appropriate relief.” In this case, “other appropriate relief” could
include an injunction to prevent Byrne’s “race to the courthouse”
to gain a preferential benefit.
34
one another.46 Not only must all claim holders in a foreign
bankruptcy receive just treatment, but the possibility of
preferential treatment must be prevented. As previously mentioned,
if Byrne is not enjoined from asserting his alter ego and single
business enterprise claims against HANS, he will be first in line
to seize assets of HANS, up to the full amount of his judgment.
That, of course, would negatively affect the value of HACBV. As
previously recognized, not only would Byrne thus receive
preferential treatment, but the remaining claim holders in the
HACBV bankruptcy would be relegated to sharing pro-rata in the
concomitantly diminished equity value of HANS.47 Consideration of
these two factors therefore weighs in favor of granting injunctive
relief.
We cannot, though, ignore the impact injunctive relief for
HACBV would have on Byrne. Subsection (c)(2) mandates protection
of Byrne’s claim against prejudice and inconvenience if he is
forced to raise his claim in the foreign proceeding. This factor
requires us to consider Dutch bankruptcy law and its effect on
46
Subsection (c)(6) is not relevant because the foreign debtors
are not individuals.
47
It is also likely that just treatment of all creditors would
be impaired by the ongoing litigation and resources expended in the
United States. See In re Gercke, 122 B.R. 621, 629 (Bankr. D.D.C.
1991) (“To allow [the creditor’s] claim to be tried in the United
States now would threaten the just treatment of all holders of
claims because the estate has inadequate resources to engage in a
trial without threatening the [curators’] efforts to maximize the
estate.”)
35
Byrne’s claim.
First, we agree with the Curators’ contention that the mere
fact that Byrne would have to pursue his claim against HACBV in a
foreign proceeding is not sufficient prejudice to deny relief.48
In fact, we require foreign creditors to litigate in the United
States when seeking distributions in a domestic bankruptcy case.49
From the translations of the Dutch Civil Code contained in the
record, it is patently clear that Dutch law entitles Byrne to
receive the same treatment that he would under Title 11. For
example, section 3, article 277 of the Dutch Civil Code treats
creditors as “equally entitled to be paid from the net proceeds of
the goods of their debtor, . . . in proportion to the claim of each
creditor, subject to priorities that have been acknowledged by
law.” Compare this to section 726 of the Code, which sets forth
the general distribution rules for liquidation cases, giving
priority to secured creditors first and then to unsecured
creditors, with all claims in the same class receiving pro-rata
treatment when there are insufficient funds to pay that class in
full. Additionally, the Dutch Bankruptcy Act provides for a first
creditor’s meeting, similar to that provided under the Code.50
48
See In re Davis, 191 B.R. at 585; In re Rubin, 160 B.R. at
269.
49
See In re Brierley, 145 B.R. 151, 163 (Bankr. S.D.N.Y. 1992).
50
Compare Dutch Bankruptcy Act, §§ 116, 119, 122 with 11 U.S.C.
§ 341 (1994).
36
Our review of the Dutch code articles governing bankruptcy
satisfies us that creditors are afforded rights sufficiently akin
to those provided in the Code to eschew prejudice. We are
convinced that Byrne’s claims will not be prejudiced when raised in
the foreign proceeding.
Similarly, section 304(c)’s fourth factor calls for an
examination of the foreign law governing the debtor’s proceeding to
ensure that the distribution of proceeds of the foreign bankrupt
estate will occur substantially in accordance with Title 11.
Although the foreign distribution scheme need not be identical to
Title 11, it must be comparable.51 Derived largely from above-cited
article 277 of the Dutch Civil Code, the order of priority in a
Dutch bankruptcy is as follows: (1) Special bankruptcy costs; (2)
General bankruptcy costs; (3) Tax authorities; (4) Creditors with
specific privileges related to specific assets; (5) Creditors with
general privileges; and (6) Unsecured creditors.52 A creditor who
has retained ownership of a particular asset and holds either a
mortgage or a pledge encumbering that asset can exercise his rights
irrespective of the authority of the Curator. With this exception,
preferences under Dutch law generally track the hierarchy of claims
51
In re Gercke, 122 B.R. at 629.
52
See also Dutch Civil Code, § 2, art. 23b.1 (“The liquidator
transfers all that is left of the estate of the liquidated legal
entity, after payment to the creditors in proportion to everyone’s
rights, to those that have rights resulting from the articles of
association, or otherwise to the members or shareholders.”)
37
in a domestic proceeding: (1) Secured claims; (2) Administrative
expenses; and (3) Unsecured creditors. Under either scheme,
Byrne’s claim qualifies as an unsecured breach of contract claim
arising, if at all, from the Redemption Agreement. Byrne has
already filed his claim in the Dutch proceeding, so distribution of
the foreign estate vis-à-vis his claim should occur substantially
in accordance with Title 11.
Fifth and finally, we must evaluate the principles of comity
to ensure that the Dutch proceeding does not offend our notions of
justice. Foreign proceedings are generally recognized in the
United States, as long as the foreign laws comport with due process
and treat the claims of local creditors fairly.53 We favor granting
comity to foreign bankruptcy proceedings because “the assets of the
debtor [can] be dispersed in an equitable, orderly, and systematic
manner, rather than in a haphazard, erratic or piecemeal fashion.”54
As noted in our analysis of the fourth factor, the foreign laws
need not be identical to their counterparts under the laws of the
United States; they merely must not be repugnant to our laws and
policies.55 As we have already found sufficient congruity between
Dutch and American bankruptcy laws to eschew such repugnance, we
53
Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709,
714 (2d Cir. 1987).
54
Cunard S.S. Co. v. Salen Reefer Servs. A.B., 773 F.2d 452,
458 (2d Cir. 1985).
55
In re Davis, 191 B.R. at 587; In re Rubin, 160 B.R. at 283;
In re Brierley, 145 B.R. at 168.
38
conclude that principles of comity weigh in favor of granting the
injunction sought by the Curators.
We are confident that Byrne’s claim, already asserted in the
Dutch liquidation proceeding, will receive essentially equal and
fair treatment among other claimants who are members of his class
of creditors. Dutch bankruptcy law clearly is not repugnant to
Title 11 and the factors specified in section 304(c) are present.
We therefore hold that the bankruptcy and district courts erred as
a matter of law in refusing to grant the Curators injunctive
relief. Finding that Byrne’s efforts to recover from HANS the debt
owed by HACBV, but not owed directly by HANS, violate applicable
principles of both United States and Dutch bankruptcy law, we
reverse the bankruptcy and district courts and grant the relief
sought by the Curators.
III.
CONCLUSION
As a result of our section 362/S.I. Acquisition analysis of
the Curators’ entitlement to declaratory and injunctive relief, we
find ourselves in disagreement with the judgments of the bankruptcy
and district courts that denied such relief. In particular, we
perceive error in the finding of those courts that a creditor’s
action based on reverse-piercing of a corporate veil does not
constitute property of the bankruptcy estate of the parent
39
corporation even when, as here, the purpose of a creditor’s veil-
piercing suit in state court against the non-bankrupt, wholly-owned
subsidiary of the Debtor, is to obtain a money judgment on an
obligation that concededly is not owed directly by the subsidiary.
Given our view that, generally, application of the equitable theory
that a corporate debtor should not be allowed to profit from its
untoward manipulations of an affiliated entity misses the mark here
by failing to recognize that —— at least in the context of this
domestic bankruptcy proceeding ancillary to a foreign bankruptcy ——
pre-bankruptcy corporate misdeeds of the Debtor should not inure to
the detriment of its general bankruptcy creditors, we conclude that
the instant reverse-piercing action belongs to the Curators, not to
one individual creditor of the Debtor.
More to the point, even if we assume arguendo that the
bankruptcy and district courts correctly decided that Byrne’s veil-
piercing cause of action is not “property of the estate” under the
first prong of S.I. Acquisition’s disjunctive test —— the “belongs
to” prong —— those courts nevertheless erred in halting their
inquiry at that point. Even though, as in S.I. Acquisition, a
“yes” answer to the “belongs to” question ends the inquiry, a “no”
answer to that first prong question requires the court to proceed
to the second prong —— the “recovery or control of property”
question. Thus, the bankruptcy and district courts abused their
discretion when, having answered the first prong’s question in the
negative, they failed entirely to address Byrne’s reverse-piercing
40
action under the second prong of the S.I. Acquisition test. As a
correct application of the second “recovery or control” prong leads
inevitably to a determination that Byrne’s goal in attempting to
reverse-pierce the veil of the non-bankrupt, wholly-owned
subsidiary of the Debtor was the “recovery or control” of property
of the Debtor, i.e., the estate’s interest in HANS or its assets,
those courts’ failure to address recovery or control of the
Debtor’s property constitutes reversible error. Based on S.I.
Acquisition’s take on section 362, we hold that the Curators are
entitled to declaratory and injunctive relief.
Alternatively, we conclude that, when declaratory and
injunctive relief is sought in a bankruptcy court in this country
through proceedings that are ancillary to a foreign bankruptcy from
a country whose laws are compatible with and not repugnant to ours,
analysis of the ancillary case should be conducted not under
section 362 of the Code but under section 304. For the reasons we
have explained, a proper section 304 analysis of the instant case
makes the Curators’ entitlement to the relief sought even clearer
than it is when examined under section 362 and S.I. Acquisition.
The Debtor’s ownership of all issued and outstanding stock in HANS,
a non-bankrupt affiliate, makes unavoidable the conclusion that
HANS and its assets are “involved in” HACBV’s bankruptcy for
purposes of section 304. As such, injunctive relief is highly
appropriate if not absolutely required.
We therefore reverse the bankruptcy and district courts’
41
denial of the relief sought by the Curators, declare any veil-
piercing action vis-à-vis HACBV and its affiliated companies to be
“property of the estate” for purposes of HACBV’s bankruptcy
proceedings, and remand this case for entry of judgment permanently
enjoining Byrne from prosecuting the portion or portions of his
state court action in Texas that seek a money judgment against
HANS, on veil-piercing (alter ego and common business enterprise)
grounds, for claims on which HANS is not purported to be directly
responsible as the primary obligor.
REVERSED and REMANDED.56
56
We recognize that if the take-nothing judgment rendered
against Byrne in the trial court in Texas is affirmed on appeal and
becomes final, the judgment we render today will be moot.
42