This content is from: Local Insights

United States

In a highly significant case under the US bankruptcy laws, Hong Kong and Shanghai Banking Corporation v Simon [9th Cir 1998], the US Court of Appeals for the Ninth Circuit ruled that a foreign creditor may not bring a foreign collection proceeding against a debtor that has obtained a discharge under the bankruptcy law. In so doing, the Ninth Circuit has affirmed the extraterritorial effect of the US Bankruptcy Code.

Hong Kong and Shanghai Bank (HSB) had extended a US$24 million loan to Odyssey International Holdings, an international company incorporated in the British Virgin Islands. William Neil Simon, Odyssey's principal shareholder, personally guaranteed the loan. The guarantee provided for enforcement under the laws of Hong Kong in the courts of Hong Kong.

When the loan went into default, HSB called on Simon to pay under his personal guarantee. At the time, Simon had personal debts of over US$200 million, so he travelled to the US and filed a personal bankruptcy petition under Chapter 7 of the US Bankruptcy Code.

HSB filed a proof of claim in the bankruptcy proceeding with respect to a separate US$37 million loan to Simon. It did not, however, file a proof of claim with respect to Simon's personal guarantee.

The US bankruptcy court entered an order granting Simon a discharge of all his debts. The order contained an injunction against all creditors instituting any action to collect the debts of Simon. Shortly after, HSB sought a declaratory judgment from the bankruptcy court to the effect that the discharge and injunction were not effective outside the US. Evidently, the bank intended to file suit against Simon in the courts of Hong Kong. The bankruptcy court dismissed HSB's complaint for a declaratory judgment and the US district court affirmed the bankruptcy court.

The Ninth Circuit has not affirmed both lower courts. The appellate court noted that the Bankruptcy Code confers jurisdiction over the debtor's property "wherever located and by whomever held". Thus, the bankruptcy court has jurisdiction in rem over all the property in the debtor's estate. This includes property outside the territorial jurisdiction of the US. Accordingly, a US bankruptcy court has the power to enjoin a creditor from proceeding against the debtor's property before and after discharge of the debtor. The creditor's remedy is to file a proof of claim in the bankruptcy court.

The Ninth Circuit also noted that the discharge and injunction did not apply to the courts of Hong Kong. Rather, it applies to the foreign creditor, in this case HSB, subject to jurisdiction of the US bankruptcy court. If HSB were to ignore the injunction (by bringing suit in the Hong Kong courts), it would be subject to the imposition of sanctions by the US court.

HSB argued that principles of international comity dictate that the discharge and injunction should not apply to foreign proceedings. However, the Ninth Circuit found that considerations of international comity only apply where there is a conflict of jurisdictions. Here, an insolvency proceeding had not been started against Simon in Hong Kong or anywhere else. The US bankruptcy proceeding was the only one in effect. Thus, the court held that international comity did not prevent the bankruptcy court from entering its injunction.

As a consequence of the Ninth Circuit's decision in Simon, if a foreign creditor is doing business in the US and its debtor files for bankruptcy in the US, it must look to the US Bankruptcy Code for its remedies.

Robert Rendell

Instant access to all of our content. Membership Options | One Week Trial