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United States

Foreign debtors subject to bankrupcy jurisdiction

The extent to which foreign debtors and foreign creditors are subject to the US Bankruptcy Code is one of the grey areas in this field of law. A recent case decided by a US bankruptcy court in Houston, Texas, In re Jacobo Xacur (96-48538), sheds some light on this troublesome area.

From 1992 to 1994, a number of leading Mexican banks loaned over US$240 million to the Xacur group of companies in Mexico. The owners of the companies, three Mexican brothers, guaranteed the loans by placing an 'aval' on the notes.

When the loans went into default, the Mexican banks brought numerous lawsuits in Mexico against the Xacur companies and the individual guarantors. The Xacur companies filed a Suspension of Payments proceeding (suspensión de pagos), a form of reorganization under Mexican law. The Xacur brothers evidently left Mexico to avoid these various legal actions. The bank creditors alleged that Jacobo Xacur has been living in the US either in Miami or Houston. One of his companies owns a condominium in Houston, where it appears he has been residing and conducting business.

While the suspension of payments proceeding and the civil cases against Xacur brothers were pending in Mexico, the Mexican banks filed an involuntary bankruptcy case against the brothers under US law in bankruptcy court in Houston. The brothers moved the court to dismiss the case on jurisdictional and other grounds.

On August 25 1997, bankruptcy judge Brown rejected the brothers' arguments and granted the Mexican banks' petition for relief under the US bankruptcy code.

Under the bankruptcy code, a bankruptcy court has jurisdiction over a person "that resides or has a domicile, a place of business, or property in the US". Judge Brown concluded that the court had jurisdiction over Jacobo Xacur because he now resides in Houston and owns property there. The other brothers did not contest jurisdiction.

However, the brothers argued that the bankruptcy court should abstain from exercising jurisdiction because of the pending proceeding in Mexico. Judge Brown found that the Suspension of Payment proceeding in Mexico only involved the Xacur companies, and not the individual guarantors. Further, the civil cases filed against the brothers in Mexico were not in the nature of a reorganization or liquidation proceeding.

Significantly, Judge Brown stated in her opinion: "Even if the suspension of payments proceeding for the Xacur companies qualifies as a foreign proceeding for these alleged debtors, the Court finds that an economical and expeditious administration of the alleged debtors' estates will not be enhanced by deference to a foreign proceeding ... the interests of comity do not support abstention in this case."

Under the ruling of the Xacur case, foreign debtors who reside in the US or own property here can be subject to jurisdiction in respect of their foreign debts, even where the creditors are foreign banks and a reorganization or liquidation proceeding is pending in the debtor's home country.


Jurisdiction over foreign bank

When may a foreign bank, with no offices in the US, be subject to the jurisdiction of American courts? According to a federal court in Chase Manhattan Bank v Banque Générale du Commerce, 1997 WL 266968 (SDNY), it does not take very much US activity on the part of the foreign bank.

This case arose out of a dispute over the validity of an endorsement of a cheque drawn by Johnson & Johnson International on its account at Chase Manhattan Bank. Chase paid the cheque on presentation by Banque Générale du Commerce (BGC), a French bank. Chase subsequently questioned the validity of a prior endorsement and sued BGC in New York to recover the amount it had paid on the cheque.

BGC moved to dismiss the suit on the grounds that the federal court in New York did not have personal jurisdiction over it. BGC had no offices in New York, and its only contact with New York was a correspondent account it maintained at Chase.

In a prior case in New York, Citibank v International Bank, 646 NYS 2d 261 (Sup Ct 1996), a New York court held that routing a cheque to New York for collection was not a sufficient basis for the assertion of personal jurisdiction. The federal court in Chase Manhattan Bank distinguished this case on two grounds: BGC maintained a correspondent account in New York which it used for purposes of collecting the Johnson & Johnson cheque, and the agreement establishing the correspondent account provided for New York choice of law. Thus, the federal court held that New York's long-arm statute did justify personal jurisdiction over BGC in this case, even though the lawsuit arose out of a single transaction conducted by BGC in New York.

The holding in Chase Manhattan Bank does not mean that the existence of a correspondent account by itself will confer jurisdiction over a foreign bank. However, if that correspondent account is used by the foreign bank, then a court in New York would have jurisdiction over the foreign bank in any dispute arising out of such use.


Contract formation

When may an exchange of correspondence ripen into a binding contract? This interesting contract law question was the subject of a recent case decided by a federal court in Washington DC, Novecon Ltd v Bulgarian-American Enterprise Fund, 967 F Supp 1382 (DDC 1997).

Novecon, a private investment firm specializing in structuring new business ventures in eastern Europe, formed a joint venture to develop a real estate project in Sofia, Bulgaria. Novecon approached the Bulgarian-American Enterprise Fund (BAEF) to request funding for the project. BAEF is a US government entity established by Congress to promote private sector development in Bulgaria.

Over a two month period in 1993, Novecon and BAEF exchanged correspondence on four different occasions concerning financing of the project. BAEF's correspondence indicated that its participation would be "contingent on the signing of a definitive agreement". However, BAEF also asked Novecon to cease soliciting funds from alternative sources. Due to problems associated with acquisition of the land and other difficulties, BAEF ultimately withdrew from the negotiations. Thereupon, Novecon sued BAEF alleging that BAEF breached an investment contract by failing to provide the promised funding for the project. Both parties moved for summary judgment.

BAEF contended that it never entered into a binding, enforceable contract with Novecon. The district court agreed with BAEF. Citing Jack Baker v Office Space Development Corp, 664 A2d 1236 (DC 1995), the court found that "two parties may enter into binding contract, even though they anticipate drafting a subsequent written memorialization". However, where there is no written agreement, the party asserting that a contract exists has the burden of proof.

To meet the burden of proof, the party must consider five factors:

  • whether the contract is one usually put in writing;
  • whether there are few or many details;
  • whether the amount involved is large of small;
  • whether it requires a formal writing for a full expression of the covenants and promises; and
  • whether the negotiations indicate that a written draft is contemplated as the final conclusion of negotiations.

Applying these factors to the present case, the court found that there was no binding contract between Novecon and BAEF. The court was particularly impressed with the fact that BAEF's letters stated that a definitive, written agreement was contemplated before BAEF broke off negotiations.

Could Novecon then recover damages under a promissory estoppel theory? Under the promissory estoppel doctrine, a person who reasonably relies on the promise of another and thereby incurs losses or damages, can recover such amount from the person who made the promise. The court rejected Novecon's claim for damages because it was not reasonable for Novecon to rely on statements made by BAEF officials. As noted above, these statements indicated that BAEF did not intend to be bound until the execution of a final written agreement.

The lesson of the Novecon case is clear: a firm presenting a letter of intent or term sheet, or conducting negotiations, must clearly state that it does not intend to be bound until a definitive contract has been concluded between the parties. Without such a statement, if there is an agreement on material terms, a firm may find that it has entered into a binding contract even though no formal document is signed by the parties.

Robert S Rendell

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