By: Malerie Ma
St. John’s University Law Student
American Bankruptcy Institute Law Review Staff
Applying the “public policy” exception of Chapter 15, the Bankruptcy Court for the Southern District of New York refused to enforce a German bankruptcy order that would have allowed the foreign representative[1] access to a chapter 15 debtor’s emails stored in the United States in In re Toft.[2] This case represents one of the first decisions to explore the outer boundaries of the public policy exception in section 1506 of the Bankruptcy Code. This chapter 15 proceeding was brought pursuant to a German case, the foreign main proceeding,[3] in which the foreign representative was granted a “Mail Interception Order” on an ex parte basis. The German “Mail Interception Order,” which was also recognized by the English courts,[4] allowed the foreign representative to, among other things, intercept the debtor’s postal and electronic mail without giving notice to the debtor, Dr. Toft.[5] The Bankruptcy Court refused to grant comity to the decision of the German Court because the relief sought was “manifestly contrary” to U.S. public policy.[6]
Generally, foreign judgments are entitled to recognition in U.S. courts on the basis of comity. The United States grants comity to foreign judgments freely “as long as the proceedings in the foreign court ‘are according to the course of a civilized jurisprudence, i.e. fair and impartial.’”[7] One of the only limits on the grant of comity is if the extension of comity would be “manifestly contrary” to the public policy of the United States.[8] Congress drafted the “public policy” exception narrowly and courts have applied it sparingly in chapter 15 proceedings.[9] In the instant matter, the court denied the requested relief because allowing access to the debtor’s emails could result in criminal liability for the foreign representative, his U.S. agents, or even the e-mail providers under the Wiretap and Privacy Acts.[10] In addition, the “Mail Interception Order” did not require notice to the debtor, which the court found to be contrary to U.S. constitutional due process requirements. The Court held that, “chapter 15 proceeding[s] cannot ordinarily be pursued without notice to the debtor,”[11] and the court made no exception in this case.
In re Toft is one of the few cases to deny relief on the basis of chapter 15’s “public policy” exception.[12] This case is useful for understanding the limits of comity in U.S. courts when balanced against the fundamental U.S. requirement of notice. While courts will continue to apply the “public policy” exception narrowly, this case shows that the exception can be a powerful impediment to requests for aid in foreign insolvency proceedings.
[1] Here, the foreign representative is the insolvency administrator for Dr. Toft’s bankruptcy proceeding that began in Germany. Id. at 188. See 11 U.S.C. § 1509 (2005) (describing rights of a foreign representative and requirements for recognition).
[2] 453 B.R. 186 (Bankr. S.D.N.Y. 2011).
[3] The underlying German insolvency proceeding was recognized by the bankruptcy court as a foreign main proceeding. See Recognition Order Mar. 11, 2011, ECF No. 2.
[4] Id. at 201. See Prager v. Toft, [2011] (UK), ECF No. 6, pp. 19-20.
[5] In re Toft, 453 B.R.at 201.
[6] Id. at 189.
[7] In re Toft, 453 B.R. at 189 (quoting In re Ephedra Prods. Liability Litig., 349 B.R. at 336 (S.D.N.Y. 2006)).
[8] Id. at 189.
[9] In re Metcalfe & Mansfield Alternative Investments., is an example of a case that contemplated the extension of comity to a Canadian insolvency proceeding. 421 B.R. 685 (Bankr. S.D.N.Y. 2010). There, Canadian procedural requirements previously litigated met fundamental standards of U.S. standards and chapter 15 relief was granted. Id. In re Ephedra Products Liability Litigation, is another case where American relief was extended to Canadian insolvency proceeding. 349 B.R. 333 (S.D.N.Y. 2006). There the court explicitly contemplated that the “public policy” exception “‘is only intended to be invoked under exceptional circumstances concerning matters of fundamental importance for the enacting state.’” Id. at 336 (quoting United Nations General Assembly, Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency, ¶ 89, U.N. Doc A/CN.9/442 (1997)).
[10] In re Toft, 453 B.R. at 189.
[11] Id. The court goes on to state that:
[t]he relief requested would also contravene the protection against disclosure of e-mails by internet service providers contained in the Electronic Communications Privacy Act, and would appear to constitute an unlawful interception of electronic communications in transit under the Wiretap Act. Effectuation of the relief sought might subject the Foreign Representative, or his U.S. agents and possibly an ISP disclosing the debtor’s e-mails, to U.S. criminal liability . . . [T]his is one of the rare cases in which the relief sought by the Foreign Representative must be denied under § 1506 of the Bankruptcy Code as manifestly contrary to the public policy of the United States.
Id. (citations omitted).
[12] Id.
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