U.S. companies that engage in business in multiple jurisdictions should be mindful of a recent decision by the United States Bankruptcy Court for the District of Delaware. In the Chapter 15 case of Energy Coal S.P.A., the bankruptcy court held that U.S. choice of law and forum selection provisions in a contract with a non-U.S. company did not override the terms of a foreign restructuring plan that was approved by a foreign court. The court stated that it is “appropriate to expect U.S. creditors to file and litigate their claims in a foreign main bankruptcy case.” See In re Energy Coal S.P.A., Case No. 15-12048 (Bankr. D. Del. Jan. 02, 2018).
Energy Coal S.P.A. is an Italian company that is primarily engaged in trading in coal and other raw material. Facing financial distress resulting, in part, from a dispute with a counterparty to certain contracts, Energy Coal filed an application for “Concordato Preventivo” under the Italian Insolvency Law.
A Concordato Preventivo is akin to a Chapter 11 case under the U.S. Bankruptcy Code in that it provides for a procedure pursuant to which a debtor may restructure its debts. Energy Coal also filed a petition in the United States Bankruptcy Court for the District of Delaware seeking recognition of Energy Coal’s Concordato Preventivo as a foreign main proceeding under Chapter 15 of the Bankruptcy Code. The Delaware bankruptcy court granted the Chapter 15 petition.
In its Concordato Preventivo, Energy Coal proposed a restructuring plan to creditors in accordance with Italian law. After obtaining creditor approval of the plan, Energy Coal sought and obtained a “homologation order” making the plan final and binding on all of Energy Coal’s creditors. Pursuant to the plan, administrative expenses would be paid in full while unsecured claims would receive a distribution equal to 1% to 7% depending on the classification of such claims.
Following the Italian court’s approval of the plan, Energy Coal requested an order from the Delaware bankruptcy court (1) enforcing the homologation order and the restructuring plan in the United States and (2) enjoining U.S. creditors from seeking judgments against Energy Coal or its property in the U.S.
MacEachern Energy LLC and Christopher MacEachern, counterparties to contracts with Energy Coal, objected only to the requested injunction in the United States. Notwithstanding the terms of the plan, MacEachern argued that they should be permitted to pursue litigation in Florida to determine both the amount of their claims and the appropriate level of recovery on account thereof because their contracts (1) were governed by Florida law and (2) required that venue of any dispute regarding the contracts would be in Florida. According to MacEachern, they had outstanding claims under their contracts that were entitled payment in full. Energy Coal agreed that MacEachern could liquidate its claims in any court of competent jurisdiction, including Florida, but argued that the amount of distributions MacEachern was entitled to with respect to those liquidated claims was governed by the plan approved in the Italian insolvency proceeding.
The Delaware bankruptcy court agreed with Energy Coal, stating that MacEachern’s argument (that the contract language trumped foreign insolvency law), if accepted, would likely result in Energy Coal facing litigation in every venue that is identified as appropriate in the debtor’s contracts. That result, noted the bankruptcy court, “is not the law, nor is it appropriate or sensible.” The court noted further that “U.S. bankruptcy courts have not hesitated to require foreign creditors to file their claims and to litigate in [U.S.] courts if they wish a distribution from a U.S. Debtor’s estate. It is equally appropriate to expect U.S. creditors to file and litigate their claims in a foreign main bankruptcy case.” Accordingly, the bankruptcy court concluded that U.S. creditors of a foreign debtor may be required to file their claims in a foreign jurisdiction notwithstanding the terms of their contracts with the debtor and despite the additional costs associated with pursuing such claims abroad.
The Delaware bankruptcy court’s decision in Energy Coal reinforces the well-established principles that (1) one who knowingly does business with a foreign company does so with the understanding that its claims against that company may be altered by the laws of the company’s home country, and
(2) disputes against a debtor should be centralized in a single forum. Accordingly, a foreign insolvency or reorganization may affect a creditor’s rights to collect from a foreign company notwithstanding the terms of any prior agreement or arrangement. A creditor should therefore pay close attention to a debtor’s foreign proceeding and not rely solely on the terms of its agreements with the debtor in seeking recovery on any claims.