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JP MORGAN CHASE v. ALTOS HORNOS DE MEXICO

January 7, 2004.

JP MORGAN CHASE BANK Plaintiff -against- ALTOS HORNOS DE MEXICO, S.A. DE C.V., Defendant


The opinion of the court was delivered by: HAROLD BAER, JR., District Judge

OPINION & ORDER

On March 18, 2003, plaintiff JP Morgan Chase Bank ("JPMCB") initiated this lawsuit. It sought a declaration of ownership in certain monies held in an account in its name at one of its branches in New York. Defendant Altos Hornos de Mexico, S.A. de C.V. ("Altos Hornos") moves to dismiss the complaint in this matter on the grounds of comity, pursuant to Federal Rule of Civil Procedure 12(c). JPMCB moves for summary judgment. For the following reasons, Altos Hornos's motion is granted, and thus I need not reach JPMCB's motion for summary judgment.

I. BACKGROUND

 A. Facts

  In April 11, 1997, Altos Hornos, Mexico's largest liquid steel producer, entered into a $330-million loan agreement with JPMCB and twenty-seven other lending banks. See Compl. 7, 17-22. In connection with this loan, the parties executed two documents, a Loan Agreement and a Security Agreement (collectively "the Loan Documents"). In addition to being one of the lending banks, JPMCB was designated as the "Facility Agent" to act on behalf of the banks.*fn1 The purpose of this loan was to permit Altos Hornos to satisfy existing loans of some $228 million and certain other debts. See Loan Agreement §§ 1.01, 2.02. The Loan Agreement, Page 2 among other things, established a "special cash collection account" ("Collection Account") held at JPMCB's office in New York into which certain payments under the Loan Agreement were to be made and from which JPMCB, as Facility Agent, would distribute funds to the other lending banks. See Compl. ¶¶ 7-10; Loan Agreement §§ 3.01(a), 3.02(b).*fn2 The Loan Agreement provided that the Collection Account was "in the name and under the control of" the Facility Agent and that Altos Hornos had "no right or power of withdrawal over the Collection Account." See Loan Agreement §§ 3.01(a), 3.02(a). Under the Security Agreement, Altos Hornos agreed to instruct three of its customers who had pre-existing contracts with Altos Hornos to make payments to the Collection Account.*fn3 Section 2 of the Security Agreement pertained to collateral and provided: "As collateral security for the prompt payment in full when due . . ., the Company [Altos Hornos] hereby pledges and grants to the Facility Agent, for the benefit of the Secured Parties as hereinafter provided, a security interest in all of the Company's right, title and interest in . . . the balance from time to time in the Accounts [the Collection Account and the Reserve Account]." (The Loan Agreement adopted the definition of "Collateral" from the Loan Agreement. See Loan Agreement § 1.01.) The Loan Agreement provided that twice a year, JPMCB as the Facility Agent was to distribute the assets in the Collection Account to the lending banks, after deduction of its expenses, to pay for all interest and principal due and payable. If there was any surplus after payment of these prior items, JPMCB was to pay this surplus to Altos Hornos. See Loan Agreement § 3.02(b). In addition, each of the Loan Documents contained a forum-selection and choice-of-law clause in favor of New York.*fn4 Page 3

  Due to adverse developments in the global steel market in the late 1990s caused largely by the financial crisis in Asia, Altos Hornos, already in financial difficulty, suffered additional significant operating losses. See Gonzalez Saravia Decl. ¶¶ 9-10.*fn5 As a result, Altos Hornos missed a payment required by the Loan Agreement and JPMCB declared Altos Hornos in default. On May 24, 1999, Altos Hornos filed a petition with the First Court of First Instance in Monclova (Coahuila), Mexico to be declared in suspension de pagos — suspension of payments ("SOP") — pursuant to Title VI of the Ley de Quiebras y Suspension de Pagos, the then-existing Mexican law of bankruptcy.*fn6 (Suspension de Pagos is somewhat analogous to a reorganization under Chapter 11 of the U.S. Bankruptcy Code.) The following day, the SOP court declared Altos Hornos to be in suspension of payments and notice was provided to its creditors, which included JPMCB. In June and August 1999*fn7 — i.e., after the Mexican court granted the petition — the three steel customers paid into the Collection Account approximately $4.7 million for purchases they had made prior to the SOP in the ordinary course of Altos Hornos's business. Morgan did not distribute these proceeds to the lending banks, as was provided in the Loan Agreement.*fn8 In June 1999, as a result of Altos Hornos's SOP, JPMCB determined to accelerate the entire loan amount. JPMCB formally appeared in the SOP proceedings on March 20, 2000 and filed an acknowledgment-of-credit claim, in which it sought acknowledgement as a secured creditor for $225,355,617.25 in principal and $1,912,330.78 in interest — Altos Hornos having repaid approximately $105,000,000 of the amount it owed before its SOP petition. On June 13, 2002, the SOP court recognized JPMCB's claim against Altos Hornos but declared it an unsecured general creditor for the total principal ($225,355,617.25) and reserved judgment as to Page 4 the amount of interest.*fn9 Declaration of Miguel Angel Hartasanchez Noguera ("Hartasanchez Noguera Decl.") ¶ 12. Both JPMCB and Altos Hornos appealed these rulings, and that matter remains sub judice. See Hartasanchez Noguera Decl. ¶ 13.

  By letters dated August 5 and October 5, 2002 JPMCB notified Altos Hornos of the existence of the $4.7 million in the Collection Account, and in December 2002, Altos Hornos made the equivalent in Mexico of a motion to order JPMCB to reimburse the $4.7 million to Altos Hornos for distribution in the SOP proceeding on the ground that this money is part of Altos Hornos's equity and properly belongs to it as an asset to be equitably distributed in this SOP proceeding. JPMCB filed opposition papers to this motion, and on July 17, 2003, the SOP court issued an order in which it postponed a decision on Altos Hornos's request for letters rogatory until the court of appeals decided the claims filed with respect to JPMCB's acknowledgment-of-credit claims.*fn10 On January 15, 2003, JPMCB withdrew $880,708 from the Collection Account to pay legal bills, which left a balance, as of July 31, 2003, of $3,913,317.51.*fn11 On February 6, 2003, Altos Hornos sent JPMCB a letter demanding repayment. Page 5 On March 18, JPMCB commenced this action seeking a declaration that the funds in the Collection Account are not property of Altos Hornos's estate.

  II. DISCUSSION

  Altos Hornos contends that this matter should be dismissed on the grounds of comity; it argues that the two primary considerations under the principles of comity weigh in favor of dismissal here — namely that 1) the SOP proceedings in Mexico abide by fundamental standards of procedural fairness and 2) no public policy is violated by granting comity to the SOP proceedings. Altos Hornos also argues that although it has proceeded by this motion to dismiss for the sake of efficiency, dismissal would also be appropriate under Section 304 of the U.S. Bankruptcy Code. Finally, Altos Hornos contends that JPMCB's actions impair Altos Hornos's estate to the prejudice of other creditors. JPMCB, on the other hand, contends that 1) this matter is properly before this court to determine the ownership of the Collection Account — i.e., there is subject-matter and personal jurisdiction — and that the issue presented is not before the Mexican court and lies beyond its jurisdiction. JPMCB also contends that Altos Hornos waived any argument for dismissal based on a parallel proceeding.

 1. Principles of comity

  Under the principle of comity, American courts defer to proceedings in foreign countries so long as "the foreign court had proper jurisdiction and enforcement does not prejudice the Page 6 rights of the United States citizens or violate domestic public policy." Finanz AG Zurich v. Banco Economico S.A., 192 F.3d 240, 246 (2d Cir. 1999). "We have repeatedly noted the importance of extending comity to foreign bankruptcy proceedings. Since `the equitable and orderly distribution of a debtor's property requires assembling all claims against the limited assets in a single proceeding/ American courts regularly defer to such actions." Id.; see also Ecoban Fin. Ltd, v. Grupo Acerero del Norte; S.A. de C.V., 108 F. Supp.2d 349, 351-52 (S.D.N. Y. 2000) ("Comity is particularly appropriate and important with respect to foreign bankruptcy proceedings, where equitable principles demand that all claims against a debtor's limited assets be addressed in a single proceeding."). The decision whether or not to extend comity is generally a matter of discretion. As the Supreme Court stated more than 100 years ago — and courts and commentators continue to repeat:
"Comity," in the legal sense, is neither a matter of absolute obligation, on the one hand, nor of mere courtesy and good will, upon the other. But it is the recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protection of its laws.
Hilton v. Guyot 159 U.S. 113, 1164 (1895); see also In re Treco, 240 F.3d 148, 157-58 (2d Cir. 2001) (quoting Hilton v. Guyot); 2 Lawrence P. King et al., Collier on Bankruptcy ¶ 304.08[5][a], at 304-34 (15th ed. Revised 1996)(same).*fn12

  Another district judge recently reviewed Mexico's SOP proceedings and afforded comity to these very proceedings initiated by Altos Hornos. See Ecoban, 108 F. Supp.2d at 355. Ecoban involved a lawsuit against Altos Hornos and its parent company to collect on a series of past-due promissory notes worth approximately $18 million. Id. at 350. Judge Hellerstein granted defendants' motion to dismiss on the basis of comity, given Altos Hornos's petition for suspension de pagos. See id. Judge Hellerstein noted that a suspension de pagos generally resembles a reorganization under Chapter 11 of the U.S. bankruptcy law and found that Mexican Page 7 law abides by fundamental standards of procedural fairness and violates no public policy in New York or the United States. See id. at 351, 353. Despite superficial similarities — i.e., Altos Hornos is a defendant in both cases and both revolve around the petition for SOP that Altos Hornos filed in 1999 — it is fair to say there are differences between the facts at issue here and Ecoban. Most significantly, the plaintiff sought to collect on past-due promissory notes and as Judge Hellerstein noted, "In the end, we are left with a simple case of an American creditor of a Mexican corporation asking this Court to give it a preference over other creditors by releasing it from the obligations imposed by Mexican bankruptcy law." Id. at 354. Unlike the plaintiff in Ecoban, JPMCB is not attempting to gain a preference over other creditors — at least not directly — by asserting a claim for repayment outside the Mexican SOP; rather, JPMCB is attempting to ascertain whether the Collection Asset is within Altos Hornos's estate. Interestingly on the comity front, JPMCB does not seriously challenge Judge Hellerstein's conclusion that Mexico's SOP proceedings are fundamentally fair.

  The case upon which JPMCB primarily relies is In re Koreag, Controle et Revision S.A., 961 F.2d 341 (2d Cir. 1992), in which the Second Circuit ruled that it was improper to order the turnover of assets to a foreign bankruptcy proceeding without making a threshold determination as the ownership of the assets. In re Koreag, 961 F.2d at 348. JPMCB contends that the principles of Koreag govern and that a U.S. court is permitted, under the principles of comity, to decide this issue of ownership. There, a New York company (Refco) engaged in commodity and currency transactions deposited approximately $6.9 million dollars into a bank account of a Swiss company (Mebco) pursuant to several contracts for the exchange of currency, unaware that the Swiss company had gone into liquidation in Switzerland. See id. at 344-45. After Refco's demand to the liquidator (Koreag) for the return of its money was refused, it brought suit against Mebco in federal court in New York. See id. at 346. Koreag, the liquidator, moved for dismissal based on comity and for the turnover of the assets for administration in Switzerland. See id. In addition, at the district court's suggestion, Koreag brought suit in bankruptcy court pursuant to 11 U.S.C. § 304(b)(2), which authorizes the commencement of a case in a United States bankruptcy court ancillary to a foreign bankruptcy proceeding in order to "protect the administration of the foreign proceeding" and "to prevent the piecemeal distribution of assets in Page 8 the United States by means of legal proceedings initiated in domestic courts by local creditors."*fn13 Id. at 348. The bankruptcy court ordered that the assets in the New York account be turned over to Koreag, and the district court affirmed. See id. at 347. The Circuit reversed the lower courts' decision to order the turnover of the funds without first determining whether they constituted part of Refco's estate. It noted that "the term `property of such estate' presupposes an antecedent determination of property interests as a condition to the turnover of property to a foreign representative," id. at 348, and that "[a] determination that the funds are not property of the estate therefore does not improperly affect other creditors of the estate, because they have valid claims only against the estate's bona fide assets," id. at 349.

  I agree with Altos Hornos that Koreag is not controlling where, as here, a foreign debtor seeks injunctive relief pursuant to 304(b)(1) rather than the turnover of property pursuant to § 304(b)(2).*fn14 This argument ...


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