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JP MORGAN CHASE v. ALTOS HORNOS DE MEXICO

United States District Court, S.D. New York


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 finds support in a leading treatise on bankruptcy law: Page 9

 

Because section 3 04(b)(2) applies to property of the estate, the reach of that section is narrower than section 304(b)(1), which applies to "property involved in such foreign proceeding." As explained in [Koreag], "the use of the term `property of such estate' [in section 304(b)(2)] presupposes an antecedent determination of property interests as a condition to the turnover of property to a foreign representative." Section 304(b)(1), in contrast, does not require a determination of the issue of ownership as a precondition to enjoining "litigation `with respect to property involved in' a foreign insolvency . . . to prevent dismemberment by local creditors of assets located [in the United States].'"
2 King et al., Collier on Bankruptcy ¶ 304.06, at 304-24 to-25 (footnotes omitted). Furthermore, as the Second Circuit noted in Koreag, the determination of ownership of such property involves the consideration both of foreign bankruptcy law and local law: "For purposes of section 304, the estate of a foreign debtor is defined by the law of the jurisdiction in which the foreign proceeding is pending, with other applicable Jaw serving to define the estate's interest in particular property." Koreag, 961 F.2d at 348 (emphasis in original removed).

  In sum, the present dispute is not on all fours with either Ecoban or Koreag.

  a. Whether the issue is before the SOP court

  JPMCB contends that the issue raised in this lawsuit — i.e., who owns the Collection Account — is not before the Mexican SOP court because, inter alia, Altos Hornos has not claimed the Collection Account as an asset in its SOP filing. JPMCB also argues that it did not dispute the question of ownership in its opposition to Altos Hornos's December 2002 motion, and that even if the SOP court were to issue the letters rogatory, it would not dispose of the issue of ownership of the Collection Account.

  In its December 2002 motion, Altos Hornos petitioned the SOP court for an order that JPMCB repay and place at Altos Hornos's disposal an amount equal to the amount in the Collection Account. Altos Hornos clearly asserted that the assets in the Collection Account belong to it and petitioned the SOP court "to order [JPMCB] . . . to repay and place at the disposal of [Altos Hornos] the sum of US $4,767,574.16." (As noted above, the court deferred decision on the motion until the court of appeals resolved the appeals by both Altos Hornos and Page 10 JPMCB with respect to JPMCB's acknowledgment-of-credit claim.) Although it appears that the issue is not before the SOP court as formulated so specifically by JPMCB in this declaratory-judgment action — i.e., neither party has expressly asked the SOP court to decide who owns the Collection Account and the funds contained therein — the issue of the ownership was implicitly raised by Altos Hornos. The fact that JPMCB managed to sidestep the dispute in its response cannot be used now to disadvantage the defendant.*fn15 Moreover, in its June 13, 2002 order, the judge in the SOP proceeding attempted to characterize the Collection Account and determine its significance; the parties appear to agree that their dispute about whether the funds in the account are collateral or ordinary income from pre-petition contracts or payments on the loan is significant to the issue of ownership.

 

b. Whether under Mexican law U.S. courts can, should, or must resolve the issue
  As to whether under Mexican law U.S. courts can, should, or must resolve the issue, JPMCB posits the thought that under Mexican law the ownership of this property is more appropriately resolved by a U.S. court, given that Mexico follows the doctrine of lex rei sitae and also the SOP court lacks jurisdiction over claims secured by pledges. Altos Hornos contends on the other hand that its SOP proceeding has the effect of staying actions such as JPMCB's. I disagree with both positions.

  With respect to JPMCB's argument that the concept of lex rei sitae requires that the issue of ownership of property situated in New York be decided by a New York court, my reading suggests otherwise — i.e., New York law applies, even if decided by a non-New York court. With respect to JPMCB's argument that the SOP court lacks jurisdiction, this argument is what psychiatrists might characterize as rationalization. Article 126 of the Mexican bankruptcy law Page 11 establishes the scope of claims that must be heard by the bankruptcy court.*fn16 It provides as follows:

All pending suits against the bankrupt shall be tried jointly with the bankruptcy proceedings, except the following and without interference with that set forth in Article 122 and the powers given to the trustee to sell all assets:
I. Those in which the judgment has already been declared in the trial court;
II. Those dealing with secured claims or collateral.
Assuming that JPMCB is correct that the assets in the Collection Account are assets that deal with secured claims or collateral and thus fall within the exception enumerated in subsection II — a point which Altos Hornos disputes but which finds considerable support in the language of the Loan Documents — the SOP court has jurisdiction. Indeed, JPMCB's own expert, Miguel Angel Hernandez Romo, a leading authority on Mexican bankruptcy law and the Reporter for the American Law Institute's Restatement of Mexican Bankruptcy Law of the Transnational Insolvency Project, appears to reach this conclusion: "I do not believe that there is anything in Mexican law that would require the issue [of ownership of the Collection Account] to be resolved in a Mexican court." Hernandez Romo Decl. ¶ 11.

  With respect to the scope of the stay, Article 409 of the Mexican bankruptcy law provides: "With the exception of claims for debts for work or food, or claims with guarantees, all suits against the debtor that have as their purpose claiming compliance with a monetary obligation shall be in suspension; but actions may be maintained to prevent damage to things subject to litigation or to preserve the rights of the parties." I agree with JPMCB's expert, Miguel Angel Hernandez Romo, who opines that JPMCB's claim for a declaration of the ownership rights of the Collection Account is not within the scope of this automatic stay that pertains to suspension of pagos for two reasons. First, JPMCB's claim is not for the purpose of "claiming compliance with a monetary obligation." Second, it appears to fall within the exception for actions "to preserve the rights of" JPMCB. Relatedly, Altos Hornos contends that the effect of the SOP was to terminate the Loan Agreement. Although I am not fully persuaded Page 12 that Altos Hornos has demonstrated this to be the law of Mexico, a Mexican court is clearly better able to evaluate this argument.

  The banks' expert summarized it best: "I do not believe that there is anything in Mexican law that would require the issue [of ownership of the Collection Account] to be resolved in a Mexican court; nor is there any principle in Mexican law that would be offended by this Court's resolution of the issue." Hernandez Romo Decl. ¶ 11. In short, Mexican law appears to be quite agnostic on this issue — it does not dictate one way or the other where the dispute must be decided.

 2. Waiver

  Both the Loan Agreement and the Security Agreement contain a similar forum-selection and choice-of-law clause. For example, the Loan Agreement provides:

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. Each of the parties hereto hereby submits to the jurisdiction of the United States District Court for the Southern District of New York, of any New York State court sitting in New York City, and of the courts of its own corporate domicile with respect to actions brought against it as a defendant, for purposes of the legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby.
Loan Agreement 11.06(a). The Security Agreement contains nearly identical language, and both further provide that Altos Hornos waives "to the fullest extent permitted by law" any objection to venue.*fn17 Loan Agreement 11.06(a); Security Agreement 5.07. The Loan Agreement further Page 13 states:
[Altos Hornos] irrevocably waives, to the fullest extent permitted by law, any claim that any action or proceeding commenced by the Facility Agent or any Bank relating in any way to this Agreement should be dismissed or stayed by reason, or pending the resolution, of any action or proceeding commenced by [Altos Hornos] relating in any way to this Agreement whether or not commenced earlier.
Loan Agreement 11.06(d). JPMCB contends that the forum-selection and choice-of-law clause and the waiver provision operate to prevent Altos Hornos from objecting to jurisdiction here. I disagree.

  It is settled law that the presence of such a forum-selection and choice-of-law clause does not preclude comity where it is otherwise warranted. See Allstate Life Ins. Co. v. Linter Group, Ltd., 994 F.2d 996, 1000 (2d Cir. 1993) (noting that the presence of forum-selection and choice-of-law clauses "does not preclude a court from granting comity where it is otherwise warranted"); see also Ecoban, 108 F. Supp.2d at 354. JPMCB argues that the cases associated with this rule are distinguishable on the basis that they involved forum-selection and choice-of-law clauses but did not, as here, contain this additional waiver provision that appears to encompass the comity argument. In short, the presence of this waiver provision fails to change the rule and the result. As with a contract that contains only a forum-selection and choice-of-law provision, courts still determine that the considerations associated with comity trump the parties' express wishes. That the parties here appear to have stated their intentions with even more emphasis does not change the fact that there are important considerations that may not have concerned the parties then but which must concern this Court now — for example, Altos Hornos's other creditors and the importance of a unified administration rather than a piecemeal administration of its estate in the SOP proceeding. Dismissal on the ground of comity should prevail.

  In sum, Koreag does not control and require this Court to make a threshold determination of the ownership of the Collection Account, notwithstanding Altos Hornos's pending SOP proceeding in Mexico. Nor does the waiver provision in the Loan Agreement prevent this Court from dismissing the action and permitting the SOP court in Mexico to resolve this dispute, which Page 14 has been raised at least implicitly in the proceeding there. While this is not a matter where, as in Ecoban, a creditor is making a direct claim on a foreign company's estate, given the Second Circuit's instruction that comity is especially appropriate for foreign bankruptcy proceedings, see Finanz AG Zurich, 192 F.3d at 246, the prudent exercise of discretion dictates dismissal of JPMCB's action so as to permit the SOP court to resolve this dispute. Thus, I need not reach JPMCB's motion for summary judgment.*fn18

  III. CONCLUSION

  For the foregoing reasons, Altos Hornos's motion to dismiss the complaint on the basis of comity is granted, and it is not necessary to reach JPMCB's motion for summary judgment. The Clerk of the Court is instructed to close this case and any open motions and remove the matter from my docket.

  IT IS SO ORDERED.


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