Thu, Aug. 05, 2010

Recognition of US Bankruptcy Procedure

KB - Washington.   The German Supreme Court in Karlsruhe, Bundesgerichtshof, ruled on October 13, 2009 on the recognition of American insolvency proceedings under Chapter 11 of the United States Bankruptcy Code by German courts, in the matter X ZR 79/06. Recent bankruptcies with international effect such as Chrysler and General Motors underscore the significance of the decision which Jessica Schmidt summarized and discussed in the German American Law Association Newsletter, Bonn, 2010, p.54.

The defendant in the case before the high court is a legal entity and an affiliate of a US corporate group with its registered office in the USA. It owns an American patent which the plaintiff successfully invalidated in a German court. The defendant appealed to the Bundesgerichtshof and then filed for Chapter 11 bankruptcy in the United States. The parties disagreed in the German case whether the appellate proceedings were suspended by that filing or could be ignored in Germany.

The recognition in Germany of foreign bankruptcies is codified in § 343 I 1 InsO, the German Insolvency Act. § 343 I 1 InsO requires that foreign insolvency proceedings pursue the same objectives as the German bankruptcy. The objectives need not be congruent but equivalent. The court found Chapter 11 to be equivalent because it was essentially the role model for the German insolvency plan procedure found in §§ 217 InsO et seq. Although Chapter 11 diverges in some procedural aspects from the German system, the differences do not jeopardize a finding of equivalence.

As a result of their recognition under German law, § 352 I 1 InsO extends the stay of American bankruptcies to German legal disputes which, in turn, impact the estate. The automatic stay of § 362 US Bankruptcy Code is not contrary to this principle. Although the automatic stay applies to all proceedings against the debtor, the court found the instant party's role in the trial court to be determinative. With the debtor being the defendant and not the plaintiff in the case before the high court, the rule of automatic stay should apply. The court found the United States procedural system in which the validity of a patent is judged within a patent infringement lawsuit initiated by the debtor to be irrelevant. This conclusion is based on the obligation of the German court to consider German procedure, not the American counterpart.

The plaintiff argued that it is unreasonable for German legal dispute to be suspended by the filing in the United States, because in this case the first initial judgment is enforceable. The court found the instruments provided by the US bankruptcy law to modify or annul the automatic stay to offer sufficient protection, because they give the plaintiff the opportunity to seek a revocation of the suspension. The application of these rules of American law do not violate German public policy, the court explained. Schmidt agrees with the court and does not criticize the opinion in any way. She found the legal certainty which the German court established with its decision to be essential due to the latest bankruptcies of major American corperations with international operations. The recognition of American insolvency proceedings under Chapter 11 of the United States Bankruptcy Code by German courts is, therefore, of high practical relevance.

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