Our attorneys at Westerman Ball thought this article, published by the American Bar Association, might be of interest to our international colleagues dealing with judgment collection and international USA related bankruptcy matters. Please feel free to contact Mickee Hennessy or anyone at Westerman Ball with any questions and Happy Holidays!
After the plaintiff won a $1 million arbitration award against the debtor, a limited liability company headquartered in the Principality of Monaco, it initiated discovery of assets. Those efforts were halted when the debtor filed for bankruptcy in Monaco and petitioned the U.S. Bankruptcy Court for the Northern District of California for recognition of the Monaco proceedings under Chapter 15 of the Bankruptcy Code. The court provisionally stayed all ongoing actions against the debtor, including the plaintiff’s enforcement efforts, pending resolution of the Chapter 15 petition.
On March 15, 2021, the bankruptcy court denied the petition, finding it was a “sham” designed to prevent the plaintiff (“IPAC”) from collecting its arbitration award. The debtor appealed to the BAP for the Ninth Circuit, but neither the debtor nor Lorenzo Napoleoni, who was the CEO and 50 percent shareholder, moved for a stay of the denial pending appeal. As a result, the provisional stay was lifted, and the plaintiff resumed collection efforts in the district court.
The plaintiff then moved to add Napoleoni and his wife as judgment debtors under an alter ego theory. The district court ultimately found that the Napoleonis were the debtors’ alter ego under both California and Monaco law and added them to the final judgment. This debtor appealed.
While the appeal was pending, the BAP reversed the bankruptcy court’s order and found that the Chapter 15 petition should have been granted. Although the BAP agreed the insolvency proceedings were a “sham,” it concluded that recognition should be given if the petition meets the statutory threshold and is not manifestly contrary to U.S. public policy. The plaintiff did not appeal the BAP’s decision, so it became final and triggered the automatic stay by granting the debtor’s Chapter 15 petition for recognition.
The Napoleonis then moved the Ninth Circuit to remand the case to district court, but they were denied leave to do so unless they argued the automatic stay extended to the plaintiff’s alter ego claim. They failed to make that argument and instead claimed that the plaintiff’s alter ego claim was subject to the automatic bankruptcy stay, an argument the district court ultimately rejected. The Napoleonis appealed to the Ninth Circuit.
The Ninth Circuit resolved two issues under 11 U.S.C. § 1520: (1) when the automatic stay begins, and (2) what actions it covers and whom it protects. The Ninth Circuit affirmed the district court’s judgment, holding that (1) a later reversal of a denial of recognition does not retroactively trigger the stay under Section 1520 to the date when the petition for recognition was denied, and (2) the automatic stay, once triggered, does not “encompass a creditor’s garden-variety alter ego claim against the foreign debtor’s sole owners.”
