Shareholder of a Korean corporation (“Cuzco Korea”), the sole member of a chapter 11 limited liability company debtor (“Cuzco USA” or the “Debtor”), brought an adversary proceeding against the Debtor and others, asserting claims directly, derivatively on behalf of Cuzco Korea and “double derivatively” on behalf of the Debtor. On the defendants’ motion to dismiss, the bankruptcy court for the district of Hawaii was required to consider the impact of Korean law on the derivative claims as well as notions of forum non conveniens.

Background

Cuzco USA filed a chapter 11 in Hawaii with its sole asset real property in Hawaii. Tera Resources Co., Ltd. (“Tera”), one of Cuzco Korea’s shareholders asserted that the Debtor and its insiders conspired to deprive Cuzco Korea of the value of the real property. Tera commenced an action for fraud, breach of fiduciary duties, piercing the corporate veil, unjust enrichment and imposition of constructive trust. The defendants moved to dismiss.

Discussion

Impact of Korean Fiduciary Duties Law

In their motion to dismiss, the defendants argued that that Korean law governs the right to bring a derivative action on behalf of a Korean corporation. This principle, which is fully consistent with U.S. law, was not disputed by Tera. Korean law, however, contains a certain twist – under Korean law a shareholder’s derivative action may be brought only in the Seoul District Court. Tera argued that this jurisdictional provision of Korean law is unenforceable in a U.S. bankruptcy case.

The bankruptcy court agreed with Tera: “United States statutes confer subject matter jurisdiction on United States courts. Statutes of another nation, such as the South Korean statute … cannot change the subject matter jurisdiction of a United States bankruptcy court under a United States statute.”

Forum Non Conveniens

The defendants also urged the court to dismiss the action since the litigation in South Korea would be more convenient for the parties. In considering whether to apply the doctrine of forum non conveniens, U.S. courts consider (i) whether an alternative forum exists and (ii) whether the balance of the interests involved favors dismissal. As far as the claims against the Debtor are concerned, the court refused to dismiss the action because “there is a strong public policy that favors centralization of claims against the Debtor in the bankruptcy court that outweighs any other interest.”

As to the claims against the individual defendants, the court found that some of them related to the bankruptcy case and thus should not be dismissed, while others were direct disputes among the shareholders that could not have any effect on the Debtor and the bankruptcy case and thus should be dismissed for lack of jurisdiction rather than on forum non conveniens grounds.

Implications

While U.S. courts are likely to respect the internal affairs doctrine, pursuant to which the law of formation governs the internal affairs of the corporation, they are unlikely to yield to foreign forum selection clauses contained in foreign laws, especially when they purport to apply to matters as to which U.S. courts have subject matter jurisdiction.

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