Exelco’s US Chapter 11 Case Dismissed in Favor of Belgian Proceeding

by Dechert LLP

Dechert LLP

The Delaware Bankruptcy Court recently dismissed a Chapter 11 bankruptcy case pending before it and recognized, under Chapter 15 of the Bankruptcy Code, the debtor’s bankruptcy proceeding in Belgium. Exelco NV (“Exelco”), a Belgian diamond distributor, owed KBC Bank NV (“KBC”) approximately US$14 million. KBC’s debt was secured by a pledge on essentially all of Exelco’s assets. Exelco’s debt was also guaranteed by an affiliated company and certain individuals. When Exelco defaulted on its debt obligations, KBC commenced a sort of involuntary insolvency proceeding in Belgium. Exelco then commenced a Chapter 11 case in Delaware, setting the stage for an international bankruptcy cross border jurisdictional dispute.

The U.S. and Belgium Bankruptcy Proceedings

After Exelco’s default, KBC initiated an action to have a Belgian court appointed liquidator enforce a charge over all of Exelco’s commercial assets. In response, Exelco filed a voluntary petition for bankruptcy relief in Belgium. KBC then moved in the Belgian court to terminate the protections triggered by KBC’s filing in addition to filing a writ to have Exelco liquidated. KBC procured orders from the Belgian court freezing certain bank accounts of Exelco and issued a summons to collect on certain bills of exchange. 

In response, Exelco sought to withdraw its voluntary proceeding in Belgium and filed a Chapter 11 bankruptcy petition in Delaware. Exelco sought and was granted a temporary restraining order barring KBC from violating the automatic stay. The Delaware order also provided that the Belgian proceeding should be stayed pending a hearing on Exelco’s motion. In response, KBC filed a motion seeking to dismiss the Chapter 11 case or to have the Delaware court abstain. 

Despite the temporary restraining order in the U.S., the Belgian court assigned a provisional administrator who seized all of Exelco’s available assets and initiated a process to determine if liquidation should occur in Belgium. A few weeks later, the Belgian court found that Exelco was bankrupt and appointed two permanent foreign representatives who were given authority to act on behalf of Exelco on all matters. The foreign representatives filed a Chapter 15 petition in Delaware and a motion to recognize the Belgian proceeding as a foreign main proceeding under Chapter 15. The foreign representatives also joined KBC’s motion for the Delaware court to dismiss or abstain from hearing Exelco’s Chapter 11 case. Interestingly, although the foreign representatives asked the Delaware court to recognize the Belgian proceedings, they stated in no uncertain terms that the Belgian court would not pay any regard to orders of the Delaware court. 

The U.S. Court Dismissed the Chapter 11 Case

As an initial matter, the Delaware court found that Exelco properly filed for Chapter 11 in Delaware by virtue of the presence of a non-operating affiliate there. Therefore, if there had not been an insolvency proceeding already pending in Belgium, the court would certainly have sustained jurisdiction. 

In analyzing where Exelco’s case should proceed, the court first considered the Bankruptcy Rules. While not necessarily applicable in cases involving a foreign country’s jurisdiction, the court viewed Bankruptcy Rule 1014(b) as instructive in providing that the court where the first case was filed should determine where the case should proceed. In that regard, the Delaware court recognized that the Belgian court had seemingly made that determination by appointing the foreign representatives. 

The Delaware court proceeded to discuss precedents where U.S. courts dismissed or abstained in favor of a foreign proceeding. In Northshore Mainland Services, Inc. 537 B.R. 192 (Bankr. Del. 2015), the Delaware bankruptcy court faced a motion to dismiss or abstain in a case involving several Bahamian debtors and one debtor incorporated in Delaware. In its analysis, the court reviewed seven factors for abstention:

(1) the economy and efficiency of administration;

(2) whether another forum is available to protect the interest of both parties or there is already a pending proceeding in state court;

(3) whether federal proceedings are necessary to reach a just and equitable solution;

(4) whether there is an alternative means of achieving an equitable distribution of assets;

(5) whether the debtor and creditors are able to work out a less expensive out of court arrangement which better serves all interests in the case;

(6) whether a non-federal insolvency has proceeded so far that it would be costly and time-consuming to start afresh with the bankruptcy process; and

(7) the purpose for which bankruptcy jurisdiction has been sought.

Based on those factors, the court decided to abstain and dismissed the Chapter 11 cases. The Delaware court also addressed comity and discussed at length cases holding that deference to foreign insolvency proceedings is appropriate so long as the foreign proceedings are procedurally fair and do not contravene the laws or public policy of the United States. Applying that analysis, the Delaware court concluded that the Belgian proceedings were procedurally fair and do not contravene U.S. policy, thus, precedent supported dismissal of the pending U.S. case involving Exelco. 

Following its analysis of case law, the court considered whether the proceedings in Belgium and in Delaware were substantially different, i.e. whether the Delaware proceeding was a reorganization, while the case pending in Belgium was a liquidation. The court found that they were not since both cases involved the liquidation or sale of Exelco’s assets. While the U.S. case would have involved a going concern sale and the Belgian case appeared to be a pure liquidation, the court found that both cases would simply involve the distribution of cash resulting from the sale of Exelco’s assets such that neither would involve a reorganization. 

Since there were prior pending insolvency proceedings in Belgium, which the Delaware court concluded were fundamentally fair and sufficiently similar to those in the U.S., the court held that the case belonged in Belgium. The court noted that while it understood the rational for Exelco seeking application of U.S. bankruptcy laws, the fact that the foreign representatives are fiduciaries and must act in the debtor’s best interest, or account for their actions, should provide Exelco with some comfort. Therefore, the court dismissed the Chapter 11 case without prejudice and granted the motion for recognition of the Belgian proceeding as a foreign main proceeding on a provisional basis.

Concluding Thoughts 

We are left to wonder the role that the Belgian court’s refusal to cooperate and respect the U.S. court’s ruling played in the ultimate outcome of this dispute. Since the assets were located in Belgium, there was arguably little that the Delaware court could do in the face of a recalcitrant Belgian court. Nonetheless, since KBC subjected itself to U.S. jurisdiction, as did the foreign representatives, there were potential avenues for the Delaware court to exert its influence and lead the case down the path of a going concern rather that liquidation sale. One could surmise that the Delaware court chose not to do so following the traditional spirit of cooperation underlying Chapter 15 and its application. The concern, however, is whether U.S. courts bow to international bullies, who refuse to so cooperate, in the spirit of orderly international insolvencies. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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