McKillen v Wallace (In re Ir Bank Resolution Corp)

Delaware District Court on appeal considered Barton doctrine and automatic stay in US Chapter 15 case of Irish bank’s liquidation.

This case concerned Irish Bank Resolution Corporation Limited (“IBRC”), an Irish bank based in Dublin, which was placed into Liquidation following the global financial crisis. IBRC held the remaining assets of two distressed Irish banks of which the Appellants had been clients. The Appellants had borrowed large sums from those banks to fund their extensive property portfolio valued in excess of over $350 million in the United States.

After IBRC was placed into Liquidation in Dublin, the Irish Liquidators filed for Chapter 15 Bankruptcy in Delaware, USA. That application was successful and the Liquidators were subsequently recognised as Foreign Representatives in the Chapter 15 Bankruptcy.

The Appellants issued proceedings against the Foreign Representatives, alleging that actions they had taken in Ireland had impacted and injured the Appellants’ business interests in United States. The Appellants brought claims against the Foreign Representatives for breach of fiduciary duty, fraud, misrepresentation, negligent misrepresentation and other misconduct. They also sought damages for the Foreign Representatives misusing Chapter 15 and to terminate their appointment as Foreign Representatives.

The Appellants sought (i) a determination they were not barred from pursuing this complaint against the Foreign Representatives by virtue of the automatic stay under s.362 of the Bankruptcy Code, or (ii) relief from the automatic stay.

In earlier proceedings, the Bankruptcy Court dismissed the Appellants’ application, and they subsequently appealed to the District Court for the District of Delaware.

Automatic Stay

s.362 of the US Bankruptcy Code imposes an automatic stay which bars lawsuits against debtors on actions that arose prior to the company’s Liquidation. The current case concerned proceedings issued against the Foreign Representatives rather than the company in Liquidation. Accordingly the Appellants argued that the automatic stay did not prevent actions being brought against the Foreign Representatives.

The automatic stay can be extended in “unusual circumstances” where “there is such an identity between the debtor and the third party defendant that the debtor may be said to be the real party defendant and that a judgment against the third party defendant will in effect be a judgment or finding against the debtor”. The Appellants sought relief by way of modifications to the Recognition Order so as to remove the Foreign Representatives. As  this would leave IBRC unable to administer itself (as there is no authority to replace the Foreign Representatives) it was held that those circumstances existed in this case and the stay could extend to the Foreign Representatives.

Relief from Automatic Stay

The Appellants as the party seeking relief from the automatic stay must show that the “balance of hardship from not obtaining relief tips significantly in its favour”. The balancing test in considering this included (i) whether IBRC or the Appellants will suffer any great prejudice from lifting the stay (ii) whether the hardship to the Appellants by the maintenance of the stay considerably outweighs the hardship to the IBRC if the stay is lifted and (iii) whether it is likely that the Appellants would prevail on the merits of their case against IBRC. In considering these matters, the District Court found no error in the Bankruptcy Court’s decision, and denied the Stay Relief Motion.

Finally, the Bankruptcy Court had ruled that it did not have personal and subject matter jurisdiction over the case as the alleged conduct by the Foreign Representatives took place outside the US and in no way affected the operation of the Chapter 15 Bankruptcy. The District Court found no error with this finding, or the finding that the likelihood of success did not weigh in the Appellant’s favour.

The District Court affirmed the Bankruptcy Court’s decision and the Appellants’ case was dismissed.

For more information on the above article contact Alan Bennett or Olivia Reader from the Restructuring & Insolvency Team.

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