A recent decision by the United States Bankruptcy Court for the Western District of Texas in In re Sanjel (USA) Inc., et al., Case No. 16-50778-CAG (Bankr. W.D. Tex. July 29, 2016) explains that in a Chapter 15 case, the U.S. bankruptcy court will not always apply the law of the foreign jurisdiction to U.S. creditors and U.S.-based claims.  Specifically, the case addresses whether it is appropriate for a bankruptcy court to modify or limit a foreign stay through changes to its Chapter 15 recognition order.

Sanjel (USA) Inc. and its related entities (multi-national energy services provider) originally commenced Canadian reorganization proceedings.  The Canadian court granted the debtors a broad stay of any actions against their directors and officers.  The United States bankruptcy court recognized the Canadian proceedings under chapter 15 of the Bankruptcy Code and entered a recognition order extending the reach of the Canadian stay to the United States.

The recognition order among other things gave domestic force to the Canadian stay of legal proceedings against the debtors’ directors and officers.  Claimants at issue included certain of the debtors’ U.S.-based employees who wanted to pursue claims arising under the United States Fair Labor Standards Act, or “FLSA.”  The statute of limitations on FLSA claims may continue to run during the pendency of a chapter 15 case, meaning that the continued imposition of the automatic stay could extinguish the employees’ claims.  Thus, two employees sought to modify the Canadian stay granted in the recognition order.

The Debtors contended that the recognition order was not prejudicial to the employees because they could seek relief before the Canadian court, and that any modification would be prejudicial to the debtors whose limited personnel would be distracted from their restructuring efforts.  Similar arguments made by debtors were successful in In re Nortel Networks Corp., et al., Case No. 09-10164-KG (Bankr. D. Del. Mar. 10, 2010)  in a dispute involving the similar issues before the United States Bankruptcy Court for the District of Delaware, upheld on appealNortel held that, if parties believed they were prejudiced by the stay imposed by the Canadian courts and given effect in the United States by a recognition order, the proper course of action was to seek relief from the Canadian court.

The Sanjel bankruptcy court departed from the Nortel decision under the facts presented.  Under the circumstances, the court concluded that the hardships of the employees carried the greatest weight and, accordingly, modified the recognition order to permit the employees to bring and continue their FLSA claims.  The court emphasized that, under the plain language of section 108(c) of the Bankruptcy Code, the statute of limitations for the FLSA claims would continue to run during the proceeding.  Without relief from the stay, the movants would not be able to argue this tolling point before the appropriate court.  The court also noted that the Debtors’ harm did not counterbalance movants’ risk of losing their statutory claims.

As such, the court departed from Nortel, finding that it would be too burdensome for the movants to appear in Canadian court to “pursue claims in Colorado based wholly on a statutory right created by United States law to protect employees within the United States.”

For U.S. creditors of foreign companies, the Sanjel decision appears to be a win in that they will not have to travel abroad to seek to protect certain of their rights. However, the Sanjel decision creates greater uncertainty for foreign debtors that foreign stays may be disrupted in a Chapter 15 bankruptcy proceedings in the U.S. Stay tuned for further Chapter 15 developments.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.