Bankruptcy and Restructuring Blog

In Koreag, Controle et Revision S.A. v. Refco F/X Assocs., Inc. (In re Koreag), 961 F.2d 341, 349 (2d Cir. 1992), the Second Circuit Court of Appeals held previously that questions of ownership of a debtor's property that is claimed to be part of a foreign bankruptcy estate may be resolved by local courts under local rules because international comity does not require deference to the parallel foreign proceeding. But in JPMorgan Chase Bank v. Altos Hornos De Mexico," 412 F. 3d 418, 425 (2d Cir. 2005) (2d Cir. 2005), the Second Circuit recently held that the Koreag exception that ownership of property may be addressed before comity is given to the parallel foreign proceeding only applies to disputes that present a bona fide dispute regarding property ownership. Absent such a dispute, local rules are displaced and deference to the foreign court is appropriate so long as the foreign proceedings are procedurally fair and do not contravene the laws or public policy of the United States.

JPMorgan filed a complaint seeking a judgment that certain funds held in a collection account belonged to it. The funds became the subject of litigation following Altos Hornos's filing for bankruptcy in Mexico. Altos Hornos moved to dismiss JPMorgan's complaint on the grounds of international comity and asked the Court to defer to the bankruptcy court in Mexico. The District Court dismissed and JPMorgan appealed.

The Second Circuit began its opinion by stating that U.S. courts should ordinarily decline to adjudicate creditor claims that are the subject of a foreign bankruptcy proceeding as long as those proceedings are procedurally fair and do not contravene the laws or public policy of the United States. The Second Circuit also went on to criticize the District Court's interpretation of Koreag as standing for the proposition that federal courts are barred from determining ownership of property involved in a foreign bankruptcy proceeding. Instead, the Court emphasized that because bona fide questions of property ownership must be dealt with before the distributive rules of bankruptcy administration, property ownership questions are best resolved under local law.

Having established that, the Court stated that JP Morgan had not raised a bona fide question of property ownership in this case. Because the bank did not own the funds in question, the court would not allow the bank to effect an "end-run around a parallel foreign bankruptcy proceeding." Where there is no bona fide property ownership question, the Koreag exception does not apply and U.S. courts should abstain from assuming jurisdiction and defer to the foreign proceeding.