Fairchild Summary
Written By Scott K. Brown
Lewis and Roca LLP
sbrown@lrlaw.com

In the recent decision, In re Petition of Dr. Eberhard Braun, in his Capacity as Insolvency Administrator for Fairchild Dornier GmbH, Case No. 02-52351-LMC, the bankruptcy court denied a motion to reconsider a motion seeking relief from an 11 U.S.C. §304 injunction. The court denied the motion to reconsider because the motion presented evidence – for the first time – that could have and should have been presented at the initial hearing, but was not (a valuable lesson for all practitioners). The court further said that “new evidence” did not persuade it that its ruling was manifestly wrong. This decision, not yet published, was entered on July 16, 2004.

Fairchild Dornier, GmbH filed a petition opening insolvency proceedings in Germany. A foreign representative of the Fairchild estate, Dr. Braun, opened a §304 proceeding in the U.S. Bankruptcy Court for the Western District of Texas. The §304 proceeding enjoined the “commencement or continuation of civil proceedings against Fairchild or its assets within the jurisdiction of the United States, to aid the insolvency process in Germany.” Id. at 1-2.

Meanwhile, Dornier Aviation (North America) Inc. (Dana) filed a chapter 11 proceeding in the Northern District of Virginia. Dana is an indirect subsidiary of Fairchild. Dana’s confirmed plan of reorganization created the Dana Liquidating Trust (the Trust). The Trust is authorized to bring certain litigation on behalf of the Dana estate.

The Trust (and the Committee that succeeded Dana’s official committee of unsecured creditors) filed a motion for relief from the §304 injunction in the Fairchild case in the Western District of Texas. The basis for the relief was that it wanted to pursue a preference action against Fairchild in the Northern District of Virginia. The bankruptcy court denied the request relief on the basis that the Trust’s claim against Fairchild “both could and should” be filed against Fairchild in its insolvency proceedings pending in Germany. In so doing, the court agreed with Fairchild, and its presentation of evidence, that a German court would likely apply American preference law to the resolution of that claim. It rejected the Trust’s argument that a preference action premised on American law had to be heard by an American court. The Trust did not submit any evidence supporting its argument and the bankruptcy court denied its motion.

After the bankruptcy court denied the motion, the Trust consulted German lawyers who said that the “choice of law” issue could take up to 18 months to resolve in the German court and, more than likely, the German court would apply German law rather than American law to adjudicate the claim. On this basis, the Trust sought reconsideration of the order denying its motion.

The court denied the motion to reconsider. The court said that the Trust had the burden of showing the need for relief from the §304 injunction – just as a movant has the burden of showing the need for relief from the automatic stay – and evidence submitted after the court ruled on the Trust’s emergency motion for relief from the §304 injunction was too late. The court held:

The court well knew when it entered the §304 injunction forcing the presentation of claims in German (and enjoining their pursuit in the United States) that such an injunction would necessarily impose inconvenience on all U.S. creditors. That has already been factored in by the court when it entered relief in favor of Dr. Braun in the first place. The Trust and the Committee needed to present evidence forming a basis to find a special inequity imposed on the Dana estate by the §304 injunction, but failed to discharge that burden.

Id. at 11.

Furthermore, the court was confident that its ruling was the right one (or at least did not work a “manifest injustice”). It based this on several factors:

• Dana has the “power” to pursue a preference action, but it is not “entitled” to do so. In other words, simply because the German court could conclude that American law does not control the allowance of Dana’s claim against Fairchild, that does not automatically mean Dana should be entitled to bring the claim in a forum that would apply American law, i.e., the Northern District of Virginia. The court cited many intervening factors that might preclude the “power” to bring such an action, e.g., lack of personal jurisdiction, sovereign immunity, lack of standing, limitations and so forth. Id. at 6.

• “[T]he larger goal of centralizing estate administration, for speed and in order to reduce the costs of the estate’s creditors, is one which §304 is designed to serve, and one which predominates over every creditor’s natural desire to be somewhere else.” Id. at 7-8. Dana’s desire to adjudicate its claim against Fairchild in a forum of its choosing is insufficient grounds to grant relief from the §304 injunction.

• Germany’s choice of law rules allow German courts to apply foreign law to resolve a dispute unless that law offends German public policy. Germany’s insolvency law contains a mechanism to recover preferential transfers and, thus, it is unlikely that a German court would find American preference law offensive. Whether the German court in fact applies American law is another matter, but the mere fact that it might not is not sufficient reason to do away with a §304 injunction.

Thus, the Braun decision teaches two important lessons: (a) seeking relief from a §304 injunction is an evidentiary issue (and courts do not like to receive the evidence after it makes it ruling); and (b) §304 is intended to streamline the insolvency proceeding in a foreign jurisdiction and the practical and policy reasons for doing so are not lightly disregarded.

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