Cuzco v Tera (Chapter 11). Respect for Korean exclusive jurisdictional rule (shareholder derivative claims) does not trump US subject-matter jurisdiction.

Thank you Dechert for flagging Case No. 16-00636 Cuzco v Tera (Chapter 11), in which Faris J with great clarity wades in on a motion to dismiss US Chapter 11 jurisdiction in favour of exclusive jurisdiction for the Seoul courts with respect to a Korean company shareholder derivative action.

The case is relevant to insolvency practitioners. More generally however it highlights the need for a court to keep a level heading when wading through to and fro litigation in various States.

A bit of factual detail is required to appreciate the ruling.

Cuzco USA filed a chapter 11 in Hawaii with its sole asset real property in Hawaii. Tera Resources Co., Ltd. (“Tera”), one of Cuzco Korea’s shareholders asserted that the Debtor and its insiders conspired to deprive Cuzco Korea of the value of the real property. Tera commenced an action for fraud, breach of fiduciary duties, piercing the corporate veil, unjust enrichment and imposition of constructive trust.

The defendants moved to dismiss, in favour of the Korean courts – and failed, both on arguments of forum non conveniens and on arguments of there being exclusive jurisdiction for the courts at Seoul. Defendant Mr Lee is purportedly the manager of Cuzco USA and the representative director of Cuzco Korea. Defendant Ms Yang is  shareholder and creditor of Cuzco Korea and an ally of Mr. Lee.

Cuzco USA had proposed, and the court confirmed, a Third Amended Plan of Reorganization. Briefly summarized, the Third Amended Plan provided that Cuzco USA would transfer the Keeaumoku (Hawaii) Property to Newco, a Hawaii limited liability company of which Mr. Lee is the sole member, that Newco would attempt to raise enough money through a refinancing to repay all of Cuzco USA’s creditors in full, and that if the refinancing did not occur by a date certain, Newco would sell the Keeaumoku Property at auction and distribute the proceeds to Cuzco USA’s creditors.

Tera and others filed motions for reconsideration of the order confirming the Third Amended Plan. Tera is a shareholder of Cuzco Korea. It also holds a judgment, entered by a Korean court, against Ms. Yang, and orders from a Korean court that, according to Tera, resulted in the seizure of Ms. Yang’s interests in and claims against Cuzco Korea.

Cuzco USA then moved to modify the Third Amended Plan and replaced it with a Fourth Amended Plan. Briefly summarized, this Plan eliminates the transfer of the Keeaumoku Property to Newco; instead, Cuzco USA will retain the property and either refinance it or sell it at auction. Tera and others vigorously objected to plan confirmation on multiple grounds. The court confirmed the Fourth Amended Plan.

Tera argued (among other things) that the Third Amended Plan was the product of a fraudulent scheme by Mr. Lee, Ms. Yang, and others to divert the equity in Cuzco USA from Cuzco Korea to themselves and to render Tera’s interests in Cuzco Korea worthless.

 

That Korean law covers governs the right to bring derivative claims on behalf of a Korean corporation is not under dispute between the parties. (It is therefore considered part of the rules on internal organisation which are subject to lex societatis). However Faris J dismissed defendants’ suggestion that the US court should also respect Korea’s jurisdictional rules that such suits be brought in Seoul only.

At B, p.10: US statutes confer subject matter jurisdiction on US courts. Statutes of another nation, such as the South Korean statute on which the moving defendants rely, cannot change the subject matter jurisdiction of a United States bankruptcy court under a United States statute.

Forum non conveniens was dismissed for there is a strong policy that favors centralization of claims against the debtor in the bankruptcy court that outweighs any other interest (at C, p.12). One would have to have strong arguments to push that aside and clearly these were not present here.

Geert.

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