Vol 7 (2010) - Issue 5

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Commotion over Comity: In re RHTC Liquidating Co. and Contemporaneous Bankruptcy Decisions Addressing ‘Comity’

For over a century, the doctrine of 'comity' has been a prominent feature of US cross-border commercial law. The term is essentially shorthand for the idea that US courts typically afford respect and recognition (i.e., enforcement) within the US to the judgment or decision of a non-US court – so long as that decision comports with those notions of 'fundamental fairness' that are common to American jurisprudence.
In the bankruptcy context, 'comity' forms the backbone for significant portions of the US Bankruptcy Code's Chapter 15. Chapter 15 – enacted in 2005 – provides a mechanism by which the administrators of non-US bankruptcy proceedings can obtain recognition of those proceedings, and further protection and assistance for them, inside the US.
But in at least some US Bankruptcy Courts, 'comity' only goes so far. Earlier this spring, US Bankruptcy Judge Thomas Argesti, of Pennsylvania's Western District, offered his understanding of where 'comity' stops – and where US bankruptcy proceedings begin. His decision – and two others issued only weeks earlier – afford important indicators of comity's use, and limits, in US Bankruptcy Courts.

In re RHTC Liquidating Co. (RHTC Liquidating Co. v Union Pacific Railroad Company, et al.)
As of March, Judge Argesti presided over Chapter 15 proceedings commenced in furtherance of two companies – Canada's Railpower Technologies Corp. ('Railpower Canada') and its wholly-owned US subsidiary, Railpower US. The two Railpower entities commenced proceedings under the Canadian Companies Creditors' Arrangement Act ('CCAA') in Quebec in February 2009. Soon afterward, their court-appointed monitors, Ernst & Young, Inc., sought recognition of the Canadian Railpower cases in the US.

Railpower US' capital structure
Railpower US' assets and employees – and 90% of its creditors – were located in the US. The company was managed from offices in Erie, Pennsylvania. Nevertheless, it carried on its books an inter-company obligation of USD 66.9 million, owed to its Canadian parent. From the outset, Railpower US' American creditors asserted this 'intercompany debt' was, in fact, a contribution to equity which should be subordinate to their trade claims. Judge Argesti's predecessor, now-retired Judge Warren Bentz, therefore conditioned recognition of Railpower US' case upon his ability to review and approve any proposed distribution of Railpower US' assets. After the company's assets were sold, Judge Bentz further required segregation of the sale proceeds pending his authorization as to their distribution. Finally, after the Canadian monitors obtained a 'Claims Process Order' for the resolution of claims in the CCAA proceedings and sought that order's enforcement in the US, Judge Bentz further 'carved out' jurisdiction to adjudicate the inter-company claim if the trade creditors received anything less than a 100% distribution under the CCAA plan.