In re Fotochrome, Inc., 70 B 209.

• Citation: 377 F. Supp. 26
• Decision Date: 04 June 1974
• Docket Number: No. 70 B 209.,70 B 209.
• Parties: In the Matter of FOTOCHROME, INC., Debtor.
• Court: U.S. District Court — Eastern District of New York

377 F. Supp. 26

In the Matter of FOTOCHROME, INC., Debtor.

No. 70 B 209.

United States District Court, E. D. New York.

June 4, 1974.

Louis P. Rosenberg, Brooklyn, N. Y., for debtor.

Dugald Campbell Brown, William M. Kahn, John H. Pinto, Jr., Gillard S. Glover, New York City (Whitman & Ransom, New York City, of counsel) for claimant.

MEMORANDUM AND ORDER

WEINSTEIN, District Judge.

The litigants have joined issue where the laws of bankruptcy, foreign arbitration, jurisdiction and judgment recognition overlap. Although the result is troubling, for the reasons indicated below we hold that, in the circumstances of this case, pending foreign arbitration proceedings are not subject to stays by a bankruptcy judge. We recognize that this holding may prefer foreign to American creditors in a limited class of cases.

I. FACTS

Fotochrome, Inc., a New York corporation, fell into dispute with Copal Co., Ltd.—a Japanese corporation apparently neither present nor doing business in the United States—over the terms of an agreement to manufacture special cameras in Japan. Copal sought damages of $631,528.07 for Fotochrome's failure to pay; Fotochrome claimed $930,000.00 for defective cameras.

Under a provision in their contract, the parties proceeded to arbitration before the Commercial Arbitration Association in Tokyo, Japan. All the evidence was presented in thirteen days of hearings, both parties being represented by local counsel.

On March 26th, 1970, while the parties were awaiting issuance of an award by the Arbitration Association, Fotochrome filed a Chaper XI arrangement in the Eastern District of New York. The bankruptcy judge issued the usual order the next day continuing the debtor in possession and staying all proceedings by creditors, including pending arbitrations, under the authority of section 11(a) of the Bankruptcy Act. 11 U.S. C.A. § 29 (a). He ruled:

"That until the further order of this Court, all creditors of the debtor, including their agents, servants and employees and any Marshal of the City of New York and Sheriff of the State of New York, acting in their behalf or in the furtherance of their claims, be and they are hereby restrained and enjoined from commencing or continuing any actions, suits, arbitrations, or the enforcement of any claim in any Court against this debtor or taking any further steps or proceedings except before this Court." (Emphasis added.)

After certified copies of this order were delivered to Copal and the Commercial Arbitration Association in Japan, Fotochrome "withdrew" from the arbitral proceedings.

Undaunted, the Arbitration Association published its decision in favor of Copal on September 18, 1970. It awarded damages in the sum of $624,457.80 with interest and divided costs between the parties. Copal entered judgment on its award in Japan and filed a proof of claim here in the Eastern District of New York. It never entered judgment on the award in an American court on the theory that it was constrained in this country by the stay of March, 1970.

Upon the strength of the stay, the bankruptcy judge refused to recognize the finality of the arbitral award to Copal and ruled that he had power to rehear the issues of liability de novo. This appeal followed.

II. JURISDICTION OF THE BANKRUPTCY COURT

It is not surprising that the Japan Commercial Arbitration Association made its award despite the bankruptcy court order. Our courts were bereft of any basis to exercise in personam jurisdiction over Copal—much less the Arbitration Association—in this case until after proceedings in Japan had terminated and Copal filed its claim here.

Section 2(a) of the Bankruptcy Act (11 U.S.C. § 11(a)) codifies a fundamental rule for all American courts requiring some basis of jurisdiction over the person of the party the court seeks to bind. The provision reads:

"The Courts of the United States hereinbefore defined as courts of bankruptcy are hereby created courts of bankruptcy and are hereby invested, within their respective territorial limits as now established or as they may be hereafter changed with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in proceedings under this title . . ., to . . . (15) Make such orders, issue such process . . . as may be necessary for the enforcement of the provisions of this title . . .." 11 U.S.C. § 11(a)(15).

(Emphasis added.)

By providing, under section 311 of the Bankruptcy Act (11 U.S.C. § 711), that the court in which a bankruptcy petition is filed shall have "exclusive jurisdiction of the debtor and his property, wherever located", Congress indicated that a Chapter XI court would have the power to send its process beyond the boundaries of its district to protect its jurisdiction. See Continental Illinois National Bank & Trust Co. v. Chicago, R. I. & P. Ry. Co., et al., 294 U.S. 648, 682-684, 55 S.Ct. 595, 609, 79 L.Ed. 1110 (1935) (construing the predecessor statute § 77; civil process "in any other district"); see also In re Greyling Realty Corp., 74 F.2d 734, 737-738 (2d Cir.), cert. denied sub. nom Troutman v. Compton, 294 U.S. 725, 55 S. Ct. 639, 79 L.Ed. 1256 (1935); 8 Collier on Bankruptcy, 3.03 at 183-188 (14th ed. 1971). But no authority has construed that power to extend beyond the territorial limits of the United States to control the action of parties and tribunals without some independent basis of jurisdiction over them. Cf. Advisory Committee's Notes to Bankruptcy Rule 111, eff. October 1, 1973.

The Chapter XI Court, though graced with nationwide jurisdiction, is still bound in extranational matters by the well established "minimum contacts" principle enunciated in Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958). There the Supreme Court held:

"However minimal the burden of defending in a foreign tribunal, a defendant may not be called upon to do so unless he has had the `minimal contacts' with that State that are a prerequisite to its exercise of power over him."

357 U.S. at 251, 78 S.Ct. at 1238, 2 L.Ed.2d at 1296.

See, also, Mariash v. Morrill, et al., 496 F.2d 1138, 1141-1143 (2d Cir. 1974); Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1339-1342 n. 11 (2d Cir. 1972) (minimal contacts principle applied to extraterritorial service upon foreign defendants under the Securities Exchange Act of 1934). Here, neither the Japanese corporation nor the Japanese Arbitration Association had, so far as this record shows, the minimal contacts essential to the exercise of jurisdiction by the bankruptcy judge.

III. RECOGNITION OF THE ARBITRAL AWARD

Under Japanese law the award to Copal is final. Federal Rule of Civil Procedure 44.1 and N.Y.C.P.L.R. 4511 permit judicial notice of those Articles of the Japanese Code of Civil Procedure providing for deposits of arbitral awards in Japanese courts.

"Article 799: An award shall contain an entry of the day, month, and year when it was drawn up and arbitrators shall sign and seal thereon.

"2. An exemplification of the award bearing the signatures and seals of the arbitrators shall be served upon the parties and the original thereof shall be deposited with the jurisdictional court together with a certificate of service."

Once the award is deposited with the Japanese court, it is subject to no further confirmation proceedings. At that point, under Article 800, the effect of the award is conclusive.

"Article 800: An (arbitral) award shall have the same effect as a judgment which is final and conclusive between the parties."

Copal was unable to confirm its award as a judgment in our courts in the face of the Referee's order which apparently barred any further action against the bankrupt in this country. The Japanese Corporation now asks that it be allowed to enforce its Japanese award in this country so that it will be a provable debt for the purposes of bankruptcy court proceedings. Bankruptcy Act § 63(a)(5), 11 U.S.C. § 103(a)(5).

In support of its right to enforcement, Copal invokes two treaties, one bilateral, the other multilateral, to which both the United States and Japan are parties. The bilateral treaty at least has been held to be self-executing. See Oregon-Pacific Forest Products Corp. v. Welsh Panel Co., 248 F.Supp. 903, 910 (D.C.Oregon 1965) (state law must yield to arbitration provisions of treaty with Japan); L. Henkin, Foreign Affairs and the Constitution, 157 n. (1972). Under the Treaty with Japan on Friendship, Commerce and Navigation, conclusive Japanese arbitration awards which do not violate our public policy are conclusive in this country as well.

"Awards duly rendered pursuant to any such contracts, which are final and enforceable under the laws of the place where rendered, shall be deemed conclusive in enforcement proceedings brought before the courts of competent jurisdiction of either Party, and shall be entitled to be declared enforceable by either such courts, except where found contrary to public policy." Treaty with Japan on Friendship, Commerce and Navigation, Art. IV, para. 2, 4 U.S.T. 2063 at 2068, T.I.A.S. 2863 at 7 (April 2, 1953). (Emphasis added.)

Recognition of such foreign arbitral awards are mandated under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. They are treated much like a judgment under the Full Faith and Credit Clause of the United States Constitution.

"Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles. There shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of the arbitral awards to which this Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards." United Nations Convention on the Recognition and Enforcement of Foreign

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