Jp Morgan Chase Bank v. Altos Hornos De Mexico

Decision Date22 June 2005
Docket NumberDocket No. 04-0450-CV.
Citation412 F.3d 418
PartiesJP MORGAN CHASE BANK, Plaintiff-Appellant, v. ALTOS HORNOS DE MEXICO, S.A. DE C.V., Defendant-Appellee.
CourtU.S. Court of Appeals — Second Circuit

Jonathan L. Greenblatt, Washington, D.C. (Jared A. Goldstein, Shearman & Sterling LLP, Washington, D.C.; James D. Greenhalgh, J.P. Morgan Chase Legal Department, New York, New York, of counsel), for Plaintiff-Appellant.

Mitchel H. Ochs, New York, New York (Jason A. Stern, Anderson & Ochs, LLP, New York, New York, of counsel), for Defendant-Appellee.

Before: WALKER, Chief Judge, CARDAMONE and HALL, Circuit Judges.

CARDAMONE, Circuit Judge.

J.P. Morgan Chase Bank (J.P. Morgan, bank, or appellant) filed a complaint in the United States District Court for the Southern District of New York before Judge Harold Baer seeking a judgment declaring that certain funds held in a collection account in the bank belonged to it. Appellee Altos Hornos de Mexico, S.A. de C.V. (Altos Hornos, debtor, or appellee), a Mexican steel manufacturer, had borrowed $330 million from a consortium of banks led by J.P. Morgan, which also managed the collection account for receiving the loan payments. Three Altos Hornos customers made payments directly into this collection account at the bank. Matters proceeded in the normal course until Altos Hornos filed for bankruptcy in Mexico, at which point the funds in the collection account became the subject of the instant litigation. The debtor moved to dismiss the bank's complaint on grounds of international comity, asking the federal court in New York to defer to the bankruptcy court in Mexico. The district court granted that motion to dismiss. J.P. Morgan appeals.

On this appeal we are asked to clarify the scope of our holding in Koreag, Controle et Revision S.A. v. Refco F/X Assocs., Inc. (In re Koreag), 961 F.2d 341, 349 (2d Cir.1992), where we ruled that the ownership of property a debtor claims as part of its estate in a foreign bankruptcy proceeding is a question "antecedent to the distributive rules of bankruptcy." Local courts may resolve the question because international comity does not require deference to the parallel foreign bankruptcy proceeding in such circumstances. Id. at 349. The rule announced in Koreag, however, only applies to disputes that present a bona fide question of property ownership. It has no application to disputes like this one where a bankruptcy creditor claims to own assets but has a contractual obligation to use those assets to pay down the same debt that is the subject of a foreign bankruptcy proceeding. In such a case, local courts are displaced and must defer to the foreign proceeding. We therefore affirm the district court's order dismissing appellant's complaint on international comity grounds.

BACKGROUND
A. The Loan and Security Agreements

On April 11, 1997 appellee Altos Hornos de Mexico, S.A. de C.V.—one of Mexico's largest steel producers — concluded a loan agreement with J.P. Morgan and a consortium of 27 other banks under which the banks agreed to loan Altos Hornos a total of $330 million to pay off a preexisting loan by J.P. Morgan to Altos Hornos and to fund Altos Hornos' ongoing operations. J.P. Morgan was also designated as the "Facility Agent," meaning that it established and managed a collection account into which certain payments would be made and from which J.P. Morgan would distribute funds to the other consortium members.

According to the terms of the loan agreement, J.P. Morgan established the collection account in its own name at its office in New York. It had exclusive power to withdraw funds from the account, but only for specified purposes in the following priority: (1) to cover its own expenses and fees, (2) to pay interest and principal on the loan to itself and other consortium members, and (3) to refund any surplus funds to Altos Hornos.

Like most contracts, the loan agreement contained forum selection and choice of law clauses under which the parties agreed that New York law would govern any disputes and that the United States District Court for the Southern District of New York or any New York state court in New York City were acceptable forums. The debtor also "irrevocably waive[d], to the fullest extent permitted by applicable law, any claim that any action or proceeding commenced by the Facility Agent ... should be dismissed or stayed by reason, or pending the resolution, of any action or proceeding commenced by [the debtor] relating in any way to this Agreement whether or not commenced earlier."

The parties entered into a security agreement on the same day they concluded the loan agreement. Under the security agreement, Altos Hornos assigned its right to payment from three of its customers— Thyssen Handelsunion AG, Kloeckner & Co. AG, and Ferrostaal AG—to J.P. Morgan for deposit in the collection account. These payments were "collateral security for the prompt payment in full when due. . . of the Secured Obligations," and effectively required each of the three customers to make deposits directly into the collection account as payment on the debtor's loan. Any payments the three customers mistakenly made to Altos Hornos were to be turned over to J.P. Morgan for deposit in the collection account as soon as possible, and in the meantime were to be held by the debtor in trust "for and as the property of the Facility Agent [J.P. Morgan] and shall not be commingled with any other funds or property of [the debtor]."

B. Altos Hornos Enters Suspension De Pagos

Altos Hornos defaulted on its loan in April 1999, and the following month it filed for suspension de pagos (suspension of payments) (SOP) in a Mexican civil court. Much like Chapter 11 reorganization in the United States, SOP is a judicial order authorized under Mexican law that allows a debtor to suspend payments to its creditors and continue normal operations until such time as the debtor and creditors, under the auspices of the court, reorganize the debt. The Mexican court granted Altos Hornos' petition and issued the SOP order. J.P. Morgan, for itself and on behalf of the other consortium banks, appeared before the Mexican court to acknowledge its claim as secured creditors for the remaining balance on the loan, which included $225,355,617.25 in principal and $1,912,330.78 in interest. The Mexican court acknowledged the consortium's claims but ruled that J.P. Morgan and the other banks were general unsecured creditors because the debtor's agreement to permit three of its customers to pay directly into the collection account was an "assignment" rather than "collateral" and thus did not qualify the banks as secured creditors under Mexican law. Both J.P. Morgan and Altos Hornos appealed this ruling, and the Mexican appellate court denied both appeals in February 2004. J.P. Morgan took an appeal to the Mexican federal court, which reversed the lower courts in January 2005 and held that the consortium banks are secured creditors.1 To date, Altos Hornos continues to operate in suspension de pagos and has not resumed payment on its debt.

C. The Dispute Over Funds in the Collection Account

During the summer of 1999, following the Mexican court's SOP declaration, the three customers of the debtor that had agreed to pay directly into the collection account continued to do so. Their payments totaled approximately $4.7 million, from which the bank withdrew $880,708 for payment of its legal fees and expenses in connection with its participation in the SOP proceeding. According to the record before us, no further payments or deductions have been made and the account has been inactive since January 2003.

In December 2002 Altos Hornos petitioned the Mexican court to summon J.P. Morgan to return the $4.7 million and to issue a letter rogatory to a New York court requesting assistance in enforcing the summons. The debtor sought this remedy to prevent the bank from collecting part of the debt outside the SOP proceeding. The bank opposed the debtor's motion on the ground that the Mexican court lacked jurisdiction to consider Altos Hornos' petition. The Mexican court deferred decision on the debtor's motion pending resolution of the parties' appeals related to the acknowledgment of J.P. Morgan's claim, and thus made no decision regarding its jurisdiction or the ownership of the assets.

D. Proceedings Below

On March 18, 2003 the bank filed suit in the Southern District of New York seeking a declaration that it owned the funds in the collection account. Altos Hornos moved to dismiss because, inter alia, principles of international comity counsel a U.S. court to abstain from deciding such questions and to defer to a pending foreign bankruptcy proceeding. In an opinion and order dated January 7, 2004, the district court granted the debtor's motion to dismiss. JP Morgan Chase Bank v. Altos Hornos De Mexico, S.A., No. 03 Civ.1900, 2004 WL 42268, at *8 (S.D.N.Y. Jan. 8, 2004). The district court found the issue of who owns the collection account "was implicitly raised by Altos Hornos" before the Mexican court and that Mexican law "does not dictate one way or the other where the dispute must be decided." Id. at *5, *7. It further ruled that the choice of law and forum selection clauses in the loan agreement would not control where international comity warranted abstention. Id. at *7. And, it concluded that because the issue had been raised before the Mexican court, and that court had jurisdiction to decide the question, international comity required the district court to abstain and allow the issue to be resolved in the Mexican proceedings. Id. at *7-*8. J.P. Morgan appeals from this order.

DISCUSSION

J.P. Morgan raises three issues on appeal. It contends the district court erred, first, in finding that the ownership issue had been raised before a Mexican court with jurisdiction to hear the claim; second, in finding that international comity...

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