Petition of Shavit

• Decision Date: 10 July 1996
• Docket Number: Bankruptcy No. 94-B-44586.
• Citation: 197 BR 763
• Parties: In re Petition of Ilan SHAVIT, as Interim Liquidator of Red Rock Commodities, Ltd., and Red Rock Holdings, Ltd., Debtors in a Foreign Proceeding.
• Court: U.S. Bankruptcy Court — Southern District of New York

197 B.R. 763 (1996)

In re Petition of Ilan SHAVIT, as Interim Liquidator of Red Rock Commodities, Ltd., and Red Rock Holdings, Ltd., Debtors in a Foreign Proceeding.

Bankruptcy No. 94-B-44586.

United States Bankruptcy Court, S.D. New York.

July 10, 1996.

Lichtenberg & Ginach, P.C. (Uri Sella, of counsel), New York City, Haim Zadok & Co. (Gideon Toledano, of counsel), Tel-Aviv 66 883, Israel, for Petitioner.

Duker & Barrett, L.L.P. (Laura A. Hastings, of counsel), New York City, for Respondents.

MEMORANDUM DECISION GRANTING PETITIONER'S MOTION FOR A VOLUNTARY DISMISSAL WITHOUT PREJUDICE

STUART M. BERNSTEIN, Bankruptcy Judge.

Ilan Shavit (the "Petitioner" or "Shavit") moves to dismiss this ancillary case, commenced under 11 U.S.C. § 304, without prejudice. Red Rock Commodities, Ltd. ("Commodities") and Red Rock Holdings, Ltd. ("Holdings", and jointly with Commodities, the "Debtors") do not oppose the dismissal, but insist that it be with prejudice. The Debtors also seek costs and attorneys' fees. Because the Debtors have failed to allege or show legally sufficient prejudice or bad faith, the Petitioner's motion is granted, and the petition is dismissed without prejudice, and without costs or attorneys' fees.

FACTS

The Debtors are Delaware corporations and formerly engaged in the business of commodities trading. At all relevant times, Menachem Pri-Har ("Pri-Har") was the Debtors' president, and the Debtors conducted business out of an office located at 120 West 45th Street, New York, New York. Pri-Har is presently serving a fourteen year prison sentence imposed by the United States District Court for the Southern District of New York. The sentence follows a conviction, after a jury trial, on twenty-four counts that include conspiracy, wire and bank fraud and making false statements.

In or about June 1993, and over the Debtors' objection, the Tel Aviv-Jaffa District Court appointed Shavit to act as Interim Liquidator of the Debtors. It acted under section 380 of the Israeli Companies Ordinance (1993)¹ which authorizes an Israeli court to liquidate a foreign corporation that has assets in Israel. In asserting jurisdiction, the Israeli court relied solely upon the existence of a cause of action asserted by the Debtors against Ram Industries Ltd.:

It appears that the foreign companies entered into significant transactions in Israel with Olges Ltd. and Ram Industries Ltd., and they have, according to their own statements, good causes of action for millions of dollars against Ram Industries Ltd. (In Liquidation). This action is, it appears, their asset in Israel for purposes of Section 380 of The Companies Ordinance.

Accordingly, I have determined that this Court has jurisdiction to conduct hearings regarding the liquidation of the above foreign companies and each and every one of them.

(Tel Aviv District Court Order, Civ. Case No. 307/93, June 29, 1993, at p. 5.)

On August 2, 1994, the Israeli Court granted Petitioner's request to commence this ancillary case pursuant to 11 U.S.C. § 304, and the Petitioner filed his petition on September 29, 1994. After filing their answer and counterclaims (which were eventually dismissed), the Debtors moved to dismiss the petition, or alternatively, for summary judgment. They made a variety of arguments that primarily boiled down to two points: (1) the Debtors are American corporations, and hence, should not be subject to liquidation in Israel, and (2) the Debtors had no assets in, or substantial connection with, Israel. The Petitioner, on the other hand, argued that the principal assets and place of business were located in Israel, and the petition, which he certified under the penalty of perjury to be true and correct, set forth numerous facts supporting his contention.²

The hearing on the Debtor's motion clarified the parties' positions. The Petitioner acknowledged that he did not know of any United States assets, and at that moment, only sought discovery. (Transcript of hearing, held Apr. 6, 1995, at 24-25.) The Debtors, on the other hand, conceded that their objection to Shavit's standing, and ultimately, to relief under 11 U.S.C. § 304(c), turned on the same issue: did the Debtors' have sufficient assets in Israel to support the filing of the ancillary petition and the granting of assistance to the Israeli court under the doctrine of comity. (Id. at 38.) In light of the factual nature of the dispute, I directed the parties to conduct discovery regarding the location of the Debtors' assets with a view toward holding a single hearing on the Petitioner's standing and his right to relief.³ (See Order, dated Apr. 25, 1995.)

After conducting discovery for nearly one year, Shavit moved to dismiss this ancillary case without prejudice. In the course of discovery, Shavit had failed to locate any significant assets in the United States, and determined that continuing the ancillary case was a waste of time and money which he did not have. In the declaration supporting his motion, he explained:

9. After reviewing Respondent\'s Answers to Petitioner\'s Interrogatories, and after reviewing the documents produced by the Respondents, I have not been able to identify or locate any meaningful assets of the Red Rock Companies in the United States. Thus, it is my belief that the continuation of these Ancillary Proceedings would not benefit the interests of the creditors of the Red Rock Companies.

10. Currently, the Israeli estate, which I represent in this case, has no financial means. The Israeli estate will not be able to bear the costs, expenses and attorneys fees which are expected to be incurred as a result of the continuation of these proceedings.

(Declaration of Ilan Shavit, dated March 26, 1996, at ¶¶ 9-10.) The Debtors responded that the dismissal should be with prejudice in order to prohibit the Petitioner from filing another ancillary proceeding. (Transcript of hearing, held Apr. 18, 1996, at 6).

At the hearing on the Petitioner's motion, the Court and the parties explored the meaning and scope of a dismissal with prejudice in the context of an ancillary case. Although the parties, with the Court's assistance, tried to work out acceptable language that would impose certain terms and conditions on any future filing, the parties could not agree. Accordingly, I took the Petitioner's motion under advisement.

DISCUSSION

A. Introduction

A proceeding under section 304 is sui generis. Unlike a full-scale bankruptcy case, its commencement does not trigger the automatic stay, or cloak the petitioner with avoiding powers, see Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452, 454-55 (2d Cir.1985); In re Axona Int'l Credit & Commerce Ltd., 88 B.R. 597, 606 (Bankr.S.D.N.Y. 1988); In re Gee, 53 B.R. 891, 896 (Bankr. S.D.N.Y.1985); 2 Lawrence P. King, Collier on Bankruptcy, ¶ 304.01, at 304-03 (15th ed. 1996) ("Collier"), or create an estate. See 11 U.S.C. § 541(a) ("The commencement of a case under section 301, 302, or 303 of this title creates an estate."). The foreign debtor need not even be eligible to be a debtor under 11 U.S.C. § 109. Goerg v. Parungao (In re Goerg), 844 F.2d 1562, 1568 (11th Cir.1988), cert. denied, 488 U.S. 1034, 109 S.Ct. 850, 102 L.Ed.2d 981 (1989); accord 2 Collier ¶ 304.02, at 304.6. Instead, "a 304 case is a limited one, designed to function in aid of a proceeding pending in a foreign court." In re Gee, 53 B.R. at 896.

In enacting section 304, Congress recognized the increasing number of foreign insolvency proceedings and their effect on American assets and interests. It sought, through section 304, to create a mechanism for courts in this country to provide flexible assistance to their foreign counterparts, see generally 2 Collier ¶ 304.01; In re Gee, 53 B.R. at 896, and to give effect to the principle of comity. Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709, 714 (2d Cir. 1987); H.R.Rep. No. 595, 95th Cong., 2nd Sess. 324-25 (1978) U.S.Code Cong. & Admin.News 1978, pp. 5963, 6280-6281; S.Rep. No. 989, 95th Cong., 2d Sess. 35 (1978) U.S.Code Cong. & Admin.News 1978, pp. 5787, 5821 ("Principles of international comity and respect for the judgments and laws of other nations suggest that the court be permitted to make the appropriate orders under all of the circumstances of each case, rather than being provided with inflexible rules."); see also Stuart A. Krause, Peter Janovsky, & Marc A. Lebowitz, Relief Under Section 304 of the Bankruptcy Code: Clarifying the Principal Role of Comity in Transnational Insolvencies, 64 Fordham L.Rev. 2591, 2594-95 (1996). "A section 304 proceeding was conceived as a more efficient and less costly alternative to a full bankruptcy case," In re Axona Int'l Credit & Commerce Ltd., 88 B.R. at 607, with the court "free to broadly mold appropriate relief in near blank check fashion. . . ." In re Culmer, 25 B.R. 621, 624 (Bankr.S.D.N.Y.1982); see also Angulo v. Kedzep Ltd., 29 B.R. 417, 419 (S.D.Tex.1983) (the scope of section 304 is flexible enough to be used for limited purpose of obtaining discovery).

Section 304 is aimed at "foreign debtors," and hence, the initiation of this case raised a threshold and untested issue under section 304: should an American bankruptcy court ever entertain an ancillary petition filed in connection with the involuntary foreign liquidation of an American company? The Israeli court had rejected the Debtors' argument that they could not be liquidated in Israel, but based its decision on Israeli law. Further, although the Israeli court specifically granted the Petitioner authority to file this ancillary case, his standing turns on federal bankruptcy law. See In re Tam, 170 B.R. 838, 843-44 (Bankr.S.D.N.Y.1994).

At the April 1995 hearing in connection with the Debtors' motion to dismiss, I had resisted the Debtors' urging to dismiss this case as a matter of law, referring to the provisions of the Bankruptcy Code that seemed to recognize that section 304 could cover a...