Schimmelpenninck v. Byrne

• Decision Date: 29 July 1999
• Docket Number: No. 98-10600,98-10600
• Citation: Schimmelpenninck v. Byrne, 183 F.3d 347 (5th Cir. 1999)
• Parties: (5th Cir. 1999) In the Matter of: RUTGER SCHIMMELPENNINCK, Curator of the Estate of Harris Adacom Corporation B.V.; WOUTER J.P. JONGEPIER, Curator of the Estate of Harris Adacom Corporation B.V., Debtors, RUTGER SCHIMMELPENNINCK, Curator of the Estate of Harris Adacom Corporation B.V.; WOUTER J.P. JONGEPIER, Curator of the Estate of Harris Adacom Corporation B.V., Appellants, v. JAMES J. BYRNE, Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

Page 347

183 F.3d 347 (5th Cir. 1999)

In the Matter of: RUTGER SCHIMMELPENNINCK, Curator of the Estate of Harris Adacom Corporation B.V.; WOUTER J.P. JONGEPIER, Curator of the Estate of Harris Adacom Corporation B.V., Debtors,

RUTGER SCHIMMELPENNINCK, Curator of the Estate of Harris Adacom Corporation B.V.; WOUTER J.P. JONGEPIER, Curator of the Estate of Harris Adacom Corporation B.V., Appellants, v. JAMES J. BYRNE, Appellee.

No. 98-10600

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

July 29, 1999

Rehearing Denied Aug. 25, 1999.

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

Appeal from the United States District Court for the Northern District of Texas

Before JOLLY, WIENER, and PARKER, Circuit Judges.

WIENER, Circuit Judge:

This appeal presents complex issues that arise at the confluence of a Dutch bankruptcy proceeding and a Texas state court lawsuit. Appellants, Rutger Schimmelpenninck ("RJS") and Wouter J.P. Jongepier ("WJP") are the Curators¹ of Harris Adacom Corporation, B.V. ("HACBV" or "Debtor"), the debtor in a liquidation proceeding² filed in Amsterdam, the Netherlands. During administration of the estate, a creditor of HACBV, James T. Byrne ("Byrne" or "Appellee"), filed suit in Texas state court (the "Byrne Lawsuit") against Harris Adacom Network Services ("HANS"), a wholly-owned subsidiary of the Debtor, alleging, inter alia, that, under theories of alter ego and single business enterprise, the subsidiary, HANS, is responsible for the debts that its parent, the Debtor, purportedly owed to Byrne. In an attempt to preserve for the estate the value of the Debtor's ownership interest in HANS by preventing diminution of the subsidiary's assets through the execution of an improvidently granted judgment, the Curators filed this ancillary proceeding in the United States Bankruptcy Court in the Northern District of Texas. In it they requested declaratory and injunctive relief to prevent Byrne from prosecuting his alter ego and single business enterprise claims against HANS in the Byrne Lawsuit.³

The bankruptcy court, and the district court on appeal, denied the Curators' request for declaratory and injunctive relief. These courts' analyses were grounded in their equating of Byrne's claims to those raised by a similarly situated creditor in S.I. Acquisition, Inc. v. Eastway Delivery Service (In re S.I. Acquisition).⁴ In S.I. Acquisition, we established a two-part, disjunctive test for determining whether a creditor's indirect claim alleging alter ego against a non-bankrupt corporation affiliated with the debtor corporation is subject to the automatic stay provisions of the Bankruptcy Code (the "Code"): Does the creditor's cause of action either (1) "belong to" the corporate debtor, or (2) seek "recovery or control of property" of the corporate debtor. If the first question gets a "yes" answer, the inquiry is over; but if the first is answered "no," the second question must be asked and answered. In S.I. Acquisition, we answered the first question in the affirmative, holding that the creditor's alter ego claim against a non-bankrupt affiliate ---- the parent corporation of the bankrupt subsidiary corporation which actually owed the debt ---- "belongs to" the corporate debtor and is therefore subject to the automatic stay. As such, we did not reach the second, "recovery or control of property" question.

In the instant case, the bankruptcy and district courts identified what they believed to be significant factual distinctions that removed Byrne's claim from the S.I. Acquisition model. Specifically, in contrast to the creditor's efforts in S.I. Acquisition to reach the Debtor's parent corporation by piercing the corporate veil ("direct piercing"), Byrne has engaged in veil-piercing in an effort to reach the Debtor's subsidiary, HANS ("reverse piercing"). The district court concluded that the underlying policy of Texas alter ego law, which deems a control corporation liable for its affiliated corporation's obligations when that control entity misuses the corporate form, would be frustrated if HACBV could pierce its own veil to rectify an abuse that it had caused. Stated otherwise, HANS, the entity that Byrne seeks to reach, is controlled by the Debtor, HACBV; it is not the controlling entity that has misused the corporate form through the entity it controlled.

Focusing narrowly on this factual difference, the bankruptcy and district courts could discern no legal justification for concluding that Byrne's claims based on alter ego and single business enterprise "belonged to" the corporate debtor, HACBV, and therefore denied injunctive relief. In so doing, those courts apparently failed to note the distinction between the technical ascription of the veil-piercing cause of action as property of the putatively abusing debtor and the actual claim of the Curators for the benefit of the creditors, to whom no inter-corporation abuse could be ascribed.

We conclude that the bankruptcy and district courts erred as a matter of law in two respects: First, after answering the first S.I. Acquisition question ("belongs to") in the negative, the district court stopped its testing, rather than proceeding to consider the second question of the test ---- whether the creditor is seeking "recovery or control" of property of the debtor's estate ---- as an alternative reason for granting injunctive relief. Second and more compelling, the district court evaluated Byrne's alter ego and single business enterprise claims under S.I. Acquisition and the stay provisions of the wrong Bankruptcy Code section ---- section 362 ---- which requires that the creditor's claim affect "property of the debtor's estate" to be eligible for injunctive relief. As a proceeding that is purely ancillary to a foreign bankruptcy, however, this case is governed not by section 362 at all, but by section 304 of the Code, which authorizes a court to grant injunctive relief against actions seeking torecover property "involved in" a foreign bankruptcy. In contrast to section 362's effects in a full-blown, domestic bankruptcy case, section 304 of the Code does not create the legal concept of "property of the estate." Additionally, section 304's threshold for enjoining actions in foreign bankruptcies is lower than that of section 362 in domestic bankruptcies. It follows that any analysis defining "property of the estate" is superfluous and essentially inapposite.

Even so, whether we analyze this case under section 362 and S.I. Acquisition as did the bankruptcy and district courts, or under section 304, the equitable principles of bankruptcy overarch our inquiry. "Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally. A race of diligence by creditors for the debtor's assets prevents that."⁵ The Code furthers this design by permitting a foreign debtor to enjoin actions by U.S. creditors that seek to collect or control property that is involved in the foreign bankruptcy. Ultimately, the interests of all creditors, foreign and domestic, are to be put on a level playing field, with like-situated claimants being treated equally. If Byrne were allowed to proceed with his alter ego and single business enterprise claims, it would oppugn the very equitable foundation on which bankruptcy is built. Not only would Byrne unjustly gain a first-come/first-served preference, but the remaining creditors of HACBV (and, for that matter, HANS) would suffer a concomitant disadvantage.

We conclude that Byrne's alter ego and single business enterprise claims against HANS, as asserted in the Byrne Lawsuit, advance a general grievance of all of HACBV's creditors (not a personal grievance exclusive to Byrne) which must be asserted, if at all, by the Curators for the ultimate benefit of the creditors. Consequently, we reverse the holding of the bankruptcy court, as affirmed by the district court, and grant the Curators' requested declaratory and injunctive relief, proscribing the prosecution of these claims and thereby limiting Byrne's remedy to that which is available to him in the foreign bankruptcy.

I. FACTS AND PROCEEDINGS

The operable facts of this case arise from corporate restructurings, asset transfers, and officer reassignments in a large-scale communications business. In 1990, Harris Corporation sold its data communications business to Adacom Corporation in exchange for cash, stock, and promissory notes payable to Harris (the "Adacom Acquisition"). Following the closing of this transaction, Adacom changed its name to Harris Adacom Corporation ("HAC"). When the Adacom Acquisition was consummated, Byrne, who had previously managed Harris's data communications business, became an executive employee of HAC, eventually acquiring approximately 8% of HAC's outstanding stock as well.

In July of 1992, HAC formed HANS as a wholly-owned subsidiary. HAC contributed its North American computer network services to HANS in exchange for 100% of HANS's stock. In 1993, HAC formed a Netherlands subsidiary, HACBV, to which it transferred all of its stock in HANS in consideration for HACBV's assumption of the HAC promissory notes originally owed by HAC to Harris by virtue of the Adacom Acquisition. Following this transaction, the structure of the companies was as follows: HAC was the parent of HACBV and, in turn, HACBV was the parent of HANS, i.e., HANS was the wholly-owned subsidiary of HACBV, which was the wholly-owned subsidiary of HAC. Byrne maintains that, coincident with this corporate restructure, he entered into an agreement with HAC and HACBV (the "Redemption Agreement") under which he exchanged his stock in HAC for stock in HACBV, and HACBV agreed that, on any eventual sale of HANS, HACBV would redeem Byrne's HACBV stock for at least $2.9 million.

In June of 1994, HACBV declared bankruptcy in the Netherlands, and the District Court of Amsterdam appointed RJS and WJP as the curators of...