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District Court Dismissed Claims Against the Debtor’s Liquidators that Filed a Chapter 15 Petition for Recognition of a Foreign Proceeding

By David Tanabe posted 04-21-2022 08:41


In ASI, Inc. v. Aquawood, LLC, No. CV 19-763 (JRT/HB), 2022 WL 980398 (D. Minn. Mar. 31, 2022), the court determined that it did not have personal jurisdiction for alter ego and fraudulent transfer claims against a debtor’s liquidators that filed a petition for recognition of a foreign proceeding under Chapter 15 of the Bankruptcy Code.

The plaintiff won a judgment in the District of Minnesota in the amount of $8.5 million against the debtor. Thereafter, the debtor initiated proceedings in its home jurisdiction of Hong Kong to liquidate its assets. The principals of the debtor also provided funding to the liquidators to carry out a Chapter 15 bankruptcy petition in the District of New Jersey for recognition of the foreign proceeding, but allegedly concealed the debtors’ assets and otherwise misled the liquidators into believing the debtor conducted little of its business in the United States and had less than $100,000 in assets in the United States. The liquidators filed the Chapter 15 bankruptcy petition, triggered a bankruptcy stay, and blocked the plaintiff’s efforts to pursue legal action against the debtor. Thereafter, a Hong Kong court in the liquidation proceedings rejected a settlement that would have given the debtor’s creditors .1% of their claims against the debtor.

In the instant case, the defendants included the debtor, the principals of the debtors, and the liquidators in the Hong Kong liquidation. The plaintiff alleged that the defendants were a complex web of alter egos of another, engaged in fraudulent transfers intended to prevent the plaintiff from recovering its judgment from the debtor, and aided and abetted the fraudulent transfers. The amended complaint included allegations that the principals shifted sales, employees, accounts, documents, intellectual property, product inventory, good will, and payment demands to other entities to defraud creditors. The defendants filed motions to dismiss the amended complaint for failure to state a claim and lack of personal jurisdiction.

In its decision, the court held that the plaintiff failed to state a fraudulent transfer claim against the liquidators. The court also concluded that aiding and abetting fraudulent transfer claims are not cognizable under the Minnesota Uniform Voidable Transactions Act. For the alter ego claims, the court dismissed the claims that alleged corporate defendants were alter egos of other corporate defendants.

As to personal jurisdiction, the plaintiff argued the court had jurisdiction over the liquidators based on the minimum contacts test for the Due Process Clause of the Fourteenth Amendment. In rejecting the argument, the court determined that the liquidators lacked sufficient minimum contacts with Minnesota because the liquidators were residents of Hong Kong and never engaged in business in Minnesota. Further, the court found that the only nexus between the case and Minnesota was the Chapter 15 bankruptcy case in New Jersey where liquidators sought to dispose of the debtor’s assets. The court also recognized that a foreign representative filing a bankruptcy petition does not subject itself to the jurisdiction of a U.S. Court for any purpose under 11 U.S.C. § 1510. As such, the court concluded it did not have jurisdiction over the liquidators under the minimum contacts test.

The plaintiff also argued that the court’s jurisdiction over the debtor was imputed to the liquidators. In rejecting the argument for imputed jurisdiction, the court determined that the debtor was not acting on behalf of the liquidators. Rather, the court found that the liquidators served an entirely different function—to liquidate the debtor’s business and distribute its assets to creditors.

The plaintiff further argued that the court had personal jurisdiction over the liquidators based on the “effects test” articulated in Calder v. Jones, 465 U.S. 783 (1984), which required the plaintiff to demonstrate that the liquidators (1) had acted intentionally, (2) knew the plaintiff would be harmed, and (3) knew that the brunt of injury would be suffered in Minnesota (as the state of residence of the plaintiff). In finding the first element had not been met, the court noted that the liquidators did not have the requisite intent given the amended complaint demonstrated that the principals concealed the debtor’s assets from the liquidators.

As to the third element of the effects test, the plaintiff argued that the liquidators intentionally directed their actions by filing bankruptcy proceedings that disrupted the flow of litigation in the District of Minnesota. Unpersuaded by the argument, the court pointed to the amended complaint wherein the allegations included that the other defendants acted to drain the debtor of assets prior to the filing of the chapter 15 bankruptcy, misled the debtor’s liquidators and the court, and made it more difficult for creditors to trace or seize the debtor’s assets. Thus, the court held that the plaintiff failed to establish the effects test was met for jurisdiction over the liquidators.

The Court dismissed the liquidators from the action. The Court denied motions to dismiss as to (1) fraudulent transfer claims against certain remaining defendants including the principals and the debtor; and (2) alter ego claims asserting that certain corporate defendants were alter egos of the principals of the debtor.


Co-Editors in Chief
Karl J. JohnsonTaft Stettinius & Hollister LLP
David M. TanabeWinthrop & Weinstine, P.A.