Schimmelpenninck v. Byrne

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

__________________________

No. 98-10600
__________________________

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,

versus

JAMES J. BYRNE,
Appellee.

___________________________________________________

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

___________________________________________________
July 29, 1999

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

1
The office of curator in a Dutch bankruptcy is the equivalent
of a trustee in a United States bankruptcy.
2
Roughly the equivalent of a Chapter 7 proceeding in a United
States bankruptcy.
3
In addition to his indirect claims, Byrne brought direct
claims against HANS for breach of contract, fraud, and quantum
meruit. The Curators are not challenging Byrne’s pursuit of these
claims because they are direct claims for wrongs alleged to have
been committed by HANS. The Curators only seek to enjoin Byrne
from prosecuting his alter ego and single business enterprise

2
 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

claims because they are indirect, derivative claims that attempt to
recover from HANS debts owed by HACBV.
4
817 F.2d 1142 (5th Cir. 1987).

3
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.

4
 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 to recover 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

5
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

5
H.R.Rep. No. 595, 1st Sess., at 340 (1977).

6
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

7
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 HACBV. While still in bankruptcy, HACBV appointed

Byrne as sole director of its subsidiary, HANS. In that capacity,

Byrne asserts, he was requested by RJS to sell HANS as quickly as

possible. According to Byrne, he reminded RJS of his (Byrne’s)

right to receive at least $2.9 million for his shares of HACBV

stock when and if HANS were sold. Byrne further contends that RJS

assured him (Byrne) that he would be “taken care of.” In contrast,

the Curators claim that, as Curator for HACBV, RJS entered into a

written agreement with Byrne which described both the services

Byrne would render in connection with the sale of HANS and the

compensation he would receive.

Nevertheless, Byrne presented the Curators with his bankruptcy

claim against HACBV for $2.9 million, conditioned on HANS being

sold, as provided in the alleged Redemption Agreement. RJS, acting

in his capacity as one of HACBV’s Curators, informed Byrne that his

claim —— if valid at all —— was, at most, an ordinary claim in the

HACBV bankruptcy.

8
 In March of 1995, HANS sold all its assets for approximately

$20 million. The Curators concede that Byrne performed services in

connection with the sale, but insist that he was fully compensated

pursuant to the written agreement. Byrne asserts that once HANS

was sold, his demand for remuneration was rebuffed by HACBV and

RJS. In April of 1995, the month following the sale of HANS, Byrne

was removed by HACBV from his position as sole director of HANS.

In August of that year, Byrne filed the Byrne Lawsuit. In it

he asserted claims against HANS (HACBV’s subsidiary) for breach of

contract, fraud, and quantum meruit, and against HAC (HACBV’s

parent) for fraud, quantum meruit, tortuous interference with a

contract, and fraudulent transfer. Byrne amended his petition to

include a claim that HACBV (the Debtor), HAC (the Debtor’s parent),

and HANS (the Debtor’s subsidiary) were operated as a single

business enterprise or were each others’ alter egos, as a result of

which HANS is independently liable for HAC and HACBV’s contractual

obligations to him.

Two years later, consistent with the Code, the Curators filed

an ancillary proceeding in the United States Bankruptcy Court,

requesting: (1) a declaration that any claims against HANS or

other subsidiaries of HACBV based on a theory that HACBV is a

member of a single business enterprise with, or the alter ego of,

another person or entity, are the sole and exclusive property of

the Debtor, HACBV, and (2) a preliminary and permanent injunction

against the prosecution in this country of any action against HANS,

9
the subsidiary of the Debtor, with respect to the property of the

Debtor. After a hearing, the bankruptcy court denied the

declaratory and injunctive relief requested by the Curators and

enjoined HANS from transferring funds to HACBV until the Byrne

Lawsuit was resolved. The Curators appealed to the district court,

which affirmed the bankruptcy court’s order. Both the bankruptcy

and district courts reasoned that our decision S.I. Acquisition, in

which we concluded that an alter ego claim asserted by a creditor

against a non-bankrupt parent of its debtor subsidiary is property

of the debtor’s estate, did not apply to Byrne’s claim against

HANS. The Curators timely filed this appeal.

Meanwhile, in April of 1998, the Byrne Lawsuit proceeded to

trial in state court, in which the jury returned a verdict against

Byrne, rejecting all material issues. Specifically, the jury

failed to find that Byrne, HAC, and HACBV ever entered into the

Redemption Agreement. This pretermitted the jury’s addressing the

issue whether, pursuant to alter ego and single business enterprise

theories, HANS should be responsible for HACBV’s obligations under

the Redemption Agreement. After post-trial motions, the state

trial court rendered judgment that implements the jury’s verdict

and thus provides no recovery to Byrne. At the request of the

Curators, the bankruptcy court declared that the Byrne Lawsuit had

been “resolved” within the meaning of that court’s order that had

enjoined HANS from transferring funds to HACBV. Accordingly, the

bankruptcy court concluded that the injunction had lapsed by its

10
own terms, entitling HANS freely to transfer assets to HACBV.

Byrne’s counsel stated in open court that he intended to appeal the

state court’s judgment in the Byrne Lawsuit.

II.

ANALYSIS6

A. Standard of Review

We review a denial of declaratory or injunctive relief for

abuse of discretion.7 When such relief has been granted or denied

by a bankruptcy court, we perform the same task as the district

court: we review the bankruptcy court’s findings of fact for clear

error and issues of law de novo.8

As there are no outstanding issues of fact surrounding the

Curators’ request for declaratory and injunctive relief or the

bankruptcy and district courts’ denial of such relief, our review

6
Appellants submitted a motion, which was carried with the
case, to supplement the record on appeal with additional documents:
(1) the judgment and post-trial motions from Texas state court in
the Byrne Lawsuit, and (2) the motions and hearing to lift the
injunction from the bankruptcy court. We conclude that only the
outcome of the Byrne Lawsuit, and not its substance, is relevant to
this appeal. As the outcome is evident from the injunction
proceedings and Appellee does not object to supplementing the
record with these proceedings, we grant the motion, in part, to
allow inclusion of subsections (f) through (h), but deny the motion
with respect to subsections (a) through (e).
7
North Alamo Water Supply Corp. v. City of San Juan, 90 F.3d
910, 916 (5th Cir.), cert. denied, 519 U.S. 1029 (1996); Peaches
Entertainment Corp. v. Entertainment Repertoire Assocs., Inc., 62
F.3d 690, 693 (5th Cir. 1995); Pembroke v. Wood County, 981 F.2d
225, 228 (5th Cir.), cert. denied, 508 U.S. 973 (1993).
8
Kaepa, Inc. v. Achilles Corp., 76 F.3d 624, 626 (5th Cir.
1995), cert. denied, 519 U.S. 821 (1996).

11
is de novo. And, because the bankruptcy court’s order contained

holdings without accompanying reasons, we focus predominately on

the comprehensive analysis performed by the district court, which

affirmed the legal conclusions of the bankruptcy court.

B. Declaratory and Injunctive Relief under section 362

The Curators contend that the district court erred when it

affirmed the bankruptcy court’s denial of their request for a

declaration that the alter ego and single business enterprise

claims are property of the HACBV bankrupt estate. They insist that

the Byrne Lawsuit is functionally equivalent to the litigation

addressed in S.I. Acquisition, in which a creditor’s alter ego

lawsuit against a non-bankrupt affiliate of the debtor was deemed

property of the bankrupt estate and thus subject to the automatic

stay provisions of the Code. As the Curators, like the bankruptcy

and district courts, rely principally on S.I. Acquisition, we find

it helpful and instructive to examine the opinion closely.

1. In Re S.I. Acquisition

In S.I. Acquisition, we were required to decide whether a

creditor’s alter ego suit against the bankrupt corporate debtor’s

non-bankrupt parent was subject to the automatic stay provisions of

section 362 of the Code.9 Eastway Delivery Services, Inc.

9
Section 362(a) provides, in pertinent part:

(a) [A] petition filed under section 301, 302, or 303 of this title
. . . operates as a stay, applicable to all entities, of ——
(1) the commencement or continuation . . . of a judicial,
administrative, or other action or proceeding against the

12
(“Eastway”), a creditor of S.I. Acquisition, Inc. (“SIA”), had

filed suit against SIA for breach of contract. Eastway had also

named as defendants various companies affiliated with SIA on the

theory that these affiliates were alter egos of SIA. During

pendency of the suit, SIA filed bankruptcy and, pursuant to the

automatic stay, was severed from Eastway’s lawsuit. Eastway

continued to prosecute the suit against the non-bankrupt affiliates

debtor . . . or to recover a claim against the debtor .
. . ;
(2) . . .;
(3) any act to obtain possession of property of the
estate or of property from the estate or to exercise
control over property of the estate; . . . .

11 U.S.C. § 362(a) (1994). The section 362 automatic stay does not
apply in this case, however, because HACBV is in bankruptcy in the
Netherlands and must affirmatively seek injunctive relief under
section 304 of the Code. The district court noted that the parties
did not dispute that the section 304 injunction performs the same
function as the section 362 automatic stay, and therefore concluded
that the section 362 stay sought in S.I. Acquisition is
sufficiently analogous to the section 304 relief requested by
Appellants to apply our reasoning from that case to this one.
As will be discussed infra in more detail, this conclusion led
to fundamental errors in the district court’s analysis and the
parties’ briefs on appeal. The bankruptcy court, the district
court, and the parties throughout this litigation relied solely on
the S.I. Acquisition analysis, which interpreted section 362's
requirement that any claim affected by the automatic stay must be
“property of the estate.” This requirement, however, is not found
in the applicable subsection of section 304. As similarities
between the automatic stay in domestic bankruptcies and injunctive
relief in foreign bankruptcies have been recognized previously, we
will apply the dictates of S.I. Acquisition. See, e.g., In re
Banco Nacional, 91 B.R. 661, 664 (Bankr. S.D.N.Y 1988) (recognizing
that the injunctive relief under section 304 “is not unlike the
injunction which is automatic in a chapter 7 or 11 case pursuant to
section 362 of the Code”). Later in the opinion, however, we will
discuss the more appropriate analysis under section 304 of the
Code.

13
of SIA, but SIA argued that, because the alter ego claim was

property of the bankruptcy estate, continuation of the suit

violated the automatic stay.10

Drawing from American Nat’l Bank v. MortgageAmerica Corp. (In

re MortgageAmerica Corp.), a prior decision of ours that addressed

the effect of the automatic stay on “corporate trust fund” and

“denuding the corporation” causes of action,11 our panel in S.I.

Acquisition set forth the analytical scheme under which it would

determine whether the section 362(a)(3) automatic stay applied to

Eastway’s alter ego claims:

(1) the automatic stay applies to a cause of action that
under state (or federal) law belongs to the debtor, or

(2) the automatic stay applies to a cause of action that
seeks to recover property of the estate when the property
is held or controlled by a person or entity other than
the debtor, and

(3) in applying the above rules, a court must keep in
mind the general bankruptcy policies of securing and
preserving the debtor’s property and ensuring equal
distribution of the debtor’s assets to similarly-situated
creditors.12

Applying this legal framework, the panel determined that, under the

first prong of the analysis, “Eastway’s alter ego action is a right

of action belonging to SIA and, as such, is ‘property of the

10
S.I. Acquisition, 817 F.2d at 1143-45.
11
714 F.2d 1266 (5th Cir. 1983). The corporate trust fund and
the denuding the corporation doctrines impose personal liability on
those who use their power of control for their personal benefit
rather than that of the corporation. Id. at 1272.
12
S.I. Acquisition, 817 F.2d at 1150.

14
estate’” subject to the automatic stay.13 As noted above and as

will later be seen as important to our analysis, the S.I.

Acquisition court, by answering the first question in the

affirmative, ended the inquiry and thus (correctly) never reached

the second prong of the test.

We determined in S.I. Acquisition that, even though, under

Texas law, claims based on alter ego and other piercing-the-

corporate-veil theories are typically brought by a creditor,

nothing prevents a corporation from asserting such a claim against

its own subsidiary or affiliated companies.14 Our reasoning was

two-fold. First, we noted that the policy behind Texas veil-

piercing theories is “that the control entity that has misused the

corporation form will be held accountable for the corporation’s

obligations.” Accordingly, to meet its corporate obligations, the

corporation may pierce its own corporate veil to reach those who

have misused it.15

Second, we surmised in S.I. Acquisition that, by keeping

Eastway from asserting its veil-piercing action, the general

policies of the Bankruptcy Code would be furthered: All of SIA’s

13
Id. at 1153 (emphasis added).
14
Id. at 1152; see also In re MortgageAmerica Corp, 714 F.2d
at 1270-72 (holding that the trust fund and denuding theories of
recovery were considered to belong to the debtor corporation
because each action was created for the benefit of the corporation,
i.e., to vindicate injury to the corporation caused by improper
actions by control persons).
15
S.I. Acquisition, 817 F.2d at 1152.

15
creditors —— including but not limited to Eastway —— would benefit

from having more assets available to satisfy their claims.

Otherwise, any creditor could seek remuneration from the debtor’s

affiliates, and the multi-jurisdictional, first-come/first-served,

unequal distribution, which cuts against the policies of the Code,

would be promoted.16 For these reasons, we stayed Eastway’s state

law alter ego claim against the debtor’s affiliates.17

As we were in S.I. Acquisition, we are called on here to

decide whether Byrne, as an individual creditor of the bankrupt

corporation, HACBV, can assert his claim against an affiliate of

that debtor —— in this case, its wholly-owed subsidiary, HANS ——

that is not directly obligated to the creditor on that particular

claim. In making this decision, we must apply Texas law and

determine the extent of the Debtor’s interest in the alter ego and

16
Id. at 1153-54.
17
Id. at 1154. The Second, Fourth, and Seventh Circuits agree
with the holding in S.I. Acquisition that a creditor’s alter ego
claim belongs to the corporate debtor in bankruptcy. See Kalb,
Voorhis & Co. v. American Financial Corp., 8 F.3d 130 (2d Cir.
1993) (applying Texas law); St. Paul Fire and Marine Ins. Co. v.
PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) (applying Ohio law);
Steyr-Daimler-Puch of America Corp. v. Pappas, 852 F.2d 132 (4th
Cir. 1988) (applying Virginia law); Koch Refining v. Farmers Union
Central Exch., Inc., 831 F.2d 1339 (7th Cir. 1987), cert. denied,
485 U.S. 906 (1988) (applying both Illinois and Indiana law). The
Sixth and Eighth Circuits, however, disagree. Both courts denied
the corporation in bankruptcy the right to bring alter ego claims
on behalf of its creditors. See Spartan Tube and Steel, Inc. v.
Himmelspach (In re RSC Engineered Prods. Co.), 102 F.3d 223 (6th
Cir. 1996) (applying Michigan law); Mixon v. Anderson (In re Ozark
Restaurant Equip. Co.), 816 F.2d 1222 (8th Cir.) (applying Arkansas
law), cert. denied sub. nom., Jackoway v. Anderson, 484 U.S. 848
(1987).

16
single business enterprise claims that Byrne is seeking to assert.18

Keeping in mind the legal framework articulated in S.I.

Acquisition, we turn aside briefly to explore the treatment of

alter ego and single business enterprise claims under Texas law.

2. Alter Ego and Single Business Enterprise Theories

Texas recognizes various legal theories that facilitate

disregarding the corporate form, i.e., piercing the corporate veil,

two of which are alter ego and single business enterprise. An

alter ego remedy is available when there is an identity or unity

between a corporation and either a natural person or an affiliated

entity such that all separateness between the parties has ceased

(or never existed) and failure to disregard the corporate form

would be unjust.19 A single business enterprise remedy likewise

defeats the corporate form, but is appropriate when two or more

organizations that are separate de jure pool or integrate their

resources de facto to achieve a common business purpose. If such

commonality is established, each constituent organization may be

held liable for the debts incurred by one or more of the others in

18
To ascertain the property ownership of a foreign bankruptcy
estate, the law of the jurisdiction where the section 304
proceeding is pending determines whether the debtor has a valid
ownership interest in the property. Once the foreign debtor
establishes an interest in the property, the law of the
jurisdiction where the foreign proceeding is pending determines
whether such interest becomes property of the bankrupt estate. See
Koreag, Controle et Revision S.A. v. Refco F/X Assocs., Inc. (In re
Koreag), 961 F.2d 341, 348 (2d Cir. 1992).
19
Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex. 1986).

17
pursuit of that common business purpose.20

With this basic understanding of the state law aspects of

Byrne’s veil-piercing claims in mind, we proceed to examine the

bankruptcy facet of S.I. Acquisition’s framework. Throughout the

instant litigation, the parties and the courts have focused solely

on the first prong of the two-part test —— whether Byrne’s alter

ego and single business enterprise claims “belong to” the HACBV

estate. Although we too begin with that first prong, we do not

stop there.

3. Whether Byrne’s claims “belong to” HACBV

The Curators maintain that Byrne’s claim mirrors the alter ego

claim in S.I. Acquisition and thus “belongs to” HACBV. We

recognize the similarities between the facts in this case and those

in S.I. Acquisition, but we cannot ignore their differences. In

each case a creditor of the debtor sued a non-bankrupt affiliated

entity, insisting that the defendant’s relationship with the debtor

is such that the debtor’s corporate form should be disregarded to

allow the creditor to collect from the non-bankrupt affiliate the

debt owed by the debtor. Although Byrne’s claim followed this

general path, it was raised in a significantly different procedural

context: HACBV had filed bankruptcy in a foreign liquidation

proceeding, not in a United States proceeding, and —— after its

subsidiary was sued in Texas —— affirmatively sought injunctive

20
Old Republic Ins. Co. v. Ex-Im Services Corp., 920 S.W.2d
393, 395-96 (Tex. Ct. App. 1996).

18
relief pursuant to section 304 of the Code to protect its property

in this country.

In addition to this procedural distinction, Byrne advances

another element of his veil-piercing remedy as a distinguishing

difference that bears review. Diametrically opposed to the “direct

piercing” action instituted to reach the debtor’s parent (the

entity controlling the Debtor) in S.I. Acquisition, Byrne seeks to

pierce the corporate veil to reach the Debtor’s wholly-owned non-

bankrupt subsidiary (the entity controlled by the parent), a

variation referred to as “reverse piercing.”21 Byrne argues, and

the bankruptcy and district courts agreed, that, because HACBV is

the controlling party, the policy supporting a creditor’s right to

21
Piercing the corporate veil in “reverse” has been recognized
in many jurisdictions as an equitable doctrine used to prevent
injustice by corporate principals. See e.g. Stoebner v.
Lingenfelter, 115 F.3d 576, 580 n.4 (8th Cir. 1997) (recognizing
reverse piercing when other shareholders and creditors are not
adversely affected); Scholes v. Lehmann, 56 F.3d 750, 758 (7th
Cir.) (recognizing reverse piercing ordinarily in one-man
corporations), cert. denied, 516 U.S. 1028 (1995); McCall Stock
Farms, Inc. v. United States, 14 F.3d 1562, 1568 (Fed. Cir. 1993)
(affirming the use of reverse piercing to seek repayment of
corporate principals’ debt from refunds due to the undercapitalized
corporation); Dahl v. Gardner, 583 F. Supp. 1262, 1268 (D. Utah
1984) (collecting reverse piercing cases). Texas, in particular,
has recognized the doctrine for over thirty years. See Zahra
Spiritual Trust v. United States, 910 F.2d 240, 243-45 (5th Cir.
1990) (reverse pierce permitted to reach assets of corporation that
was the alter ego of individual who owed tax debt); Zisblatt v.
Zisblatt, 693 S.W.2d 944 (Tex. Ct. App. 1985) (wife sought to use
reverse piercing in divorce action); Dillingham v. Dillingham, 434
S.W.2d 459 (Tex. Ct. App. 1968) (same); American Petroleum Exch.,
Inc. v. Lord, 399 S.W.2d 213 (Tex. Ct. App. 1966) (judgment
creditor of shareholder sought to use reverse piercing to proceed
against corporation’s assets).

19
pierce the corporate veil —— to hold accountable those persons or

entities that controlled and misused the corporate form —— would be

undermined if we should hold that the veil-piercing claim “belongs

to” the bankruptcy estate of the Debtor.22 This argument was made

and accepted even though, like the automatic stay under the Code,

the injunctive relief available to the Debtor as the parent would

squarely block Byrne from pursuing the Debtor’s shares of HANS

stock, an asset of the parent corporation’s bankruptcy estate that

is clearly beyond the reach of the creditor, Byrne.

In response, the Curators insist that these facts present a

distinction without a difference —— and we agree. Whether, under

a veil-piercing theory, a creditor seeks repayment from the

shareholders of the debtor or from a subsidiary of the debtor ——

assuming that creditor has no direct, independent claim for

22
Appellee cites Southmark Corp. v. Crescent Heights VI, Inc.
(In re Southmark Corp.), No. 95-10849 (N.D. Tex. July 26, 1996)
(unpublished), aff’d, 95 F.3d 53 (5th Cir. 1996), for the
proposition that reverse piercing is not available to an entity
that abused the corporate form for its own benefit. We view the
facts in Southmark as clearly distinguishable from the facts at
hand. Moreover, the Southmark court specifically noted “[w]e do
not hold that a shareholder could never use the reverse piercing
doctrine under any circumstances.” The shareholder in Southmark
sought to pierce the corporate veil of its subsidiary to transfer
one of the subsidiary’s assets, a promissory note, into its estate
where the debtor could then assert a fraudulent transfer action
that arose from a purchase agreement between the subsidiary and a
third party. The court forbade Southmark’s piercing its own
corporate veil because the “particular use of reverse piercing” did
not further any equitable concerns. Such is not the case for
HACBV. HANS has no separate, direct agreement with Byrne, and by
enjoining Byrne from asserting his claims, all of HACBV’s creditors
will be protected.

20
repayment of the debt against the shareholder or subsidiary, i.e.,

no guarantee or co-signed instrument —— Byrne’s actions constitute

an “end-run,” skirting other creditors to reach the bankrupt

estate. As the Curators urge, this is precisely Byrne’s motive.

It is undisputed that HANS is not independently or directly liable

for the debt allegedly owed by HACBV to Byrne; nonetheless, Byrne

seeks to recover this debt from HANS even though the bankrupt

debtor, HACBV, is his sole obligor. By agglomerating to himself

the other creditors’ rightful pro-rata share of this asset (HANS)

of the Debtor’s estate, Byrne would obtain indirectly a very

preferential status that he cannot obtain directly —— a result that

flies in the face of bankruptcy’s structure and its equitable

concerns.

We recognize the theoretical tension implicit in the question

posed by the S.I. Acquisition court: How can Byrne’s claims “belong

to” HACBV when HACBV clearly controls the subsidiary, which it now

seeks to reach? Any pause that we may be given by the issues of

control posed by Texas law and adopted by the S.I. Acquisition

court is merely transitory, though, given our conclusion that Byrne

is seeking “recovery or control” of property of the Debtor within

the meaning of the second prong of the S.I. Acquisition test.23 In

23
Although our holding is not based on the “belongs to” prong
of the S.I. Acquisition analysis, we nonetheless briefly comment on
its applicability. Texas law clearly regards the alter ego remedy
as an equitable doctrine to “hold accountable those who have
misused the corporation (i.e., the shareholders, officers, or
directors).” Byrne insists that the right to pierce the corporate

21
reaching this conclusion, we pay particular attention to the third

“guiding principle” articulated by the S.I. Acquisition court ——

ensuring equal distribution of the debtor’s assets to similarly

situated creditors.

4. Whether Byrne’s claims seek “recovery or control” of
HACBV property

We have neither been referred to nor found independently any

case dealing directly with the second prong of S.I. Acquisition’s

disjunctive test. We therefore decipher the meaning of “recovery

or control” by turning again to S.I. Acquisition’s “guiding

principle.” Heeding our own analysis in In re MortgageAmerica, we

emphasized in S.I. Acquisition that, when considering whether a

creditor’s cause of action “belongs to” the debtor or seeks

“recovery or control” of property of the debtor, the Code’s general

veil (or veils) cannot “belong to” HACBV because it is the very
party that abused HANS’s corporate form. As HACBV is the entity
with unclean hands, he insists, it cannot avail itself of the
equitable remedy designed to rectify its own abuse.
Although initially this argument has an appealing ring, it is
cut down by the blade that creates it: Equity. The mere filing of
a bankruptcy petition creates legal consequences for both the
debtor and the creditors that are sheathed by the principles of
equity. For example, the moment that a petition for bankruptcy is
filed, the fictional “estate” passes to trustees (or Curators in
this case) for the benefit of all of the creditors. The creditors
are not only protected against fire sales by the debtor, but they
can expect to receive a pro-rata distribution of the estate’s
residuary. HACBV is currently in liquidation proceedings, and its
creditors, through the actions of the Curators, should not be
tarred with the brush of any pre-filing corporate abuses or
wrongdoings by HACBV, its officers, or directors. Stated
differently, HACBV’s alleged unclean hands should not preclude pro-
rata distribution of its property because the real parties with an
interest in HACBV’s liquidated assets —— including, notably, HANS
and its assets —— are all of its creditors.

22
policies of securing and preserving the debtor’s property and

ensuring equal distribution of that property to similarly situated

creditors should remain a paramount concern.24

The legislative history of the Code is replete with support

for this proposition. For example, a House Report reflects that

the automatic stay provision was adopted to “provide[] creditor

protection. Without it, certain creditors would be able to pursue

their own remedies against the debtor’s property. Those who acted

first would obtain payment of the claims in preference to and to

the detriment of other creditors.”25 It is pellucid from this

passage alone that Congress intended to protect all creditors.

And, to ensure adequate protection, Congress gave the trustee the

exclusive power to assert claims against the debtor’s property for

the collective benefit of creditors.26

5. General and Personal Claims

It is in this perspective that the distinction between general

and personal claims is both significant and consistent with the

24
S.I. Acquisition, 817 F.2d at 1152.
25
H.R.Rep. No. 595, 2nd Sess., at 340 (1978). We note that even
though the automatic stay provision does not apply in this case,
the injunctive relief that must be requested by the Curators
embodies the same policy concerns.
26
We do not imply that a creditor can never assert an
individual claim against the debtor. Indeed, we intend just the
opposite. Courts and commentators alike recognize differences
between a “personal” claim —— one in which an individual creditor
has been harmed —— and a “general” claim —— one in which the
creditors collectively have been harmed.

23
Bankruptcy Code. It is axiomatic that a trustee has the right to

bring actions that will benefit the estate. Such claims can either

be founded on the rights of the debtor or on the rights of the

debtor’s creditors. If the right belongs to the debtor’s creditors,

the distinction between personal and general claims takes on

significance: A trustee can assert the general claims of

creditors, but is precluded from asserting those creditor claims

that are personal. In other words, even if a claim “belongs to”

the creditor, the trustee is the proper party to assert the claim,

for the benefit of all creditors, provided the claim advances a

generalized grievance.27

We understand that characterizing an injury as personal or

general traditionally comports with notions of standing. A

bankruptcy court has correctly recognized that “[i]njury

characterization analysis should be considered as an inseparable

component of whether an action belongs to the corporation or

individual.”28 We agree with that position and conflate the injury

characterization analysis with not only the first, “belongs to,”

27
But see Ellenberg v. Walliagha (In re Mattress N More), 231
B.R. 104, 109-10 (Bankr. N.D. Ga. 1998) (recognizing that from a
policy perspective, a trustee should be able to pursue general
alter ego claims as a representative of the estate, but concluding
that no statutory basis under the Code exists for the trustee to do
so).
28
In re E.F. Hutton Southwest Properties II, Ltd., 103 B.R.
808, 812 (Bankr. N.D. Tex. 1989); see also, In re Mattress N More,
231 B.R. at 107-08 (discussing standing and whether the claim
belongs to the debtor contemporaneously).

24
prong of the S.I. Acquisition test but with the second, “recovery

or control” prong as well. Consideration of whether a claim is

general or personal should aid courts in deciding whether a claim

seeks “recovery or control” of property of the debtor. This

analysis, we find, helps to crystallize the structure for

determining when trustees can or cannot act on behalf of creditors

in pursuing claims.

To capsulize this legal framework for determining whether the

trustee or an individual creditor is the appropriate actor, we

categorize three kinds of action:

1)Actions by the estate that belong to the estate;

2)Actions by individual creditors asserting a generalized
injury to the debtor’s estate, which ultimately affects
all creditors; and

3)Actions by individual creditors that affect only that
creditor personally.

The trustee is the proper party to advance the first two of these

kinds of claims, and the creditor is the proper party to advance

the third. This construction ensures that the estate will not be

wholly or partially consumed for the benefit of one creditor, or

even a small number of creditors. Moreover, preservation of the

estate for the advantage of all creditors will (1) prevent multi-

jurisdictional rushes to judgment, (2) save judicial resources, and

(3) further the equitable principles of bankruptcy. To reiterate

our earlier observation, in S.I. Acquisition we provided two

circumstances in which the automatic stay would affect a creditor’s

25
claim against a non-debtor affiliate of the debtor: (1) when the

claim “belongs to” the debtor, or (2) when the claim seeks

“recovery or control” of property of the debtor. And again, as we

based our holding in S.I. Acquisition on the “belongs to” prong, we

never needed to question whether the claims sought “recovery or

control” of property of the debtor’s estate.

As not all claims necessarily “belong to” the debtor ——

because either by statute or common law the debtor is precluded

from asserting the action —— another mechanism must exist to

prevent individual creditors from annexing assets of the estate to

gain an advantage. Injunctive relief is therefore necessary to

prevent prosecution of actions that could lead to recovery or

control of the debtor’s property to the disadvantage of other

similarly situated creditors.

Byrne’s pursuit of his indirect claims against the non-

bankrupt, wholly-owned subsidiary of the debtor exemplifies the

need for such relief. His alter ego and single business enterprise

claims seek to collect a debt allegedly owed by the Debtor by suing

—— and hoping eventually to enforce a judgment against ——the

Debtor’s non-bankrupt subsidiary, HANS. Even if the Redemption

Agreement exists and is enforceable, it provides no direct or

independent claim against HANS. The claim is based entirely on

Byrne’s relationship with HACBV. Even though Byrne attempts to sue

HANS, a non-debtor third party, his action is grounded in a claim

26
against the Debtor only.29

We find further support in Texas law, under which the

viability of an action to reverse-pierce the corporate veil depends

on finding that the debtor and the corporation should be treated as

one entity or that one entity is a “mere tool or business conduit”

for the other entity.30 Although the creditor bears the burden of

proving the inseparable relationship, for the claim to be

characterized as personal to that creditor it must be based solely

on the interaction between the debtor and its affiliate and in no

way hinge on the creditor’s interaction with either entity.31

In his petition in the Byrne Lawsuit, Byrne alleged that “HANS

was not operated as a business entity separate from HAC or HACBV.”

He went on to explain the single business enterprise and alter ego

theories to support his theory, seeking to hold HANS liable “for

the debt of HACBV.” The relief sought by Byrne —— to ignore the

limitations of liability of HACBV and HANS as separate corporate

entities —— is not peculiar or personal to his cause, but is common

29
See In re Saunders, 101 B.R. 303, 305 (Bankr. N.D. Fla. 1989)
(“While a fraudulent transfer action may be an action against a
third party, it is also an action ‘to recover a claim against the
debtor.’ Absent a claim against the debtor, there is no
independent basis for the action against the transferee.”)
30
Zahra Spiritual Trust, 910 F.2d at 243-44 (noting that the
ultimate goal in reverse piercing is unique: The court treats the
individual and the corporation as “one and the same.”).
31
S.I. Acquisition, 817 F.2d at 1152 (“The doctrine of alter
ego does not rest upon a particular creditor’s dealings with or
reliance on the control entity, nor does the doctrine require a
showing of fraud on a particular creditor.”).

27
to all of the creditors. If the entities are proved to exist as

one, whether for failure to observe corporate formalities or as

undercapitalized shell corporations, the assets and liabilities of

the entities should be amalgamated for the benefit of all

creditors, not Byrne alone. Indeed Byrne insists that other

creditors of HACBV could institute the same kind of action as his,

which would allow them to share in the equity, i.e., this residual

asset value of HANS.

We are convinced that Byrne’s alter ego and single business

enterprise claims are general claims that ultimately seek to

recover or control property of HACBV, and that such claims are the

Curators’ to enforce or not enforce. Accordingly, we reverse the

district court’s order denying the Curators’ request for

declaratory relief, and we declare that assertion of any such alter

ego or single business enterprise claims must be initiated, if at

all, by the Curators on behalf of all creditors.

C. An Alternative: Injunctive Relief under section 304

Even if reversal based on the bankruptcy and district courts’

analyses under S.I. Acquisition and section 362 of the Code were

not indicated, reversal —— and granting of declaratory and

injunctive relief —— are mandated by proper application of section

304 of the Code. The Curators, on behalf of HACBV, filed a

petition under section 304 seeking declaratory and injunctive

relief to prevent Byrne from prosecuting his alter ego and single

business enterprise claims against HANS. Section 304(a) authorizes

28
a representative of a foreign bankruptcy estate to commence an

ancillary proceeding in the United States Bankruptcy Court.32 The

filing of a 304 petition does not create a bankruptcy “estate” that

must be administered by a court in the United States, but it does

allow the foreign debtor to prevent piecemeal distribution of its

assets in the United States while its plan is being structured in

the foreign jurisdiction.33 Although section 304 contains no

automatic stay provision, the bankruptcy court is given the

authority in subsection (b) to:

(1) enjoin the commencement or continuation of ——
(A) any actions against ——
(i) a debtor with respect to property involved
in such foreign proceeding; or
(ii) such property; or . . .

(2) order turnover of the property of such estate, or
the proceeds of such property, to such foreign
representative; or

(3) order other appropriate relief.

Subsection (b) is intended to arm the courts with maximum

flexibility in light of principles of international comity and

respect for the laws of foreign nations.34 One court has referred

to section 304's grant of judicial authority as tantamount to the

power to mold relief “in near blank check fashion.”35

32
11 U.S.C. § 304 (1994).
33
In re Koreag, 961 F.2d at 348.
34
See H.R.Rep. No. 95-595, 2nd Sess., at 324-25 (1978).
35
In re Culmer, 25 B.R. 621, 624 (Bankr. S.D.N.Y. 1982).

29
 Even though injunctive relief under subsection (b) is

available to a litigant, however, it is not to be granted

automatically. Rather, the grant of such relief, being within the

court’s discretion, is guided by the six factors enumerated in

section 304(c), with the economical and expeditious administration

of the foreign estate being of paramount concern, to wit:

(1) just treatment of all holders of claims against or
interest in such estate;
(2) protection of claim holders in the United States
against prejudice and inconvenience in the
processing of claims in such foreign proceeding;
(3) prevention of preferential or fraudulent
dispositions of property of such estate;
(4) distribution of proceeds of such estate
substantially in accordance with the order
prescribed by this title;
(5) comity; and
(6) if appropriate, the provision of an opportunity for
a fresh start for the individual that such foreign
proceeding concerns.36

The Curators complain that, because Byrne’s alter ego and

single business enterprise claims are “property of the HACBV

estate,” the bankruptcy and district courts abused their discretion

in refusing to grant injunctive relief pursuant to section 304. As

both courts concluded that Byrne’s claims are not “property of the

estate,” the Curators’ argument failed. The bankruptcy and

district courts did not, however, consider subsections (b)(1) or

(b)(3) —— which provide alternative grounds for granting injunctive

relief when the property in question is not “property of the

estate.” We find the plain language in these sections compelling

36
11 U.S.C. § 304(c)(1)-(6) (1994).

30
and deserving of full review.

1. Section 304(b): Is an Injunction Available?

Subsection (b)(1) of section 304(b) permits a bankruptcy court

to enjoin actions “against the debtor with regard to property

involved in such foreign proceeding.” We note first that, in the

context of the automatic stay under sections 362(a)(1) and (a)(3),

the phrase “against the debtor” has been extended to non-debtors

when failure to enjoin the action would jeopardize the success of

the bankruptcy process or cause irreparable harm to the debtor’s

estate and its creditors.37 Generally, such a situation exists when

the debtor and the non-debtor are closely related such that the

debtor is the real party defendant and a judgement against the non-

debtor will in effect be a judgment or finding against the debtor.38

The value of HACBV’s ownership interest in HANS would be

diminished were the subsidiary’s assets seized to satisfy HACBV’s

alleged debt to Byrne. It follows that the remaining creditors of

HACBV would share pro-rata in a smaller pie. Additionally, as

HACBV and HANS are in a parent-subsidiary relationship and HACBV’s

equity in HANS is an asset that would otherwise be available to

repay creditor debt, Byrne’s obtaining and executing on a judgment

against HANS would have an effect economically indistinguishable

37
S.I. Acquisition, 817 F.2d at 1148; In re Davis, 191 B.R.
577, 586 (S.D.N.Y. 1996) (compiling citations).
38
S.I. Acquisition, 817 F.2d at 1147-48; Audio Data Corp. v.
Monus, 789 S.W.2d 281, 286 (Tex. Ct. App. 1990).

31
from his obtaining and executing on a judgment obtained post-

petition directly against HACBV —— which, of course, he cannot do.

We will therefore apply the injunction to Byrne’s action against

HANS, the non-debtor, if his alter ego or single business

enterprise claims regard or affect property involved in the foreign

proceeding.

Few courts have discussed subsection (b)(1) in detail,

particularly the conduct necessary for property such as a cause of

action to be “involved in” the foreign proceeding.39 On two

occasions, however, a New York Bankruptcy Court faced the issue,

both times in the context of actions seeking to collect insurance

funds held in trust. In re Lines40 and In re Rubin41 involved

American reinsurance companies that sued to collect insurance funds

set up by foreign reinsurance companies that had become debtors in

liquidation. In each case, the American company claimed that the

foreign debtor had no interest in the fund because the claims of

other beneficiaries exceeded the amount of the fund, leaving the

debtor with no reversionary interest. The court disagreed and held

39
Courts have noted, with curiosity, the different statutory
language used in subsections (b)(1) and (b)(2). See, e.g., In re
Koreag, 961 F.2d at 349 (recognizing that Congress permits
injunctions to be issued under subsection (b)(1) regarding property
“involved in” the foreign proceeding, but subsection (b)(2) only
authorizes turnover of “property of the estate,” leading to the
conclusion that the two sections must perform different functions).
40
81 B.R. 267 (Bankr. S.D.N.Y. 1988).
41
160 B.R. 269 (Bankr. S.D.N.Y. 1993).

32
that even if the debtor’s reversionary interest was valueless, that

interest was sufficiently connected to the debtor to be “involved

in” the foreign liquidation proceeding, thereby entitling the

debtor to injunctive relief.42

When today we apply Texas law, we come to the same conclusion.

Byrne’s argument that HACBV has no interest in his actions

grounded in alter ego and single business enterprise theories

because a control entity cannot pierce its own corporate veil to

remedy its own abuse, is not dispositive of the “involved in”

issue. Even assuming arguendo that HACBV is not the proper party

to assert the veil-piercing action, that corporation, as the sole

stockholder of HANS, nevertheless has an equity or property

interest in HANS —— not unlike a reversionary interest ——

sufficient for HANS to be “involved in” HACBV’s foreign

bankruptcy.43

Neither can we ignore the fact that Byrne filed a proof of

claim in HACBV’s foreign bankruptcy for the exact same debt that he

seeks to collect from HANS in Texas through the alter ego and

single business enterprise theories.44 It is obvious beyond

42
In re Rubin, 160 B.R. at 277; In re Lines, 81 B.R. at 271-72.
43
See also In re Davis, 191 B.R. at 577 (granting injunctive
relief under section 304(b)(1)(A) and stating “[g]iven the debtor’s
contingent liability for any judgment taken by [the creditor]
against [affiliates of the debtor], it is appropriate for any such
litigation to go forward in Canada”).
44
See In re Rubin, 160 B.R. at 277 n.11 (“[The creditor] has
already filed a proof of claim . . . in the Israeli liquidation

33
peradventure that Byrne’s own actions “involve” him in the foreign

bankruptcy. As any claim Byrne could assert successfully in the

foreign bankruptcy appeared certain to produce a lesser monetary

recovery than 100 cents on the dollar, he attempted the Texas “end

run,” targeting a solvent affiliate of the Debtor. We hold,

therefore, that Byrne’s alter ego and single business enterprise

claims are sufficiently “involved in” HACBV’s liquidation

proceedings in Amsterdam to warrant a section 304 injunction

against pursuit of these claims in the United States.45

This holding does not, however, end our inquiry. As dictated

by section 304's subsection(c), relief is appropriate only if we

conclude that it will ensure an economical and expeditious

administration of the estate. We turn therefore to the factors

enumerated in section 304(c).

2. Section 304(c): Propriety of an Injunction

Cognizant of the six factors mentioned above, we begin with

subsections (c)(1) and (c)(3), which often work in conjunction with

proceeding. By his own actions, [the creditor] has involved the
Trust in the foreign liquidation case, as have numerous other
beneficiaries/creditors.”).
45
We note in passing that subsection (b)(3) provides another
relief mechanism. Even if Byrne’s claim were not sufficiently
“involved in” the foreign proceeding to warrant injunctive relief
under (b)(1), (b)(3) gives us the authority to order “other
appropriate relief.” In this case, “other appropriate relief” could
include an injunction to prevent Byrne’s “race to the courthouse”
to gain a preferential benefit.

34
one another.46 Not only must all claim holders in a foreign

bankruptcy receive just treatment, but the possibility of

preferential treatment must be prevented. As previously mentioned,

if Byrne is not enjoined from asserting his alter ego and single

business enterprise claims against HANS, he will be first in line

to seize assets of HANS, up to the full amount of his judgment.

That, of course, would negatively affect the value of HACBV. As

previously recognized, not only would Byrne thus receive

preferential treatment, but the remaining claim holders in the

HACBV bankruptcy would be relegated to sharing pro-rata in the

concomitantly diminished equity value of HANS.47 Consideration of

these two factors therefore weighs in favor of granting injunctive

relief.

We cannot, though, ignore the impact injunctive relief for

HACBV would have on Byrne. Subsection (c)(2) mandates protection

of Byrne’s claim against prejudice and inconvenience if he is

forced to raise his claim in the foreign proceeding. This factor

requires us to consider Dutch bankruptcy law and its effect on

46
Subsection (c)(6) is not relevant because the foreign debtors
are not individuals.
47
It is also likely that just treatment of all creditors would
be impaired by the ongoing litigation and resources expended in the
United States. See In re Gercke, 122 B.R. 621, 629 (Bankr. D.D.C.
1991) (“To allow [the creditor’s] claim to be tried in the United
States now would threaten the just treatment of all holders of
claims because the estate has inadequate resources to engage in a
trial without threatening the [curators’] efforts to maximize the
estate.”)

35
Byrne’s claim.

First, we agree with the Curators’ contention that the mere

fact that Byrne would have to pursue his claim against HACBV in a

foreign proceeding is not sufficient prejudice to deny relief.48

In fact, we require foreign creditors to litigate in the United

States when seeking distributions in a domestic bankruptcy case.49

From the translations of the Dutch Civil Code contained in the

record, it is patently clear that Dutch law entitles Byrne to

receive the same treatment that he would under Title 11. For

example, section 3, article 277 of the Dutch Civil Code treats

creditors as “equally entitled to be paid from the net proceeds of

the goods of their debtor, . . . in proportion to the claim of each

creditor, subject to priorities that have been acknowledged by

law.” Compare this to section 726 of the Code, which sets forth

the general distribution rules for liquidation cases, giving

priority to secured creditors first and then to unsecured

creditors, with all claims in the same class receiving pro-rata

treatment when there are insufficient funds to pay that class in

full. Additionally, the Dutch Bankruptcy Act provides for a first

creditor’s meeting, similar to that provided under the Code.50

48
See In re Davis, 191 B.R. at 585; In re Rubin, 160 B.R. at
269.
49
See In re Brierley, 145 B.R. 151, 163 (Bankr. S.D.N.Y. 1992).
50
Compare Dutch Bankruptcy Act, §§ 116, 119, 122 with 11 U.S.C.
§ 341 (1994).

36
 Our review of the Dutch code articles governing bankruptcy

satisfies us that creditors are afforded rights sufficiently akin

to those provided in the Code to eschew prejudice. We are

convinced that Byrne’s claims will not be prejudiced when raised in

the foreign proceeding.

Similarly, section 304(c)’s fourth factor calls for an

examination of the foreign law governing the debtor’s proceeding to

ensure that the distribution of proceeds of the foreign bankrupt

estate will occur substantially in accordance with Title 11.

Although the foreign distribution scheme need not be identical to

Title 11, it must be comparable.51 Derived largely from above-cited

article 277 of the Dutch Civil Code, the order of priority in a

Dutch bankruptcy is as follows: (1) Special bankruptcy costs; (2)

General bankruptcy costs; (3) Tax authorities; (4) Creditors with

specific privileges related to specific assets; (5) Creditors with

general privileges; and (6) Unsecured creditors.52 A creditor who

has retained ownership of a particular asset and holds either a

mortgage or a pledge encumbering that asset can exercise his rights

irrespective of the authority of the Curator. With this exception,

preferences under Dutch law generally track the hierarchy of claims

51
In re Gercke, 122 B.R. at 629.
52
See also Dutch Civil Code, § 2, art. 23b.1 (“The liquidator
transfers all that is left of the estate of the liquidated legal
entity, after payment to the creditors in proportion to everyone’s
rights, to those that have rights resulting from the articles of
association, or otherwise to the members or shareholders.”)

37
in a domestic proceeding: (1) Secured claims; (2) Administrative

expenses; and (3) Unsecured creditors. Under either scheme,

Byrne’s claim qualifies as an unsecured breach of contract claim

arising, if at all, from the Redemption Agreement. Byrne has

already filed his claim in the Dutch proceeding, so distribution of

the foreign estate vis-à-vis his claim should occur substantially

in accordance with Title 11.

Fifth and finally, we must evaluate the principles of comity

to ensure that the Dutch proceeding does not offend our notions of

justice. Foreign proceedings are generally recognized in the

United States, as long as the foreign laws comport with due process

and treat the claims of local creditors fairly.53 We favor granting

comity to foreign bankruptcy proceedings because “the assets of the

debtor [can] be dispersed in an equitable, orderly, and systematic

manner, rather than in a haphazard, erratic or piecemeal fashion.”54

As noted in our analysis of the fourth factor, the foreign laws

need not be identical to their counterparts under the laws of the

United States; they merely must not be repugnant to our laws and

policies.55 As we have already found sufficient congruity between

Dutch and American bankruptcy laws to eschew such repugnance, we

53
Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709,
714 (2d Cir. 1987).
54
Cunard S.S. Co. v. Salen Reefer Servs. A.B., 773 F.2d 452,
458 (2d Cir. 1985).
55
In re Davis, 191 B.R. at 587; In re Rubin, 160 B.R. at 283;
In re Brierley, 145 B.R. at 168.

38
conclude that principles of comity weigh in favor of granting the

injunction sought by the Curators.

We are confident that Byrne’s claim, already asserted in the

Dutch liquidation proceeding, will receive essentially equal and

fair treatment among other claimants who are members of his class

of creditors. Dutch bankruptcy law clearly is not repugnant to

Title 11 and the factors specified in section 304(c) are present.

We therefore hold that the bankruptcy and district courts erred as

a matter of law in refusing to grant the Curators injunctive

relief. Finding that Byrne’s efforts to recover from HANS the debt

owed by HACBV, but not owed directly by HANS, violate applicable

principles of both United States and Dutch bankruptcy law, we

reverse the bankruptcy and district courts and grant the relief

sought by the Curators.

III.

CONCLUSION

As a result of our section 362/S.I. Acquisition analysis of

the Curators’ entitlement to declaratory and injunctive relief, we

find ourselves in disagreement with the judgments of the bankruptcy

and district courts that denied such relief. In particular, we

perceive error in the finding of those courts that a creditor’s

action based on reverse-piercing of a corporate veil does not

constitute property of the bankruptcy estate of the parent

39
corporation even when, as here, the purpose of a creditor’s veil-

piercing suit in state court against the non-bankrupt, wholly-owned

subsidiary of the Debtor, is to obtain a money judgment on an

obligation that concededly is not owed directly by the subsidiary.

Given our view that, generally, application of the equitable theory

that a corporate debtor should not be allowed to profit from its

untoward manipulations of an affiliated entity misses the mark here

by failing to recognize that —— at least in the context of this

domestic bankruptcy proceeding ancillary to a foreign bankruptcy ——

pre-bankruptcy corporate misdeeds of the Debtor should not inure to

the detriment of its general bankruptcy creditors, we conclude that

the instant reverse-piercing action belongs to the Curators, not to

one individual creditor of the Debtor.

More to the point, even if we assume arguendo that the

bankruptcy and district courts correctly decided that Byrne’s veil-

piercing cause of action is not “property of the estate” under the

first prong of S.I. Acquisition’s disjunctive test —— the “belongs

to” prong —— those courts nevertheless erred in halting their

inquiry at that point. Even though, as in S.I. Acquisition, a

“yes” answer to the “belongs to” question ends the inquiry, a “no”

answer to that first prong question requires the court to proceed

to the second prong —— the “recovery or control of property”

question. Thus, the bankruptcy and district courts abused their

discretion when, having answered the first prong’s question in the

negative, they failed entirely to address Byrne’s reverse-piercing

40
action under the second prong of the S.I. Acquisition test. As a

correct application of the second “recovery or control” prong leads

inevitably to a determination that Byrne’s goal in attempting to

reverse-pierce the veil of the non-bankrupt, wholly-owned

subsidiary of the Debtor was the “recovery or control” of property

of the Debtor, i.e., the estate’s interest in HANS or its assets,

those courts’ failure to address recovery or control of the

Debtor’s property constitutes reversible error. Based on S.I.

Acquisition’s take on section 362, we hold that the Curators are

entitled to declaratory and injunctive relief.

Alternatively, we conclude that, when declaratory and

injunctive relief is sought in a bankruptcy court in this country

through proceedings that are ancillary to a foreign bankruptcy from

a country whose laws are compatible with and not repugnant to ours,

analysis of the ancillary case should be conducted not under

section 362 of the Code but under section 304. For the reasons we

have explained, a proper section 304 analysis of the instant case

makes the Curators’ entitlement to the relief sought even clearer

than it is when examined under section 362 and S.I. Acquisition.

The Debtor’s ownership of all issued and outstanding stock in HANS,

a non-bankrupt affiliate, makes unavoidable the conclusion that

HANS and its assets are “involved in” HACBV’s bankruptcy for

purposes of section 304. As such, injunctive relief is highly

appropriate if not absolutely required.

We therefore reverse the bankruptcy and district courts’

41
denial of the relief sought by the Curators, declare any veil-

piercing action vis-à-vis HACBV and its affiliated companies to be

“property of the estate” for purposes of HACBV’s bankruptcy

proceedings, and remand this case for entry of judgment permanently

enjoining Byrne from prosecuting the portion or portions of his

state court action in Texas that seek a money judgment against

HANS, on veil-piercing (alter ego and common business enterprise)

grounds, for claims on which HANS is not purported to be directly

responsible as the primary obligor.

REVERSED and REMANDED.56

56
We recognize that if the take-nothing judgment rendered
against Byrne in the trial court in Texas is affirmed on appeal and
becomes final, the judgment we render today will be moot.

42