Mandatory Abstention is Available when Foreign Law Claims are Brought with State Claims

By: Matthew A. Seymour

St. John’s University School of Law

American Bankruptcy Institute Law Review, Staff Member

            In Principal Growth Strategies, LLC v. AGH Parent LLC, the Delaware District Court held that it must abstain from hearing a lawsuit and remand it on equitable grounds.[1] Platinum Partners Value Arbitrage Fund L.P. (“PPVA”) was in liquidation proceedings in the Cayman Islands where liquidators were appointed.[2] Upon the liquidators’ request, the United States Bankruptcy Court for the Southern District of New York (“SDNY”) issued an order recognizing the Cayman Island liquidation as a “foreign main proceeding” under chapter 15 of title 11 of the United States Code (the “Bankruptcy Code”).[3] The SDNY order granted the liquidators’ authority to assert claims on PPVA’s behalf against any party that is subject to jurisdiction within the United States.[4] Relying on this authority, the liquidators filed a complaint against certain parties (the “Defendants”) in the Delaware Court of Chancery, alleging five claims based on Delaware law and four claims based on Cayman Island law.[5] The liquidators’ principal allegation was that the Defendants had “orchestrated a series of transactions that ‘stripped away’” a promissory note to the detriment of PPVA and its creditors.[6] Defendants moved to remove this proceeding to the district court under 28 U.S.C. § 1334 and § 1452, and specifically argued that this case arose under title 11.[7] In response, the liquidators contended that the district court must abstain from hearing this lawsuit and that it should be remanded back to the Court of Chancery on equitable grounds.[8]

            Under 28 U.S.C. § 1334(c)(2), when determining whether a district court must abstain from hearing a case, Delaware courts have applied the five-factor test of Stoe v. Flaherty, 436 F.3d 209, 213 (3d Cir. 2006) to decide:

(1) the proceeding is based on a state law claim or cause of action; (2) the claim or cause of action is “related to” a case under title 11, but does not “arise under” title 11 and does not “arise in” a case under title 11; (3) federal courts would not have jurisdiction over the claim but for its relation to a bankruptcy case; (4) an action “is commenced” in a state forum of appropriate jurisdiction; and (5) the action can be “timely adjudicated” in a state forum of appropriate jurisdiction.[9]

Of the five requirements, neither party disputed the fourth factor.[10] Accordingly, the court analyzed the four remaining requirements.[11] First, the court held that “based on a state law claim” did not mean that the claims had to arise solely upon state law claims.[12] The court further interpreted “based upon” to mean the same as “based in part on” and found that plaintiffs’ Cayman Island law claims did not invalidate their claim for abstention.[13] Second, the court held that the claims do not arise under title 11 because plaintiffs’ authority to bring the claim was not dependent on the SDNY order, and the claims could be brought outside of a bankruptcy proceeding.[14] Specifically, the claims brought by the plaintiffs did not “arise under” title 11, by their nature so the court found that the second Stoe requirement was satisfied.[15] Third, the court was not persuaded by Defendants’ belief that diversity or federal question jurisdiction existed in this case because Defendants only argued that federal jurisdiction could arise at some point in the future.[16] Lastly, the court held that it had no reason to believe that the Delaware Court of Chancery could not provide timely adjudication of this case.[17] The court used this reasoning because this action was never going to be consolidated with the SDNY action and the Court of Chancery was known for being well equipped to handle complex civil litigation.[18] For these reasons, the court found that all five of the Stoe requirements had been met and that it was required to abstain from hearing this proceeding.[19]

            The court then considered whether it should remand this litigation to the Court of Chancery pursuant to 28 U.S.C. § 1452.[20] Defendants argued that the litigation’s relation to a chapter 15 case precluded remand.[21] The court rejected Defendants’ arguments on three fronts. First, the court stated that § 1452 does not explicitly exclude chapter 15 cases.[22] Second, the case Defendants cited to only addressed permissive abstention under a different statute, whereas here, this case involved mandatory abstention under § 1334(c)(2).[23] Additionally, no language in § 1334(c)(2) suggests that it does not apply to chapter 15 cases. Lastly, the court once again relied on Stoe which held that § 1334(c)(2) was not in conflict with § 1452.[24] Further relying on Stoe, the court stated that if a court determines that mandatory abstention is required, “there will be an equitable ground justifying remand under § 1452(b).”[25]

            In Principal Growth Strategies, LLC, the Delaware District Court directly applied the Third Circuit’s Stoe test to determine that it must abstain from hearing this case.[26] This case makes it evident that a foreign representative may proceed with claims based upon foreign law in a state court and not necessarily in a bankruptcy or other federal court.[27]