CASE:  EMA Garp Fund v. Banro Corp., 2019 WL 773988 (S.D.N.Y. 2/21/2019)

QUESTION:  May shareholders of a Canadian corporation which previously filed a restructuring proceeding in the Canadian court system, maintain a securities fraud suit against the foreign corporation in a federal court in the United States?
ANSWER:  No.  In EMA Garp Fund v. Banro Corp., the federal court dismissed the shareholders’ securities fraud suit as a matter of international comity, given that plaintiffs knew about the pending Canadian case but deliberately chose not to participate in the foreign proceeding.
FACTS:   Defendant, Banro Corporation (“Banro”), is a public corporation headquartered in Canada and incorporated under Canadian law.  In December 2017, Banro filed a reorganization proceeding pursuant to Canada’s Companies’ Creditors Arrangement Act in a Canadian court (the “CCAA”).  Although certainly not identical to U.S. bankruptcy proceedings, the CCAA is very comparable to a U.S. bankruptcy.  On December 22, 2017, the CCAA court issued an initial order staying all claims.  A Bar Date deadline of March 6, 2018 was later set for the filing of any claims against Banro.  No claims were filed by any creditors, including plaintiffs, at any time.  After several meetings of creditors, the CCAA court issued a Sanction Order that approved of the proposed reorganization of Banro which included releases of all Banro directors and officers.  Plaintiffs are a group of U.S. shareholders of Banro.  On March 5, 2018 (the day prior to the Bar Date set by the CCAA court), plaintiffs filed suit against Banro and the former CEO of Banro in the Southern District of New York, seeking compensatory damages for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  Defendants moved to dismiss plaintiffs’ suit on international comity grounds.
DISCUSSION:  Significantly, the plaintiffs knew of the CCAA proceeding and the Bar Date but chose instead to commence an action in New York against the debtor and its CEO for U.S. securities law violations.  According to the district court, comity is particularly appropriate in connection with foreign insolvency proceedings and should be granted when the foreign proceeding satisfies fundamental due process standards and when granting comity would not violate any U.S. laws or public policies. A CCAA proceeding involves notice to creditors and an opportunity to be heard and similar treatment of similarly situated creditors and so satisfies fundamental due process requirements. Nothing in the CCAA proceeding or the sanction order, including the release of the CEO from securities fraud claims, violates fundamental U.S. law or public policy. Although the debtor could have sought recognition under Chapter 15 in the United States of the CCAA proceeding, its failure to do so does not preclude a U.S. court from giving the Canadian court the recognition that the United States allows to the acts of a foreign nation.  The district court dismissed plaintiffs’ action against Banro and its CEO on grounds of international comity.  Defendants filed an appeal in March 2019, which is pending.