The opinion
Opinion issued July 31, 2014.
In The
Court of Appeals
For The
First District of Texas
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NO. 01-13-00636-CV
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KUMKANG VALVE MANUFACTURING CO. LTD., Appellant
V.
ENTERPRISE PRODUCTS OPERATING LLC AND
ENTERPRISE GAS PROCESSING LLC, Appellee
On Appeal from the 165th District Court
Harris County, Texas
Trial Court Case No. 2007-77260
OPINION
After a thousand industrial valves in two of its facilities failed, Enterprise
Products Operating LLC and Enterprise Gas Processing, LLC (collectively
Enterprise), sued Kumkang, the valve manufacturer, for breach of warranty. A
Korean company, Kumkang appeared and answered in the suit, but later filed for
bankruptcy relief in Korea and sought recognition of the foreign proceeding in a
United States bankruptcy court, under Chapter 15 of the federal Bankruptcy Code.
The United States Bankruptcy court entered a preliminary order of recognition, and
the trial court below stayed this state court suit pending resolution of the federal
proceedings. But that stay was lifted after the federal bankruptcy court dismissed
Kumkang’s Chapter 15 proceeding for want of prosecution.
The parties stipulated to liability and damages on Enterprise’s breach of
warranty claims. Kumkang then moved for summary judgment, claiming that the
Korean bankruptcy judgment discharged Enterprise’s state court claims.
Enterprise filed a cross-motion, claiming that Kumkang’s affirmative defense of
discharge in bankruptcy failed as a matter of law. The trial court granted summary
judgment to Enterprise.
Kumkang appeals, contending that the trial court erred in refusing to
recognize that the Korean bankruptcy judgment discharged Enterprise’s claims
against it and in failing to give effect to the federal bankruptcy court’s recognition
order in the dismissed Chapter 15 proceeding. Because the federal bankruptcy
proceedings were dismissed for want of prosecution, we conclude that the federal
bankruptcy court never finally determined the effect of the Korean court’s
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judgment on Enterprise’s claims, and thus Enterprise’s state law claims against
Kumkang were never discharged. We therefore affirm.
Background
Enterprise purchased approximately 1000 of Kumkang’s high-pressure
valves for use in constructing two of its gas-processing facilities, one in Colorado
and one in Wyoming. The valves failed. Ultimately, Enterprise replaced them at
an out-of-pocket cost of approximately $11 million.
In 2007, Enterprise sued Kumkang for, among other claims, breach of
warranty. It sought reimbursement for its out-of-pocket cost and damages to
compensate for its lost profits. In February 2009, before the suit was resolved,
Kumkang filed for protection under the Korean Debtor Rehabilitation and
Bankruptcy Act in Korean bankruptcy court. The Korean bankruptcy court
ordered Inspection Commissioner Samil PricewaterhouseCoopers to investigate the
circumstances that led to Kumkang’s bankruptcy and render an opinion concerning
whether the requested relief would be appropriate.
In April 2009, Kumkang petitioned a federal bankruptcy court in the
Southern District of Texas for recognition of a foreign main proceeding under
Chapter 15 of the United States Bankruptcy Code. 11 U.S.C. §§ 1501–1532.
Kumkang served Enterprise with its petition, which included information about the
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Korean bankruptcy proceeding, as well as notice of the recognition hearing
scheduled in the Chapter 15 proceeding.
The federal bankruptcy court entered an order recognizing the pendency of
the Korean proceeding, which gave rise to the automatic stay of all litigation
against Kumkang in the United States. Kumkang filed a suggestion of bankruptcy
in this case, and the trial court abated the proceedings.
Enterprise did not appear in the Korean bankruptcy proceeding. The list of
creditors that Kumkang filed in the Korean bankruptcy proceeding did not include
Enterprise. The Korean Inspection Commissioner’s report mentioned Enterprise’s
claims against Kumkang, but Kumkang’s Korean rehabilitation plan did not
address them.
The Korean bankruptcy court approved Kumkang’s rehabilitation plan in
December 2009. Kumkang did not inform the federal bankruptcy court or its
American bankruptcy counsel of this development. After nearly two years passed
without word from Kumkang, the federal bankruptcy court sent notice of its intent
to dismiss the Chapter 15 proceeding and scheduled a status conference. At the
conference, Kumkang’s American counsel informed the bankruptcy court that he
had tried, without success, to communicate with his client and that he had no
information about the status of the Korean proceeding. The United States
bankruptcy court gave Kumkang’s American counsel another month to provide an
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update, but received no response. The United States bankruptcy court thereafter
entered an order dismissing the Chapter 15 case and lifted the stay.
Enterprise moved the trial court below to lift the bankruptcy stay, and the
trial court granted the motion. The parties eventually entered into an agreement,
pursuant to Texas Rule of Civil Procedure 11, in which Kumkang “[a]gree[d] that
Enterprise is damaged in the amount of $11,000,000 due to problems with the
valves[,]” and that the valves did not comply with Kumkang’s express warranties
and were unfit for Enterprise’s particular purpose.
Next, Kumkang moved for summary judgment on the affirmative defense of
discharge in bankruptcy. With its motion, Kumkang provided copies of the
Korean bankruptcy statute, the court records underlying the Korean bankruptcy
proceeding, the Korean bankruptcy judgment approving Kumkang’s
reorganization, and certified translations of those documents.
Enterprise responded that the Korean proceeding had not discharged its
claims against Kumkang because (1) Enterprise was not subject to the Korean
bankruptcy court’s jurisdiction and did not participate in the proceeding,
(2) Kumkang failed to identify Enterprise’s claim against it to the Korean
bankruptcy court, and (3) Kumkang waived its opportunity to raise bankruptcy
discharge as an affirmative defense by failing to fully comply with Chapter 15 in
the United States bankruptcy court. Enterprise also filed a cross-motion for
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summary judgment, contending that Kumkang failed to raise a fact issue on its
affirmative defense of discharge in bankruptcy and that Enterprise was entitled to
liability and damages findings in its favor as a matter of law based on the parties’
Rule 11 agreement. The trial court denied Kumkang’s motion and granted
summary judgment in favor of Enterprise.
Discussion
I. Summary Judgment Standard of Review
We review a traditional summary judgment to determine whether the record
establishes there is no genuine issue of material fact and the movant is entitled to
judgment as a matter of law on a ground set forth in the motion. TEX. R. CIV. P.
166a(c); Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548–49 (Tex. 1985). In
deciding whether the summary judgment record establishes the absence of a
genuine issue of material fact, we view as true all evidence favorable to the non-
movant and indulge every reasonable inference, and resolve all doubts, in its favor.
Nixon, 690 S.W.2d at 548–49.
Discharge in bankruptcy is an affirmative defense. TEX. R. CIV. P. 94;
Strata Resources v. State, 264 S.W.3d 832, 843 (Tex. App.—Austin 2008, no pet.);
Burnam v. Patterson, 119 S.W.3d 12, 14 (Tex. App.—Amarillo 2003, pet. denied).
A defendant moving for traditional summary judgment must conclusively establish
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each element of an affirmative defense. Sci. Spectrum, Inc. v. Martinez, 941
S.W.2d 910, 911 (Tex. 1997).
When both sides move for summary judgment and the trial court grants one
motion and denies the other, we review both sides’ summary judgment evidence
and determine all questions presented. FM Props. Operating Co. v. City of Austin,
22 S.W.3d 868, 872 (Tex. 2000); Jones v. Strauss, 745 S.W.2d 898, 900 (Tex.
1988). In reviewing cross-motions for summary judgment, we may render the
judgment that the trial court should have rendered. FM Props. Operating Co., 22
S.W.3d at 872; Williamson v. State Farm Lloyds, 76 S.W.3d 64, 67 (Tex. App.—
Houston [14th Dist.] 2002, no pet.).
II. Foreign country bankruptcy judgment as proof of discharge
Kumkang first contends that the trial court erred in refusing to recognize that
Enterprise’s claims were discharged in the Korean rehabilitation proceeding.
Kumkang, however, has not cited to any case in which a party has sought and
obtained summary judgment based on the direct recognition of a foreign country
bankruptcy judgment without regard to American law.
Kumkang cites to two cases to suggest that our inquiry involves application
of Korean law and principles of comity to determine whether the Korean
bankruptcy judgment is valid: Mindis Metals, Inc. v. Oilfield Motor & Control,
Inc., 132 S.W.3d 477 (Tex. App.—Houston [14th Dist.] 2004, pet. denied), and
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Fleeger v. Clarkson Co., Ltd., 86 F.R.D. 388 (N.D. Tex. 1980). We find guidance
in neither. Mindis Metals involved a judgment issued by a court in the state of
Georgia that Mindis sought to enforce pursuant to the Uniform Enforcement of
Foreign Judgments Act (UEFJA). See 132 S.W.3d at 483 (citing TEX. CIV. PRAC.
& REM. CODE ANN. § 35.001–.008.). The UEFJA, however, does not provide a
mechanism for obtaining enforcement of judgments from other countries. See
TEX. CIV. PRAC. & REM. CODE ANN. § 35.001 (defining “foreign judgment” as “a
judgment, decree, or order of a court of the United States or of any other court that
is entitled to full faith and credit in this state.”). Chapter 36 of the Civil Practice
and Remedies Code, which provides a mechanism for obtaining enforcement of
foreign country judgments, by its terms, does not extend to foreign bankruptcy
judgments. See TEX. CIV. PRAC. & REM. CODE ANN. § 36.001(2) (defining
“foreign country judgment” as “a judgment of a foreign country granting or
denying a sum of money other than a judgment for taxes, a fine, or other penalty;
or support in a matrimonial or family matter”). Our sister court in Mindis
ultimately determined that the Georgia judgment was entitled to full faith and
credit and ordered its reinstatement pursuant to the UEFJA. 132 S.W.3d at 490.
In Fleeger, the federal district court granted the motion to dismiss a
shareholder derivative suit against a Canadian corporation in receivership pursuant
to an order of the Supreme Court of Ontario. See 86 F.R.D. at 393. “American
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courts have consistently deferred to Canadian courts under the comity principle.”
Caddel v. Clairton Corp., 105 B.R. 366, 366 (N.D. Tex. 1989); see also Fleeger,
86 F.R.D. at 393 (observing that it was “aware of no case in which an American
court has refused to defer to Canada.”). The plaintiff shareholder’s complaint
arose out of dealings that culminated in a settlement agreement approved by the
Ontario court. Fleeger, 86 F.R.D. at 393. Under the Canadian legal system, the
plaintiff would be required to obtain leave from the Ontario court before he could
bring the shareholder derivative claim. Id. at 394. The district court concluded
that comity compelled dismissal of the suit, explaining that “the appropriate forum
for this suit is Canada.” Id.
Even within the United States and its territories, bankruptcy law is itself
foreign to state courts. Congress has exercised its constitutional grant of authority
over bankruptcy matters by vesting jurisdiction over them exclusively in the
federal courts. 28 U.S.C. § 1334(a) (giving federal district courts “original and
exclusive jurisdiction of all cases under title 11”); see U.S. CONST. art. I, § 8
(requiring Congress “[t]o establish . . . uniform Laws on the subject of
Bankruptcies throughout the United States”); Kalb v. Feuerstein, 308 U.S. 433,
438–39, 60 S. Ct. 343 (1940). “‘Congress intended to grant comprehensive
jurisdiction to the bankruptcy courts so that they might deal efficiently and
expeditiously with all matters connected with the bankruptcy estate.’” Celotex
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Corp. v. Edwards, 514 U.S. 300, 308, 115 S. Ct. 1493, 1499 (1995) (quoting
Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)).
Thus, we reject Kumkang’s request that we directly recognize the scope and
effect of a foreign bankruptcy proceeding without regard to federal bankruptcy
law. The historical deference that state courts owe to the federal judicial system in
bankruptcy matters instead requires us to determine whether federal bankruptcy
law authorized the trial court to accept the Korean bankruptcy judgment as direct
evidence of discharge, even absent a federal bankruptcy court order discharging
Enterprise’s claims. We conclude that it does not. We begin by examining the
relevant bankruptcy law, codified in Chapter 15 of the United States Bankruptcy
Code.
Entitled “Ancillary and Other Cross-Border Cases,” Chapter 15 of the
Bankruptcy Code, enacted in 2005, essentially adopts the Model Law on Cross–
Border Insolvency, which the United Nations Commission on International Trade
Law (“UNCITRAL”) had developed in 1997 “to provide effective mechanisms for
dealing with cases of cross-border insolvency.” 11 U.S.C. § 1501(a); see also H.R.
REP. No. 109–31, pt. 1, at 105 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 169.
Chapter 15 identifies five objectives: (1) to encourage cooperation with “the courts
and other competent authorities of foreign countries involved in cross-border
cases;” (2) to increase “legal certainty for trade and investment;” (3) to promote the
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“fair and efficient administration of cross-border insolvencies” in order to
“protect[] the interests of all creditors, and other interested entities, including the
debtor;” (4) to protect and maximize “the value of the debtor’s assets;” and (5) to
facilitate “the rescue of financially troubled businesses.” 11 U.S.C. § 1501(a); see
also H.R. REP. No. 109–31, pt. 1, at 105. See generally Leif M. Clark & Karen
Goldstein, Sacred Cows: How to Care for Secured Creditors’ Rights in Cross-
Border Bankruptcies, TEX. INT’L L.J. 513, 514–15, 527 (2011) [hereinafter Sacred
Cows]. Comity—“the ‘recognition which one nation allows within its territory to
the legislative, executive or judicial acts of another nation, having due regard both
to international duty and convenience, and to the rights of its own citizens, or of
other persons who are under the protections of its laws’”—is central to Chapter 15.
In re Vitro, S.A.B. de C.V., 701 F.3d 1031, 1043–44 (5th Cir. 2012) (quoting Hilton
v. Guyot, 159 U.S. 113, 164, 16 S. Ct. 139, 143 (1895)).
Chapter 15 authorizes a foreign representative to petition for recognition of a
foreign proceeding in United States bankruptcy court. 11 U.S.C. §§ 1504, 1509(a),
1515. If the petition meets the statutory requirements, the bankruptcy court must
enter an order granting recognition of the foreign proceeding. If the foreign
proceeding “is pending in the country where the debtor has the center of its main
interests,” it is recognized as a “foreign main proceeding.” 11 U.S.C.
§ 1517(b)(1); see also id. § 1502(4).
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With the entry of an order recognizing a foreign main proceeding, the
foreign representative of the proceeding automatically receives relief, including the
automatic stay created by section 362, with respect to the debtor and its property in
the United States. Id. §§ 1520(a), 1509(b)(1), 1524. Chapter 15 authorizes the
federal court to assist the debtor throughout the course of the bankruptcy
proceedings by giving its foreign representative the ability to operate the debtor’s
business within the United States under section 363 and the right to sue, be sued,
and “intervene in any proceedings in a State or Federal court in the United States in
which the debtor is a party.” See id. § 1521 (empowering bankruptcy court to
grant appropriate relief after recognition of foreign proceeding); Id. § 1507
(empowering bankruptcy court, if recognition is granted, to provide additional
assistance, including “just treatment of all holders of claims against or interests in
the debtor’s property”); see also In re Vitro, 701 F.3d at 1051–69 (considering,
under sections 1521 and 1507, reasonableness of bankruptcy court’s denial of
debtor’s request for permanent injunction enjoining United States creditors from
continuing suits against it).
The Bankruptcy Code categorizes a Chapter 15 proceeding as a “core
proceeding.” 11 U.S.C. § 1157b(2)(P); see generally In re Wood, 825 F.2d 90, 97
(5th Cir. 1987) (defining “core proceeding” as one that “involves a right created by
the federal bankruptcy law,” or “one that would arise only in bankruptcy,” such as
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“the filing of a proof of claim or an objection to the discharge of a particular
debt”). The federal bankruptcy courts retain exclusive subject-matter jurisdiction
over core proceedings. See 28 U.S.C. §§ 157(b), 1334(b); Koval v. Henry Kirkland
Contractors, Inc., No. 01-06-00067-CV, 2008 WL 458295 (Tex. App.—Houston
[1st Dist.] Feb. 15, 2008, no pet.) (citing Sigmar v. Anderson, 212 S.W.3d 789, 794
(Tex. App.—Austin 2006, no pet.)); America’s Favorite Chicken Co. v. Samaras,
929 SW 2d 617, 630 (Tex. App.—San Antonio 1996, writ denied) (“The allowance
and disallowance of a bankruptcy claim is considered a core proceeding under
federal bankruptcy law, and the bankruptcy court retains exclusive jurisdiction
over such claims.”). Chapter 15 is “the exclusive door to ancillary assistance to
foreign proceedings, thus concentrating control of these questions in one court.” In
re Vitro, 701 F.3d at 1043.
Because the Bankruptcy Code exclusively vests in the federal bankruptcy
courts the authority to determine whether to grant comity to the bankruptcy
proceedings of foreign courts, we hold that the trial court correctly refused to apply
Korean law and comity and to directly recognize the Korean bankruptcy discharge.
We next determine whether the federal bankruptcy proceedings in this case
resulted in a federal recognition of a Korean discharge of Enterprise’s claims.
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III. Federal bankruptcy court recognition order as proof of discharge
Kumkang procured an order from the federal bankruptcy court recognizing
the Korean bankruptcy proceeding as a foreign main proceeding. It did not,
however, pursue any specific relief from the federal bankruptcy court in
connection with Enterprise’s claims against it. By granting summary judgment in
favor of Enterprise, the trial court necessarily concluded that it could not rely on
the federal bankruptcy court’s recognition order as proof that Enterprise’s claims
against Kumkang were discharged in the Korean bankruptcy. Kumkang contends
that the trial court erred in so concluding because the federal bankruptcy court’s
May 2009 recognition order is enough to support its discharge defense. We
disagree.
Recognition of a proceeding under Chapter 15 is merely a precondition for
obtaining substantive relief from the United States bankruptcy court, such as the
recognition and enforcement of specific orders or decrees previously granted in a
foreign bankruptcy proceeding. In re Vitro, 701 F.3d at 1042. Chapter 15’s
provisions “do not prevent modification or termination of recognition if it is shown
that the grounds for granting it were fully or partially lacking or have ceased to
exist.” 11 U.S.C. § 1517(d); see also id. § 1522(a) (providing that relief may be
granted pursuant to section 1521 only if the interests of creditors and other
interested entities are “sufficiently protected”); In re Vitro, 701 F.3d at 1069
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(upholding bankruptcy court’s refusal to accord comity to permanent injunction
issued in Mexican bankruptcy proceeding that would have non-consensually
discharged claims of non-debtor guarantors). The bankruptcy court here, therefore,
could have refined its recognition decision at any step in the proceeding,
including—or perhaps especially—when the foreign debtor asked for enforcement
relief, including discharge, against United States creditors. See Sacred Cows, 46
TEX. INT’L L.J. at 527 (noting that, unlike predecessor statute, Chapter 15
“divorc[es] the issue of recognition from the issue of relief sought upon
recognition[,]” so that gaining access to United States bankruptcy court is fairly
routine, while judicial discretion “plays a much larger role in the nature and scope
of assistance afforded”).
An interim Chapter 15 recognition order that a foreign bankruptcy is a main
proceeding is not, standing alone, evidence that the eventual judgment resulting
from the foreign bankruptcy proceeding discharged a creditor’s claims. The
summary-judgment evidence presented by Kumkang contains no substantive ruling
from the federal bankruptcy court addressing the question of discharge of
Enterprise’s claims against Kumkang by the Korean judgment. Kumkang did not
provide the federal bankruptcy court with the Korean judgment when it was
finalized, and it did not ask the court for relief from Enterprise’s claims before the
Chapter 15 proceeding was dismissed for want of prosecution. Absent a ruling
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from the federal bankruptcy court encompassing the discharge question presented
here, we hold that the trial court correctly granted summary judgment in favor of
Enterprise.
Conclusion
We affirm the judgment of the trial court.
Jane Bland
Justice
Panel consists of Justices Keyes, Bland, and Brown.
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