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In re Manley Toys Ltd.

United States District Court, D. New Jersey

March 12, 2019

IN RE MANLEY TOYS LIMITED, Debtor in a Foreign Proceeding.
v.
FOREIGN LIQUIDATORS, et al., Appellees. ASI, INC., Appellant,

          HELLRING LINDEMAN GOLDSTEIN & SIEGAL LLP BY: RICHARD B. HONIG, ESQ., MATTHEW E. MOLOSHOK, ESQ. AND WEISBROD MATTEIS & COPLEY PLLC BY: STEPHEN A. WEISBROD, ESQ. COUNSEL FOR APPELLANT

          ARCHER & GREINER PC, BY: STEPHEN M. PACKMAN, ESQ., DOUGLAS G. LENEY, ESQ. AND GOODWIN PROCTOR LLP BY: DANIEL M. GLOSBAND, ESQ. COUNSEL FOR APPELLEES

          OPINION

          RENÉE MARIE BUMB, UNITED STATES DISTRICT JUDGE

         On March 22, 2016, Manley Toys Limited (“the Debtor”) commenced a creditors' voluntary liquidation in Hong Kong, pursuant to Hong Kong law. Mat Ng and John Robert Lees were appointed as liquidators (“the Liquidators”), and on the same day, the Liquidators filed a Chapter 15 case and motion in the United States Bankruptcy Court for the District of New Jersey. ASI, Inc., f/k/a Aviva Sports Inc. (“Aviva”), a judgment creditor of the Debtor, opposed the motion.[1] After a three-day evidentiary hearing, the Bankruptcy Court granted the motion, and recognized the Hong Kong liquidation of the Debtor as a “foreign main proceeding, ” 11 U.S.C. § 1502(4). Aviva appeals from that decision. For the reasons stated herein, the Court will affirm the Bankruptcy Court's well-reasoned and comprehensive recognition decision.

         I. FACTUAL BACKGROUND

         The Court recites the facts as found by the Bankruptcy Court in its decision.[2] In March of 2016, the Debtor was in significant financial and legal distress. Faced with “alleged declining sales, ” an over $8.58 million judgment entered against it in favor of Aviva in Minnesota Federal District Court, Aviva's ongoing efforts to collect on that judgment, and an upcoming jury trial in litigation with Toys “R” Us in this District, the Debtor decided “to enter into voluntary liquidation in Hong Kong.” In re: Manley Toys Ltd., 580 B.R. 632, 635 (Bankr. D.N.J. 2018).

         On March 11, 2016, notice of the “Creditors Meeting” to be held 11 days later (March 22nd) in Hong Kong-- the meeting that begins the liquidation process under Hong Kong law-- “was sent by regular mail to all of the Debtor's known creditors [(including Aviva)], and notice was published in three Hong Kong newspapers.” Manley Toys, 580 B.R. at 636. Importantly, notice was not sent by email or fax, id., although-- as the Bankruptcy Court found, and Aviva does not contest on appeal-- Hong Kong law does not require such notice. Id. The Bankruptcy Court further found, and Aviva does not contest on appeal, that Hong Kong law also does not require the notice period-- i.e., the period of time between when the notice is sent and when the meeting is held-- to be of any particular length. Id. at 640-41. In short, there is no record evidence that there were any procedural irregularities under Hong Kong law with regard to the notice of the Creditors Meeting.

         At the Creditors Meeting on March 22, 2016, liquidation of the Debtor was formally initiated in Hong Kong by the appointment of a “Committee of Inspection” (“COI”). Manley Toys, 580 B.R. at 636. The COI appointed the Liquidators and authorized the Liquidators to commence the Chapter 15 case, which the Liquidators did that same day. Id.

         Aviva argued before the Bankruptcy Court, and continues to argue on appeal, that the Debtor and its former principals “initiated the Hong Kong liquidation and the Chapter 15 case in bad faith, ” as “part of the principals' long-running scheme to defy and undermine the U.S. judicial system.” (Dkt 18-2836, p. 6, 12) In support of its argument, Aviva points to the following actions and events that occurred, or allegedly occurred, in the time leading up to March 22, 2016.

         First, in late February 2016, two Manley affiliates, Toy Quest Ltd. and Manley Fashion Direct Ltd., paid approximately HK $125 million to Hang Seng Bank and HSBC to pay off two loans made to the Debtor. (Aviva Exs. 118, 121, 164-65) The result of these transactions was to substitute Debtor affiliates (Toy Quest and Manley Fashion) for independent creditors (Hang Seng Bank and HSBC), which, in turn, nudged the percentage of the Debtor's total liabilities owed to Debtor-related companies past 50%, vesting control of the entire creditor group in Debtor affiliates. According to Aviva, this was a premeditated scheme to ensure control over the anticipated liquidation, and consequently, Aviva's marginalization from that process.[3]

         Second, Aviva believes the short notice given for the Creditors Meeting, and the decision not to email or fax notice to creditors, demonstrates that the Debtor and its principals desired to exclude Aviva from the meeting. However, as the Bankruptcy Court found, “the Liquidators and the COI have offered to place Aviva on the COI to cure any perceived prejudice related to lack of notice, but Aviva has refused.” Manley Toys, 580 B.R. at 641.

         Third, Aviva asserts that “by the time the Principals [of the Debtor] formally put the company in liquidation, it had been stripped of nearly all of its assets.” (Dkt 18-2836, Entry 19, p. 86) According to Aviva, “[a]t most, the Liquidators have less than U.S. $13, 000 available to them in Hong Kong, ” which “could not possibly be enough to pay for” the litigation of claims “for the actual benefit of [] independent creditors” like Aviva. (Id. at 86-87) While the Liquidators have received funding from Toy Quest, Aviva suggests that a potential conflict of interest exists insofar as Toy Quest itself allegedly has “a highly suspect creditor claim and, in addition, is an obvious potential target of fraudulent transfer and alter ego litigation” (Dkt 18-2836, Entry 29, p. 13) in connection with Aviva's attempts to collect on its judgment against the Debtor.

         II. LEGAL STANDARD

         This Court has jurisdiction to hear appeals from the Bankruptcy Court's final orders pursuant to 28 U.S.C. § 158(a). The Bankruptcy Court's legal determinations are reviewed de novo; its factual findings are reviewed for clear error. In re: Titus, -- F.3d --, 2019 WL 693026 at *3 (3d Cir. Feb. 20, 2019).

         III. ANALYSIS

         On appeal, Aviva contests only three issues with regard to recognition: (A) that the Hong Kong proceeding is “collective” in nature, as required by 11 U.S.C. § 101(23); (B) that the proceeding is a “main” (as opposed to “nonmain”) proceeding because the Debtor's “center of main interests” (“COMI”), 11 U.S.C. § 1502(4), is in Hong Kong; and (C) that recognition of the Hong Kong proceeding is not “manifestly contrary to the public policy of the United States.” 11 U.S.C. § 1506.

         A. Collective in nature

         Among other requirements, a foreign liquidation must be “collective in nature” to be recognized under Chapter 15. In re: ABC Learning Centres Ltd., 728 F.3d 301, 308 (3d Cir. 2013) (citing § 101(23)). A proceeding is collective if it considers the rights and obligations of all creditors. In re: ABC Learning Centres Ltd., 445 B.R. 318, 328 (Bankr. D. Del. 2010), aff'd, 728 F.3d 301 (3d Cir. 2013).[4] The collective proceeding requirement reflects U.S. policy “to provide an orderly liquidation ...


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