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Takata's Japanese Bankruptcy Case Survives Public Policy Objection

Background

As has been widely reported, over the last several years Takata Corporation and its various worldwide subsidiaries (together “Takata”)1  have been involved in a multitude of governmental investigations, class actions and personal liability suits resulting from defective airbags manufactured by Takata. The defective airbags led to a recall of over 40 million vehicles, the largest such recall in history, and to a consent decree with the U.S Dep’t of Justice. Facing mounting financial liabilities, Takata Corporation, the Japanese parent of the Takata group, and its Japanese subsidiaries commenced civil rehabilitation proceedings in Japan while its U.S. subsidiary, TK Holdings, Inc., commenced Chapter 11 proceedings in Delaware. Thereafter, the foreign representative of the Japanese debtors filed Chapter 15 petitions in Delaware and sought recognition of the Japanese cases. 

The Objection to Recognition

The only parties that objected to recognition of the Japanese cases were the Takata Multi-District Litigation Plaintiffs (the “Takata MDL Plaintiffs”). The Takata MDL Plaintiffs are the putative representatives of the U.S. based holders of claims seeking damages on account of alleged personal injuries incurred as a result of the defective inflators in Takata manufactured airbags and economic loss attributable to the ownership of a vehicle containing a defective airbag. 

The Takata MDL Plaintiffs did not dispute that the foreign representative satisfied each of the elements required for recognition under Section 1517 of the Bankruptcy Code. Under Section 1517, an order recognizing a foreign proceeding shall only be entered if: (1) the proceeding is a foreign main or non-main proceeding; (2) the foreign representative is a person or body; and (3) the petition meets the evidentiary requirements of Section 1515. Under Section 1515, a petition for recognition must be accompanied by: (1) a certified copy of the decision commencing such foreign proceeding and appointing the foreign representative; (2) a certificate from the foreign court affirming the existence of such foreign proceeding and of the appointment of the foreign representative; or (3) in the absence of evidence referred to in (1) and (2), any other evidence acceptable to the court of the existence of such foreign proceeding and of the appointment of the foreign representative. Additionally, the petition for recognition must be accompanied by a statement identifying all foreign proceedings with respect to the debtor that are known to the foreign representative. 

The objection argued that recognition was improper because it would severely impinge their Constitutional rights to due process, and is, therefore, in violation of U.S. public policy. Under Section 1506 of the Bankruptcy Code, a court can deny recognition of a foreign proceeding if recognition would be “manifestly contrary to the public policy of the United States.” 

Specifically, the objection alleged that the Japanese debtors failed to provide reasonable notice of the Japanese bar date to U.S. claimants. The Japanese cases were filed in Japan on June 26, 2017 and the bar date was set for August 26, 2017. However, the objection stated that certain Takata MDL Plaintiffs did not receive notice of the Japanese cases and the bar date until August 23, 2017. The objection emphasized that this short notice was exacerbated by the fact that all proofs of claim had to be filed in Japanese. Additionally, the objection argued that Japanese law imposes draconian fees on creditors who wish to press for allowance of their claims. The objection explained that if the Takata MDL Plaintiffs’ claims are initially disapproved by the Japanese debtors and then, upon summary review, disallowed by the Japanese court, then the Takata MDL Plaintiffs will be required to file complaints seeking reexamination of the disallowed claims. The fees for filing such complaints are calculated according to a formula based on the amount of the claims. Overall, the Takata MDL Plaintiffs argued that the alleged lack of notice of the bar date, the conditions for filing proofs of claim, and the costs of pursuing those claims were grossly unfair to U.S. based creditors and would amount to unconstitutional denial of due process in a U.S. proceeding. 

The objection also argued that the court could fashion relief to cure the alleged due process defects. In a joint stipulation, the parties agreed that the Takata MDL Plaintiffs filed class proofs of claim and individual proofs of claim. The parties also agreed that the Japanese debtor disapproved all of the Takata MDL Plaintiffs’ claims in their entirety. As to the class proofs of claim, the Japanese debtors asserted that such claims are not permitted in Japan. Nonetheless, the objection argued that recognition of the Japanese cases, as requested by the Japanese debtors, would effectively bar millions of claims by U.S. claimants without notice or an opportunity to be heard. As a result, the objection stated that the court could condition its recognition of the Japanese cases on the allowance of the Takata MDL Plaintiffs’ proofs of claims in the Japanese cases. 

The U.S Court Denied the Objection

While the court noted that it was sympathetic to the concerns expressed by the Takata MDL Plaintiffs with respect to the scope of notice and the opportunity to participate in the Japanese cases, it held that recognition of the Japanese cases would not be fundamentally contrary to U.S. public policy. The court considered the issue from the perspective of a hypothetical Japanese claimant in a U.S. case and found that U.S. bankruptcy courts would not accept a proof of claim unless it had been translated into English, and the local rule in Delaware, which follows the bankruptcy rule, only requires a 21-day claims bar date, less time than the 60 days that the Takata MDL Plaintiffs had to file their claims with the Japanese court. Additionally, it was not disputed that each of the Takata MDL Plaintiffs raising objections received actual notice, filed proof of claims in Japanese, and, most importantly, no objection has been raised to the timeliness of their claims. 

In the same vein, the court rejected the Takata MDL Plaintiffs’ request that the court tailor the recognition order to protect their rights. With respect to the Japanese debtors’ rejection of the class proofs of claim, the parties noted that there is a substantial issue as to whether or not such claims are available in Japan. The court found that there is no absolute right to a class proof of claim in the U.S. and the denial of a class proof of claim in the Japanese cases would not itself be manifestly contrary to U.S. public policy. Furthermore, the court found that while the request for a class proof of claim in Japan was initially disapproved, the process was not complete. Following the statement of disapproval, there is an assessment period and parties can request the Japanese court to overrule the debtors’ disapproval of the claims. Thus, the court held that it would not prejudge or assume that the proceeding will turn out one way or the other. 

Noting that Section 1517 of the Bankruptcy Code contemplates the process and mechanics for recognition of a foreign proceeding, the court found that Section 1517 is mandatory if such factors are met, subject only to the narrow public policy exception in Section 1506. The court found that all cases that have considered recognition have similarly observed that Chapter 15 does not require an identity of procedure and process and substantive law between the U.S. proceeding and a foreign proceeding. The court found that while the proceedings in the Japanese cases are different from those in the U.S., they are not remarkably different. As a result, the court held that recognition would not be manifestly contrary to U.S. public policy and granted the petition for recognition of the Japanese cases.

 

Footnotes

1) Dechert represented Takata prior to its bankruptcy filing and continues to act as ordinary course professional post petition.

 
 

This update is authored by:

 
Shmuel Vasser 
Partner, New York
T: +1 212 698 3691
shmuel.vasser@dechert.com
 
 

*The author would like to thank Alaina Heine for her contributions to this article.