Bankruptcy Court Can Enter Default Judgment Against Foreign Defendants in an Adversary Proceeding

On Jun 29, 2018, Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York issued an opinion in which he granted a motion for entry of default  judgment against foreign adversary proceeding defendants.  Peter Kravitz v. Deacons (In re Advance Watch Company, Ltd.), Case No. 17-01137 (MG). The plaintiff, a trustee of a creditor trust, sought to recover preferential transfers from three Hong Kong defendants pursuant to Sections 547 and 550 of the Bankruptcy Code.  The defendants were served personally with the summons and complaint at their Hong Kong address by a bailiff’s assistant of the High Court of Hong Kong.  The defendants’ secretary accepted service of process.  When none of the defendants answered or otherwise responded to the complaint, plaintiff moved for entry of default against each of them.  The certificate of default, the motion for entry of default and notice of presentment of default (the “Default Papers”) were served on each defendant in Hong Kong by U.S. Mail.  The defendants did not respond to or otherwise appear in connection with the Default Papers.  Accordingly, plaintiff moved for entry of default  judgment in accordance with Rule 55(a) of the Federal Rules of Civil Procedure (the “Civil Procedure Rules”) and Rule 7055 of the Federal Rules of Bankruptcy Procedure.

Judge Glenn’s analysis commenced with a review of his 2012 decision in Executive Sounding Board Assocs. v. Adv. Machine & Engineering Co. (In re Oldco M. Corp.), 484 B.R. 598 (Bankr. S.D.N.Y. 2012).  There, he concluded that “the failure to respond to a properly served adversary complaint constitute[s] implied consent for the entry of a final judgment by a bankruptcy judge,” such that “a bankruptcy judge has the constitutional authority to enter a final default judgment when the defendant fails to respond to the complaint.”  Id. at 612.  Judge Glenn then held in Oldco M. that implied consent was based on language in the summons expressly advising of the consequences of failing to respond to the complaint.  Id. In Advance Watch, Judge Glenn validated the holding of Oldco M. notwithstanding the Supreme Court’s decision in Wellness Int’l Network, Ltd. v. Sharif, 135 S.Ct. 1432 (2015), saying he “continues to believe that the analysis in Oldco M. Corp. is correct, permitting the Court to enter default judgments in all adversary proceedings in which a defendant has failed to respond to a properly served summons and complaint.”

Judge Glenn then examined whether the defendants, who all are domiciled in Hong Kong, were served properly.  Civil Procedure Rule 4(f)(1) provides that service on an individual in a foreign country may be obtained “by any internationally agreed means of service that is reasonably calculated to give notice, such as those authorized by the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents.”  In turn, courts have held that service on a foreign defendant in a signatory country must be accomplished pursuant to the Hague Convention.  Because Hong Kong is a Special Administrative Region of China, and China and the U.S. are both signatories to the Hague Convention, the Hague Convention applies to the Hong Kong defendants.

Judge Glenn found that service of the preference complaints on the defendants at issue was effectuated in accordance with The Hague Convention and Hong Kong’s High Court rules.  He also determined that plaintiff correctly served the defendants with the Default Papers.  Judge Glenn concluded that because plaintiff did everything “by the book,” he would enter default judgment in the amount requested.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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