Relevant Document:Opinion
Following a bench
ruling on Oct. 23, Judge John Gibney Jr. of the U.S. District Court for the Eastern District of Virginia today issued an opinion with respect to Fung Retailing Ltd.’s consolidated appeal of two bankruptcy court orders. Judge Gibney affirmed the bankruptcy court’s orders, finding that “
[b]ecause Fung has immersed itself in the bidding process in the United States from start to finish, the Bankruptcy Court properly exercised specific personal jurisdiction over Fung” (emphasis added).
Despite Fung’s “active participation in the bidding process in the United States to purchase the majority stake in an Asian company,” Fung “now argues that the Bankruptcy Court lacked personal jurisdiction over it” with respect to that very process, says the court in its ruling rejecting such argument.
Fung has filed a
notice of appeal of the district court’s ruling to the Fourth Circuit Court of Appeals.
Judge Gibney reviews that Fung has participated in the auction process since Lazard, as financial advisor to the Toys “R” Us debtors, first began marketing a majority interest in the Asia JV asset in March.
Fung “hung in the process” through three rounds of bidding, offering three decreasing bids: between $675 million and $775 million in the March 14 first round, $650 million and $750 million in the second round, and either $525 million or $700 million in the third round, depending on whether the sale included intellectual property, the opinion discloses (emphasis added). Fung did not participate in negotiations after the third round, the court says, adding that Fung’s counsel was “cagey” as to whether Fung quit bidding voluntarily or Lazard “dropped Fung from the process because of its decreasing bids.” The opinion also notes Fung’s significant participation in the due diligence process and says that “like all participants in the virtual [data] room,” Fung executed a confidentiality agreement in which it consented to jurisdiction in New York or the bankruptcy court for suits arising from violations of the terms.
After the TRU Taj creditors’ $760 million credit bid
was selected as the stalking horse and after the debtors moved the court to invalidate Fung’s right of first refusal included in the JV shareholder agreement, the opinion explains, Fung “jumped back into the fray to prevent the sale.” On Aug. 23 Fung filed a
limited jurisdictional objection arguing that the bankruptcy court lacked personal jurisdiction over Fung and on the same day commenced arbitration proceedings in Hong Kong.
The opinion notes that regardless of the ultimate sale price obtained in the bankruptcy sale, if Fung prevailed in the Hong Kong arbitration, it would be able to exercise its ROFR and have the Hong Kong arbitrators determine the value of the Asia JV stalking horse bid. According to the opinion this would “essentially encumber the asset sold by the Bankruptcy Court.” The court says that according to Fung, the arbitrator must determine the value of the stalking horse bid because Fung says “the true value differs from the stated amount of the bid, because the bidder (a TRU creditor) will pay part of the consideration by forgiving debt.”
Further, says Judge Gibney, Fung “tried to interfere in the Bankruptcy Court sale in another way,” by asking the arbitrator to require the proceeds of any sale to remain in the Asia JV instead of going through the bankruptcy court to TRU creditors.
In response to Toys’ Sept. 10
commencement of an adversary proceeding against it, Fung “tried another tactic” to impede the bankruptcy court’s sale of the asset, by securing an
ex parte injunction from the High Court of Hong Kong. Judge Gibney says Fung told the High Court it “needed to move fast (and without notice to its opponents) to avoid the effects of the Bankruptcy Court auction
that Fung had unsuccessfully participated in” (emphasis added). The High Court ultimately issued a temporary order prohibiting TRU from selling its majority stake in the JV absent a deposit sufficient to secure the payment of any award in favor of Fung.
The High Court’s temporary injunction expired on Oct. 12, states the opinion. While seeking this injunction, the opinion says Fung “continued to try to use the arbitration to foul up the auction” by filing an amended request for arbitration in Hong Kong on Sept. 18 “complaining - among other things” - that Toys wrongfully prevented Fung from conferring with other bidders during the bidding process.
Personal Jurisdiction
Judge Gibney determined that Fung submitted itself to the bankruptcy court’s personal jurisdiction on multiple grounds. First, he held that Fung “purposely availed itself of the privilege of conducting activities in the United States,” applying Fourth Circuit precedent in his analysis. Specifically, Judge Gibney notes that the parties’ arguments largely touch upon two of the several factors courts use to determine “purposeful availment” - whether Fung reached into the United States to “solicit or initiate business” and “the nature, quality and extent of the parties’ communications about the business being transacted.”
Addressing the first consideration, Judge Gibney determined that Fung “has actively and ‘repeatedly reached into’” the U.S. in connection with the proposed sale of the majority stake of the Asia JV taking place in the bankruptcy court. According to Judge Gibney, “
Fung did much more here than send a few sporadic emails to TRU and their advisors … Fung made its extensive contacts with a singular purpose in mind: to purchase the majority stake in the Asia JV in the Bankruptcy Court” (emphasis added). Specifically, Fung participated in three rounds of bidding and conditioned each bid on receiving orders from the bankruptcy court, submitted 279 due diligence requests to Lazard, accessed Lazard’s data room 1,200 times and downloaded 100,000 documents, notes the judge.
Further, Judge Gibney states that Fung signed a confidentiality agreement with the debtors in connection with the diligence process under which Fung agreed to “submit to jurisdiction in New York or the Bankruptcy Court” for any violation of that agreement. Therefore, Judge Gibney concludes,
“Based on Fung’s immersion in the bidding process, which forms the ‘gravamen of this dispute,’” Fung “‘should have reasonably anticipated being haled’” into court in the United States (emphasis added).
Judge Gibney next considers whether Fung’s activities in the U.S. formed “the basis of the dispute.” According to the judge,
“From the start, Fung has engaged in a ‘purposeful effort’ to buy the Asia JV and has immersed itself in the bidding process in the Bankruptcy Court” (emphasis added). Even though Fung tried to “disaggregate” its contacts in the U.S. with its contacts in Hong Kong, its “overall course of conduct” related to its desire to purchase the Asia JV, “by either winning or derailing” the bankruptcy auction, says Judge Gibney. Further, Judge Gibney states that after Fung made unsuccessful bids for the assets in the U.S., it commenced various legal proceedings designed “to thwart the bidding process.” Thus, the judge concludes, Fung “cannot now argue that TRU’s claims” do not arise out of its contacts with the U.S.
Finally, Judge Gibney finds that the bankruptcy court’s exercise of personal jurisdiction over Fung would be “constitutionally reasonable” because it would not be so unduly burdensome on Fung as to place them at a “severe[] disadvantage in comparison to [its] opponent” in the forum state.