In Advance Watch, SDNY Bankruptcy Court Offers How-To Guide on Serving Process on Foreign Defendants and Applies Broad Implied Consent Standard under Stern and Wellness

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In a recent opinion from the Bankruptcy Court for the Southern District of New York, Judge Glenn determined it was appropriate in three adversary proceedings to enter default judgments against foreign defendants that refused to answer the plaintiff’s summons and complaint. Kravitz v. Deacons (In re Advance Watch Co., Ltd.) offers a helpful tutorial for plaintiffs looking to serve process and other documents on foreign defendants. Moreover, the opinion confirms bankruptcy courts’ constitutional authority to enter final default judgments under Stern v. Marshall, and provides a warning to foreign defendants against taking an out-of-sight, out-of-mind approach to adversary proceedings in the U.S.

Background Facts

Peter Kravitz (the “Trustee”), the trustee for a creditor trust under the debtor’s confirmed chapter 11 plan, commenced avoidance actions against three foreign entities to recover prepetition preferential transfers of property. The defendants in the adversary proceedings – Deacons, Wheeler Corporation Ltd., and Display & Packaging Ltd. (each a “Defendant”) – all were domiciled in and subject to the laws of Hong Kong.

In each of the adversary proceedings, the Trustee took the same steps. First, he filed a complaint in the Bankruptcy Court and caused a summons to be issued to the Defendant, and then caused the bailiff’s assistant of the Hong Kong High Court to serve the summons and complaint on the Defendant. The Trustee also filed an accompanying proof of service.

Next, after not receiving a response to the complaint, the Trustee filed a request for entry of a certificate of default by the clerk of the Bankruptcy Court, which the clerk issued. The Trustee served the Defendant with the certificate of default by first class mail and filed an accompanying proof of service in the Bankruptcy Court. Still, the Defendant offered no response.

Finally, the Trustee filed a motion for entry of default judgment, supporting declaration, and notice of presentment of order for default judgment in the Bankruptcy Court. The Trustee served the Defendant with those documents by regular mail and filed an accompanying proof of service. Again, the Defendant offered no response.

Bankruptcy Court’s Authority to Enter Final Default Judgments

As a preliminary matter, Judge Glenn’s decision on whether to enter default judgments revolved around the interplay between Rule 55 of the Federal Rules of Civil Procedure1 and the Bankruptcy Court’s constitutional authority to enter final default judgments. Relevant here, Federal Rule 55(a) provides:

When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party’s default.

Rule 55(b)(1) further provides:

If the plaintiff’s claim is for a sum certain or a sum that can be made certain by computation, the clerk—on the plaintiff’s request, with an affidavit showing the amount due—must enter judgment for that amount and costs against a defendant who has been defaulted for not appearing and who is neither a minor nor an incompetent person.

Alternatively, under Rule 55(b)(2), a plaintiff may move for the bankruptcy judge rather than the clerk to enter a default judgment.

As readers of this blog know well, however, under the Supreme Court’s 2011 decision in Stern v. Marshall, bankruptcy courts lack constitutional authority to enter final judgments with respect to certain matters. Still, the Supreme Court clarified in Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) that litigants can impliedly consent to having a bankruptcy court enter final judgments regarding such matters, so long as such consent is knowing and voluntary.

With that constitutional and procedural backdrop, and consistent with his prior rulings, Judge Glenn held that Bankruptcy Courts have the constitutional authority to enter default judgments based on implied consent when a defendant fails to respond to a summons and complaint, and as applied to the case before him, the Bankruptcy Court could enter final default judgments against the Defendants if:

  1. The (a) summons and complaint, (b) certificate of default, and (c) motion for default judgment, supporting declaration, and notice of presentment were all properly served on the Defendants; and
  2. The Trustee’s motion for default judgment was for a sum certain or made certain by computation.

Proper Service and Proofs of Service

To analyze whether the Trustee properly served the Defendants with the summons and complaint, Judge Glenn looked to Rule 4 of the Federal Rules of Civil Procedure.2 Rules 4(f) and (h) articulate service of process requirements on foreign corporations, allowing plaintiffs to serve “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.” The Hague Convention, in turn, provides that the central authority of the foreign state must serve the documents “by a method prescribed by its internal law for the service of documents in domestic actions upon persons who are within its territory.”

Separately, Rule 4(l)(2)(A) sets forth the proof of service requirements for foreign corporations, incorporating the requirements enumerated in the applicable treaty or convention. Here, the Hague Convention provides that the central authority of the foreign state must complete a form certificate, which “shall state that the document has been served and shall include the method, the place and the date of service and the person to whom the document was delivered.”

Applying these rules to the facts at hand, Judge Glenn found that the Trustee properly served the Defendants with the summons and complaint. This paragraph and the next paragraph set forth the example for one of the Defendants. In compliance with the Hague Convention and Hong Kong’s High Court rules of service of process, the Trustee caused the bailiff’s assistant to personally serve a summons and complaint on the Defendant at its Hong Kong address. The Defendant’s secretary voluntarily accepted the service. The Trustee then obtained and filed a certificate confirming the date and place that the summons and complaint were served on the Defendant, and supplemented the certificate with an affidavit from the bailiff’s assistant identifying the method and recipient of service. Taken together, these facts satisfied Rule 4’s service requirements.

Judge Glenn then looked to Rule 5 of the Federal Rules of Civil Procedure3 to determine whether the Trustee properly served the Defendants with the remaining documents. Compared to Rule 4, Rule 5(b) provides greater flexibility and allows service of non-process documents to be made by mailing documents to a person’s last known address. Here, the Trustee mailed each of the certificate of default, motion for default judgment, supporting declaration, and notice of presentment to the Defendant’s last known address. The Trustee also filed a separate certificate of service certifying that the documents were mailed to the Defendant at its last known address. Accordingly, Judge Glenn held that service of those documents was proper.

Sums Certain

Lastly, the Trustee’s motion for default judgment sought $14,558.55 plus interest and costs, with such amount supported by a declaration and bank statements. Satisfied that such amount was a “sum certain” for Rule 55 purposes, that service of summons and complaint and other documents was proper, and noting that the Defendants all failed to respond or otherwise appear in the cases, Judge Glenn concluded that entry of default judgments against the Defendants was appropriate.

Takeaways

For plaintiffs, Advance Watch offers an excellent walkthrough of the necessary considerations and steps for providing service to foreign defendants (although, of course, one should consult counsel about the particularities of any individual situation). But the case also serves as a reminder to foreign defendants to take bankruptcy court adversary proceedings seriously. Turning a blind eye toward notices may constitute implied consent to entry of an adverse final default judgment.