Trikona Advisers, Ltd. v. Chugh, 846 F.3d 22 (2d Cir. 2017) [click for opinion]

This case arises out of a messy business divorce and related litigation. Plaintiffs-Appellees, Aashish Kalra on behalf of Trikona Advisors (“TAL” or “Kalra”) and Defendants-Appellees Rakshitt Chugh, ARC Capital LLC, and other related corporate entities (“Chugh”), were former business partners in TAL’s real estate investment business. The 2008 economic crisis took its toll on TAL, and soured the relationship between Chugh and Kalra. TAL’s board of directors voted to expel Chugh from the business, even though Chugh still owned a sizable portion of outstanding shares. TAL then continued its operations as if all of its assets belonged to the beneficial owners of TAL, and not Chugh.

Out of these facts spawned several pieces of litigation, two of which are relevant for the issues presented in this case: a wind-up proceeding in the Cayman Islands and the federal civil suit in Connecticut that is the subject of this appeal.

As part of the wind-up proceeding, the Grand Court of the Cayman Islands granted Chugh’s motion to liquidate the business of TAL and divide its assets among its shareholders. Chugh claimed that (1) TAL had experienced a “loss of substratum,” i.e. a loss of its ability to “carry on the business for which it was established,” due to its dire financial condition; (2) TAL had wrongfully caused Chugh to be removed from TAL’s board; and (3) after he had removed Chugh from the board, Kalra proceeded to misuse TAL’s assets for his sole benefit.

In response, Kalra/TAL asserted the following affirmative defenses: (1) Chugh intentionally sabotaged a portion of TAL’s business; (2) Chugh later prevented TAL from bringing suit against a third party relating to the alleged sabotage, over Kalra’s objections; (3) Chugh forced Kalra to agree to an unfavorable settlement of an arbitration arising out of a failed business venture; and (4) Chugh stole TAL’s assets and customer information for use in establishing his own business and interfered in the distribution of payments due to Kalra.

The Grand Court of the Cayman Islands found for Chugh and against Kalra on all of Kalra’s affirmative defenses, ordering TAL to be wound up and its assets to be distributed among its shareholders (including Chugh and Kalra).

Meanwhile, two months before the commencement of the wind-up proceeding, TAL/Kalra brought an action in district court in Connecticut, alleging Chugh breached his fiduciary duty to TAL by undertaking all of the actions forming the basis of TAL’s affirmative defenses in the wind-up proceeding. After the ruling in the Cayman Islands, the district court granted summary judgment in favor of Chugh on collateral estoppel grounds.

The district court ruled that because Kalra had framed his assertions against Chugh as a jurisdictional defense based on unclean hands, he had effectively argued that the Cayman court was required to dismiss Chugh’s petition for lack of jurisdiction if that court accepted any of his claims as true. Because success on any single claim of fiduciary breach by Chugh would necessitate a finding of unclean hands and thus bar the petition, the Cayman court’s findings on these claims were “essential” to the outcome of the petition. And since the factual basis for these claims mirror the factual basis of the claims in this case, the district court granted summary judgment for Chugh on collateral estoppel grounds.

TAL appealed, arguing the following five bases: (1) the district court was precluded by Chapter 15 of the United States Bankruptcy Code from applying collateral estoppel to the findings of fact from the wind-up proceeding; (2) the district court incorrectly gave preclusive effect to the Cayman court’s findings of fact because those findings were not “essential” to its judgment; (3) the Cayman court’s findings of fact cannot have preclusive effect in the district court because the wind-up proceeding was an in remproceeding, while the district court proceeding is in personam; (4) TAL and the respondents in the wind-up proceeding are not in privity with each other; and (5) the district court erred in granting comity to the judgment of the Cayman court because doing so was contrary to United States national policy. The Second Circuit denied each of these bases, affirming the decision of the district court. In response to TAL’s first argument, the Second Circuit explained that Chapter 15 normally requires a foreign representative of a debtor to first apply for recognition before a U.S. court will assist in a foreign bankruptcy proceeding. However, Chapter 15 does not apply when a court in the United States simply gives preclusive effect to factual findings from an otherwise unrelated foreign liquidation proceeding.

In response to TAL’s second argument, the Second Circuit found that since the affirmative defenses asserted by TAL in the Cayman court would have been dispositive of the Cayman wind-up proceeding, they were, in fact, “essential” to its judgment, and they could, therefore, preclude TAL from pursing the instant claims on the basis of collateral estoppel.

The Second Circuit found TAL’s third, jurisdictional-based arguments meritless, citing the Second Restatement of Judgments for the proposition that in rem proceedings do have preclusive effect in subsequent in personam suits where parties to the subsequent suits were represented in the prior in rem proceeding.

Next, the Second Circuit denied TAL’s fourth grounds for appeal on the basis of privity, concluding that while the parties in the wind-up proceeding and the district court proceeding were not identical, they were nearly so, and TAL made no effort to show that its interests were not identical to the only party present in the Cayman case not present in this one.

Finally, the Second Circuit denied TAL’s fifth, and final, grounds for appeal, finding that granting comity to the judgment from the Cayman court was warranted given the strong presumption in favor of granting comity to foreign judgments and TAL’s failure to provide any argument, in law or policy, in support of its contention that comity would be inappropriate in this case.