Salyer v Sheahan and Lock, in the matter of SK Foods Australia Pty Ltd

BRADLEY D. SHARP AS TRUSTEE IN BANKRUPTCY OF SK FOODS LP, A CALIFORNIA LIMITED PARTNERSHIP (UNDER CHAPTER 11)

ROBERT C. GREELEY AS RECEIVER APPOINTED BY THE UNITED STATES BANKRUPTCY COURT

JUDGE: EMMETT J DATE: 6 JUNE 2012 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The applicants seek orders under s 581 of the Corporations Act 2001 (Cth) (the Act) in relation to orders made by the United States Bankruptcy Court. Section 581(1) of the Act provides, relevantly, that the Federal Court, the judges of the Federal Court, and the officers of or under the control of the Federal Court must act in aid of, and be auxiliary to, each other in all external administration matters. Section 581(2) relevantly provides that, in all external administration matters, the Court must act in aid of, and be auxiliary to, the courts of prescribed countries that have jurisdiction in external administration matters. Under s 581(3), where a letter of request from a court of a country other than Australia, requesting aid in an external administration matter, is filed in the Federal Court of Australia, the Federal Court may exercise such powers with respect to the matter as it could exercise if the matter had arisen in its own jurisdiction. Under s 580 of the Act, external administration matter includes a matter relating to winding up, outside Australia, a body corporate, or to the insolvency of a body corporate. Section 580 also provides that a prescribed country means a country prescribed under the Corporations Regulations 2001 (Cth) (the Regulations) for the purpose of that definition. Under reg 5.6.74 of the Regulations, the United States is a country prescribed for that purpose. 2 The first plaintiff, Mr Bradley D. Sharp, was appointed as trustee in bankruptcy of SK Foods LP on 14 May 2009. That appointment was approved on 18 May 2009 by the United States Bankruptcy Court. The second plaintiff, Mr Robert C. Greeley, has, at the behest of Mr Sharp, been appointed receiver of diverse assets by the United States Bankruptcy Court. The Federal Court has received three letters of request from the honourable Robert S. Bardwil, in his capacity as a judge of the United States Bankruptcy Court for the Eastern District of California. All three letters of request have been issued in case number 09-29162-D-11 in the United States Bankruptcy Court, Eastern District of California, Sacramento Division. Case number 09-29162-D-11 (the Chapter 11 Case) is a proceeding brought under Chapter 11 of the United States bankruptcy legislation in relation to SK Foods LP. The three letters of request relate to separate adversary proceedings brought in the Chapter 11 Case. Each letter of request relates to the recognition of the appointment of Mr Greeley as receiver of certain assets that are the subject of a different adversary proceeding in the Chapter 11 Case. Before describing the specific orders that are the subject of the letters of request, it is desirable to say something about SK Foods LP, and the various other companies that are the subject of proceedings in the Chapter 11 Case, as well as other proceedings in the Federal Court. 3 At all material times prior to the appointment of Mr Sharp, SK Foods LP was recorded in the share register of SK Foods Australia Pty Limited (SK Foods Australia) as the legal and beneficial owner of 100 shares in the capital of SK Foods Australia. Mr Scott Salyer was registered as the owner of one issued share in the capital of SK Foods Australia. SK Foods Australia was also the legal and beneficial owner of the issued shares in the capital of Cedenco JV Australia Pty Limited (Cedenco JV). The principal business of SK Foods Australia and Cedenco JV was the carrying on of an unincorporated partnership under the name Cedenco Australia (the Cedenco Partnership). The principal business of the Cedenco Partnership was the processing of tomatoes into tomato paste, diced tomatoes, and other products. 4 SS Farms LLC was, at material times, registered as the owner of all of the issued shares in SS Farms Australia Pty Limited (SS Farms Australia). The business of SS Farms Australia was to grow tomatoes for the purposes of supplying them to the Cedenco Partnership. SS Farms Australia had no employees, and the employees of the Cedenco Partnership managed and undertook the business of SS Farms Australia. As and when required, the Cedenco Partnership provided loans to SS Farms Australia for working capital, and to finance losses incurred by SS Farms Australia. 5 Commencing from about August 2005, SK Foods LP and related entities operating in the United States were subject to a criminal investigation conducted by the United States Federal Bureau of Investigation (FBI), Internal Revenue Services Criminal Investigations Division (IRS), the Office of Inspector General, Food and Drug Administration (FDA), and the Department of Justice, Antitrust Division. The subject of that investigation included Mr Salyer's participation in a number of matters, including the payment of bribes by employees or agents of SK Foods to the purchasing officers of customers of SK Foods, the payment of bribes by employees or agents of SK Foods to officers of customers of SK Foods to obtain confidential information about competitors' bids or tenders, the widespread selling and shipping of tomato products that did not meet contractual specifications or were adulterated with mould at levels exceeding limits prescribed by the FDA, and the falsification of documentation to disguise the adulteration levels in order to comply with FDA limits, or to make products appear as though they were contractually compliant. The criminal investigation of Mr Salyer and the SK Foods group became overt on 16 April 2008, when the FBI, the IRS, and the FDA executed numerous, judicially authorised search warrants in the states of California and New Jersey. 6 After the appointment of Mr Sharp as trustee in bankruptcy of SK Foods LP, various transfer forms and other documents were signed, at the direction of Mr Salyer, purporting to transfer the 100 shares in SK Foods Australia held by SK Foods LP to SKPM Corporation, a California corporation, as to 55.45 per cent, and to the Scott Salyer Revocable Trust (the SSR Trust), of which Mr Salyer's family are the beneficiaries, as to the remainder. At the same time as those 100 shares were purportedly transferred, there was also purportedly assigned to the SSR Trust and to Fast Falcon LLC a debt of over $18 million owing to SK Foods LP by SK Foods Australia (the Intercompany Receivable). 7 In the meantime, liquidators were appointed to SK Foods Australia. SK Foods LP lodged a proof of debt in respect of the Intercompany Receivable. The liquidators partially admitted the proof of debt, and set off from the amount admitted debt an amount of approximately $8.7 million, said to be a contra debt owing by SK Foods LP to Cedenco JV. That resulted in a net admitted debt owing to SK Foods LP of approximately $9.13 million. SK Foods LP has appealed from the decision of the liquidators to set off the alleged contra debt. That appeal is still on foot in the Federal Court. 8 SSR Trust and Fast Falcon LLC have lodged separate proofs of debt, claiming to be owed the Intercompany Receivable. The liquidators rejected those proofs of debt. An appeal against the liquidators' decision has now been dismissed for want of prosecution (see Salyer v Sheahan and Lock, in the matter of SK Foods Australia Pty Ltd (in liquidation) [2012] FCA 734). 9 SS Farms Australia is also in liquidation, and there is likely to be a significant distribution to the shareholders of SS Farms Australia. Mr Sharp claims that the shares in SS Farms Australia are beneficially owned by SK Foods LP. 10 There is complex litigation in United States Bankruptcy Court, presently being managed by Judge Bardwil. On 15 September 2011, Judge Bardwil granted a preliminary injunction against various parties, restraining them from dealing with the 100 shares in SK Foods Australia, and restraining them from dealing with the right to payment of the Intercompany Receivable. Judge Bardwil has expressed the view that that preliminary injunction is not worth the paper it is printed on to the defendants. Judge Bardwil also observed that the bankruptcy of SK Foods LP has been plagued by "the chicanery that the defendants have repeatedly engaged in, in their aggressive, ongoing effort to divert and dissipate assets that would otherwise be available" to Mr Sharp as trustee in bankruptcy. Accordingly, Judge Bardwil appointed Mr Greeley as receiver of the various assets to which I have made brief reference. 11 In the Chapter 11 Case, there are currently three sets of adversary proceedings. In those proceedings, Mr Sharp as trustee in bankruptcy claims recovery of assets from various entities associated with Mr Salyer. The claims include the following: first, the claim in respect of the 100 shares issued by SK Foods Australia; secondly, the claim over the Intercompany Receivable; and thirdly, claims concerning recovery of assets held by other entities related to Mr Salyer, including the shares in SS Farms Australia held by SS Farms LLC. Each of those claims is the subject of the separate appointment of Mr Greeley as receiver. 12 On 6 March 2012, Judge Bardwil made an order in adversary proceeding 11-2337. On 7 May 2012, he made an order in adversary proceeding 12-2169, and on 10 May 2012 he made an order in adversary proceedings 09-2692, 10-2014, and 10-2016. Those three orders might conveniently be referred to respectively as the SKPM Receiver Order, the Fast Falcon Receiver Order, and the SS Farms Receiver Order. The first relates to the shares in SK Foods Australia, the second relates to the Intercompany Receivable, and the third relates to the shares in SS Farms Australia. 13 The evidence in support of the present application includes a declaration made on 23 May 2012 by Mr Gregory Nuti, a partner of the firm of Schnader Harrison Segal & Lewis LLP, who are acting for Mr Sharp. Mr Nuti said in his declaration that, at that date, the SKPM Receiver Order was final and not subject to any appeal. On 12 May 2012, SS Farms LLC and the other defendants in the relevant proceeding filed a notice of appeal from the SS Farms Receiver Order. That appeal remains pending in the United States District Court for the Eastern District of California. On 14 May 2012, Fast Falcon LLC filed a notice of appeal from the Fast Falcon Receiver Order. That appeal also remains pending in the United States District Court for the Eastern District of California. However, notwithstanding the appeals, both the SS Farms Receiver Order and the Fast Falcon Receiver Order remain in full force and effect. Mr Nuti is not aware of any fact, matter, or circumstance affecting the validity or enforceability of any of the SKPM Receiver Order, the Fast Falcon Receiver Order, or the SS Farms Receiver Order. 14 SK Foods LP is a California limited partnership, which is governed by the California Corporations Code. Title 2 of that Code deals with limited partnerships. Chapter 5.5 of title 2 enacts the Uniform Limited Partnership Act of 2008. Section 15901.04 of the Code, being part of the Uniform Limited Partnership Act of 2008, relevantly provides that a limited partnership is an entity distinct from its partners, and that a limited partnership has perpetual duration. Under s 15901.105 of the Code, a limited partnership has the power to do all things necessary or convenient to carry on its activities, including the power to sue, be sued, and to defend in its own name and maintain an action against a partner for harm caused to the limited partnership by a breach of the partnership agreement or violation of a duty to the partnership. 15 Under Californian law, a limited partnership is a distinct legal entity, separate from its individual partners, has perpetual duration, can be sued and be sued, and can be administered in bankruptcy under Chapter 11 of the Bankruptcy Code in a manner no different from any other legal entity recognised under the law of the United States. Mr Nuti has been informed by Mr Sharp, and believes, that SK Foods LP is insolvent and has liabilities exceeding assets by approximately USD $250 million. 16 In the light of that evidence, I am satisfied that SK Foods LP is a body corporate. I am also satisfied that each of the adversary proceedings to which I have referred is a matter relating to the insolvency of SK Foods LP. 17 In all of the circumstances, I am satisfied that s 581(2) and s 581(3) of the Act have been enlivened by the receipt by the Federal Court of the three letters of request from Judge Bardwil in his capacity as a judge of the United States Bankruptcy Court. I consider, therefore, that it is appropriate to make orders that the SKPM Receiver Order, the Fast Falcon Receiver Order and the SS Farms Receiver Order be recognised, and that the appointment of Mr Greeley as receiver of the respective assets described be recognised. Each letter of request identifies the specific assets to which Mr Greeley is appointed by the relevant order, and it is appropriate that possession and control of those assets be vested in Mr Greeley, and that he be given expressly the powers conferred upon him by the United States Bankruptcy Court. I therefore propose to make orders along the lines sought in the originating process. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.