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Fung Retailing Ltd. v. Toys "R" US, Inc.

United States District Court, E.D. Virginia, Richmond Division

October 25, 2018

TOYS "R" US, INC., et ah, Appellees.


          John A. Gibney, Jr., United States District Judge.

         Fung Retailing Limited ("Fung") appeals two orders of the United States Bankruptcy Court for the Eastern District of Virginia (the "Bankruptcy Court"). 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 process. Because 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. Accordingly, the Court AFFIRMS the decisions of the Bankruptcy Court.[1]

         I. BACKGROUND

         In September, 2017, Toys "R" Us declared bankruptcy.[2] Since then, the Bankruptcy Court has devoted considerable efforts to liquidate TRU's assets. Among other things, the court has been overseeing the sale of TRU's majority interest in Toys (Labuan) Holding Limited (the "Asia JV"), which operates Toys "R" Us stores in Asia. Fung, a company incorporated and headquartered in Hong Kong, owns a 15.13% stake in the Asia JV. TRU (UK) Asia Limited (the "TRU Asia JV Partner"), a corporate subsidiary of TRU, owns the other 84.87% stake. A shareholders' agreement between Fung and the TRU Asia JV Partner governs the Asia JV.

         Lazard, Freres & Co. LLC ("Lazard"), TRU's New York-based financial advisor, has shepherded the sale of the TRU Asia JV Partner's majority interest in the Asia JV. To accomplish the sale, Lazard conducted a lengthy process that combined aspects of negotiations and auctions. In March, 2018, Lazard began to seek bidders for the asset. Interested parties would tell Lazard how much they would likely pay, and what conditions of sale they would demand. Lazard conducted several rounds of bidding, and after each round, it whittled down the number of participating bidders. Fung, among others, submitted "Non-Binding Indications of Interest" in the rounds of bidding. Fung hung in the process through three rounds. It submitted three decreasing bids: Fung offered between $675 and $775 million on March 14, 2018, between $650 and $750 in the second round, and either $525 or $700 million in the third.[3] Fung conditioned each bid on receiving favorable orders from the Bankruptcy Court. The proposed orders would insure that Fung got clear title to the asset, and would include findings of good faith and other protections under the Bankruptcy Code.

         After the third round of bidding supervised by Lazard, Fung no longer participated in the negotiations. Fung's counsel was cagey about whether Fund quit bidding voluntarily or Lazard dropped Fung from the process because of its decreasing bids. Either way, the bidding continued among other potential buyers, and Lazard eventually selected a "stalking horse" purchaser for a court supervised auction. The stalking horse set a bottom line for the auction by agreeing to buy the TRU Asia JV Partner for $760 million, pursuant to certain terms (the "Stalking Horse Bid"). Lazard selected certain of TRU's creditors as the stalking horse.

         The bidding process involved the exchange of large amounts of information as the bidders conducted due diligence investigations. Given the size of the asset and the expected enormous bids, Lazard set up a virtual data room where bidders could get business documents and ask questions about the sale before bidding. Fung was among the first entities to express interest in the sale and to participate in the virtual room. Lazard ultimately granted 72 Fung representatives access to the room.[4] From March to August 2018, Fung submitted 279 due diligence requests to Lazard. Fung logged into Lazard's diligence data room approximately 1, 200 times and downloaded approximately 100, 000 documents from the data room. Fung's United States-based legal and financial advisors also sent 100 emails to Lazard and had 15 phone conferences with Lazard.

         On August 4, 2018, TRU took steps to move ahead with the sale of the TRU Asia JV Partner's interest. TRU moved the Bankruptcy Court to invalidate Fung's Right of First Refusal ("ROFR") in the Partner's interest, which Fung held pursuant to a shareholder's agreement with the Partner. TRU also moved the Bankruptcy Court to approve the Stalking Horse Bid.

         Although Fung had dropped out of the bidding process, at this point it jumped back into the fray to prevent the sale. Fung claimed to be concerned because the Stalking Horse Bid would strip the TRU Asia JV Partner of all its assets. On August 23, 2018, therefore, Fung filed a limited jurisdictional objection to TRU's motion, arguing that the bankruptcy court lacked personal jurisdiction over Fung and could not invalidate its ROFR.

         On the same day, Fung commenced arbitration in Hong Kong against the TRU Asia JV Partner for breach of the shareholders' agreement. In this proceeding, Fung asked arbitrators declare that, regardless of the outcome of the bankruptcy sale, it could still exercise its ROFR. It also asked the arbitrators to determine the value of the Stalking Horse Bid, [5] which would trigger the amount Fung would need to pay to exercise its ROFR. If Fung prevailed on its argument, it would essentially encumber the asset sold by the Bankruptcy Court.

         Fung tried to interfere in the Bankruptcy Court sale in another way. It asked the arbitrator to require the proceeds of any sale to remain in the Asia JV, instead of going through the Bankruptcy Court to TRU's creditors.

         The Bankruptcy Court held a hearing on TRU's motion to invalidate the ROFR on September 6, 2018. At the hearing, the court declined to invalidate the ROFR and overruled Fung's personal jurisdiction objection. The court noted "the immersion of Fung in the bidding process," and the execution of the confidentiality agreement. A. 383-84. By these actions, it held, Fung had "subject[ed] itself to the process that's being supervised by this Court." A. 384. On September 14, 2018, the court entered an order approving the Stalking Horse Bid and scheduling a final sale hearing, which will occur on November 5, 2018 (the "Bidding Procedures Order").

         On September 10, 2018, TRU commenced an adversary proceeding against Fung in the Bankruptcy Court and filed an expedited motion to (1) extend the automatic stay as to the Asia JV and the TRU Asia JV Partner and (2) enjoin Fung from continuing the Hong Kong arbitration.[6]

         In response, Fung tried another tactic to impede the Bankruptcy Court's sale of the asset. Fung secured an ex parte injunction from the High Court of Hong Kong on September 18, 2018. Fung told the High Court that 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. Fung said "the U.S. Court will (on 20 September 2018) make an order on the Second U.S. Application, the objective of which will be to seek to fetter the ability of [Fung] to appear again before this Court for the purpose of pro-actively seeking a continuation of any time-limited ex parte injunction granted on this application." A. 738 If 81. On the same day, the High Court issued a temporary order, prohibiting TRU from selling the majority stake in the Asia JV unless the TRU Asia JV Partner "deposit[s] an amount to be determined by the Court or the Arbitration tribunal sufficient to secure the payment of any award in favor of Fung." A. 763.

         At the same time, Fung continued to try to use the arbitration to foul up the auction. On September 18, 2018, Fung filed an amended request for arbitration in Hong Kong, complaining-among other things-that TRU had wrongfully prevented Fung from conferring with other bidders during the bidding process in the Bankruptcy Court.[7] Fung also indicated that its request "was necessitated by developments in the Bankruptcy Court and the Chapter 11 Cases," referring to the Bidding Procedures Order and TRU's motion for injunctive relief in the Bankruptcy Court. A. 750-51 ¶ 19.

         Fung also continued to participate in the bankruptcy proceeding, primarily by protesting that the court lacked jurisdiction over it. Over Fung's objections, the Bankruptcy Court granted TRU's motion for a preliminary injunction at a hearing on September 27, 2018, reaffirming that the court had personal jurisdiction over Fung (the "Injunction Order"). According to the Bankruptcy Court,

Fung's commencement of arbitration proceedings in Hong Kong before the September 6th hearing and in connection with its ex parte injunction relief. . . were in direct response to the Court's September 6th ruling, and directly are related to the bidding procedures and represent a bidder's attempt to gain control of, and perhaps, even manipulate the bidding process.

A. 972-73. The Injunction Order prohibits Fung from initiating or continuing any proceedings in Hong Kong "relating to the bidding process until the earlier of (a) consummation of a plan of reorganization for [TRU], or (b) December 31, 2018, subject to further extension by the Court." A. 1027 ¶ 3. The High Court's temporary injunction expired on October 12, 2018.

         In this appeal, Fung challenges the Bidding Procedures Order[8] and the Injunction Order.[9] Although Fung appeals from two different orders, Fung solely objects to the Bankruptcy Court's personal jurisdiction finding. Fung moved to consolidate and expedite the appeals. TRU moved to dismiss Fung's appeals, arguing that Fung must first file leave to appeal because the Bankruptcy Court's findings of personal jurisdiction do not qualify as final orders. The Court granted Fung's motion to expedite the ...

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