Given the ever-increasing investment in the United States by foreign entities and the globalization of economic transactions, cross-border competence in relevant foreign law will become crucial for international firms. In particular, with the inevitable financial failures that arise from business transactions, companies, creditors, suppliers, lenders and their advisors and representatives will increasingly need to be familiar with the U.S. Bankruptcy Code. The following is an overview of the U.S. bankruptcy laws as they pertain to foreign entities with directly held assets or operations in the United States. In order to understand the best approach for any particular matter, however, a detailed review of the facts and issues of each particular case is necessary.

The Code provides the following four principal types of access to the bankruptcy courts of the United States for a foreign representative of a foreign proceeding:

(a) commencement of a case ancillary to a foreign proceeding under 11 U.S.C.§304(a) (the "ancillary case");

(b) commencement of a voluntary case under 11 U.S.C.§301 (the "voluntary case");

(c) commencement of an invol-untary case under 11 U.S.C.§303(b)(4) (the "involuntary case"); and

(d) dismissal of a case or sus-pension of all proceedings in a case under 11 U.S.C.§305(a)(2) and (b) (the "dismissed or suspended case");

Each of the foregoing will be discussed in greater detail below.

In order to initiate these cross-border procedures, the individual seeking relief must be a "foreign representative" as defined in 11 U.S.C.§101(24). A "foreign representative" is a "duly selected trustee, administrator or other representative of an estate in a foreign proceeding."¹ In addition, the debtor’s estate must be involved in a "foreign proceeding" as defined in 11 U.S.C.§101(23). A "foreign proceeding" is a "proceeding, whether judicial or administrative and whether or not under bankruptcy law, in a foreign country in which the debtor’s domicile, residence or place of business, or principal assets were located at the commencement of such proceeding, for the purpose of liquidating an asset, adjusting debts by composition, extension, or discharge, or effecting a reorganization."²

Generally, an ancil-lary case is com-menced to prevent the piecemeal distribution of foreign-owned assets to U.S. creditors where the foreign owner is otherwise already the subject of a foreign insolvency proceeding.³ An ancillary case is not a full blown chapter 7 or 11 proceeding but a procedure to assist a foreign representative for an entity in a foreign proceeding, which entity also has U.S. assets and/or liabilities.

Ancillary cases may be utilized for three principal purposes. First, such cases may be commenced to seek an injunction against creditors seizing assets in the United States of an entity that is the subject of a foreign proceeding or commencing or continuing a lawsuit or enforcing a judgment against an entity which is the subject of a foreign insolvency proceeding.⁴ Second, ancillary cases may be commenced to seek an order regarding turnover of property or money located in the United States to the foreign representative of a foreign proceeding.⁵ The foreign rep-resentative’s right to compel turnover of property or money will be determined pursuant to applicable foreign law, not U.S. bankruptcy law, and will only be determined after the U.S. bankruptcy court first determines whether to sustain the commencement of the ancillary case.⁶ Third, an ancillary case may be commenced to obtain any other appropriate relief.⁷

Other appropriate relief is very broad but includes, for example, permitting discovery of U.S. persons by the foreign representative or permitting the foreign representative to maintain certain foreign causes of action in the United States even if not specifically authorized by U.S. law.⁸

The right to maintain an ancillary case is not automatic. A U.S. bankruptcy court will either dismiss or permit an ancillary case to proceed pursuant to its analysis of the following six factors. First, the court must consider the just treatment of all creditors and equity security holders without a bias for or against resident or non-resident creditors or resident or non-resident equity security holders.⁹ Second, the court must consider the prejudice and inconvenience that will be experienced by U.S. creditors in processing their claims abroad in a foreign proceeding.¹⁰ Third, the court must consider whether the ancillary case will prevent preferential and fraudulent disposition of assets of the estate.¹¹ Fourth, the court must consider whether, in the foreign proceeding, proceeds of the estate will be distributed substantially in accordance with the order prescribed by the Bankruptcy Code.¹² Fifth, the court must consider the doctrine of comity, which provides deference to a foreign proceeding so long as the foreign proceeding is conducted in a manner that comports with United States’ standards of procedural and substantive fairness.¹³ Sixth, the court must consider the opportunity, if any, provided to an individual to obtain a fresh start in a foreign proceeding.¹⁴ In determining to sustain an ancillary case, a court must consider those factors, which given their number and nature provides a court with great flexibility in making such a determination. To date, a number of ancillary cases have been approved in the United States.¹⁵

A foreign person or entity who resides, has a domicile or a place of business, or property in the United States may commence a full blown bankruptcy proceeding in the United States (the "voluntary case").¹⁶ Such a case may be commenced by a foreign debtor even if it is already the subject of an insolvency proceeding in a foreign country.

A voluntary case is commenced by the filing of a voluntary petition. Although there are a few different types of bankruptcy petitions, business debtors typically file chapter 11 reorganization proceedings if they wish to attempt to reorganize their financial affairs.

Although a foreign person or entity may be the subject of a voluntary case while at the same time being the subject of a foreign insolvency proceeding, the Bankruptcy Code does not contain any rules or procedures for how a court should administer such a dual cross-border matter. Generally, three approaches have been utilized by U.S. courts to address issues arising from dual cross-border insolvency proceedings. First, a U.S. bankruptcy court may voluntarily cooperate with a foreign court, under notions of comity, to effectuate a smooth and efficient reorganization or liquidation.¹⁷ Second, a court might approve a formal written protocol or agreement entered into between the representatives of the debtor and a foreign representative, which written protocol or agreement would attempt to harmonize dual cross-border insolvency cases involving the same debtor.¹⁸ Third, some countries, although not yet the United States, have adopted treaties to address dual cross-border insolvency cases.¹⁹

A foreign representative of a foreign proceeding may, subject to certain conditions, commence an involuntary bankruptcy case (the "involuntary case") under either chapter 7 or chapter 11, against a debtor for which the foreign representative is serving as the representative for in the foreign proceeding.²⁰ Creditors of a foreign debtor are also permitted to commence an involuntary case against a foreign debtor assuming certain statutory conditions are satisfied. One principal condition a petitioning party in an involuntary case must satisfy is to demonstrate either (i) that the debtor is generally not paying such debtor’s debts unless such debts are the subject of a bona fide dispute; or (ii) within 120 days before the date of the involuntary case a custodian was appointed for the debtor.²¹ If a involuntary case is sustained by the court, it proceeds just like a voluntary case. If it is not approved, it will be dismissed.

A court may dismiss or suspend a voluntary, an involuntary or an ancillary case (i) if there is a pending foreign proceeding; and (ii) the six factors discussed earlier with respect to ancillary cases warrant dismissal or suspension (the "dismissed or suspended case").²² A foreign representative may make a limited appearance in the United States to seek dismissal or suspension of a case without consenting to jurisdiction in the United States.²³

This article provides an orientation to the U.S. bankruptcy system as it pertains to cross-border insolvency cases. A familiarity with the ancillary case will be particularly important for interested parties, because filing an ancillary case is quicker and less expensive than filing a voluntary case.

Footnotes

¹11 U.S.C.§101(24) (West 1993). See In re Kingscroft, 138 B.R. 121 (Bankr. S.D. Fla. 1992) (Boards of Directors of companies undergoing winding-up proceedings under United Kingdom and Bermuda law qualified as foreign representatives). Return to text.

² 11 U.S.C.§101(23). See In re Tam, 170 B.R. 838 (Bankr. S.D.N.Y. 1994) (a voluntary wind-up supervised only by the debtor corporation, although permitted under Cayman Islands law, did not qualify as a "foreign proceeding"). Return to text.

³Collier on Bankruptcy ô304.03 (Lawrence P. King ed., 15th ed., 1997). Return to text.

⁴11 U.S.C.§304(b)(1). Return to text.

⁵11 U.S.C.§304(b)(2). Return to text.

⁶See Koreag, Controle et Revision S.A. v. Refco F/X Assocs. Inc. (In re Koreag, Controle et Revision S.A.), 130 B.R. 705 (Bankr. S.D.N.Y. 1991), vacated, 961 F.2d 341 (1992), and cert. denied, 506 U.S. 865. Issues related to property rights and property ownership are determined, however, pursuant to the law of the state in which the case is being heard. Return to text.

⁷11 U.S.C.§304(b)(3). Return to text.

⁸Section 304(b)(3) should be read expansively. See Collier on Bankruptcy ô304.07. See In re Brierley, 145 B.R. 151, 160 (Bankr. S.D.N.Y. 1992); Universal Casualty & Surety Co. Ltd. v. Gee (In re Gee), 53 B.R. 891 (Bankr. S.D.N.Y. 1985) (petition seeking only discovery was found to be consistent with "other appropriate relief"). Return to text.

⁹11 U.S.C.§304(c)(1). See In re Papeleras Reunidas S.A., 92 B.R. 584 (Bankr. E.D.N.Y. 1988) (petition to commence an ancillary case denied in part because lienholder was not a "creditor" under Spanish law).Return to text.

¹⁰ 11 U.S.C.§304(c)(2). See In re Rubin, 160 B.R. 269 (Bankr. S.D.N.Y. 1993) (condition satisfied because U.S. creditor had already availed itself of protection of foreign proceeding). The burden of traveling outside the United States or the costs of litigation are not sufficient inconveniences for the denial of a petition. See In re Brierley, 145 B.R. at 160. Return to text.

¹¹ 11 U.S.C.§304(c)(3). See Metzeler v. Bouchard Transp. Co. Inc. (In re Metzeler), 78 B.R. 674 (Bankr. S.D.N.Y. 1987) (court held that preferential and fraudulent transfer actions in foreign proceeding provided adequate protection for U.S. creditors). Return to text.

¹² 11 U.S.C.§304(c)(4). See In re Hourani, 180 B.R. 58 (Bankr. S.D.N.Y. 1995) (condition not satisfied because Jordanian law did not recognize a distinction between secured and unsecured creditors); In re Tam, 170 B.R. 838. Return to text.

¹³ 11 U.S.C.§304(c)(5). There is disagreement in the courts as to how comity should be weighed relative to other factors. See In re Koreag, 130 B.R. 705 (the bankruptcy court weighed comity more heavily than the other factors, but this issue was not addressed on appeal), vacated, 961 F.2d 341, and cert. denied, 506 U.S. 865; In re Toga Mfg. Ltd., 28 B.R. 165 (Bankr. E.D. Mich. 1983).Return to text.

¹⁴ 11 U.S.C.§304(c)(6). Return to text.

¹⁵ See, e.g., Allstate Life Ins. Co. v. Linter Group Ltd., 994 F.2d 996 (2nd Cir. 1993), cert. denied, 510 U.S. 945 (1993); In re Kingscroft Ins. Co. Ltd., 138 B.R. 121; In re Brierley, 145 B.R. at 166-67; In re Gercke, 122 B.R. 621, 630-31 (Bankr. D.D.C. 1991). Return to text.

¹⁶ 11 U.S.C.§301. Return to text.

¹⁷ See Hilton v. Guyot, 159 U.S. 113, 164 (1895) (comity defined); In re Axona Int’l Credit & Commerce Ltd., 88 B.R. 597 (Bankr. S.D.N.Y. 1988), aff’d, 115 B.R. 442 (S.D.N.Y. 1990), and appeal dismissed, 924 F.2d 31.Return to text.

¹⁸ See In re Maxwell Communication Corp. plc, 170 B.R. 800 (Bankr. S.D.N.Y. 1994), aff’d, 186 B.R. 807 (1995), and aff’d, 93 F.3d 1036 (1996). Return to text.

¹⁹ H. S. Burman, "Harmonization of International Bankruptcy Laws: A United States Perspective", 64 Fordham L. Rev. 2543, 2544 (1996) (U.S. not a signatory to any international treaties).Return to text.

²⁰ 11 U.S.C.§303(b)(4). See, e.g., Interpool Ltd. v. Certain Freights of The M/VS Venture Star, Mosman Star, Fjord Star, Lakes Star, Lily Star, 102 B.R. 373 (D.N.J. 1988), appeal dismissed, 878 F.2d 111 (1989).Return to text.

²¹ 11 U.S.C.§303(h).Return to text.

²² 11 U.S.C.§305(a)(2) - (b). For the six factors, see supra notes 9-14 and accompanying text. Return to text.

²³ 11 U.S.C.§306.Return to text.