How Well Does the U.S. Bankruptcy Code Support the Emerging Standards of Comity in Cross-border Insolvencies

How Well Does the U.S. Bankruptcy Code Support the Emerging Standards of Comity in Cross-border Insolvencies

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In this column in the July/August 1997 issue of the ABI Journal, Bruce Leonard reported on the recent adoption by the United Nations Commission on International Trade Law (UNCITRAL) of a Model Law on Cross-border Insolvencies (the "Model Law"). The goal of the Model Law is to foster a higher level of cooperation between courts in cross-border insolvencies. If adopted by a critical mass of nations, the Model Law would certainly go a long way to accomplishing that goal, although a lack of uniformity among nations on other issues of substantive and procedural law (most notably, conflicts of law) would still pose significant problems for international harmony in the insolvency arena.

Short of a utopian world with uniform and harmonized insolvency laws, one must rely on the dictates of each nation's disparate domestic laws to smooth international friction in multi-state insolvencies. The obvious question for any U.S. practitioner interested in international insolvency issues is how well does the U.S. Bankruptcy Code foster international cooperation and harmony. The answer is not that encouraging.

The Bankruptcy Code contemplates both a "full" bankruptcy case under U.S. law (invoking the entire panoply of rights, powers and remedies under its various chapters, including liquidation under chapter 7 and reorganization under chapter 11) and an "ancillary proceeding" under §304. The latter is essentially a U.S.-based case that serves as an adjunct to a "foreign proceeding" in which a U.S. bankruptcy court, in its discretion, may enter certain injunctions and turnover orders or grant other appropriate relief in aid of the foreign proceeding.

The eligibility requirement for being a debtor in a "full" U.S. case is found in §109(a). This section permits any person "that resides or has a domicile, a place of business or property in the United States" to commence such a case. The statute on its face and case law interpreting the statute is clear that the debtor need not have a principal place of business in the United States nor the majority, or even a substantial portion, of its assets within the United States to qualify. Any place of business and, apparently, any property will suffice. Although issues as to the "situs" of certain types of personal property have arisen in the case law, the courts have taken a very expansive view as to the scope of domestic assets. This all-encompassing concept of eligibility under §109 does not appear to be a very promising start in advancing the concept of international harmony and cooperation.

The National Bankruptcy Review Commission heard a presentation on the UNCITRAL Model Law on Cross-border Insolvencies at its August session in Washington. The presentation focused on a report by Prof. Jay L. Westbrook of the University of Texas at Austin. Prof. Westbrook's report recommended that the provisions of the UNCITRAL Model Law on Cross-border Insolvencies be adopted as a separate section or chapter in the Bankruptcy Code with only a few exceptions. The report also recommended that the present §304 should be left in place with minor revisions to provide additional relief where appropriate.

Also appearing for the presentation were Hon. Burton R. Lifland, S.D.N.Y., Donald S. Bernstein of New York, Daniel M. Glosband of Boston, Richard A. Gitlin of Hartford, Conn.; Hon. Harold Burman of the State Department; and John A. Barrett of Houston.

The Commission unanimously supported Prof. Westbrook's recommendations that the Model Law be included in the Bankruptcy Code. Copies of the report are available from Bruce Leonard by fax request (416/360-8877).

Thankfully, both the Bankruptcy Code and case law interpreting the Code to some extent ameliorate the broad reach of §109, although application of all of these limiting factors is subject to the broad discretion of the court. Thus, a judge has the power to dismiss a full case filed by a foreign debtor if it has been filed in bad faith. Examples of bad faith include moving assets or creating a nominal place of business within the United States in contemplation of a bankruptcy filing or removing substantially all of one's assets from, but leaving nominal assets within, the United States in contemplation of such a filing.

Additionally, under §305, a court may dismiss a full (or ancillary) case or suspend all proceedings under such a case if: (i) the interests of creditors and the debtor would be better served by such dismissal or suspension; or (ii) there is pending a "foreign proceeding" and that foreign proceeding satisfies the factors set forth in §304(c). As dismissal or abstention must serve the best interests of both creditors and the debtor, one court has held that a debtor's interest in a U.S. style chapter 11 reorganization rather than a liquidation, which may be the only course available to it under the law of an appropriate foreign jurisdiction, would be enough to preclude dismissal under this standard.[1]

Dismissal or abstention in favor of a "foreign proceeding" appears promising on its face in terms of fostering international cooperation but the devil is in the details. First, the remedy is discretionary and, worse still, a trial court's decision to dismiss or not to dismiss a case cannot be reviewed by a circuit court or the Supreme Court. Secondly, §101(23) defines a foreign proceeding as a judicial or administrative proceeding in a foreign country "in which the debtor's domicile, residence, principal place of business or principal assets were located at the commencement of such proceeding." While deferring to a foreign insolvency proceeding pending in a country where the debtor's principal assets or principal operations are located is sound policy in terms of recognizing the competing interests of domestic and foreign jurisdictions, the "out-bound" abstention provisions clearly do not mirror the "in-bound" eligibility provisions for a full domestic insolvency proceeding, which onlystipulate the presence of nominal assets or operations within the United States.

Further, a U.S. court will only abstain in favor of a foreign proceeding under §305 if that proceeding is consistent with the basic principals enunciated in §304(c), i.e., the application of foreign law in the foreign proceeding will: (i) provide for the just treatment of all creditors and interest holders; (ii) protect the claims of U.S. creditors against prejudice and inconvenience; (iii) prevent the preferential or fraudulent disposition of property; (iv) distribute proceeds substantially in accordance with the prescripts of the Bankruptcy Code; (v) if appropriate, provide a "fresh start" opportunity for an individual debtor; and (vi) advance the interests of "comity." "Comity" is a poorly defined concept that has not been refined by modern case law. Indeed, courts still rely on the definition proffered by the U.S. Supreme Court more than 100 years ago that comity is "neither a matter of absolute obligation, on the one hand, nor of mere courtesy and goodwill, upon the other" but something akin to respect for, and recognition of the legislative, executive and judicial powers of other sovereign states.[2]

Finally, there is an emerging third route available to bankruptcy courts to limit the all-encompassing embrace of §109. This approach, which is tantamount to "partial abstention," allows a U.S. bankruptcy court administering a full case of a foreign debtor to abstain from applying some of the substantive provisions of the Bankruptcy Code on the basis of "comity" when failing to do so would result in an overreaching application of U.S. law. Thus, in Maxwell Communication, the 2nd Circuit upheld a U.S. bankruptcy court's refusal to apply U.S. preference law to permit an English debtor in a full U.S. Chapter 11 case to recover payments made in England to two English banks when the debtor had no significant connection with the United States and the United States had no compelling interest in applying its preference laws.[3]

In summary, both in the broad invitation it offers foreign debtors to seek plenary bankruptcy protection under its laws, and in the limited and paternalistic manner in which it will subsequently defer to a foreign jurisdiction, the United States appears to pay lip service to the concept of "comity" in the administration of cross-border insolvencies. A more restrictive eligibility requirement for a foreign debtor, and one which would require the presence of a significant, or even a principal place of business or the presence of a significant portion, or even the majority of a debtor's assets, would certainly further the goal of international harmony. Abstaining in favor of a foreign proceeding pending in a country in which the debtor's principal place of business or principal assets are located without requiring the laws of that nation to comport with the basic standards of U.S. bankruptcy law also would further that goal. The development of these concepts, which provide for a full proceeding in the country where the debtor's "center of gravity" is located and ancillary or secondary proceedings in other countries where the debtor maintains less significant assets or operations, would mirror the "main" proceeding and "non-main" proceeding concept which has been advanced by UNCITRAL in the Model Law and would hopefully, in the long run, foster reciprocal respect by foreign states for the legitimate interests of U.S. bankruptcy law.


[1]In re Spanish Cay Co. Ltd., 161 B.R. 715, 724 (Bankr. S.D. Fla. 1993).[RETURN TO TEXT]

[2]Hilton v. Guyot, 159 U.S. 113, 163-4, 16 S.Ct. 139, 143, 40 L.Ed. 95 (1895).[RETURN TO TEXT]

[3]In re Maxwell Communication Corporation plc, 93 F.3d 1036 (2nd Cir. 1996).[RETURN TO TEXT]

Journal Date: 
Wednesday, October 1, 1997