This month's column looks at several recent cases between Canada and the United States that continue to demonstrate a trend toward increasing cooperation between the bankruptcy courts of the two countries.

Canadian Enforcement of a Chapter 11 Stay

In a major internationally oriented decision, the Alberta court of Queen's Bench (Mr. Justice G.R. Forsyth) recognized and enforced a stay of proceedings arising out of a chapter 11 reorganization against a plaintiff who had sued the reorganizing debtor in Canada. This is more significant than might first appear because, while the Bankruptcy Code applies worldwide, internationally, orders of domestic courts are not automatically enforceable in other countries and may not be enforceable in other countries at all without the assistance of the local court, unless the party affected has a presence within the jurisdiction of the domestic court.

The proceedings arose out of the Dow Corning Corp. (DCC) chapter 11 case. The plaintiff was an implant claimant who had started proceedings against DCC prior to its chapter 11 filing. DCC brought an application in Alberta for an order staying the plaintiff's proceedings. The application was heard subsequent to DCC's first plan of reorganization but before its amended plan had been presented. On the merits, the plaintiff alleged, among other things, that the plan was inequitable because her recoveries would be less than recoveries offered to comparable claimants in the United States.

The Alberta court applied Canadian principles of comity to stay the plaintiff's proceedings. The Supreme Court of Canada has ruled that a domestic Canadian court must, as a matter of comity, take cognizance of the orders of a foreign court that has assumed jurisdiction over an issue on principles of forum non conveniens. Under Canadian principles, if the foreign court could reasonably have concluded that there was no alternative forum that was clearly more appropriate, a Canadian court should respect that decision unless the foreign court had acted on principles that were not consistent with principles that Canadian courts would accept.

The Alberta court cited the decision of the U.S. District Court for the Southern District of New York in In re American Sensors Inc. (31 B.C.D. 273 (1997)), in which the district court stayed proceedings against a Canadian corporation that had filed under the Canadian Companies' Creditors Arrangement Act (CCAA). In Dow Corning, the court concluded that matters relating to claims against DCC would be best dealt with by one court, and "in the interest of promoting international comity, it seems the forum for this case is in the U.S. bankruptcy court." Although the plaintiff had filed a proof of claim in the DCC chapter 11 proceedings, the court indicated that it would have reached the same result whether or not there had been an attornment to the jurisdiction through the filing of a proof of claim. (Roberts v. Picture Butte Municipal Hospital et al: Unreported: Alta. Q.B., July 10, 1998).

Dismissal of a "Filing of Convenience"

Another recent decision seems to have been intended to discourage filings in "jurisdictions of convenience." The bankruptcy court for the Western District of New York in Buffalo dismissed chapter 11 proceedings that had been filed by several Canadians who were Lloyds' "Names."¹ ("Convenience" in this case includes the geographical convenience that Buffalo is only a relaxing 90-minute drive from Toronto). The arrangements between the Names and Lloyds required that disputes between them be heard in England. The court seemed to feel that the strategy of the Names who had filed in New York was likely an attempt to have Lloyds file proofs of claim in the U.S. proceedings, which would then give the Names the ability to commence adversary proceedings against Lloyds in a jurisdiction that they hoped would be friendlier than England.

The Names obtained U.S. mailing addresses and opened small bank accounts in the United States to attempt to establish jurisdiction for the chapter 11 proceedings. They also contended that the fact that they had all done extensive business in the United States should be treated as equivalent to having property in the United States for purposes of jurisdiction under the Bankruptcy Code. The court concluded that the debtors could not "manufacture eligibility" for purposes of chapter 11 proceedings by the pretext of having U.S. mailing addresses and small bank accounts. The court dismissed the proceedings not for "bad faith," but for failing to proceed "in a fundamentally fair manner, with honesty of intention and with a...reasonably founded proposal." Thus the Names involved were presumably left to their own devices in Canadian or U.K. proceedings involving Lloyds. In re Head et al., 223 B.R. 648 (Bankr. W.D.N.Y. 1998).

Cross-border Comity Between the State of Washington and British Columbia

Another recent cross-border reorganization reached an advantageous conclusion for the stakeholders involved because of the cooperation between the bankruptcy court for the Western District of Washington in Seattle (Hon. Karen Overstreet) and the Supreme Court of British Columbia (Madam Justice Mary Saunders). The reorganization involved a corporate group consisting of a Canadian public company with one subsidiary in British Columbia and another in Washington. When the group encountered financial difficulties, it filed under Canada's curious CCAA and under chapter 11 in Seattle. Because of the complexities of the situation, the company's objective was to use a single forum, and it ultimately abandoned the three chapter 11 proceedings it had commenced in Washington and instead brought an application for relief under §304 of the Bankruptcy Code.

The bankruptcy court recognized the CCAA proceedings as "foreign proceedings" within the meaning of §101(23) of the Bankruptcy Code and recognized the agent of the monitor appointed in the CCAA proceedings (an officeholder with responsibilities akin to those of an examiner) to be a "foreign representative" within the meaning of §101(24). The bankruptcy court consequently issued a permanent injunction prohibiting actions against the company except as those actions were authorized in the Canadian proceedings on the basis of its conclusion that there were adequate provisions to protect the interests of all interested parties in the Canadian proceedings. The bankruptcy court further ordered creditors to comply with both its own orders and orders entered in the Canadian proceedings. The bankruptcy court order was an extraordinarily constructive and innovative response to a highly complex and fragile commercial situation, which was a major benefit to all of the stakeholders involved in the case as well as being an exceptional contribution to the development of international comity in cross-border cases between the United States and Canada. (In re Starcom Services Corp., Bankr. W.D. Wash., Case No. M-98-60005, Nov. 20, 1998.)

Cross-border Plans of Arrangement

Two-country plans of reorganization are still relatively rare, but two recent cases show that cross-border plans can be concluded successfully: In re Everfresh Beverages and In re Starcom Services Corp. In Everfresh, the debtor had filed reorganizational proceedings under chapter 11 in New York and under the Canadian Bankruptcy and Insolvency Act in Toronto. The proceedings resulted in a Cross-border Insolvency Protocol between Canada and the United States in the case. The protocol mandated levels of cooperation on major aspects of the reorganization that were occurring in both countries and, as the reorganizational process proceeded in both countries, it became clear that a single distribution to creditors would be an efficient and fair conclusion to the proceedings.

The concept of a single distribution to creditors seemed workable based on the terms of the Cross-border Insolvency Protocol, which allowed creditors to file claims in either jurisdiction. Factually, the position of the unsecured creditors of the company in the United States was relatively stronger than it was in Canada. In the Toronto proceedings, the Canadian court had recognized the validity of a general security agreement held by the company's major lender which covered all of the company's Canadian assets and, consequently, the most logical source for funds for a plan of arrangement was in the United States.

The company consequently proceeded with a reorganizational plan in Canada that provided that Canadian creditors would accept in satisfaction of their claims their proportionate share of a distribution of the assets available in the United States. Properly explained and informed, the creditors in Canada voted by a wide margin to accept the plan and it was approved by the Ontario court.

In Starcom, the reorganizational plan was designed to pool all of the assets of the company in both Canada and the United States and to provide a single plan for all of the company's creditors. The plan created a pot for general creditors and a separate pot for executory contract creditors. There were two areas of sensitivity because of the cross-border nature of the reorganization, i.e., the treatment of executory contract creditors and the priority of IRS claims in a Canadian reorganization. In Canadian reorganizations, it is not necessary that executory contract creditors be paid in full or continued in order for the plan to succeed and, under general Canadian law, most governmental claims are general unsecured claims. The ultimate plan adopted the U.S. position in relation to executory contracts such that all arrears were paid in full, and the plan accepted the Canadian position in relation to general tax claims, which were compromised. The bankruptcy court concluded that it had authority to allow the proceedings to be carried forward in Canada on the basis that the Canadian proceedings fulfilled the requirements of §304 of the Bankruptcy Code.

There are several other current cross-border situations extant between Canada and the United States that, if successful, may lead to comparable two-country plans or dual concurrent plans. "The International Scene" reiterates its interest in learning of cross-border protocols and other kinds of cooperative arrangements between courts in multinational cases. Please advise Bruce Leonard c/o Cassels Brock & Blackwell at (fax) 416-360-8877 or by e-mail at [email protected].

Author's Note: Copies of the bankruptcy court order made in the Washington/British Columbia proceedings in Starcom and of the decision of the Alberta court in Roberts (in which the author assisted in the representation of Dow Corning) are available from the author. The author acknowledges and appreciates the assistance of Michael A. Fitch of Vancouver in the analysis of Starcom.

Footnotes

¹ Lloyds is a celebrated U.K. insurer. Until recently it was a limited liability association, and the backup for its policies came from wealthy investors, i.e., "Names," who promised to stand behind the policies. Lloyds underwent severe losses in the mid-1980s and took the position that the Names should cover the losses, which dismayed the Names and led to some very significant lititagion and many personal bankruptcies of Names. Return to article