TRANSNATIONAL INSOLVENCY
Cases commenced under the Bankruptcy Code as well as cases commenced
under the insolvency or reorganization schemes in other countries increasingly
involve assets in various countries as companies increasingly have international
business interests. Administering assets in other countries has historically been
difficult for a number of reasons, including no recognition of the "foreign"
insolvency proceeding in the country where the assets are located, inadequate notice
to foreign creditors, and the inability to stay actions against foreign assets in order to
administer them in one collective proceeding to the benefit of all creditors.
The Commission could not have addressed these issues without significant
guidance from the international legal community, which would have been difficult
given the Commission's limited lifespan and funds. Fortunately, the Commission's
work in this area follows the groundbreaking development of an international model
law on insolvency and reorganization drafted by the United Nations Commission on
International Trade Law (UNCITRAL). (874) The Commission's Recommendations on transnational insolvency propose conforming changes to the Bankruptcy Code in
order to implement the provisions of the UNCITRAL model law. In addition, the
Commission has recommended an amendment to the venue provisions regarding
ancillary proceedings under section 304.
RECOMMENDATIONS
2.2.1 Adoption of the UNCITRAL Model Law for Cross-Border Insolvencies
2.2.2 Retention of provisions for additional relief
2.2.3 Amendment of title 28 to add jurisdiction over the Model Law provisions
2.2.4 Conforming amendments to the definitions of foreign proceeding and
foreign representative in 11 U.S.C. § 101(23)-(24)
2.2.5 Exclusion from the application of the Model Law of consumers resident
in the United States if their debts are within the limits for Chapter 13
2.2.6 Recognition vel non of foreign tax claims to be left to evolving caselaw
and treaty negotiations
2.2.7 28 U.S.C. § 1410 should be amended to provide that the various bases for
venue may be used in the alternative as a matter of choice, i.e., the word
"only" should be deleted from the section; additionally there should be
a catch-all venue choice related to the interest of justice and convenience
of the parties
DISCUSSION
The Grab Rule
Although there is widespread agreement that the globalization of trade and
enterprise requires a coordinated approach to international bankruptcy, the field of
bankruptcy law (or, as most of the world calls it, "insolvency law") has remained
steadfastly parochial. "Territorialism" or the "grab rule" has prevailed since time
immemorial. When a person or a company with international operations falls into
serious financial trouble, each country employs its insolvency laws to grab local
assets and administer them locally according to the procedures and priorities of that
country's laws. Even where no local proceeding is opened, the delay and expense of
obtaining local judicial cooperation with a foreign insolvency proceeding encourages
debtors to conceal assets in foreign caches and prevents realization of full value for
assets that are recovered.
Scholars and practitioners have long criticized the unhappy results of
territorialism. There are five major disadvantages:
a) Reorganization is difficult or impossible, because each uncoordinated local
proceeding is focused on maximizing the return for local creditors. The local
officials are often unwilling to permit any use of local assets for ongoing
international operations. Indeed, in many countries there is no authority for
cooperation with foreign proceedings even if the local officials were so inclined. In
addition, many of the actions necessary for cooperation are not contemplated by local
procedures and would violate local law.
b) Even in a liquidation there can be realization of much greater value if
assets can be sold without regard to national borders. For example, a division of a
company may have manufacturing and distribution facilities in several countries.
That division might be saleable for a much higher price as a unit than would be each
bundle of assets in each country, but existing law makes it very difficult to sell assets
in multinational packages.
c) Although virtually all national insolvency laws endorse the principle of
equality of distribution to creditors, territorialism produces highly unequal results.
Aside from differing priority rules in each country, the distributions vary greatly
depending on the assets seizable in each country at the moment of bankruptcy. Local
creditors benefit where they are lucky enough to have more assets in their country at
that moment and suffer where their jurisdiction is less fortunate. A few very
sophisticated international creditors may collect in several proceedings and do very
well, but most smaller creditors cannot play that game. The results are arbitrary and
inconsistent with the principles of virtually every country's laws. Above all, they are
unpredictable, creating substantially increased transaction costs in international
financing.
d) Shrewd debtors can exploit modern technology and the globalization of
commerce to move assets rapidly from one jurisdiction to another and to transfer
assets to insiders or preferred creditors in other countries. Because recognition of
foreign insolvency proceedings and cooperation with those proceedings is so
cumbersome in most countries, it is very hard for administrators or liquidators to
pursue and capture the assets.
e) Although overt discrimination against foreign creditors is relatively rare,
they often receive little or no real notice of insolvency proceedings and too often
suffer de facto discrimination in those proceedings.
United States Leadership - Section 304
By adopting section 304 of the 1978 Reform Act, Congress put the United
States in a position of leadership in the field of international insolvency. Although
the United States courts had taken some important steps toward international
cooperation, section 304 for the first time gave the courts explicit authority to
recognize foreign insolvency proceedings, to cooperate with those proceedings, and,
where appropriate, to transfer assets from the United States to a foreign proceeding
in the debtor's home country. As one might expect, the degree of internationalism
displayed by our courts has varied, but on the whole the United States has established
an enviable record of cooperation with foreign jurisdictions in insolvency matters.
For a number of years other countries seemed to be indifferent to the United
States lead in this regard. As noted by Professor Jay Westbrook, after ten years there
had been little sign that other countries were responding to the section 304 initiative
by granting similar cooperation to our insolvency proceedings. (875) Although Congress in adopting section 304 had deliberately eschewed any reciprocity requirement (a
requirement that usually reduces the chances for cooperation in international
litigation to somewhere near zero), he predicted the United States would not wait
forever for other countries to begin to respond in a positive way.
Happily, they have begun to do so. Reacting to the example of section 304
and spurred by efforts of the International Bar Association and of INSOL (an
international association of insolvency practitioners affiliated in the United States
with the American Bankruptcy Institute), courts and legislatures around the world
have begun in the last few years to expand international cooperation in insolvency
matters. For example, the United Kingdom has adopted a provision calling for close
cooperation with countries designated by its government for cooperation in
insolvency matters. (876) The new Australian statute has gone farther, surpassing even
section 304. (877) At the same time, the European Union has finally broken a two-decade logjam to adopt a bankruptcy convention for its member countries that is
widely expected to receive final approval this year. (878)
Largely through the efforts of INSOL, the United Nations Commission on
International Trade Law (UNCITRAL) was persuaded to embark on a project to
improve international cooperation in insolvency cases. UNCITRAL has a long and
successful record of developing treaties and model laws relating to business and
commerce. Its convention and model law on arbitration, for example, are perhaps the
most successful international commercial laws in history, having been adopted by
most of the leading commercial countries of the world. One reason for its success
is that it is very selective in the projects it undertakes. After judicial colloquia
organized with the help of INSOL and involving judges from around the world,
UNCITRAL concluded that there was a realistic chance to achieve progress in the
insolvency field, despite its difficulty, and began an insolvency project.
The UNCITRAL Process
The UNCITRAL process involves meetings held alternately in Vienna (the
headquarters of UNCITRAL) and New York, lasting two weeks at a time in each
venue. The first meeting on insolvency was in Vienna in October, 1995. The
convocation is described as a "Working Group," but is in fact a formal UN-style
meeting, in a large conference hall with simultaneous translation into the six official
languages of the UN, recording of the meetings, and so forth. There are
approximately thirty member countries on UNCITRAL at any given time, always
including the five permanent members of the Security Council. For any given
subject, any other member nation may send observers who are given full rights to
speak on the floor. UNCITRAL also invites relevant "NGOs," Non-Governmental
Organizations, with a particular expertise to bring to the discussions. Approximately
forty countries and several NGOs participated in the insolvency meetings. Decisions
are always by consensus and there is no voting.
The insolvency project began with countries very reluctant to take substantial
steps toward cooperation with foreign proceedings. For example, there was an
attempt at the start to exclude a debtor in possession completely. There was also
substantial sentiment for requiring that the foreign proceeding involve a threshold
finding of the debtor's insolvency. In these and other respects, over the course of the
project the text moved decisively in the directions sought by the United States and
by the leading NGOs. On the other hand, there were substantial compromises
reflecting the concerns of delegations from around the world.
Throughout the discussions, a significant minority of countries favored a
treaty rather than a model law, in part because they favored a system based on
reciprocity. However, a substantial majority, in which the United States took a
leading role, favored the model-law approach as a first step that could be agreed and
implemented far more quickly and more generally than a treaty.
The UNCITRAL process results in a proposed text, here a model law. The
text of a model law is accompanied by a series of reports of each meeting, a final
report upon adoption, and, usually, a Guide to Enactment. Although there is no
legislative history as such, the reports and the Guide provide insights into the drafters'
intentions. Where the text is a model law, it is understood that it should be adopted
in as uniform a manner as possible, but that some adjustments to fit each national
legal system are inevitable.
The product of a Working Group is then taken up by the Commission itself
at its annual meeting, final revisions are agreed, and it is adopted. Subsequently, its
work is reviewed and approved by the Sixth (Legal) Committee of the General
Assembly and the Assembly then recommends the law for adoption by member
states. The final text of the Model Law on Cross-Border Insolvency was adopted by
the Commission in May, 1997, and it will be recommended for adoption by the Sixth
Committee and the Assembly this fall. The Guide to Enactment (which has been
largely agreed in draft) will be published in the fall as well.
By the very nature of a model law adopted in such an international context,
the text is a matter of compromise. The ambiguities of compromise are inevitably
exaggerated by the challenges of translation. Thus the text is not in the standard
statutory language used in the United States or any other member country and is not
always felicitous. On the other hand, English was the working language in the
drafting of the Model Law on Insolvency and the other language texts were based on
the English draft, although of course all six language texts are equally official.
Overall Description of The Model Law
Because the text is a model law rather than a treaty, it is meant to be adopted
as part of the law of each enacting state. Thus in the United States, it will become
part of the Bankruptcy Code.
The Model Law's 32 articles can be grouped and summarized by subject, at
least as to the key points. The key subjects of the Model Law are as follows: a)
scope; b) access and recognition; c) effects of recognition; d) treatment of foreign
creditors; e) cooperation and coordination among proceedings in several countries.
Scope (Arts. 1 & 2)
The recognition, nondiscrimination, and cooperation procedures undertaken
by the enacting state in adopting the Model Law extend to any proceeding "relating
to insolvency," if the proceeding is "collective" and the debtor's assets and affairs are
subject to court supervision or control. The definitions are carefully constructed to
include the United States Chapter 11 proceeding (and similar debtor in possession
reorganization proceedings in Latin America and elsewhere). Both reorganization
and liquidation are covered and no specific finding of the debtor's insolvency is
required. As in the European Union Convention, insolvency is understood to include
financial distress of the sort that leads to insolvency. In addition, a debtor in
possession is included in the definition of a "foreign representative" under Article 2,
because a representative may be a person (e.g., a trustee in bankruptcy) or a "body"
authorized to administer the proceeding.
"Interim" proceedings of the sort commonly found in Commonwealth
countries are also included, as are nonjudicial procedures in some countries that have
purposes and effects similar to judicial bankruptcy cases. Individual creditor actions,
like attachment and garnishment, are excluded. Also excluded are the insolvencies
of entities, like banks and insurance companies, that are subject to a specialized
insolvency regime in the enacting state. It is contemplated that a separate convention
or model law will be developed for these kinds of bankruptcies, with the Model Law
as the starting point.
The Model Law applies to natural persons as well as companies and makes
no distinction between consumer and business debtors. The United States delegation
pressed hard for a consumer exclusion. We were unsuccessful in putting an
exclusion in the text, but we did succeed in getting a concession in the Guide to
Enactment that enacting states may exclude consumer debtors to a substantial extent
(see below).
Access and Recognition (Arts. 9-12; 15-24)
Access
The Model Law gives a "foreign representative" the right to appear in local
courts, a right denied or subject to elaborate diplomatic requirements in many states.
It also protects the foreign representative from being subject to local jurisdiction
outside of the subject matter of its appearance, a provision similar to section 306 of
the Bankruptcy Code. Articles 11 and 12 give the foreign representative standing to
initiate a local bankruptcy or to participate as of right in an existing local bankruptcy
proceeding. After recognition, in initiating an insolvency proceeding the foreign
representative will have the benefit of a presumption of insolvency given by Article
31.
Recognition
In typical Anglo-American fashion, the United States courts have not focused
much on a concept of "recognition" as such, but upon the specific requests for relief
made by foreign representatives. In most countries, however, recognition is key to
any sort of cooperation, or even standing, for a foreign representative. Thus
recognition is a key procedural step under the Model Law, giving rise to a number
of effects and entitlements.
Recognition of a foreign representative is presently a long and expensive
process in many countries. Articles 15-17 of the Model Law are designed to make
the recognition process as simple, fast, and inexpensive as possible. Article 15
provides that the only showing necessary is that the applicant for recognition is a duly
approved foreign representative in a foreign proceeding, as defined in Article 2, and
permits proof of those facts by certificates from the foreign court or certified copies
of its decision. Article 16 permits the local court to presume that such documents are
genuine unless shown to be otherwise and to presume that such a decision or
certificate is factually correct. Thus recognition can be reduced to a simple
documentary process, unless challenged by an interested party.
The Model Law requires recognition of both "main" and "non-main"
proceedings, although a representative in a non-main proceedings is entitled to far
less relief. A main proceeding is defined in Article 2 as a proceeding in the debtor's
home country, "the center of its main interests," a concept taken from the European
Union Convention on Insolvency and akin to concepts like "principal place of
business" or "chief executive office." Article 16 provides a presumption that a
company's place of incorporation is the center of its main interests, unless proof to
the contrary is offered. Under Article 17, a proceeding in a country other than the
debtor's home country (i.e., a non-main proceeding) must be recognized only if the
debtor has an "establishment" in that country. An establishment is defined in Article
2 as a "nontransitory" place where the debtor operates with "human means and goods
or services." Again the definition comes from the EUC and means something more
than a mail drop but not necessarily as much as a branch. If a local proceeding is
opened in a country where the debtor has assets but no establishment, recognition is
not required.
Although recognition is required upon a proper showing, the local court
retains broad discretion under articles 6, 17, 19 and 22 to revoke or modify
recognition or to revoke or modify the relief granted to the foreign representative.
At several points, the court is required to consider the interests of creditors, including
local creditors, and of other interested parties, including the debtor.
Effects of Recognition (Arts. 19-24)
Article 19 of the Model Law permits a foreign representative to apply for
temporary, emergency relief while an application for recognition is pending.
Thereafter, if the foreign proceeding is recognized as a foreign main proceeding (i.e.,
a proceeding in the debtor's home country), then recognition produces certain
mandatory effects under Article 20. A stay comes into effect restraining all lawsuits
and creditor enforcement actions and all transfers of interests in the debtors' assets.
The stay is similar to the automatic stay under section 362 of the Code, although not
quite as broad, along with the restrictions on debtors provided primarily by sections
363 and 549. It is subject to the limitations on a bankruptcy stay that would apply
under local bankruptcy laws, primarily section 362(b) and section 363 of the Code
in the case of the United States. It can be modified or terminated as a result of the
opening of a local proceeding involving the same debtor.
Article 21 gives the local court the power to grant additional relief to the
foreign representative, including turning over assets to the foreign proceeding. The
relief includes obtaining information and evidence to the extent permitted by local
law.
The mandatory stay under Article 20 does not apply to recognition of a non-main proceeding. The representative of a non-main proceeding can use article 21 to
obtain any of the relief available under articles 20 and 21, but only with regard to
assets that local law considers properly within the domain of that non-main
proceeding. Examples would be obtaining an asset fraudulently transferred from the
foreign jurisdiction where the non-main proceeding is pending or getting information
relating to such an asset.
Recognition also gives the foreign representative the right to intervene in
actions to which the debtor is a party, although not as a substitute for the debtor, and
gives the representative standing to bring avoidance actions available under local
insolvency law.
Treatment of Foreign Creditors (Arts. 13-14)
Article 13 of the Model Law gives "national treatment" to foreign creditors.
That is, they are generally to be treated without discrimination in the same way that
local creditors are treated, including the right to commence and participate in a local
insolvency proceeding. Article 13 does permit the enacting state to grant or deny
equivalent treatment for foreigners as to priorities, as in Bankruptcy Code section
507(a), but provides a general floor of treatment as a general, unsecured creditor. It
also leaves to the enacting state, as an option, whether to accept foreign tax claims
in an insolvency.
Article 14 provides for "national treatment plus," recognizing that foreign
creditors are always at a disadvantage compared to local creditors. It requires that
notice be given to foreign creditors whenever it is given to local creditors under local
law. It goes further to provide that notice to foreign creditors must be individual, not
merely published or tacked on the courthouse door, unless the court finds that another
method is appropriate. The exception was adopted primarily in light of costs in very
small cases. It also requires that foreign creditors be told of the time given them to
file claims and that the time for filing be reasonable. They must also be told where
claims should be filed and whether secured creditors are required to file at all.
Cooperation and Coordination (Arts. 25-32)
Articles 25 through 27 empower local courts to cooperate with foreign courts,
a power otherwise unavailable in many countries. Cooperation is authorized between
courts or between courts and representatives or between representatives, as
appropriate, and examples of cooperation are listed for illustration. The courts are
also authorized to communicate directly with foreign courts as appropriate, although
it is assumed such authority will be exercised in accordance with local ideas of due
process and fairness. In the United States, the statute or the rules will provide
appropriate guidance, including notice to the parties, a record of the communication,
and so forth.
Articles 28 through 32 deal with the problem of coordinating multiple
proceedings. As noted above, a sine qua non of achieving this first step in
international cooperation was agreement that local insolvency proceedings involving
the same debtor would trump foreign proceedings, although with the considerable
reform that the foreign representative would be authorized to intervene in the local
proceeding under article 12. Articles 28 and 29 require that relief given to the foreign
representative be made consistent with the existence of the local proceeding,
including modification or termination of that relief as necessary. On the other hand,
this requirement is stated in the context of a strong emphasis on cooperation and
coordination with foreign proceedings and does not preclude deference to the foreign
proceeding.
Article 30 addresses coordination where more than one foreign proceeding
seeks recognition. If one of them is a foreign main proceeding, it gives primacy to
that proceeding.
Article 32 provides a "hotchpot" rule analogous to section 508(a) of the Code,
so that a creditor that receives a distribution in a foreign insolvency proceeding must
stand aside in a local distribution until creditors of the same class have gotten as
much from the local proceeding as the first creditor got from the foreign one. Of
course, distributions will be equal within the class from that point on. Thus if a
general, unsecured creditor owed $100 received $5 in a foreign proceeding and the
distribution to general creditors in a United States proceeding involving the same
debtor was 15%, the first creditor would receive $10, putting that creditor
proportionately equal to the other general creditors at a 15% overall dividend.
2.2.1 Adoption of the UNCITRAL Model Law for Cross-Border Insolvencies
Because the United States is already a world leader in this field, adoption of
the Model Law will result in relatively minor substantive changes to U.S. Bankruptcy
Law. Some of the most important are noted below. These changes will add some
definition and predictability to U.S. law, which is now almost entirely case law, by
providing specific provisions concerning various issues that must now be addressed
on a case-by-case basis. A provision permitting additional assistance, beyond that
mandated by the Model Law, will enable the United States courts to continue to use
ideas of international cooperation as they have been evolving under section 304 as
to issues not reached by the Model Law.
Although these changes will be beneficial, the principal benefit to the United
States from adopting the Model Law will lie in the effect of its adoption on other
jurisdictions. Early adoption by the United States is likely to influence other
countries to adopt this law and to spur international organizations to encourage
countries to do so. The leadership of the United States in adopting section 304 has
been an important factor in increasing cooperation in this field up to now and its
adoption of the Model Law is probably essential to the law's widespread adoption by
other countries.
Adoption of the model law by other countries will dramatically increase the
potential for cooperation with those countries in multinational insolvencies and the
likelihood that such cooperation will in fact occur. The most important provisions
of the Model Law (a) establish a relatively simple and mechanical process for
recognition of a foreign insolvency proceeding, including reorganization proceedings;
(b) permit fast application of a bankruptcy stay something like the automatic stay
under U.S. law, getting assets safely under court control; (c) strengthen the rights of
foreign creditors, by ensuring them proper notice and by granting them a substantial
measure of equal treatment; and (d) direct local courts to cooperate and coordinate
with foreign courts, especially those of the home country of the debtor.
In turn, those provisions will make it much more practical to reorganize a
troubled multinational, saving jobs and preserving value. They will also help to
prevent debtor fraud and to increase distributions to employees, suppliers, and others
in liquidation situations. Finally, they will improve predictability of result, lowering
the risks and costs of international financing.
In particular, adoption of the Model Law by the United States, Canada, and
Mexico would greatly facilitate the current project of the American Law Institute to
develop cooperative insolvency procedures among the three NAFTA partners.
It is important not to claim too much. The Model Law is necessarily a first
step and no more. It bows to the primacy of local proceedings wherever they may be
opened and depends greatly upon a willingness of local officials to cooperate. It
leaves many difficult legal issues unresolved. Nonetheless, it does give special
precedence to "main" proceedings--proceedings in the debtor's home country--and
makes it possible for the home-country's "foreign representative"--the person or entity
acting for the bankruptcy estate--to move quickly to protect foreign assets from
debtor manipulation and creditor seizure. At a minimum, it should help considerably
in getting a situation under control until the interested parties and the courts can
formulate fair solutions.
It is recommended that the law be adopted as a single section, with a few
exceptions. The law is drafted as a coherent whole and will be more useful to the
courts in that form. Furthermore, because it is hoped that other countries will follow
the United States' lead in adopting it, our approval will be clearer and more
demonstrable if it is all in one place in our law, rather than in bits and pieces.
Summary of Changes In United States Law
Adoption of the Model Law by the United States would require some
substantive changes in the Bankruptcy Code. Many of these changes would have
little effect on present practice, but would put in the statute rules presently found only
in the case law and require their systematic observance.
The most significant changes will be:
1. Section 304 authorizes relief for a foreign representative only vis a vis what
the Model Law calls a foreign main proceeding. The definition of "foreign
proceeding" in present United States law, section 101(23), is limited to the debtor's
home country (as defined by domicile, residence, principal assets, or principal place
of business). The Model Law goes farther, providing for recognition of a foreign
non-main proceeding as well, although it narrowly constrains the relief available to
a foreign representative in such a proceeding.
2. Section 304 gives the court substantial discretion in determining whether
to grant relief to a foreign representative. The Model Law requires recognition of any
such proceeding, subject to public policy considerations (Article 6), but gives the
court broad discretion as to the relief that will be granted or maintained. Article 20
provides for mandatory effects restraining creditors and the debtor from disturbing
the status quo once the foreign representative has been recognized, but the relief is
qualified with reference to local exceptions and the court is given the power to limit
or terminate those effects under Articles 16(4) and 20(2). As under present section
304, all of the relief available in Articles 19 and 21 is subject to the court's discretion
from start to finish, although always in the context of cooperation and of a general
policy of deference to a home-country proceeding.
3. United States law currently has no special provisions relating to foreign
creditors. Indeed, we have no definition of foreign creditors. The Model Law
requires that creditors with foreign addresses (a neat and practical finesse) be given
notice that explains about filing a claim (see below). The statute and rules would
have to be modified to provide for this special notice. It also requires
nondiscriminatory treatment for foreign creditors, but that has generally been United
States policy in any case.
2.2.2 Retention of provisions for additional relief
It is appropriate to provide U.S. courts with the flexibility to deal with issues
beyond those covered in the Model Law, using the concepts and techniques that have
been evolving under section 304 up to now. Article 7 of the Model Law expressly
contemplates retention of provisions providing additional or different assistance to
an international insolvency administration. While adoption of the Model Law will
be a large step forward in many countries, limitation of relief in U.S. courts to its
provisions would actually be a step backwards in some respects. By retaining the
capacity to continue a common law development begun under section 304, the U.S.
]courts have the power to cooperate in ways beyond the provisions of the Model Law
and the U.S. can continue to break new ground in this field.
2.2.3 Amendment of title 28 to add jurisdiction over the Model Law provisions
Article 4 of the Model Law is an empty vessel into which each nation is to
pour the necessary designation of courts to exercise jurisdiction over its provisions.
Assuming no change in the current structure of the bankruptcy court, jurisdiction
would go to the district courts, with referral to the bankruptcy courts, under sections
1334 and 157 of title 28, as long as the current jurisdictional scheme remains in
place. Section 19 of the Model Law clarifies that the district courts and the
bankruptcy courts by way of referral, will have power to issue emergency relief
pending consideration of recognition of a foreign insolvency proceeding.
2.2.4 Conforming amendments to the definitions of foreign proceeding and
Foreign representative in 11 U.S.C. § 101(23)-(24)
The Model Law's definitions cover non-main as well as main (that is, home
country) proceedings and the foreign proceedings to be recognized are broadly
defined to include all legal efforts of a collective nature designed to address the
problems of actual or threatened insolvency, including Chapter 11 and the debtor in
possession. These definitions are especially important, because their breadth ensures
that United States proceedings under Chapter 11 via a debtor in possession will be
widely recognized.
The addition of non-main proceedings is a change in U.S. law, which
arguably has recognized only main proceedings in the past. It is a healthy change,
however, because sometimes local politics or the awkwardness of local law prevents
initiation of a bankruptcy proceeding in the debtor's home country, but a proceeding
can and should be started in other countries to protect creditors and other company
constituencies. Any concern about recognition of a rogue proceeding brought in a
friendly forum is greatly reduced by two limitations:
a) If a local proceeding is opened in a country where the debtor has assets but
no establishment (which is a nontransitory, on-going operation), recognition is not
required.
b) Relief under the Model Law for a foreign representative in a non-main
proceeding is very narrow, being limited to assistance with respect to assets having
some close connection to the country where the non-main proceeding was instituted.
For example, relief might be granted to an English liquidator of a non-English
company as to moneys looted from an English pension fund and deposited in a New
York account.
2.2.5 Exclusion from the application of the Model Law of consumers resident
in the United States if their debts are within the limits for Chapter 13
This exclusion would represent a variation from the Model Law, but one
recognized as necessary for some countries by the Report and Guide to Enactment.
The United States is one such country, because we have specialized and quite
different treatment for consumer debtors as opposed to debtors whose debts arise
primarily from business. The Model Law is designed primarily for business and
commercial debts. Its use to enforce debts against United States resident
noncommercial individuals would be controversial and may be unjust. The excluded
debtors would be those whose debts were incurred primarily for personal, family, or
household purposes. Discretionary relief of the sort now available under section 304
would remain available to protect creditors as well as debtors in consumer cases with
international dimensions and it would be important for the U.S. courts to use that
relief to help other countries in pursuing individual consumer debtors in appropriate
cases, especially where fraud or other serious wrongdoing is involved.
Even as to debtors with primarily consumer debts, very large debts will
almost certainly include business or investment-related obligations and the debtors
involved will generally be able to afford more than adequate legal representation.
The new, much larger Chapter 13 debt limits established (and indexed to inflation)
by the 1994 amendments to the Bankruptcy Code represent Congress' decision about
the line between ordinary consumers and those whose affairs require broader judicial
supervision and creditor participation. Therefore those limits seem an appropriate
place to draw the line on a consumer exclusion from the Model Law. As in other
respects, the U.S. courts will retain broad discretion to prevent any unfair treatment
of debtors.
A residence requirement is included per the UNCITRAL Guide to Enactment.
The requirement reflects the agreements reached at UNCITRAL between countries
like the United States who are anxious to protect consumers and other countries
greatly concerned about possible misuse of a consumer exclusion by fraudsters. The
United States certainly does not wish to be a haven for those who might come here
just to avoid their home-country authorities or others who might stash assets in the
United States while living elsewhere. This limitation may be especially important
to our friends in Canada and Mexico.
2.2.6 Recognition vel non of foreign tax claims to be left to evolving caselaw
and treaty negotiations
Traditionally the United States has not enforced foreign revenue laws. There
is no statutory provision involved. Instead, the rule derives from an ancient common-law doctrine traceable to Lord Mansfield. Article 13 of the Model Law, which
forbids discrimination against foreign creditors as such, permits an optional
exception that foreign revenue claims will not be recognized.
Congress could decide that international comity requires recognition of such
claims, although it would then have to decide whether and when the claims would
be given the same priority as domestic tax claims under section 507(a)(8). On the
other hand, Congress could decide for the first time to forbid recognition of such
claims by statute. The first solution raises some complex problems that would
require careful study prior to enactment. The second might offend a number of our
friends and might block otherwise helpful negotiations in the on-going evolution of
our tax-treaty practice.
The most sensible approach would be for Congress to leave the question open
explicitly by saying that nothing in the provision is intended either to endorse or to
repudiate current law and by instructing the Treasury to include in future tax-treaty
negotiations the mutual recognition of revenue claims in insolvency proceedings.
2.2.7 28 U.S.C. § 1410 should be amended to provide that the various bases for
venue may be used in the alternative as a matter of choice, i.e., the word
"only" should be deleted from the section; additionally there should be
a catch-all venue choice related to the interest of justice and convenience
of the parties
In addition to UNCITRAL, the Commission discussed the venue of ancillary
proceedings under the Bankruptcy Code. Section 304 of title 11 provides for the
commencement of a proceeding ancillary to a foreign (non-U.S.) insolvency
proceeding in order to administer U.S. assets of foreign debtors or to otherwise assist
the foreign proceeding. (879) Such assistance may include enjoining actions and enforcement of judgments against the foreign debtor or against property of the debtor.
The venue provisions for section 304 ancillary proceedings require that a proceeding
be commenced in each and every district in which such property of the foreign debtor
is located or where an action is pending or threatened against the foreign debtor. (880)
Problems arise, however, when a foreign debtor has U.S. assets or
actions pending or threatened against it in multiple districts. A literal interpretation
of section 1410 would require a separate ancillary proceeding to be filed in each and
every district where the foreign debtor had property or was a party to litigation.
Multiple ancillary proceedings are costly and create a risk of piecemeal distribution
of the estate as well as inconsistent rulings and are obviously an inefficient use of
judicial resources.
Statutory Background. Section 304 was enacted as part of the
Bankruptcy Reform Act of 1978. The purpose behind section 304 was to preserve
the U.S. assets of a foreign debtor and otherwise assist the foreign insolvency
proceeding. (881) It is not a full case under any of the debtor-relief chapters of the
Bankruptcy Code: an estate is not formed, the automatic stay of section 362 is
inapplicable, and a discharge is not granted. (882) Broad relief is, however, available
under section 304 consistent with the legislative history. (883) The assistance provided
under section 304 includes ordering discovery, (884) enjoining an action or the enforcement of a lien, (885) or to order the turnover of property in the United States. (886)
Section 1410 of title 28 prescribes the proper venues for an ancillary
petition. Subsections (a) and (b) provide that if the relief is to enjoin an action or
enforcement of a lien, or to turnover property, the petition shall only be filed in the
district where the action is pending or the property is located. (887) In all other cases,
subsection (c) provides that the petition shall be filed in the district where the foreign
entity has its principal place of business or principal assets in the United States. (888)
Thus, if property is located in more than one district and the foreign representative
seeks a turnover order of such property, section 1410, as written, requires an ancillary
proceeding to be commenced in each district where such property is located.
Similarly, if multiple actions are pending or threatened against a foreign debtor,
multiple ancillary proceedings would be required to enjoin the continuation or
commencement of each of those actions.
Venue of Ancillary Proceedings
The clear meaning of section 1410 requires multiple ancillary petitions
when there are several actions pending or threatened against a foreign debtor in
several districts in the United States, or when it is necessary to seek a turnover of
property from various sources located in various districts in the United States.
Multiple pending ancillary proceedings, however, are contrary to the purpose behind
section 304. (889) The tension between the clear meaning of section 1410, which requires multiple ancillary proceedings and the flexible purpose behind section 304
has led some courts to permit a single ancillary proceeding to suffice. (890) One court even deferred to the nationwide injunction entered by a bankruptcy court in New
York and dismissed as moot the multiple ancillary proceeding filed in the bankruptcy
court in Florida. (891)
The courts to date that have diverged from literal application of the
venue provisions of section 1410 have done so because literal application would
conflict with the purposes behind a section 304 ancillary proceeding. In Evans v.
Hancock, Rothert & Bunshoft, (892) the foreign debtor (a British insurance company)
commenced an ancillary proceeding in its principal place of business in the United
States. (893) The relief sought was a nationwide temporary restraining order staying the
"226 cases pending in 34 states and 114 judicial districts" in the United States. (894)
The Evans court overruled a motion to transfer venue, holding that a literal reading
of section 1410 "contravenes the purpose of" section 304. (895) Similarly, the court in
Saleh v. Triton Container Int'l, Ltd.(896) held that the foreign debtor had to file only
one ancillary proceeding and issued a nationwide preliminary injunction protecting
all of the foreign debtor's U.S. property. (897) Undue burdens on the foreign debtor as
well as the risk of inconsistent results between multiple proceedings warranted a
departure from literal application of section 1410. (898)
A section 304 ancillary proceeding is not a full bankruptcy case; it
does not deal with the continuing operation of a business, general distribution to
creditors, the appointment of an estate representative or retention of professionals,
or any aspects of reorganizing a business. As a result, the issues in an ancillary
proceeding are much more discrete and circumscribed. Flexible venue rules are more
suitable for this type of proceeding.
Competing Considerations. It can be argued that it is preferable to
have some nexus between the issue of the proceeding and the court in which relief
is requested. Section 1410, as written, provides that relationship. As a matter of
policy, however, it should not be necessary to have multiple proceedings. The
Proposal maintains a nexus between the foreign debtor, the court in which relief is
requested and the subject of the ancillary proceeding, but offers eligible venues in the
alternative in order to eliminate the need for multiple proceedings. Under the
Proposal, any single venue chosen would be proper and there would be no question
of a single bankruptcy courts authority to issue an order that would have nationwide
application. As a jurisdictional matter, it is important to recognize that a bankruptcy
court has nationwide jurisdiction. (899) Furthermore, venue is not jurisdictional and is waivable. Aside from the possibility of leading to conflicting results, the current
requirements under section 1410 are wasteful bb of both time and money.
Notes:
874 The Commission's work in this area is due to the efforts of the American delegation to UNCITRAL. The delegation was led by Professor Jay L. Westbrook and Harold Burman and
included John Barrett, Donald Bernstein, Professor Carl Felsenfeld, and Hon. Burton R. Lifland.
Richard Gitlin and Daniel Glosband also assisted the Commission in these efforts.
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875 Jay L. Westbrook, U.S. Fights Bankruptcy 'Grab' Rule Alone, WALL ST. J., January 29, 1988.
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876 Insol. Act 1986, ch. 45, § 426. Barclays Bank PLC v. Homan, BCLC 680 (1993).
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877 Austl. Corp. L. §§ 580-581 (1997).
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878 European Union Convention on Insolvency Proceedings, Nov. 23, 1995, 35 I.L.M. 1223. The full text of the Convention is set forth in Nick Segal, The Choice of Law Provisions in The
European Union Convention on Insolvency Proceedings, 23 Brook. J. Int'l L. 57, 75 (1997).
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879 Section 304 provides in pertinent part that:
(a) A case ancillary to a foreign proceeding is commenced by the filing
with the bankruptcy court of a petition under this section by a foreign
representative.
11 U.S.C. § 304 (1994). Return to text
880 Section 1410 provides that:
(a) A case under section 304 of title 11 to enjoin the commencement or
continuation of an action or proceeding in a State or Federal court, or the
enforcement of a judgment, may be commenced only in the district court
for the district where the State or Federal court sits in which is pending
the action or proceeding against which the injunction is sought.
(b) A case under section 304 of title 11 to enjoin the enforcement of a lien
against a property, or to require the turnover of property of an estate, may
be commenced only in the district court for the district in which such
property is found.
(c) A case under section 304 of title 11, other than a case specified in
subsection (a) or (b) of this section, may be commenced only in the
district court for the district in which is located the principal place of
business in the United States, or the principal assets in the United States,
of the estate that is the subject of such case.
28 U.S.C. § 1410 (1994). Return to text
881 See Koreag, Controle et Revision S.A. v. Refco F/X Assoc., Inc., 961 F.2d 341, 348 (2d
Cir.) ("The purpose of a § 304 petition is to prevent the piecemeal distribution of assets in the United
States by means of legal proceedings initiated in domestic courts by local creditors.") cert. denied,
113 S. Ct. 188 (1992); Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709, 713-14 (2d Cir.
1987) (Section 304 "allows foreign bankrupts to prevent piecemeal distribution of assets in this
country by filing ancillary proceedings in domestic bankruptcy courts." citations omitted); Cunard
S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452, 454-55 (2d Cir. 1985) ("In order to administer
assets in the United States and to prevent dismemberment by local creditors of assets located here,
the representative of a foreign bankrupt may commence a section 304 proceeding, rather than a full
bankruptcy case.").
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882 H.R. REP. NO. 95-595, at 324-25 (1977); S. REP. NO. 95-989, at 35 (1978).
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883 "Congress intended that bankruptcy courts have 'maximum flexibility handling ancillary
cases' under section 304. The statute achieves that purpose by authorizing the bankruptcy court to
order 'other appropriate relief' in addition to or in lieu of the specifically authorized injunctive and
turnover relief. This catch-all authorization, in effect, gives the bankruptcy court a "near blank
check" in molding relief under section 304." 2 COLLIER ON BANKRUPTCY ¶ 304.03, 304-9 (Lawrence
P. King et al. eds. 15th ed.) (citing H.R. REP. NO. 95-595, at 324-25 (1977); S. REP. NO. 95-989,
at 35 (1978)).
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884 See, e.g., Angulo v. Kedzep, Ltd., 29 B.R. 417, 419 (Bankr. S.D. Tex. 1983) (utilizing section 304 ancillary proceeding to obtain discovery).
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885 See, e.g., Saleh v. Triton Container Int'l, Ltd., 175 B.R. 422 (Bankr. S.D. Fla. 1994) (continuing nationwide injunction preventing enforcement of creditor remedies against foreign
debtor's U.S. assets).
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886 Despite the hint by some courts that foreign debtors can utilize Bankruptcy Code-based avoidance powers (see, e.g., In re Trakman, 33 B.R. 780, 783-84 (Bankr. S.D.N.Y. 1983), most
courts have held that the foreign debtor's rights are delineated by the foreign law. See, e.g., In re A.
Tarricone, Inc., 80 B.R. 21, 23 (Bankr. S.D.N.Y. 1987); 2 COLLIER ON BANKRUPTCY ¶ 304.03, 304-8
(Lawrence P. King et al. eds., 15th ed. 1996).
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887 For the text of 28 U.S.C. § 1410(a) & (b), see note 880, supra.
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888 For the text of 28 U.S.C. § 1410(c), see note 880, supra.
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889 See note 881 supra.
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890 See Evans v. Hancock, Rothert & Bunshoft, 177 B.R. 193, 197 (Bankr. S.D.N.Y. 1995)
(permitting foreign representative to bring single ancillary proceeding to obtain nationwide injunction
similar to automatic stay; "[t]his construction of 28 U.S.C. § 1410 not only comports with Section
304, but is also consistent with the principles that venue statutes should be liberally construed to avoid
unnecessary litigation and excessive costs."); Saleh v. Triton Container Intl, Ltd., 175 B.R. 422, 425
(Bankr. S.D. Fla. 1994) (permitting a single ancillary proceeding in order to enjoin multiple creditor
remedies; "With due deference to the 'plain meaning' rule, the Court does not find that doctrine
applicable here.... 'A statute susceptible of more than one meaning must be read in the manner which
effectuates rather than frustrates the major purpose of the legislative draftsman.'").
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891 In re Kingscroft Ins. Co., Ltd., 150 B.R. 77 (Bankr. S.D. Fla. 1992) (dismissing as moot
ancillary proceeding filed in Florida bankruptcy court under section 1410(a); deferral was proper to
national injunction issued by bankruptcy court in New York).
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892 177 B.R. 193 (Bankr. S.D.N.Y. 1995).
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893 Id. at 195.
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894 Id.
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895 Id. at 197.
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896 175 B.R. 422 (Bankr. S.D. Fla. 1994)
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897 Id. at 426.
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898 Id. ("Enormous burdens would be placed on a foreign petitioner if it had to file an ancillary proceeding in every federal district in which there was litigation pending or property
situated. . . . With multiple § 304 cases, there would be significant risk of inconsistent results.
Furthermore, there would be litigation in multiple forums, discovery proceedings in multiple forums
and, in general, a procedural nightmare inconsistent with the intended purpose of § 304.").
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899 28 U.S.C. § 1334(e) (1994).
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