What Are U.S. Creditors' Rights?

Efforts Unsuccessful

Over the past several years, there have been a number of attempts to establish rules and regulations to govern cross-border plenary bankruptcy proceedings. The objective of these efforts is to convert multi-national bankruptcy cases from territorialism, which uses local assets to satisfy local claimants in local proceedings with little regard for proceedings or parties elsewhere, [to] universalism, which would provide a single forum applying a single legal regime to all aspects of a debtor's affairs on a worldwide basis. Maxwell, 170 B.R. at 816. (Emphasis added). However, to date, none of those efforts has succeeded.

As the enactment of section 304 of the Bankruptcy Code demonstrates, the United States in ancillary bankruptcy cases has embraced an approach to international insolvency which is a modified form of universalism accepting the central premise of universalism, that is, that assets should be collected and distributed on a worldwide basis, but reserving to local courts discretion to evaluate the fairness of home country procedures and to protect the interests of local creditors. Maxwell, 170 B.R. at 816. See e.g., Koreag, Controle et. Revision, S.A., v. Refco F/X Associates, Inc., 961 F.2d 341, cert. denied, 506 U.S. 865 (1992).

The most recent, and thus far unsuccessful, attempt by the international community to adopt universalism, and provide a mechanism for dealing with cases of cross- border bankruptcies is the Model Law on Cross-Border Insolvency (Model Law), adopted by the United Nations Commission on International Trade Law in 1997. However, the Model Law has not advanced beyond being considered by a number of countries, including the United States, and adopted, but with alterations and qualifications, by fewer than five countries. The United States has not enacted legislation on cross-border bankruptcies but has included the Model Law as proposed Title VIII (Sec. 801) in Bill H.R. 833, for consideration together with provisions relating to other bankruptcy issues. The Bill was introduced on January 31, 2001 and still is pending.

An earlier, unsuccessful, effort to apply a universal approach to transnational insolvencies was the European Convention on Certain International Aspects of Bankruptcy, known as the Istanbul Convention, which was proposed as a multilateral treaty by the Council of Europe at Strasbourg in 1989. Only six nations signed the Istanbul Convention, which was never ratified. It failed because it did not provide sufficient predictability to creditors attempting to determine which of the jurisdictions involved in a cross-border bankruptcy will be the forum for the main proceeding. Obviously, that inability was critical because creditors could not predict which state's laws would govern their claims.

Another failed attempt was the Cross-Border Insolvency Concordat adopted in 1996 by the International Bar Association. The Concordat has not gained support because of its generality and failure to offer a practical solution to the existing weaknesses surrounding transnational insolvencies. For example, the Concordat fails to prevent disputes over jurisdiction, and does not provide to creditors the guidance needed to predict which state's laws will govern an insolvency proceeding.

The European Union Convention on Insolvency Proceeding (EU Convention), which was presented in 1995, is another, thus far fruitless, attempt by the international community to provide a mechanism for dealing with cross-border bankruptcies. The EU Convention has not been adopted because it has failed to receive the requisite approval of all of the EU member states. In any event, the EU Convention is deficient in a number of respects. For example, although it contemplates multiple proceedings in two or more states, including a main proceeding and secondary proceedings, EU Convention does not fully provide for the jurisdiction of the main proceeding. Also, a member state may refuse to recognize or enforce insolvency proceedings commenced in another member state where doing so would be contrary to the public policy, or constitutional rights of individuals, of the state being asked for such recognition or enforcement.

The 'Regulation'

As an interim measure, the European Union has adopted a regulation on insolvency proceedings (Regulation). The Regulation limits the ability of insolvent companies and individuals to shop around the EU for the best deal and to transfer assets from one member state to another to obtain a more favorable legal position. Under the Regulation, the courts with jurisdiction to open primary insolvency proceedings are those of the member state where the debtor has its center of main business interests; secondary proceedings may be opened subsequently to liquidate assets located in other member states; and, the law of the state in which the main proceedings are opened determines the main and the secondary proceedings.

However, the Regulation does not apply outside of the EU and would have no bearing on the rights of debtors and fiduciaries in an EU plenary bankruptcy proceeding to commence another plenary proceeding in a country outside of the EU.

Utilizing Protocols

Since there are no multinational treaties or statutes that govern parallel plenary cross-border bankruptcies, some courts and practitioners have developed ad hoc 'Cross-Border Insolvency Protocols' (Protocols) to harmonize and govern particular parallel bankruptcy proceedings commenced in different countries. The first reported decision in a case where a formalized, court-approved Protocol was utilized to coordinate multinational plenary proceedings was In re Maxwell Communications Corporation PLC (MCC). That case involved a Protocol governing two plenary bankruptcy proceedings, one pending in the High Court of Justice in London under the UK Insolvency Act; the other pending in the U.S. Bankruptcy Court for the Southern District of New York. The Protocol was negotiated and agreed to by the U.S. court appointed examiner and the English Joint Administrators and was approved by the courts of both countries.

The pertinent facts in the case were, as follows: MCC, the debtor, was an English holding company managed and headquartered in England with more than 400 subsidiaries worldwide. Approximately 80% of MCC's assets were located in the U.S. but most of its debt was incurred in England. After MCC defaulted under its loan documents with a U.S. banking syndicate, it commenced a voluntary Chapter 11 case in the New York bankruptcy court, in order to benefit from the more pro-reorganization inclinations of the U.S. bankruptcy law. The next day, MCC obtained an order of the London court putting it into administration under the UK Insolvency Act so as to protect MCC from creditors in the UK As a result of the two filings, MCC was engaged in two primary insolvency proceedings and was subject to the independent orders of the U.S. and the UK courts, and the creation of the Protocol followed.

The objective of the courts and the administrators and examiners in adopting the Protocol was to establish guidelines and procedures to maximize the value of the MCC estate and harmonize the proceedings to reduce expenses, waste and jurisdictional conflicts as much as possible. The Protocol assigned corporate governance of the MCC estate to the UK administrators but required the administrators to obtain the consent of the U.S. examiner, or approval of the U.S. court, to major decisions concerning the estate. The Protocol also directed that the UK administrators consult with the U.S. examiner in the formulation of a coordinated plan of reorganization. Under the Protocol, instead of dividing the assets for distribution by the two courts, to different creditor groups, the assets were pooled in one 'pot' for distribution to all creditors who were permitted to file a claim in either the U.S. or the UK court. But the Protocol did not resolve all problems that might arise, such as which substantive law would govern resolution of disputed claims by creditors.

One of the issues that was not covered by the Protocol, and with which the two courts had to deal during the proceedings, was that the preferences avoidance laws of England were 'somewhat different' from those of the U.S. 170 B.R. at 818. The U.S. court determined that, although the laws were different, the English laws were 'not repugnant' to those of the U.S. Id. Therefore, application of English law would not be so unfair as to require the use of U.S. law. The U.S. court determined that the doctrine of international comity precluded application of the U.S. avoidance laws because the transfers at issue had a 'strong English connection' and 'England had a stronger interest than the United States in applying its own avoidance law to these actions.' 93 F.3d, at 1052.

Next month's article explains in depth what happens when a U.S. court finds that there is a real conflict between the laws of two or more countries in the treatment of creditors' claims.

Jack Weinberg is a partner in the law firm of Herrick, Feinstein LLP.

Part One of aTwo-Part Article

Cross-border bankruptcies, a by-product of the globalization of businesses, are increasing in number, size and complexity. Coordination of reorganization or liquidation of transnational businesses is difficult because the applicable laws, social policies and concerns of the various nations are not uniform or sufficiently similar so as to be interchangeable or harmonized. In partial recognition of the globalization of businesses, Congress enacted Bankruptcy Code ' 304 in 1978, which gives foreign representatives in foreign insolvency proceedings access to U.S. bankruptcy courts.

Under ' 304, a foreign representative may commence an ancillary proceeding, but not a full-blown bankruptcy case, in a U.S. bankruptcy court for relief in aid of a foreign plenary insolvency proceeding. Foreign courts that recognize and give access to U.S. representatives of American debtors have reciprocated such access. The Bankruptcy Code, however, does not compel U.S. bankruptcy courts to cooperate with the foreign proceedings. Nor does ' 304 address circumstances where plenary bankruptcy cases are pending at the same time in courts of the U.S. and one or more other nations, ie, parallel proceedings. In re Maxwell Communications Corporation PLC , 186 B.R. 807, 819 (S.D.N.Y. 1995), aff'g , 170 B.R. 800 (Bankr. S.D.N.Y. 1994), and affirmed at 93 F.3d 1036 (2nd Cir. 1996).

Efforts Unsuccessful

Over the past several years, there have been a number of attempts to establish rules and regulations to govern cross-border plenary bankruptcy proceedings. The objective of these efforts is to convert multi-national bankruptcy cases from territorialism, which uses local assets to satisfy local claimants in local proceedings with little regard for proceedings or parties elsewhere, [to] universalism, which would provide a single forum applying a single legal regime to all aspects of a debtor's affairs on a worldwide basis. Maxwell, 170 B.R. at 816. (Emphasis added). However, to date, none of those efforts has succeeded.

As the enactment of section 304 of the Bankruptcy Code demonstrates, the United States in ancillary bankruptcy cases has embraced an approach to international insolvency which is a modified form of universalism accepting the central premise of universalism, that is, that assets should be collected and distributed on a worldwide basis, but reserving to local courts discretion to evaluate the fairness of home country procedures and to protect the interests of local creditors. Maxwell, 170 B.R. at 816. See e.g., Koreag, Controle et. Revision, S.A., v. Refco F/X Associates, Inc. , 961 F.2d 341, cert. denied, 506 U.S. 865 (1992).

The most recent, and thus far unsuccessful, attempt by the international community to adopt universalism, and provide a mechanism for dealing with cases of cross- border bankruptcies is the Model Law on Cross-Border Insolvency (Model Law), adopted by the United Nations Commission on International Trade Law in 1997. However, the Model Law has not advanced beyond being considered by a number of countries, including the United States, and adopted, but with alterations and qualifications, by fewer than five countries. The United States has not enacted legislation on cross-border bankruptcies but has included the Model Law as proposed Title VIII (Sec. 801) in Bill H.R. 833, for consideration together with provisions relating to other bankruptcy issues. The Bill was introduced on January 31, 2001 and still is pending.

An earlier, unsuccessful, effort to apply a universal approach to transnational insolvencies was the European Convention on Certain International Aspects of Bankruptcy, known as the Istanbul Convention, which was proposed as a multilateral treaty by the Council of Europe at Strasbourg in 1989. Only six nations signed the Istanbul Convention, which was never ratified. It failed because it did not provide sufficient predictability to creditors attempting to determine which of the jurisdictions involved in a cross-border bankruptcy will be the forum for the main proceeding. Obviously, that inability was critical because creditors could not predict which state's laws would govern their claims.

Another failed attempt was the Cross-Border Insolvency Concordat adopted in 1996 by the International Bar Association. The Concordat has not gained support because of its generality and failure to offer a practical solution to the existing weaknesses surrounding transnational insolvencies. For example, the Concordat fails to prevent disputes over jurisdiction, and does not provide to creditors the guidance needed to predict which state's laws will govern an insolvency proceeding.

The European Union Convention on Insolvency Proceeding (EU Convention), which was presented in 1995, is another, thus far fruitless, attempt by the international community to provide a mechanism for dealing with cross-border bankruptcies. The EU Convention has not been adopted because it has failed to receive the requisite approval of all of the EU member states. In any event, the EU Convention is deficient in a number of respects. For example, although it contemplates multiple proceedings in two or more states, including a main proceeding and secondary proceedings, EU Convention does not fully provide for the jurisdiction of the main proceeding. Also, a member state may refuse to recognize or enforce insolvency proceedings commenced in another member state where doing so would be contrary to the public policy, or constitutional rights of individuals, of the state being asked for such recognition or enforcement.

The 'Regulation'

As an interim measure, the European Union has adopted a regulation on insolvency proceedings (Regulation). The Regulation limits the ability of insolvent companies and individuals to shop around the EU for the best deal and to transfer assets from one member state to another to obtain a more favorable legal position. Under the Regulation, the courts with jurisdiction to open primary insolvency proceedings are those of the member state where the debtor has its center of main business interests; secondary proceedings may be opened subsequently to liquidate assets located in other member states; and, the law of the state in which the main proceedings are opened determines the main and the secondary proceedings.

However, the Regulation does not apply outside of the EU and would have no bearing on the rights of debtors and fiduciaries in an EU plenary bankruptcy proceeding to commence another plenary proceeding in a country outside of the EU.

Utilizing Protocols

Since there are no multinational treaties or statutes that govern parallel plenary cross-border bankruptcies, some courts and practitioners have developed ad hoc 'Cross-Border Insolvency Protocols' (Protocols) to harmonize and govern particular parallel bankruptcy proceedings commenced in different countries. The first reported decision in a case where a formalized, court-approved Protocol was utilized to coordinate multinational plenary proceedings was In re Maxwell Communications Corporation PLC (MCC). That case involved a Protocol governing two plenary bankruptcy proceedings, one pending in the High Court of Justice in London under the UK Insolvency Act; the other pending in the U.S. Bankruptcy Court for the Southern District of New York. The Protocol was negotiated and agreed to by the U.S. court appointed examiner and the English Joint Administrators and was approved by the courts of both countries.

The pertinent facts in the case were, as follows: MCC, the debtor, was an English holding company managed and headquartered in England with more than 400 subsidiaries worldwide. Approximately 80% of MCC's assets were located in the U.S. but most of its debt was incurred in England. After MCC defaulted under its loan documents with a U.S. banking syndicate, it commenced a voluntary Chapter 11 case in the New York bankruptcy court, in order to benefit from the more pro-reorganization inclinations of the U.S. bankruptcy law. The next day, MCC obtained an order of the London court putting it into administration under the UK Insolvency Act so as to protect MCC from creditors in the UK As a result of the two filings, MCC was engaged in two primary insolvency proceedings and was subject to the independent orders of the U.S. and the UK courts, and the creation of the Protocol followed.

The objective of the courts and the administrators and examiners in adopting the Protocol was to establish guidelines and procedures to maximize the value of the MCC estate and harmonize the proceedings to reduce expenses, waste and jurisdictional conflicts as much as possible. The Protocol assigned corporate governance of the MCC estate to the UK administrators but required the administrators to obtain the consent of the U.S. examiner, or approval of the U.S. court, to major decisions concerning the estate. The Protocol also directed that the UK administrators consult with the U.S. examiner in the formulation of a coordinated plan of reorganization. Under the Protocol, instead of dividing the assets for distribution by the two courts, to different creditor groups, the assets were pooled in one 'pot' for distribution to all creditors who were permitted to file a claim in either the U.S. or the UK court. But the Protocol did not resolve all problems that might arise, such as which substantive law would govern resolution of disputed claims by creditors.

One of the issues that was not covered by the Protocol, and with which the two courts had to deal during the proceedings, was that the preferences avoidance laws of England were 'somewhat different' from those of the U.S. 170 B.R. at 818. The U.S. court determined that, although the laws were different, the English laws were 'not repugnant' to those of the U.S. Id. Therefore, application of English law would not be so unfair as to require the use of U.S. law. The U.S. court determined that the doctrine of international comity precluded application of the U.S. avoidance laws because the transfers at issue had a 'strong English connection' and 'England had a stronger interest than the United States in applying its own avoidance law to these actions.' 93 F.3d, at 1052.

Next month's article explains in depth what happens when a U.S. court finds that there is a real conflict between the laws of two or more countries in the treatment of creditors' claims.

Jack Weinberg is a partner in the law firm of Herrick, Feinstein LLP.