Cross-border Insolvencies Under United States Law An Update. Andrew P. DeNatale and Daniel P. Ginsberg White & Case LLP

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1 Cross-border Insolvencies Under United States Law An Update Andrew P. DeNatale and Daniel P. Ginsberg White & Case LLP This article was published in slightly different form in Butterworths Journal of International Banking and Financial Law, October, November, December 2005

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3 Cross-border Insolvencies Under United States Law An Update In this three-part guide, we review the provisions of US bankruptcy law applicable to crossborder restructurings involving the US, a core part of which Section 304 of the United States Bankruptcy Code was replaced as of October 17, 2005 by a new Chapter 15. We believe that a basic familiarity with Chapter 15 and associated US legal doctrines is critical for any major financial institution or international law firm. Part I discusses US courts extensive extraterritorial jurisdiction over non-us debtors and the circumstances in which the US courts will refrain from exercising this jurisdiction. It also examines US courts powers under the former Section 304 to sanction ancillary proceedings in the US in aid of foreign proceedings. Part II contains a detailed examination of the new Chapter 15 regime, including a discussion of relevant decisions under the European Insolvency Regulation. Part III reviews recent US case law relating to crossborder insolvencies involving the US. Introduction The past decade or so has seen a significant rise in the level of integration among economies around the world as well as in the number of multinational corporations. As a result, the number and complexity of cross-border restructurings has also increased significantly, and many of these involve the US. Thus, it is increasingly likely that major financial and other institutions will face situations in which they will be involved in cross-border restructurings involving the US. While US bankruptcy law has had a mechanism for dealing with cross-border restructurings namely Section 304 of the United States Bankruptcy Code (the US Bankruptcy Code ) 1 the US Congress recently amended US law in connection with cross-border insolvency proceedings in a significant manner by replacing Section 304 with a new Chapter 15 to the US Bankruptcy Code. Thus, a basic familiarity with Chapter 15 and associated US legal doctrines is critical for any major financial institution or international law firm. Recent US case law and legislation in the area of cross-border insolvency have reset the rules of engagement in cross-border restructurings. At a time when at least some recent US case law would suggest that the powers of US courts to restructure a non-us debtor are robust, US legislation is stating quite the opposite. In particular, while the recent US case law restates the principle that there are virtually no barriers to the use of US courts and US bankruptcy law to restructure a non-us debtor, including, in appropriate cases, subjecting the non-us debtor to an involuntary filing in the US, the recently enacted Chapter 15 will result in a diminished ability of US courts to restructure non-us entities under certain circumstances. 2 This analysis discusses the current state of the law governing the use of US courts to restructure non-us debtors, including the new Chapter 15, and expresses some concerns about cross-border restructurings in light of Chapter 15. Part I: Non-US Corporations as US debtors in plenary US proceedings and US ancillary proceedings in aid of foreign proceedings A. Non-US Corporations as US Debtors in Plenary US Proceedings 1. Initial Eligibility as a Debtor Under the US Bankruptcy Code Perhaps the most pervasive way in which a US court can restructure a non-us debtor is to grant the non-us debtor the status of a Chapter 11 debtor 1

4 Cross-border Insolvencies Under United States Law An Update under the US Bankruptcy Code with all of the rights, privileges, powers, and responsibilities associated therewith. 3 The starting point for determining eligibility as a debtor under the US Bankruptcy Code is Section 109 of the US Bankruptcy Code, which provides, as a general matter, that a person 4 is eligible to be a debtor under the US Bankruptcy Code if it: (i) resides or has a domicile in the US; (ii) has a place of business in the US; or (iii) has property in the US. 5 Prior to the enactment of Chapter 15, US courts applied this test quite literally and permitted entities to be debtors under the US Bankruptcy Code even if such entities only had nominal assets located in the US. The property could be several thousand dollars in a US bank account, a retainer held by the company s US professionals or stock in a US corporation held by the company (e.g., In re Global Ocean Carriers, Ltd., 251 B.R. 31, (Bankr. D. Del. 2000) (finding that bank accounts constitute property in the United States for purposes of eligibility under Section 109 of the [US] Bankruptcy Code, regardless of how much money was actually in them on the petition date and further stating that, pursuant to Delaware State law, a company has property in Delaware by virtue of its ownership of stock in a Delaware corporation); In re McTague, 198 B.R. 428 (Bankr. W.D.N.Y. 1996) ($194 in bank account was sufficient property for bankruptcy eligibility).) Indeed, given this rather low threshold, US courts have stated that there is virtually no formal barrier to having non-us debtors become subject to US bankruptcy proceedings. (In re Globo Comunicacoes E Participacoes S.A. ( Globopar ), 317 B.R. 235, 249 (S.D.N.Y. 2004) (citing In re Aerovias Nacionales de Colombia S.A. (In re Avianca), 303 B.R. 1, 9 (Bankr. S.D.N.Y. 2003).) In fact, US courts have even held that, although it may be novel, creditors can commence involuntary bankruptcy proceedings against non-us entities. (See Globopar, at )) The significance of this low barrier is even more remarkable when one considers that the filing of a US bankruptcy proceeding results in the US court having exclusive jurisdiction over all of the property of the debtor and its estate wherever located. (See 28 USC Section 1334(e) and 11 USC Section 541.) This broad grant of jurisdiction results in the extraterritorial application of the US Bankruptcy Code, at least with respect to those creditors subject to personal jurisdiction in the US such as large non-us financial institutions with a presence in the US. 7 The intent of the broad grant of jurisdiction is to permit the US bankruptcy court to deal efficiently and expeditiously with all matters connected with the bankruptcy estate. (Celotex Corp v Edwards, 514 US 300, 308 (1995) (quoting Pacor, Inc v Higgins, 743 F.2d 984, 994 (3d Cir. 1984), overruled on other grounds by Things Remembered, Inc v Petrarca, 516 US 124 (1995).) As we shall see, the application of this provision may result in conflicts with the laws of other nations and as discussed in Part II is limited under Chapter 15, particularly where the US case is commenced after the recognition of a foreign main proceeding. 2. Jurisdiction Over the Debtor In order to hear a case, a US court must establish that it has subject matter jurisdiction and in personam (or personal) jurisdiction, and that venue is proper. As an initial matter, 28 USC Section 1334 establishes subject matter jurisdiction in US federal courts for all US bankruptcy cases, including those involving non-us debtors. 8 As noted above, this jurisdiction of the US court is worldwide (at least with respect to debtors who are subject to the personal jurisdiction of the US court). 9 US federal courts, such as US bankruptcy courts, will have personal jurisdiction over persons only under certain specified circumstances. These circumstances generally include persons who are subject to personal jurisdiction in the state in which the US federal court is located. (See Fed. R. Civ. P. 4(k)(1).) This would include persons residing in the state 10 or otherwise subject to the particular state s long-arm law. 11 In addition, a person can always consent to personal jurisdiction in a particular jurisdiction. 12 2

5 Where the non-us debtor is the subject of an involuntary proceeding (or does not otherwise consent to personal jurisdiction), the US court must examine the debtor s presence in, and contacts with, the US in order to determine whether there are sufficient contacts to assert personal jurisdiction over the debtor. 13 In determining whether it would be proper for the US court to assert personal jurisdiction over a particular entity (and, therefore, have the ability to adjudicate rights to property located outside of the US), the US court will consider: (i) whether the debtor had sufficient minimum contacts with the jurisdiction to subject itself to personal jurisdiction in such jurisdiction; and (ii) whether the exercise of personal jurisdiction over the debtor is reasonable under the circumstances of the particular case. (See, e.g., International Shoe Co. v Washington, 326 US 310 (1945); World-Wide Volkswagon Corp. v Woodson, 444 US 286 (1980); Burger King Corp. v Rudzewicz, 471 US 462 (1985); Asahi Metal Industry Co., Ltd. v Superior Court, 480 US 102 (1987); Globopar, at 257.) To address the first part of this test, the US court engages in a broad survey of the debtor s presence and activities in the jurisdiction to make sure that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. (International Shoe, 326 US at 316 (quoting Milliken v Meyer, 311 US 457, 463 (1940)).) This is likely to include considerations of property ownership, relationships with subsidiaries, utilization of capital markets, and any other contacts or effects that link the debtor to a US jurisdiction. 14 As to the second factor for the establishment of personal jurisdiction, the US Supreme Court has held that the reasonableness of the exercise of personal jurisdiction in a particular case depends upon an evaluation of the following factors: the burden on the defendant, the interests of the forum state and the plaintiff s interest in obtaining relief as well as the interstate judicial system s interest in obtaining the most efficient resolution of controversies and the shared interest of the several states in furthering fundamental substantive social policies. (Asahi Metal Industry, 480 US at 113 (quoting World-Wide Volkswagon, 444 US at 292).) 3. Venue Another potential restriction on commencing cases involving non-us debtors in US courts is the establishment of proper venue, and the risk that if the chosen venue is deemed improper the US court may transfer the case to a more suitable jurisdiction, or even dismiss it under the doctrine of forum non conveniens if an appropriate venue within the US does not exist. 28 USC Section 1408 limits venue in plenary US bankruptcy cases (i.e., in the case of a Chapter 11 proceeding, the venue of the overall Chapter 11 case) to the district in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of [the bankruptcy proceeding] have been located for the one hundred and eighty days immediately preceding [the] commencement [of such proceeding], or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district. 15 In practical terms, this means that venue for a US corporation is generally proper in its state of incorporation or where its principal place of business lies. The principal place of business is determined by the location of the nerve center of the corporation, 16 or where significant business decisions are made. (See In re Peachtree Lane Assocs., Ltd., 198 B.R. 272 (Bankr. N.D. III. 1996).) Where business decisions are made in a state that does not contain the principal place of business under the nerve center test, venue may be proper in either jurisdiction. (See In re Sundance Corp., 84 B.R. 699 (Bankr. D. Mont. 1988).) Forum Non Conveniens A consideration in connection with questions of venue is the applicability of the doctrine of forum non conveniens. In general, the doctrine of forum non conveniens exists to protect defendants from being subjected to jurisdiction in a particular forum where an adequate alternative forum is available and an action in the plaintiff s choice of forum is 3

6 Cross-border Insolvencies Under United States Law An Update substantially inconvenient to an extent that justifies transfer or dismissal. (See Gulf Oil Corp. v Gilbert, 330 US 501 (1947).) How this doctrine should apply in US bankruptcy cases, and if it should apply at all, is a question for which there is scant authority. As stated in the Yukos opinion, [t]he court has discovered no published opinions on the question of whether the doctrine of forum non conveniens applies with respect to the entirety of a voluntary [US bankruptcy] case. (In re Yukos Oil Co. ( Yukos ), 321 B.R. 396, 407 (Bankr. S.D. Tex. 2005).) 18 The Yukos court then considered the two reported cases which considered the applicability of forum non conveniens in the US bankruptcy context. In In re Xacur, 219 B.R. 956 (Bankr. S.D. Tex. 1998), the US bankruptcy court dismissed an involuntary US petition against a Mexican citizen who owned property in the US. The court based its decision to dismiss the petition on lack of personal jurisdiction over the defendant as well as on the doctrine of forum non conveniens, finding that Mexico was an adequate alternative forum to the US. In Baumgart v Fairchild Aircraft Corp., 981 F.2d 824 (5th Cir. 1993), the Fifth Circuit Court of Appeals affirmed the lower court s dismissal, on the basis of forum non conveniens, of a wrongful death action arising out of the crash in Germany of a plane manufactured by the debtor, which action had been commenced in the district in the US in which the debtor s US bankruptcy case was pending on the basis of related to jurisdiction under the US Bankruptcy Code. In dismissing the action, the Fifth Circuit Court of Appeals cited its broad power under Article 111 of the US Constitution to prevent the administration of litigation from becoming an instrument of abuse, injustice, or oppression. (Id. at 828 (quoting In re Air Crash Disaster Near New Orleans, La., 821 F.2d 1147, 1155 (5th Cir. 1987), aff d in part, vacated in part, 490 US (1989).) While both of these cases suggest that it is within a US court s power to use the doctrine of forum non conveniens, the Yukos opinion explicitly declined to do so in the context of an entire US bankruptcy case, arguing that the US Congress intended US statutes regulating venue and jurisdiction in US bankruptcy cases to limit the exercise of this power. (Yukos, at 408.) Abstention or Dismissal of Chapter 11 Proceedings Under Section 305 Even where a non-us debtor qualifies under Section 109 and a US court has personal jurisdiction over the non-us debtor, the US court may consider abstaining from exercising its jurisdiction under Section 305 of the US Bankruptcy Code. 20 Section 305(a)(1) gives the US court discretion to dismiss or suspend a proceeding under the US Bankruptcy Code if the interests of creditors and the debtor would be better served by such dismissal or suspension. According to the legislative history, this provision was designed to be utilized where, for example, a few recalcitrant creditors attempt to interfere with an out-of-court restructuring that ha[s] the support of a significant percentage of the debtor s creditors. (In re Board of Directors of Multicanal S.A. ( Multicanal ), 314 B.R. 486, 522 (Bankr. S.D.N.Y. 2004) (citing H.R. Rep. No th Cong., 1st Sess. 325 (1977); S. Rep. No , 95th Cong., 2nd Sess. 35 (1979); In re Wine & Spirits Specialties of Kansas City, Inc., 142 B.R. 345, 347 (Bankr. W.D. Mo. 1992)); see also Globopar, at 255.) This same section has been used to dismiss or suspend proceedings where there is already pending a judicial proceeding in another forum. (See, e.g., Multicanal, at ) Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Act ), 21 a US court was also able to abstain from exercising jurisdiction or dismiss a US bankruptcy case pursuant to Section 305(a)(2) if there were a foreign proceeding pending and the so-called Section 304(c) factors 22 warranted dismissal. 23 In In re Cenargo Int l., PLC, the US bankruptcy court relied upon Section 305(a)(2) to suspend a Chapter 11 proceeding in the US commenced by an English shipping company that was subsequently placed in administration proceedings in England. Case No (Bankr. S.D.N.Y. Feb. 27, 2003). In a later opinion, the US bankruptcy court in the Cenargo matter noted that its decision to suspend the proceeding under Section 305(a)(2) was not based on any misconduct or bad faith of Cenargo in seeking Chapter 11 relief but merely upon the factors set forth in Section 304(c) of the [US] Bankruptcy 4

7 Code as incorporated in Section 305(a)(2)(B). (In re Cenargo Int l., PLC, 294 B.R. 571, (Bankr. S.D.N.Y. 2003).) In Multicanal, which involved the commencement of both a Section 304 ancillary proceeding by the board of directors of an Argentine company as well as an involuntary Chapter 11 proceeding with respect to such a company, which was also already subject to an Argentine restructuring proceeding, the US bankruptcy court held, in relevant part, that the involuntary Chapter 11 proceeding should be dismissed pursuant to both Sections 305(a)(1) and (2). 24 In applying Section 305(a)(1), the US bankruptcy court noted that appropriate considerations included whether another forum is available[,] whether another proceeding has proceeded to the point that it would be costly and time-consuming to start afresh under the [US] Bankruptcy Code; [and] the objective futility of the maintenance of a Multicanal reorganization in the United States, over the opposition of the putative debtor. (Multicanal, at 522 (citations omitted).) 25 In applying Section 305(a)(2), the US bankruptcy court concluded that, based upon a review of the Section 304(c) factors, relief under Section 304 was appropriate and that the economical and expeditious administration of the foreign estate [would be] best served by proceeding with its Section 304 petition and dismissing the involuntary Chapter 11 petition. (Multicanal, at 521.) It should be noted, however, that the mere existence of a proceeding outside of the US did not automatically require abstention or dismissal under Section 305(a)(2). For example, In re Maxwell Communication Corp., 93 F.3d 1036 (2nd Cir. 1996), involved dual proceedings, a Chapter 11 proceeding in the US as well as an administration proceeding in England, resulting in a Chapter 11 plan as well as a scheme of arrangement, each of which treated the combined estates as one pool and permitted creditors to file claims in either jurisdiction. 6. Dismissal of Chapter 11 Proceedings Under Section 1112(b) In addition to abstention or dismissal under Section 305, the US bankruptcy court in the Yukos case, discussed more fully in Appendix A, Part 3, took the view that a Chapter 11 petition on behalf of a non- US debtor may be dismissed pursuant to Section 1112(b) of the US Bankruptcy Code. (Yukos, at ) This section permits a US court to dismiss a Chapter 11 case for cause and lists various illustrative, but not exhaustive, examples. In Yukos, a creditor of the debtor sought to have Yukos Chapter 11 petition dismissed on a variety of grounds, including, inter alia, lack of eligibility under Section 109, forum non conveniens, and pursuant to Section After rejecting all of the other arguments raised by the creditor, the US court accepted the creditor s argument under Section 1112 and dismissed Yukos Chapter 11 case by looking at the totality of the circumstances. (Yukos, at 410.) In particular, the US court considered: (i) the inability of Yukos to effectuate a reorganization without the cooperation of the Russian government; and (ii) the timing and intent of the transfer of funds for the express purpose of attempting to create jurisdiction. (Id. at ) B. US Ancillary Proceedings in Aid of Foreign Proceedings 1. Eligibility Under Section 304 In addition to a company s ability to become a debtor in its own Chapter 11 case, prior to the Act, a foreign representative of a company in a foreign proceeding was also able to seek assistance from US courts by filing a petition under Section 304 of the US Bankruptcy Code. 26 The overriding purpose of Section 304 was to best assure an economical and expeditious administration of a non-us estate and to prevent the piecemeal distribution of the estate. (See, e.g., In re Treco ( Treco ), 240 F.3d 148, (2nd Cir. 2001); Koreag, Controle et Revision S.A. v Refco F/X Assocs., Inc. (In re Koreag, Controle et Revision S.A.), 961 F.2d 341, 358 (2nd Cir. 1992).) Prior to the enactment of Chapter 15, for purposes of the US Bankruptcy Code (including Section 304), a foreign proceeding was defined, under Section 101(23) of the US Bankruptcy Code, very broadly, as a proceeding, whether judicial or administrative and whether or not under bankruptcy law, in a foreign 5

8 Cross-border Insolvencies Under United States Law An Update country in which the debtor s domicile, residence, principal place of business, or principal assets were located at the commencement of such proceeding, for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge, or effecting a reorganization. Similarly, a foreign representative was defined under Section 101(24) to mean a duly selected trustee, administrator, or other representative of an estate in a foreign proceeding. This was interpreted to include a board of directors if it plays a role similar to that of a debtor in possession under the US Bankruptcy Code. (Multicanal, at 501.) As discussed in Part II below ( Chapter 15: Crossborder Insolvency Reforms Key Definitions and Concepts ), these definitions have been revised as part of Chapter Venue In addition, as with plenary US bankruptcy proceedings, another restriction on commencing ancillary proceedings under Section 304 was the establishment of correct venue. 28 USC Section 1410, which are governed venue in ancillary proceedings, generally restricted proper venue to the district in which the principal place of business or principal assets in the US were located. Additionally, for cases against property, venue was proper where the property was located, and for injunctions against proceedings in US courts, venue was proper in the district in which those proceedings were taking place. Id. With the introduction of Chapter 15, these rules have been amended to reflect a policy of increased international cooperation and more broadly applicable standards for dealing with non-us debtors Obtaining Section 304 Relief A Section 304 proceeding was initiated under Section 304(a) of the US Bankruptcy Code by the foreign representative filing a petition for relief under Section 304 with the US court. The petition typically described the foreign representative s eligibility for relief and the specific type of relief requested. Although not technically adversary proceedings under the US Bankruptcy Code, the procedure governing Section 304 proceedings under Rules 1010, 1011 and 1018 of the Federal Rules of Bankruptcy Procedure was quite similar to the rules governing adversary proceedings and permitted a party in interest an opportunity to oppose the relief requested. In considering whether to grant relief under Section 304, Section 304(c) provided that the [US] court [was to] be guided by what [would] best assure an economical and expeditious administration of [the] estate [of the company in the foreign proceeding], consistent with: (1) just treatment of all holders of claims against or interests in such estate; (2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding; (3) prevention of preferential or fraudulent dispositions of property of such estate; (4) distribution of proceeds of such estate substantially in accordance with [but not identical to] the order prescribed by [the US Bankruptcy Code]; 28 (5) comity; and (6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns. In applying these factors the so-called Section 304(c) factors a US court was to ultimately weigh all of the relevant factors, with no one factor being determinative. (Multicanal, at 502 (citing In re lonica PLC, 241 B.R. 829, 834 (Bankr. S.D.N.Y. 1999).) However, many courts held that the fifth factor, comity, was preeminent in determining whether to grant relief. (Multicanal, at 502 (citing Treco, at ).) The legislative intent with respect to Section 304(c) was to give the US bankruptcy court maximum flexibility in handling cross-border insolvencies. 29 6

9 4. Relief Available Under Section 304 Subject to consideration of the Section 304(c) factors, and if a party in interest did not timely controvert the petition, or after trial, the US court was permitted, under Section 304(b), to: (i) enjoin litigation and enforcement actions against the debtor with respect to property involved in the foreign proceeding or against such property; (ii) order turnover of property of such estate to the foreign representative; or (iii) order other appropriate relief. There were, however, certain aspects of Section 304 which raised issues regarding its application in certain instances. One example of this was the interplay of Sections 109 and 304 of the US Bankruptcy Code. In addition to specifying eligibility requirements for becoming a US debtor, Section 109 also excludes certain types of entities from eligibility on the basis that such entities, including banks and insurance companies, are more properly suited to liquidation under their own regulatory schemes. While the US Bankruptcy Code was silent as to whether a debtor under Section 304 must also qualify under Section 109, a number of US courts held that the limitations on who may be a debtor under Section 109 did not apply to a petitioner under Section 304. (See, e.g., Agency for Deposit Insurance, Rehabilitation, Bankruptcy and Liquidation of Banks v Superintendent of Banks of the State of New York, 310 B.R. 793 (S.D.N.Y. 2004); In re Brierley, 145 B.R. 151, (Bankr. S.D.N.Y. 1992) (taking into consideration prior decisions discussing the applicability of Sections 109 to 304 and holding [h]aving now reflected on whether the debtor eligibility requirements have been engrafted onto Section 304, I hold squarely that they have not ); Universal Casualty & Surety Co. Ltd. v Gee (In re Gee), 53 B.R. 891, (Bankr. S.D.N.Y. 1985) ( since a 304 case is one which does not administer an estate as such but simply aids a foreign bankruptcy, there is little reason to exclude a debtor ineligible for Chapter 11 relief from being the subject of a case under Section 304 ).) Thus, Section 304 acted to preempt the liquidation powers of US regulators in the liquidation of banks and insurance companies, for example. 30 Of particular note is the Agency for Deposit Insurance, Rehabilitation, Bankruptcy and Liquidation of Banks v Superintendent of Banks of the State of New York decision, as an alternative scheme of regulation existed in that case. Thus, under Section 304, creditors of a branch or agency of a non-us bank operating in the US were at risk of losing the protections provided by state regulations. 31 Furthermore, the relief under Section 304 was generally limited to enjoining litigation in the US that might interfere with the foreign proceeding and ordering turnover of the non-us debtor s property and in that regard did not include explicit authorization for the foreign representative to use the substantive provisions of the US Bankruptcy Code. Thus, depending upon the extent and type of relief required in the US, it often might have been more advantageous for a foreign representative to institute a plenary US bankruptcy case (i.e., Chapter 7 or 11) instead of an ancillary proceeding under Section Part II: Chapter 15: Cross-Border Insolvency reforms A. An Introduction to Chapter 15 Section 304 of the US Bankruptcy Code was replaced with a new Chapter in the US Bankruptcy Code Chapter 15 which applies to ancillary and other cross-border bankruptcy cases. 33 Chapter 15 essentially tracks the Model Law on Cross-Border Insolvency (the Model Law ) promulgated by the United Nations Commission on International Trade Law ( UNCITRAL ) 34 and is intended to encourage co-operation between the US and other countries with respect to cross-border insolvency cases. 35 Unlike Section 304, which only applied to US proceedings by foreign representatives in aid of duly 7

10 Cross-border Insolvencies Under United States Law An Update recognized foreign proceedings, Chapter 15 is much more expansive and applies where: (i) a non-us court or foreign representative seeks assistance in the US; (ii) a US bankruptcy case is pending and assistance is sought in a country other than the US; (iii) the same debtor is subject to both a foreign proceeding and a US bankruptcy case; or (iv) non-us creditors or other interested persons have an interest in commencing or participating in a US bankruptcy case. (See 11 USC Section 1501(b).) In general, cases commenced under Chapter 15 are intended to be ancillary to cases brought in a debtor s home country, unless a full United States bankruptcy case is brought under another chapter [of the US Bankruptcy Code (such as Chapter 7 or Chapter 11)]. 36 Moreover, [e]ven if a full [US bankruptcy] case is brought, the [US] court may decide under Section 305 to stay or dismiss the United States case under the other chapter and limit the United States role to an ancillary case under [Chapter 15]. If the full [United States bankruptcy] case is not dismissed, it will be subject to the provisions of [Chapter 15] governing co-operation, communication and co-ordination with the foreign courts and representatives. 37 B. Key Definitions and Concepts As part of the changes introduced by the new law, Chapter 15 has introduced a host of new definitions which conform to the terminology and body of ideas contained in the Model Law, including new definitions of foreign proceeding and foreign representative. A foreign proceeding is now defined to mean (11 USC Section 101(23)): a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation. This definition deletes the former requirement that the foreign proceeding be in a country in which the debtor s domicile, residence, principal place of business, or principal assets were located, thus permitting foreign nonmain proceedings (as defined below). A foreign representative is now defined to mean (11 USC Section 101(24)): a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor s assets or affairs or to act as a representative of such foreign proceeding. The inclusion of the word body and the substitution of the word authorized for the former duly selected would seem to evidence an intent to clearly include a debtor s board of directors where the board is authorized to administer the foreign proceeding. 38 Section 1502 of the new chapter contains various other definitions which have been taken from the Model Law (with minor language changes to comport with US terminology). Section 1502(4) defines foreign main proceeding as a foreign proceeding pending in the country where the debtor has the center of its main interests. The designation of a foreign proceeding as a foreign main proceeding has certain procedural advantages as discussed below. While the US Bankruptcy Code does not define center of main interests, it does create a presumption that a debtor s center of main interests is the debtor s registered office, or habitual residence in the case of an individual in the absence of evidence to the contrary (11 USC Section 1516(c)). 39 Section 1502(5) defines foreign non-main proceeding as a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment. Establishment, in turn, is defined to mean any place of operations where the debtor carries out a nontransitory economic activity (11 USC Section 1502(2)). The classification of foreign proceedings as either main or nonmain is similar to the classification under the European Insolvency Regulation (the EIR ) applicable in EU member states (as defined 8

11 below) and each type of proceeding is afforded different treatment. 40 Debtor is given a special definition in Chapter 15 and is defined as an entity that is the subject of a foreign proceeding (11 USC Section 1502(1)). Trustee is defined to include a trustee, a debtorin-possession under the US Bankruptcy Code, or a debtor under Chapter 9 of the US Bankruptcy Code. (See 11 USC Section 1502(6).) Chapter 15 also defines within the territorial jurisdiction of the United States to refer to tangible property located within the territory of the United States and intangible property deemed under applicable nonbankruptcy law to be located within that territory, in recognition of the fact that the US generally asserts insolvency jurisdiction over property outside its territorial limits. (See 11 USC Section 1502(8).) 41 C. Who May Be a Debtor Under Chapter 15 Unlike Section 304 of the US Bankruptcy Code, which had been held to apply to entities even if they did not qualify as debtors under Section 109 of the US Bankruptcy Code (see, e.g., Agency for Deposit Insurance, Rehabilitation, Bankruptcy and Liquidation of Banks v Superintendent of Banks of the State of New York, 310 B.R. 793 (S.D.N.Y. 2004)), Chapter 15 generally only applies to entities which may be debtors under the US Bankruptcy Code, although there are certain exceptions to this. (See 11 USC Section 1501(c).) Thus, excluded from recognition and relief under Chapter 15 are foreign proceedings involving: (i) US citizens or resident aliens in the US and their spouses who are eligible for Chapter 13; (ii) stockbrokers and commodity brokers subject to Chapter 7 liquidations; (iii) entities subject to Securities Investor Protection Act proceedings; and (iv) other entities excluded from US bankruptcy proceedings by Section 109(b) (e.g., railroads, domestic insurance companies, US or foreign banks and certain other kinds of financial institutions). (See id.) Similarly, Chapter 15 relief is also not available with respect to certain deposit, security, escrow and related arrangements required under US state insurance laws or regulations. (See 11 USC Section 1501(d).) However, although insurance companies are excluded from relief as a debtor under the US Bankruptcy Code, foreign proceedings of non-us insurance companies are eligible for recognition and relief under Chapter 15 as they had been under Section 304. (See 11 USC Section 1501(c)(1).) D. Recognition of Foreign Proceedings Under Chapter 15 A foreign main proceeding or foreign nonmain proceeding is generally entitled to the benefits of Chapter 15 after it receives recognition from the US court. 42 A foreign representative applies to the US court for recognition by filing a petition for recognition. (See 11 USC Section 1515(a).) The procedures for recognition of a foreign proceeding merely require the presentation of certificates of the non-us court or certified copies of its decision confirming the existence of the foreign proceeding and the appointment of the foreign representative. (See 11 USC Sections 1515(b)(1) and (2).) However, in the absence of such evidence, the US court may accept any other evidence of such matters acceptable to it. (See 11 USC Section 1515(b)(3).) 43 Chapter 15 contains certain presumptions concerning recognition which further simplify the process. (See 11 USC Section 1516.) For example, the debtor s registered office (or, in the case of an individual, his or her habitual residence ) is presumed to be the center of the debtor s main interests. (See 11 USC Section 1516(c).) Subject to a public policy exception, 44 and after notice and a hearing, 45 an order recognizing a foreign proceeding shall be entered if: (i) such foreign proceeding qualifies as such within the meaning of Section 1502 discussed above; (ii) the foreign representative is a person or body; and (iii) the petition meets the requirements of Section 1515 discussed above. (See 11 USC Section 1517(a).) It should be noted, however, that Section 1506 permits a US court to refuse to take an action under Chapter 15 if the action would be manifestly contrary to the public policy of the United States. 46 This provision follows the Model Law exactly and has been narrowly interpreted on a consistent 9

12 Cross-border Insolvencies Under United States Law An Update basis in courts around the world. 47 The use of the word manifestly in international usage restricts the public policy exception to the most fundamental policies of the United States. 48 It will be interesting to observe the extent to which this provision gives rise to litigation essentially challenging the propriety of recognizing a foreign proceeding on the basis of public policy and the standards, if any, which the US court will apply in making that determination. 49 Litigation over the recognition of the foreign main proceeding is required to have an expedited hearing at the earliest possible time. (See 11 USC Section 1517(c).) While this expedited process is subject to later modification, that opportunity may be prejudiced by the requirement that the court give due weight to possible prejudice to parties that have relied upon the order granting recognition. (See 11 USC Section 1517(d).) E. Preliminary Relief Available The mere filing of a petition for recognition commences a case, thereby providing the US bankruptcy court with jurisdiction, and, upon the filing of such petition, the US court has discretion to grant certain preliminary relief where necessary to protect the assets of the debtor and the interests of creditors prior to formal consideration of the petition for recognition. (See 11 USC Sections 1504 and 1519.) Such preliminary relief may include: (i) staying execution against the debtor s assets ; (ii) entrusting the administration or realization of all or part of the debtor s assets located in the United States to the foreign representative or another person authorized by the [US] court, including an examiner, in order to protect and preserve the value of assets that, by their nature or because of other circumstances, are perishable, susceptible to devaluation or otherwise in jeopardy ; (iii) suspending the right to transfer, encumber or otherwise dispose of the debtor s assets; (iv) compelling testimony or production of documents concerning the debtor s assets, affairs, rights, obligations or liabilities; and (v) granting any additional relief that may be available to a trustee, except for [certain actions to avoid acts detrimental to creditors (most notably, the exercise of avoiding powers)]. (See 11 USC Section 1519.) 50 F. Relief Available Upon Recognition Upon recognition of a foreign main proceeding, Chapter 15 automatically provides certain relief. (See 11 USC Section 1520.) For example, the provisions of the US Bankruptcy Code governing adequate protection and the automatic stay apply to the debtor and its property within the territorial jurisdiction of the US (See 11 USC Section 1520(a)(1).) 51 Provisions governing turnover and the use, sale, or lease of the debtor s property within the territorial jurisdiction of the US are also applicable, as are the provisions governing the avoidance of postpetition transactions and the post-petition effect of a security interest with respect to such property. (See 11 USC Section 1520(a)(2).) Further, a foreign representative may operate the debtor s business and may exercise certain limited rights and powers of a trustee. (See 11 USC Section 1520(a)(3).) 52 Upon recognition of a proceeding, whether main or non-main, the US court has discretion to grant certain relief (to the extent such relief has not already been granted automatically as discussed above) in order to protect the assets of the debtor as well as the interests of the creditors. (See 11 USC Section 1521.) Such relief includes staying the commencement or continuation of an individual action or proceeding concerning the debtor s assets, rights, obligations or liabilities as well as staying execution against the debtor s assets and suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor. (See 11 USC Section 1521(a).) The US court may also order discovery concerning the debtor and entrust the administration or realization of all or part of the debtor s assets within the territorial jurisdiction of the US to the foreign representative. (See 11 USC Sections 1521(a) and (b).) Chapter 15, however, specifically provides that the discretionary relief granted under this section may not include the power to bring certain actions to avoid acts detrimental to creditors (most notably, the exercise of avoiding powers). (See 11 USC Section 1521(a)(7).) 53 Finally, upon recognition of a foreign proceeding, Chapter 15 provides for the granting of additional assistance (beyond the forms of relief set forth in Sections 1520 and 1521 discussed above) under the US Bankruptcy Code or other laws of the US 10

13 (See 11 USC Section 1507.) As neither the statute nor legislative history describes what type of assistance is intended, it will be interesting to see what type of assistance is actually granted by the US courts. In determining whether to grant such assistance (11 USC Section 1507(b)): the [US] court shall consider whether such additional assistance, consistent with the principles of comity, will reasonably assure: (1) just treatment of all holders of claims against or interests in the debtor s property; (2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in [the] foreign proceeding; (3) prevention of preferential or fraudulent dispositions of property of the debtor; (4) distribution of proceeds of the debtor s property substantially in accordance with the order prescribed by [the US Bankruptcy Code]; and (5) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns. These factors are the same factors contained in old Section 304(c) (governing the granting of discretionary relief in Section 304 proceedings), but comity has been raised to the introductory language to make it clear that [comity] is the central concept to be addressed. 54 It should be noted that these factors are relevant in Chapter 15 cases only with respect to the granting of additional assistance and not to the granting of relief otherwise available under Chapter 15, including recognition. G. Standing Granted to Foreign Representatives In addition to the sections providing for specific relief under Chapter 15 discussed above, recognition also entitles the foreign representative to authorization or standing to take various actions in US courts. These actions include: (i) the commencement of an involuntary US bankruptcy case against the debtor under Section 303 of the US Bankruptcy Code; and (ii) only if the foreign representative acts for a foreign main proceeding, the commencement of a voluntary US bankruptcy case against the debtor. (See 11 USC Section 1511.) 55 The foreign representative also has standing in a plenary case concerning the debtor pending in the US (i.e., a Chapter 11 or 7 case separate from the Chapter 15 proceeding) to initiate certain actions to avoid acts detrimental to creditors (most notably, the exercise of avoiding powers). (See 11 USC Section 1523(a).) 56 However, if the foreign representative represents only a foreign nonmain proceeding (as distinguished from a foreign main proceeding, whose representative s standing is not subject to such challenge), the [US] court must be satisfied that [such] an action relates to assets that, under United States law, should be administered in the foreign nonmain proceeding. (See 11 USC Section 1523(b).) Once the foreign proceeding is recognized, the foreign representative may also intervene in any proceedings in a state or federal court in the United States in which the debtor is a party and is entitled to participate as a party in interest in a US bankruptcy case regarding the debtor. (See 11 USC Sections 1524 and 1512.) 57 In contrast to the broad standing given to the foreign representative in the US, Section 1505 requires a trustee or other entity (including an examiner) to obtain authorization to act abroad on behalf of a US bankruptcy estate. 58 This requirement would apply whether or not a foreign proceeding has been recognized. The entity authorized to act under this section may act in any way permitted by the applicable foreign law (11 USC Section 1505). The stated main purpose for this prior approval is to ensure that the [US] court has knowledge and control of possible expensive activities. 59 As a matter of prudent practice, it has been suggested that first-day orders in US reorganization cases include authorization to act under this section. 60 H. Co-Operation with Non-US Courts and Foreign Representatives Chapter 15 contains a number of provisions intended to foster co-operation between the US court and 11

14 Cross-border Insolvencies Under United States Law An Update estate representatives, on the one hand, and the non-us court and foreign representatives, on the other. For example, the [US] court shall co-operate to the maximum extent possible with a foreign court or a foreign representative, either directly or through the trustee (11 USC Section 1525(a)). 61 In addition, the US court is expressly authorized to communicate directly with, or to request information or assistance directly from, a foreign court or a foreign representative, subject to the rights of a party in interest to notice and participation (11 USC Section 1525(b)). 62 Section 1526(a) contains a parallel provision providing that the trustee or other person, including an examiner, authorized by the [US] court, shall, subject to the supervision of the [US] court, cooperate to the maximum extent possible with a foreign court or a foreign representative. Subject to US court approval and authorization, this co-operation may include communicating directly with the non- US court or foreign representative. (See 11 USC Section 1526(b).) 63 The types of co-operation contemplated by these provisions include (11 USC Section 1527): 64 (1) appointment of a person or body, including an examiner, to act at the direction of the [US] court; (2) communication of information by any means considered appropriate by the [US] court; (3) co-ordination of the administration and supervision of the debtor s assets and affairs; (4) approval or implementation of agreements [i.e., protocols] concerning the coordination of proceedings; and (5) co-ordination of concurrent proceedings regarding the same debtor. The House Report notes that US courts already utilize most of the forms of co-operation listed, but that they now have explicit statutory authorization to do so. 65 I. Concurrent Proceedings Chapter 15 also contains various provisions dealing with concurrent proceedings in the US and abroad. For example, once a foreign main proceeding has been recognized, a plenary case on behalf of the same debtor may be commenced in the US if the debtor has assets in the US. (See 11 USC Section 1528.) 66 In such case, the bankruptcy court s jurisdiction is limited to assets located in the US. (See 11 USC Section 1528.) Further, Section 305 was modified such that it now provides the US bankruptcy court with discretion to stay or dismiss a plenary case and limit the US s involvement to that of an ancillary case when a foreign proceeding has been recognized and the purposes of Chapter 15 would be best served thereby. (See 11 USC Section 305(a)(2).) The provisions of Sections 1529 and 1530 set forth guidelines for the US court with respect to co-ordinating multiple proceedings involving the same entity: to wit, a concurrent US case and foreign proceeding, in the case of Section 1529, and more than one foreign proceeding, in the case of Section The provisions of Section 1529 follow the Model Law almost exactly, but add a reference to Section 305 to make it clear the [US] bankruptcy court may continue to use that section to dismiss or suspend a [full US bankruptcy] case as part of co-ordination and co-operation with foreign proceedings. 67 This provision is consistent with United States policy to act ancillary to a foreign main proceeding whenever possible. 68 Section 1530 follows the Model Law exactly and is intended to ensure that a foreign main proceeding will be given primacy in the United States [over a foreign nonmain proceeding], consistent with the overall approach of the United States favoring assistance to foreign main proceedings. 69 In further deference to a foreign main proceeding, Section 1531 creates a presumption of insolvency for purposes of commencing an involuntary US case where there has been recognition of a foreign main proceeding. 70 The legislative history presumes that a showing of financial distress was required to be made in the home country of the debtor to commence the foreign main proceeding. 71 As such, 12

15 the foreign representative should not be required to make a new showing of financial distress in the absence of evidence to the contrary. 72 The final co-ordinating provision of Chapter 15, Section 1532, requires that subject to the rights of secured creditors or rights in rem, a creditor who receives payment in a foreign proceeding may not receive a distribution on the same claim in a US case, so long as the distribution in the US case to other creditors of the same class is proportionately less than the payment such creditor received in the foreign proceeding. This provision replaces prior Section 508 of the US Bankruptcy Code. 73 J. Relevant Experience Under the European Insolvency Regulation The EIR enacted by the European Union 74 contains very similar definitions and concepts to those under Chapter As such, the experience to date under the EIR will prove illuminating to those attempting to decipher the new provisions of Chapter 15. In particular, the experience under the EIR has generated a fair amount of litigation (and many would say forum shopping) in establishing the proper location of the main proceeding. Like Chapter 15, the EIR contemplates main proceedings to be commenced in the jurisdiction of the centre of a debtor s main interests 76 and secondary proceedings in jurisdictions where the debtor possesses an establishment. 77 Pursuant to the preamble to the EIR, the debtor s center of main interests should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties. 78 There is also a presumption that the place of the debtor s registered office is the center of its main interests in the absence of proof to the contrary. 79 Although the EIR applies only to proceedings where the center of the debtor s main interests is located in an EU member state, it is not necessary that the debtor actually be incorporated under the laws of one of the EU member states. 80 The actual determination of a debtor s center of main interests under the EIR has resulted in some interesting litigation a good example of which is In the Matter of Daisytek-ISA Limited ( Daisytek ), [2003] All ER (D) 312, 81 which involved an English limited holding company with German and French subsidiaries, all of which filed petitions for administration in the United Kingdom. In deciding that the center of main interests for each of the companies was in England, the High Court in Leeds considered both the scale of the interests administered at a particular place and their importance and then considered the scale and importance of the debtor s interests administered at any other place which may be regarded as its center of main interests. (Daisytek, at para 14.) The Daisytek decision was particularly interesting because, at times, there were competing parallel main insolvency proceedings in England as well as in France and Germany. Due to the priority principle in Article 16 of the EIR, 82 the judgment of the English court opening the English main proceedings (including its determination as to the location of the debtors centers of main interests) had to be recognized over the later filed French and German proceedings. 83 Pursuant to Article 3(3) of the EIR, the later filed French and German proceedings became secondary proceedings. In the Matter of Eurofood IFSC Ltd. ( Eurofood ) (No 341/04), [2004] BCC 383; [2004] IL Pr 14, is another illustration of the jurisdictional difficulties that can arise under the EIR. The company was an Irish incorporated subsidiary of Parmalat SpA ( Parmalat ) dedicated to providing financing for Parmalat group companies. The company s dayto-day operations were carried out by Bank of America s Dublin branch under contract, but major policy decisions were effectively made in Italy. In December 2003, Parmalat was discovered to be in deep financial crises. On December 23, 2003, the Italian Parliament passed a law permitting the extraordinary administration of companies and on December 24, 2003, Parmalat was placed into extraordinary administration in Parma, Italy. Bank of America, fearing that an attempt would be made to move the center of main interests of Eurofood to Italy, 84 applied on January 27, 2004 for 13

16 Cross-border Insolvencies Under United States Law An Update the liquidation of the company in Ireland. At that time, the Irish High Court also appointed a provisional liquidator to take control of the company s assets, but for procedural reasons did not have to make a final determination on the liquidation petition. On February 20, 2004, and with limited notice to the Irish provisional liquidator, the Parma Court determined that the center of main interests of the company was in Italy. On March 23, 2004, the Irish High Court found the center of main interests was in Ireland and that the judgment by the Parma Court was contrary to the priority principle contained in Article 16 of the EIR as under Irish law the commencement of liquidation took effect from the date of presentation of the winding up petition (i.e., January 27, 2004). The decision of the Irish High Court was appealed by Parmalat s administrator, Enrico Bondi, to the Irish Supreme Court, which considered that it was necessary, before giving its ruling, to refer five questions to the European Court of Justice ( ECJ ) for a preliminary ruling. 85 The questions brought to the ECJ involve the appropriate basis for determining a debtor s center of main interests, what should occur when two EU member states dispute jurisdiction and the priority principle contained in Article 16 of the EIR (i.e., whether the January 27, 2004 appointment of the Irish provisional liquidator took priority over the Parma Court s February 20, 2004 appointment of an extraordinary administrator). On September 27, 2005 Advocate General Jacobs delivered an opinion considering the questions at issue. 86 It is important to note that the opinion does not represent a judgment from the ECJ although experience shows that the ECJ usually, but not always, issue judgments which conform to the views expressed by an Advocate General. 87 The Advocate General decided that the Irish provisional liquidation constituted a judgment opening proceedings for the purpose of the Article 16 before turning to consider a question at the heart of the dispute: what happens when two separate EU member states open main insolvency proceedings in respect of the same company? The Advocate General stressed the principle of mutual respect on which the EIR is premised and went on to state that any party, who is concerned that the court opening the main proceedings has wrongly assumed jurisdiction, should seek a remedy under the national law where the court claiming jurisdiction is situated (with the possibility of a reference to the ECJ where appropriate). The Advocate General next turned to consider how the phrase center of a debtor s main interests should be determined where a subsidiary in one EU member state conducts the administration of its interests in that state (e.g., Ireland) but acts in accordance with the policy decisions made in another EU member state (e.g., Italy). The Advocate General decided that in such a situation the decisive factor in determining the center of the debtor s main interests would normally be where the subsidiary conducts the administration of its interests on a regular basis in a manner ascertainable by third parties. The Advocate General considered that the phrase center of a debtor s main interests was intended to provide a test in which the attributes of transparency and objective ascertainability are dominant. To this end he considered it was clearly essential that potential creditors should be able to ascertain in advance the legal system which would resolve any insolvency affecting their interests. 88 K. Practical Concerns Under Chapter 15 Although Chapter 15 will improve the efficiency of cross-border insolvencies in general, there are certain concerns which arise upon a careful reading of the law. For example, as noted above, Chapter 15 eliminates the consideration of the Section 304(c) factors from the recognition process and limits the use of those factors to the granting of additional assistance under Section It is conceivable that this loss of flexibility may result in US bankruptcy courts recognizing foreign proceedings which may not have been deemed appropriate under the old standards. Whether or not this will happen will depend in large part upon the future interpretation of Section 1506 (which permits the court to refuse to take an action under Chapter 15 if the action would be manifestly contrary to the public policy of the United States ). Based upon the legislative history, as discussed above, it would appear that the use of 14

17 this exception is intended to be used sparingly and only in deference to the most fundamental policies of the United States. 89 The flexibility of the US bankruptcy courts may be further limited by the provisions of Section 1528, which provide that after recognition of a foreign main proceeding, the effects of a subsequent US case will be restricted to the assets of the debtor that are within the territorial jurisdiction of the US and, to the extent necessary to implement co-operation and co-ordination, to other assets of the debtor otherwise subject to the US court s jurisdiction, to the extent such other assets are not subject to the jurisdiction and control of the recognized foreign main proceeding. While this provision is entirely consistent with the philosophy underlying Chapter 15, its strict interpretation (and the virtual elimination of the Section 304(c) factors) may produce results which may be deemed inappropriate in certain situations. 90 It will be interesting to see whether the US courts are able to use Section 1506 or some other provision to prevent what they perceive to be unjust results. Perhaps the most important concern raised by the enactment of Chapter 15 is the obvious incentive to race to the courthouse in order to be the first proceeding and thereby gain certain tactical advantages or prevent others from gaining such advantages. As seen from the brief discussion above concerning the experience to date under the EIR, there are situations (particularly involving large corporate groups) where a debtor s center of main interests could arguably be in more than one jurisdiction. Under the EIR, the decision of the first court to open a main proceeding (including its decision as to the location of the debtor s center of main interests) will be recognized. Some critics argue that this aspect of the EIR has led to forum shopping in an effort to place the main proceeding in the most favorable forum. There is clearly the potential that the deference which the Model Law and Chapter 15 give to the main proceeding could result in similar concerns about forum shopping in the US or at a minimum a belief on the part of US creditors that it is desirable to file first in the US. In addition, the issue of timing will also be important anytime an insolvency proceeding is commenced anywhere in the world. The deference given to the determinations of non-us courts with respect to the opening of foreign main proceedings will make it critical that US creditors actively and promptly participate in those proceedings in order to protect their interests. For example, once a proceeding is opened in a non-us court, the US creditor should be prepared to actively participate in such foreign proceeding from the very beginning, including the determination of the center of main interests. Finally, the failure to define the center of main interests will, at least in the short term, lead to greater legal uncertainty (rather than certainty) for trade and investment. While one can appreciate the wisdom of not precisely defining the center of main interests, the lack of a precise definition will no doubt lead to uncertainty and litigation in the future. At least for now, the litigation under the EIR may provide useful guidance pending the development of case law in the US. In the meantime, creditors should attempt as best they can to draft, and monitor compliance with, appropriate representations and covenants to help determine with some certainty the appropriate venue for any subsequent insolvency proceeding for the debtor. Part III: Recent US case law on Cross-Border Insolvency There have been several recent cases prior to the enactment of Chapter 15 suggesting that, while the power of US courts to restructure a non-us debtor under US bankruptcy law is robust, the US courts will exercise that power with due regard to the interests of other competing jurisdictions, as well as the practical limitations on the exercise of that power. A. In Re Globo Comunicacoes E Participacoes S.A. In re Globo Comunicacoes E Participacoes S.A. ( Globopar ) 317 B.R. 235 (S.D.N.Y. 2004), involved 15

18 Cross-border Insolvencies Under United States Law An Update a holding company, organized under Brazilian law, that owned, directly or indirectly, one of the largest television production centers in the world. 91 Globopar was considered the leader in Brazilian pay television services. It included, among its holdings, a major provider of programming content for Brazilian television, a large Brazilian publishing and printing company, and major Brazilian media licensing and distribution operations. Its principal office and place of business, as well as all of its employees, were located in Brazil. Although the vast majority of Globopar s property and holdings were located outside of the US, Globopar did, however, own a Delaware corporation, which in turn held 30 percent interests in each of three Delaware general partnerships. The general partnerships had offices and operations in Florida, but provided pay television subscriber services located exclusively in Latin America. Globopar also had a bank account in the US with an estimated $32,000 balance. Finally, it was alleged that Globopar had raised significant sums of US dollar denominated debt, including approximately $750 million of bond debt sold on US markets and a $200 million revolving credit facility with various US and international banks. Both the bond debt and bank debt contained standard provisions subjecting Globopar to the jurisdiction of New York State or federal courts in connection with any action arising out of, or in connection with, such debt. As a result of the Brazilian currency unit the real no longer being pegged to the US dollar, Globopar was unable to service its US dollar denominated debt. As such, Globopar announced a moratorium on all interest payments and commenced out-ofcourt restructuring efforts, including the formation of steering committees composed of holders of its bond and bank debt. While these negotiations were proceeding, three apparently unhappy creditors, all allegedly affiliated with W. R. Huff Asset Management Co., Inc., filed an involuntary Chapter 11 petition against Globopar in New York. Globopar responded to the involuntary Chapter 11 petition by entering a special appearance before the US bankruptcy court for the purpose of contesting the exercise of jurisdiction over Globopar and seeking to dismiss the petition. The US bankruptcy court dismissed the involuntary petition on several bases including: (i) the consent to jurisdiction contained in the bond debt documents did not constitute a consent to US Federal jurisdiction over bankruptcy proceedings; (ii) the involuntary petition constituted an abuse of process and, as such, should be dismissed under Section 105(a); 92 and (iii) the US court s view that the involuntary petition was an improper effort to avoid the no action clause in the bond debt instruments. 93 The US district court reversed and remanded for further consideration, after making fairly aggressive statements as to the ability to commence an involuntary Chapter 11 against a non-us debtor. Specifically addressing the US bankruptcy court s ruling, the US district court stated that, on remand, the US bankruptcy court must construe the language in the bond debt instruments pursuant to New York law to determine: (i) the meaning and scope of Globopar s contractual consent to the jurisdiction of New York State and Federal courts; and (ii) whether the no action clause prohibited the filing of an involuntary petition by the petitioning creditors. (Globopar, at ) The US district court also stated that Globopar s ownership of a US bank account and a Delaware corporation would, if demonstrated, qualify Globopar to serve as a debtor under Section 109 of the US Bankruptcy Code and that, although perhaps novel, involuntary debtor-in-possession status for Globopar is clearly authorized under Section 303 of the US Bankruptcy Code. (Globopar, at 249.) The US district court added that, assuming that the US bankruptcy court could assert personal 16

19 jurisdiction over Globopar consistent with due process requirements, 94 and should not abstain on the basis of comity or public policy, there is no reason why the court could not exercise control over all of Globopar s assets, wherever located. (Globopar, at ) In this regard, the US district court criticized (after noting that it was an otherwise well-reasoned decision) the US bankruptcy court s analysis in the Multicanal case (discussed below) for focusing on the current location of the debtor s assets and the objective futility of attempting to restructure a recalcitrant debtor rather than focusing on the nature and extent of the debtor s contacts with the US. (Globopar, at 252.) The US district court proceeded to quote indirectly the US Supreme Court concerning the obligation of the US bankruptcy court to use the jurisdictional power given to it: Nevertheless, a bankruptcy court, [l]ike all federal courts, ha[s] a virtually unflagging obligation to exercise the jurisdiction given it. In re Gucci, 309 B.R. at 683 (quoting Colorado River Water Conserv. Dist. v United States, 424 US 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976)). (Globopar, at 253.) Notwithstanding the strong language on exercising jurisdiction, the US district court did, however, acknowledge that the involuntary petition was a strong candidate for dismissal pursuant to Section 305(a) on remand. (Globopar, at ) B. In Re Board of Directors of Multicanal S.A. Another US case addressing the power of US courts to restructure a non-us debtor is In re Board of Directors of Multicanal S.A. ( Multicanal ), 314 B.R. 486 (Bankr. S.D.N.Y. 2004), in which an involuntary Chapter 11 petition was filed with the US bankruptcy court in New York against an Argentine company, Multicanal S.A. 95 At the time of the filing of the involuntary proceeding, Multicanal was organized under Argentine law, with principal offices in Buenos Aires. Multicanal was a wholly owned subsidiary of Grupo Clarin, an Argentine media conglomerate that owned the largest circulation newspaper in Argentina. The US bankruptcy court found that approximately 90 percent of Multicanal s operations were in Argentina, with virtually all of the remaining operations in Panama and Uruguay. Although Multicanal purchased goods and materials from the US, it had no ongoing business in the US. At the time of the filing, Multicanal s sole US-based assets were three bank accounts with an aggregate balance of approximately $9,500. It also appears from the record that Multicanal issued approximately $509 million of US dollar-denominated notes in New York, governed by New York law, and that about 80 percent of the notes were held by US entities. Multicanal had engaged US financial advisers and institutions to market, sell and underwrite the notes. Multicanal s financial difficulties were precipitated by Argentina s economic collapse in late 2001 and early As a result of restrictions on access to bank deposits, the institution of controls on foreign exchange and, ultimately, the Argentine peso no longer being pegged to the US dollar, Multicanal defaulted on payments of principal and interest on certain of the notes, as well as its US dollar-denominated bank debt. Faced with these financial difficulties, Multicanal decided to restructure its debt pursuant to an acuerdo preventivo extrajudicial (or so-called APE ) under Argentine law. An APE is a privately negotiated debt-restructuring, approved by a majority of the creditors, that is ultimately submitted to an Argentine court for judicial approval. (Multicanal, at 493.) During the course of the APE, Multicanal engaged in negotiations with some of the noteholders, including Argentinian Recovery Company ( ARC ), an affiliate of W. R. Huff. The negotiations with ARC did not go well and resulted in ARC filing two lawsuits in New York State court seeking to collect on ARC s notes and also seeking declaratory relief stating that Multicanal could not restructure the notes in the APE. In response to these lawsuits, Multicanal s board of directors filed a petition under Section 304 of the 17

20 Cross-border Insolvencies Under United States Law An Update US Bankruptcy Code commencing a US ancillary proceeding in aid of the APE. Multicanal then filed a motion in the US bankruptcy court seeking an injunction enjoining ARC from proceeding with the New York State court litigations. In turn, ARC opposed the Section 304 proceeding filed by Multicanal and, together with two other dissatisfied noteholders, filed an involuntary petition under Section 303 of the US Bankruptcy Code to have Multicanal become an involuntary Chapter 11 debtor. After a lengthy and well-reasoned opinion, the US bankruptcy court held that Multicanal s APE may be recognized and enforced pursuant to Section 304 (subject to certain caveats discussed below) and that the involuntary petition under Section 303 be dismissed. More specifically, the US bankruptcy court found that, notwithstanding the absence of a detailed statutory framework, an APE qualified as an eligible foreign proceeding under Section 304. (Multicanal, at 509.) In arriving at this conclusion, the US bankruptcy court noted the numerous similarities between an APE and a US prepackaged plan of reorganization (where a debtor negotiates a plan and solicits acceptances on such plan prior to a Chapter 11 filing). (Globopar, at ) Likewise, the US bankruptcy court concluded that Multicanal s board of directors was an appropriate foreign representative under Section 304 by comparing its role in the APE to the role of a debtor-in-possession under the US Bankruptcy Code. (Globopar, at 501.) After consideration of the Section 304(c) factors, the US bankruptcy court concluded that relief under Section 304 was appropriate, with certain caveats. 96 Turning to the propriety of the involuntary Chapter 11 proceeding, the US bankruptcy court concluded that the involuntary petition should be dismissed pursuant to both Sections 305(a)(1) and (2) discussed above in Part I Non-US Corporations as US Debtors in Plenary US Proceedings Abstention or Dismissal of Chapter 11 Proceedings Under Section 305. In applying Section 305(a)(2) (which permits a court to dismiss or suspend a case if there is a foreign proceeding pending and the so-called 304(c) factors warrant dismissal), the US bankruptcy court concluded that the economical and expeditious administration of the non-us estate would be best served by proceeding with the Section 304 petition and dismissing the involuntary petition. (Multicanal, at 521.) Likewise, in applying Section 305(a)(1) (which permits a court to dismiss or suspend a case if the interests of creditors and the debtor would be better served by such dismissal or suspension), the US bankruptcy court decided that the involuntary petition should be dismissed noting that appropriate considerations included: (i) whether another forum is available; (ii) whether another proceeding has advanced to the point that it would be costly and time-consuming to start afresh under the US Bankruptcy Code; and (iii) the objective futility of the maintenance of a Multicanal reorganization in the United States, over the opposition of the putative debtor. Multicanal, at 522 C. In Re Yukos Oil Company In re Yukos Oil Company ( Yukos ), 321 B.R. 396 (Bankr. S.D. Tex. 2005), is another recent noteworthy cross-border case that raised interesting issues concerning the limits of the US bankruptcy court s exercise of its worldwide jurisdiction. 97 At the time of its Chapter 11 filing on December 14, 2004, Yukos was an open joint stock company organized under the laws of the Russian Federation. Through its approximately 200 subsidiary entities, Yukos was one of the largest producers of petroleum products in Russia, and was responsible for approximately 20 percent of the oil and gas production in Russia. Substantially all of Yukos affiliates and subsidiaries were Russian companies, with substantially all of their assets and their approximately 100,000 employees located in Russia. It was estimated, however, that non-russian investors held around 17 percent of Yukos equity interests. The Chapter 11 filing was admittedly precipitated by certain disputes that Yukos and its subsidiaries had with the Russian government. These disputes included the assessment of taxes of approximately $27.5 billion and the efforts of the 18

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