Oct. 17, 2010 will mark the five-year anniversary of the effective date of Chapter 15 of the U.S. Bankruptcy Code (Code). Chapter 15 was the codification of the Model Law on Cross-Border Insolvency, enacted by the United Nations Commissions for International Trade Law ("UNCITRAL"), incorporated within the Bankruptcy Code revisions effected by the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).1
For many practitioners who were familiar with the limitations of the cross-border insolvency provisions of the pre-BAPCPA Code, set forth in §304, the enactment of Chapter 15 was overdue. It promised to allow for the efficient cross-border administration and coordination of two or more insolvency proceedings involving assets of bankrupt entities. Most importantly, it promised predictability in the administration of multi-national entities subject to insolvency proceedings.
The U.S. delegation to the UNCITRAL Working Group surely realized that the harmonization of international insolvency laws (to the extent practicable) would undoubtedly require enforcement of foreign laws by U.S. courts, review of foreign precedent, and increased direct communication with foreign courts to a greater extent than occurred prior to Chapter 15.
How would this all work out? Five years after its effective date, we now examine the application of Chapter 15 and the judicial analysis of key provisions.
Lehman Brothers, the Very Large Test
For Chapter 15, no larger test could have been envisioned than the failure of Lehman Brothers in September 2008.
On Sept. 15, 2008, Lehman Brothers filed for Chapter 11 protection in the Southern District of New York. Soon thereafter, Lehman Brothers had commenced approximately 75 independent insolvency proceedings.
Normally, where there is more than one foreign proceeding, the various foreign representatives will enter into a cross-border protocol governing coordination of communications, asset distributions, and claim objections, among other issues. As might be imagined, not all representatives of the Lehman foreign proceedings signed on to the protocol, highlighting one of the unavoidable limitations of coordinating multiple foreign proceedings under the Model Act when coordination is needed most: its voluntary nature.
Absent a coordinated universalist approach to multi-national insolvencies, such as Lehman, asset maximization and allocation can quickly turn into a provincial asset grab. Over time, as additional countries adopt the Model Act, and as case law develops further, the outcome of cross-border actions should become more predictable, eliminating haphazard outcomes resulting from the uncoordinated actions of courts in various countries.
Recognition of Foreign Proceedings
The majority of decisions addressing Chapter 15 have focused on the factual showing required of foreign representatives when seeking recognition of a foreign proceeding.
Recognition pursuant to Chapter 15 involves two steps: (i) acknowledgment of the foreign representative by the U.S. court; and (ii) determining whether the foreign proceeding qualifies as a "foreign main proceeding" or a "foreign non-main proceeding." Once acknowledged, a foreign representative must establish the extent of the debtor's contacts with the foreign jurisdiction.
If the entity's "center of main interests" is in the foreign jurisdiction, then the proceeding will be recognized as a "foreign main proceeding." If the entity conducts "non-transitory economic activity" (an "establishment" per the Model Law) in the foreign jurisdiction, then the proceeding will be recognized as a "foreign non-main proceeding." In practice, this determination has been extremely nuanced.
The seminal decision on this topic to date, Judge Burton Lifland's ruling in In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122 (Bankr. S.D.N.Y. 2007), has been the subject of intensive commentator analysis. At its simplest, Judge Lifland's decision stands for the proposition that recognition of foreign actions should only occur where the foreign representative carries its burden of establishing significant contacts between the entity and the foreign jurisdiction. The Bear Stearns court concluded that the foreign proceeding was neither a foreign main nor foreign non-main proceeding, leaving the foreign representative to commence a case under Chapter 7 or 11 of the Bankruptcy Code.
Importantly, the extensive commentary resulting from the Bear Stearns opinion does not necessarily reflect ambiguities in Chapter 15, but rather is a product of the application of the law to certain corporate forms. The credit crisis has increased the volume of alternative investment fund insolvency proceedings in foreign courts, often with corresponding proceedings in the United States or other foreign courts.
As reflected in Judge Robert Gerber's decision in In re Basis Yield Alpha Fund (Master), 381 B.R. 37 (Bankr. S.D.N.Y. 2008), funds organized as Cayman Island "exempted company" funds will receive additional scrutiny during recognition proceedings. There, in determining whether to recognize the foreign proceeding, Judge Gerber requested sensitive information regarding the fund's assets, investors and strategy in analyzing the strength of contacts between the exempted company fund and the Cayman Islands. Not surprisingly, the foreign representatives declined to present such information and the foreign proceeding was not recognized.
Two recent cases may provide templates of cases where recognition will be granted. In In re BluePoint Re Ltd., No. 08-13169 (Bankr. S.D.N.Y. Sept. 29, 2008), and In re Saad Investments Finance Company (No. 5), Ltd., No. 09-13985 (Bankr. D.Del. Feb. 3, 2010), the U.S. bankruptcy courts for the Southern District of New York and Delaware, respectively, examined key contacts with the foreign jurisdiction at the time of the filing of the Chapter 15 petition and determined that the center of main interests existed in the Cayman Islands, in the case of BluePoint, and Bermuda, in the case of Saad.
Looking Abroad for Guidance
The enactment of the Model Law indicated the willingness of U.S. courts to defer to, or otherwise be guided by, foreign courts or foreign proceedings, under appropriate circumstances.
While not the first judge to address this issue, Judge Lifland in Bear Stearns reviewed the European Union Convention on Insolvency Proceedings for its definition and interpretation of "center of main interests." Additionally, the U.S. Bankruptcy Court for the Eastern District of Virginia, in In re Qimonda AG, No. 09-14766, 2009 WL 4060083 (Bankr. E.D.Va. Nov. 19, 2009), deferred to a provision of the German Insolvency Code regarding the debtor's non-performance of certain intellectual property contracts that conflicted with U.S. law.
Another good example of deference to foreign proceedings occurred in In re Quebecor World Inc., No. 08-13814 (Bankr. S.D.N.Y. July 1, 2009), where a claims filing and resolution procedure that was ordered by a Canadian court was implemented in Quebecor's Chapter 15 case pending in the Southern District of New York. The effect of the enforcement of the Canadian court's order was to require all creditors in the United States to file any claims against Quebecor in the Canadian action.
While not an exhaustive list of such cases, courts in the United States, within the Chapter 15 context, are relying upon and deferring to the actions and orders of foreign courts.
Likewise, the enactment of the Model Law by foreign nations also signaled their willingness to defer to the judgments of U.S. courts. A recent decision by the English Court of Appeal in David Rubin and Henry Lan v. Eurofinance SA and Others  EWHC 2129 Ch 31 July 2009, presents an excellent example of this principle. In that case, joint receivers and managers of The Consumers Trust (TCT), sought bankruptcy protection in the Southern District of New York bankruptcy court by commencing a voluntary Chapter 11 case. Importantly, and in contrast with U.S. law, a trust is not permitted to be a debtor under English law. The beneficiaries of TCT were resident in the United States.
During the course of the Chapter 11 case, TCT obtained default judgment on preferential and fraudulent transfer grounds against defendants Eurofinance and certain individuals, all of whom were residents of England. The defendants opted not to appear in the Chapter 11 case, assumedly relying upon the English common law principle that foreign judgments are not enforceable in England against defendants that did not appear or otherwise consent to jurisdiction.
The joint receivers thereafter sought recognition from the High Court in London pursuant to Great Britain's Cross-Border Insolvency Regulations 2006, in order to, among other things, obtain the English courts' assistance in enforcing the judgment. The High Court issued an order recognizing the Chapter 11 action as a foreign main proceeding.
However, the High Court determined that enforcement of the default judgment was not appropriate, ruling that the judgment was an in personam ruling and did not involve the resolution of creditor issues. The High Court's ruling was ultimately appealed, with a focus on whether the default judgment, and the action which led to it, were entitled to recognition.
The English Court of Appeals affirmed recognition of the Chapter 11 case, as well as the default judgment, reasoning that both the Chapter 11 case and the litigation that led to the judgment were "integral to and  central to the collective nature of bankruptcy and are not merely incidental procedural matters," and accordingly were properly recognized, collectively, as foreign main proceedings.
It has been suggested that the nature of the claims in the Chapter 11 case, preferential and fraudulent transfer claims, and accordingly, enforcement of insolvency based rights, reflect the principles of universality inherent in the Model Law, and as such, justified the Court of Appeals' recognition in this matter.
A related issue was the subject of the first U.S. circuit court-level decision regarding Chapter 15, issued by the Fifth Circuit in Tacon v. Petroquest Resources, et al. (In re Condor Insurance Ltd.), 601 F.3d 319 (5th Cir. 2010). There, the Fifth Circuit held that following recognition, a foreign representative in a Chapter 15 case is able to utilize the creditor-debtor avoidance laws of the debtor's home country.
In Condor, the foreign representatives sought to use Nevis law to avoid certain transfers. The bankruptcy court dismissed the avoidance action, relying specifically on provisions of Chapter 15 that state that upon recognition of a foreign proceeding, the court may grant "any appropriate relief," except for relief available under §§522, 544, 545, 547, 548, 550 and 724(a), which includes the avoidance powers of the Bankruptcy Code.2 The bankruptcy court's decision was appealed to, and affirmed by, the district court, which ruled that Chapter 15 was intended to bar the foreign representative from asserting avoidance-type actions, whether under U.S. or foreign law.
The Fifth Circuit disagreed, and in reviewing the provisions of Chapter 15, it concluded that "[i]f Congress wished to bar all avoidance actions whatever their source, it could have stated so; it did not." The Fifth Circuit's ruling, and this provision of Chapter 15, reflects a pragmatic universalist approach: the recognizing court may grant any appropriate relief, which includes the application of the insolvency laws of the foreign proceeding.
The global credit crisis has shown that more than ever there is a need for the development of international norms that will govern insolvencies and foster coordination and communication between courts administering different aspects (and assets) of global entities.
Effecting this universalism approach will undoubtedly necessitate the application of foreign laws by recognizing courts, will require further analysis of Chapter 15 in U.S. bankruptcy and appellate courts, and will also require review of foreign precedent. The resulting framework should provide increased predictability, efficiency and uniformity of results for creditors of multi-national entities.
1. To date, the Model Law, or a variant thereof, has been adopted by Australia, British Virgin Islands, overseas territory of the United Kingdom of Great Britain and Northern Ireland, Canada, Colombia, Eritrea, Great Britain, Greece, Japan, Mauritius, Mexico, Montenegro, New Zealand, Poland, Republic of Korea, Romania, Serbia, Slovenia, South Africa and the United States.
2. Chapter 15 also permits a foreign representative to assert avoidance actions "under another chapter of this title," as illustrated by the Eurofinance case discussed herein.
Reprinted with permission from the September 27, 2010 edition of the New York Law Journal Online. © 2010 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, email@example.com or visit www.almreprints.com.