Alexandra Cc Ragan, Comi Strikes a Discordant Note: Why U.s. Courts Are Not in Complete Harmony Despite Chapter 15 Directives

• Publication year: 2011

COMI STRIKES A DISCORDANT NOTE: WHY U.S. COURTS ARE NOT IN COMPLETE HARMONY DESPITE CHAPTER 15

DIRECTIVES

INTRODUCTION

American bankruptcy jurisdiction extends to persons who have "property" in the United States regardless of their nationalities, domiciles, residences, or places of business.¹The United States Bankruptcy Code ("the Code") also states that a foreign representative may commence a case ancillary to a foreign proceeding to give effect to a foreign determination.²Provided certain conditions are met, a bankruptcy court has broad powers to enjoin other proceedings and order the turnover of property, or its proceeds, to a foreign representative to ensure an economically efficient disposition of a debtor's assets.³Foreign proceedings are given effect under the supervision of bankruptcy courts.

Steady expansion of international trade has spurred the growth of multinational enterprise and created an increasingly integrated world- economy.⁴Business enterprises engaged in international commerce will often have both assets and creditors in several countries and can potentially face insolvency proceedings at home, abroad, or both. Today, it is not uncommon for a domestic debtor to be a subsidiary of a foreign parent company or a part of an international conglomerate. The implications of such a company becoming insolvent reach far and wide.⁵If a domestic parent is insolvent, for example, a very real issue is whether its creditors can reach the assets of its foreign subsidiary. Consequently, "insolvency laws have become recognized as essential to the regulation of market economies."⁶

International insolvency is an important issue because international bankruptcy cases are increasingly common and involve billions of dollars of assets.⁷Even though investments can cross state lines fluidly, bankruptcy remains territorial. "A foreign forum has no power to seize local assets or to enforce a local freeze unless the local forum permits it to do so,"⁸even though a forum may claim that its proceedings have a global impact. As a result, "legal issues arising from cross-border insolvency proceedings have become topical."⁹

In this context, several transnational insolvency directives have developed. In 1997, the United Nations Commission on International Trade Law promulgated a Model Law on Cross-Border Insolvency ("Model Law").¹⁰This guideline specifies the requisite conditions that must be met before a bankruptcy court can recognize an international proceeding.¹¹Similar legislation was enacted in Europe and several other countries around the world. In the United States, the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005 added chapter 15 to the Code, expressly adopting the

Model Law into American domestic law.¹²

The purpose of chapter 15 is "to provide effective mechanisms for dealing with" insolvency cases that include debtors, claimants, and other parties in interest involving more than one country.¹³A "foreign representative"¹⁴commences an ancillary case under both the Model Law and chapter 15 "by the filing of a petition for recognition of a foreign proceeding."¹⁵Like the Model Law, chapter 15 specifies that a court may grant recognition to a foreign proceeding that is either a "foreign main proceeding . . . pending in a country where the debtor has the center of main interests," or a "foreign nonmain proceeding" pending in a country where "the debtor has an establishment" but not its center of main interests.¹⁶Recognition of a foreign proceeding as a foreign main proceeding, thus, hinges on a determination of a debtor's center of main interests ("COMI").

To ensure predictability in conducting international business, it is necessary to examine the various approaches to COMI and understand how the U.S. compares to the rest of the world. While much has been written about the definition of COMI itself,¹⁷there has been no thorough analysis of the interplay between the United States's international insolvency legislation and that of other countries. Specifically, there has been little discussion on how U.S. courts approach COMI compared to courts abroad, and how, if at all, are U.S. courts considering foreign authority. While chapter 15 may be aimed at fostering effective mechanisms for dealing with multi-national insolvency cases,¹⁸this Comment observes that, despite attempts to create a more universal system of insolvency resolution, significant national differences remain. Understanding how COMI is determined in each system will help businesses better anticipate where they may seek recognition of foreign insolvency proceedings, thereby determining where creditors can collect. This Comment also sheds light on the proper weight that U.S. courts should give to decisions made in foreign jurisdictions.

This Comment addresses the key element of the law on which the whole recognition process turns: center of main interests. Part I provides an introduction to international insolvency and key legislation in the area, including the Model Law on Cross Border Insolvency, the European Council Resolution on cross-border insolvency, and chapter 15 of the Code. Part II explains key concepts in international insolvency law and focuses on the COMI concept. This section also discusses Sec. 1508 of the Code, which instructs courts to consider decisions of foreign courts when necessary. Part III analyzes how COMI has been defined in key European and U.S. cases. Part IV highlights the differences between these decisions, noting that while the European and U.S. legislation use nearly identical terminology, they serve significantly different functions in their respective contexts. This, in turn, imparts different meanings to the term, "COMI." Part V discusses how these different interpretations frustrate the purpose of Sec. 1508. This Part further argues that while the Code compels courts to consider foreign precedent, these decisions are of limited use and would necessarily create a new meaning of COMI that is different from the definition currently subscribed to in the U.S.

While Sec. 1508 is an admirable attempt to create a uniform meaning of COMI and a universal international insolvency statute, it adopts and applies a definitional structure that does not wholly fit into the general U.S. bankruptcy framework and policy decisions. Section 1508 is of little practical use and fails to guide businesses as they consider reorganization. Therefore, Sec. 1508 is not currently viable. The final section of this Comment explores solutions to remedy this viability problem. Possible solutions include repealing the section; amending chapter 15, or, in the alternative, amending the EC Regulation; creating a supranational tribunal to deal with questions of interpretation; and revising the wording of the presumption in chapter 15¹⁹to match that of the EC

Regulation. This Comment concludes that the last option, including a directive to consider foreign sources and adopting the same evidence/proof language used in the EC Regulation, is the most practical way to carry out the goal of the Model Law-uniformity.

I. THE MODEL LAW: A STEP TOWARDS CREATING UNIVERSAL INSOLVENCY

LEGISLATION

When a bankrupt company has subsidiaries scattered around the world, jurisdiction should rest with the court most competent to adjudicate the transnational insolvency.²⁰Scholars and practitioners have formulated four approaches to determining the appropriate court in multinational bankruptcy proceedings: (1) territorialism, (2) universalism, (3) cooperative territorialism, and (4) modified universalism.²¹While the theories differ in some respects, all four have the same interests in mind: "domestic adjudication of foreign assets, efficiency of the bankruptcy proceedings, and protection of local investors and markets."²²

The territoriality approach permits a court to exercise jurisdiction over any debtor who satisfies local insolvency law requirements.²³Choice of law, then, follows the forum so that the law of the forum applies in all aspects, and the local insolvency order does not bind foreign property.²⁴Therefore, this approach "avoids the complications inherent in any form of international cooperation."²⁵

According to the universalist approach, courts should give full local effect to insolvency proceedings initiated in a foreign jurisdiction.²⁶A universalist approach, in theory, eliminates forum-shopping problems.²⁷However, this approach also involves a degree of uncertainty. It is not always evident upon what basis to grant exclusive jurisdiction-the insolvent debtor's domicile, place of incorporation, seat, or some other ground.²⁸

Both territorialism and universalism have notable shortcomings.²⁹For this reason, scholars have championed two moderate approaches: cooperative territorialism and modified universalism.³⁰Cooperative territorialism suggests that the courts involved cooperate to the extent that it benefits the local proceeding.³¹The bankruptcy courts of a particular country administer the local assets of the debtor-company in their jurisdications, but cooperate and communicate in the process. Modified universalism incorporates the tenants of universalism but recognizes that a country may only control its own territory and laws.³²Courts can collect and distribute assets on a worldwide basis, but retain discretion to protect the interests of local creditors. Accordingly, modified universalism envisions a more "pragmatic approach that . . . accept[s] the reality of step-by-step progress through cooperation."³³It allows for greater flexibility and has generally been preferred among scholars to the other three approaches.³⁴

In 1997, the U.N. General Assembly and the United Nations Commission on International Trade Law ("UNCITRAL")³⁵promulgated the Model Law on Cross Border Insolvency.³⁶The Model Law adopted a modified universalist approach to improve judicial cooperation and aid in the recognition of foreign insolvency proceedings.³⁷The law also provided...