Chapter Eight Cooperation, Communication and Concurrent Proceedings

• Jurisdiction: United States

Chapter Eight Cooperation, Communication and Concurrent Proceedings

Subchapters IV and V of chapter 15 of the Bankruptcy Code deal with "Cooperation with Foreign Courts and with Foreign Representatives" and "Concurrent Proceedings," respectively. These provisions closely track the provisions of the Model Law and provide important rights in certain instances.⁵⁸⁸ Sections 1525, 1526 and 1527 provide express statutory authority for courts in the U.S. to communicate with foreign courts and foreign representatives regarding cross-border insolvency cases, and §§ 1528, 1529 and 1530 provide a mechanism for a foreign representative to liquidate assets in the U.S. or in jurisdictions not subject to the jurisdiction of a recognized foreign proceeding. While "[t]here will not always be a need to cooperate or communicate with a foreign court, particularly if narrow ancillary relief is all that is required[,]" such communication and coordination is often necessary due to the nature of a cross-border insolvency case.⁵⁸⁹ Additionally, while prior to the enactment of chapter 15 a foreign representative could file a petition to commence an involuntary case under another chapter of the Bankruptcy Code,⁵⁹⁰ chapter 15 expressly permits an insolvency case after the foreign proceeding is recognized under chapter 15 and also permits the foreign representative of a foreign main proceeding to file a petition to commence a voluntary case under any chapter of the Bankruptcy Code.⁵⁹¹

In this chapter, we look at the background regarding cooperation and communication and at the provisions regarding cooperation, communication and concurrent proceedings in the Model Law, then examine the express provisions of chapter 15 and the framework they create. U.S. bankruptcy courts have had only limited experience using the provisions in subchapters IV and V of chapter 15 of the Bankruptcy Code, so the discussion of how courts have applied these will focus on what the statute provides and examination of some examples.

I. Pre-Chapter 15 Background of Cross-Border Cases Under the Bankruptcy Code

Prior to the enactment of chapter 15, the type of cooperation that arose in the U.S. usually dealt with so-called dual plenary cases, rather than a U.S. bankruptcy judge communicating or seeking to coordinate with a foreign court after the commencement of a § 304 petition. In the dual plenary cases, the cooperation and coordination between courts grew out of protocols designed to address problems stemming from the length, expense and litigation over conflicts of laws.⁵⁹² Protocols gained popularity in the early 1990s in the wake of two major cross-border proceedings, Olympia & York and Maxwell Communications.⁵⁹³ Experiences in these cases led various international groups to pursue a standard set of guidelines for the creation of agreements in transnational bankruptcy cases.⁵⁹⁴

A. Early Development in Cooperation Through Protocols: Maxwell Communications

The Maxwell Communications⁵⁹⁵ case established many key principles that remain relevant to cross-border cases.⁵⁹⁶ Maxwell Communications Corporation plc was an English holding company with more than 400 subsidiaries worldwide that were engaged mostly in providing information services and publishing.⁵⁹⁷ When Robert Maxwell, the founder of Maxwell Communications, was found drowned after disappearing from his yacht, a global empire of publishing and other businesses collapsed in a matter of weeks amidst a financial scandal.⁵⁹⁸ Concerned that banks might commence insolvency proceedings in the U.K., Maxwell, with its principal assets in the U.S. representing 75 percent of the book value of the corporate group, filed a voluntary petition under chapter 11 in the U.S. Bankruptcy Court in New York on Dec. 15, 1991.⁵⁹⁹ The following day, Maxwell put the company into administration under the UK Insolvency Act of 1986 to protect the company from creditors in the U.K.⁶⁰⁰ Thus, the company was simultaneously engaged in two plenary bankruptcy proceedings and subject to the independent orders of two separate sovereigns.⁶⁰¹ Rather than dismiss the U.S. chapter 11 case, the U.S. bankruptcy judge entered an order on Dec. 20, 1991, that appointed an examiner "to reconcile the potential for conflict that existed as a result of the dual proceedings and to facilitate and expedite the reorganization of Maxwell."⁶⁰² On that same day, the Court of Chancery in London appointed Joint Administrators.⁶⁰³

Once appointed, the examiner and the joint administrators worked together to find a mechanism to enable the two proceedings and the two courts to coexist to maximize the value of Maxwell's corporate group.⁶⁰⁴ The parties had extensive discussions in New York and London and drafted an Order and Protocol to permit coordination and harmonization of the U.S. and U.K. proceedings.⁶⁰⁵ The Order and Protocol was approved on Dec. 31, 1991, "subject to the approval of the U.S. Bankruptcy Court of an Order substantially in the form of the draft" annexed to the U.K. court's order.⁶⁰⁶ The U.S. bankruptcy court approved the Protocol on Jan. 15, 1992.⁶⁰⁷ The U.S. court ordered, among other relief, the examiner to work with the U.K. joint administrators and "to harmonize, for the benefit of all of the Debtor's creditors and stockholders and other parties in interest, the Debtor's United States Chapter 11 case and the Administration so as to maximize the Debtor's prospects for rehabilitation and reorganization."⁶⁰⁸

The Protocol established that the joint administrators would be the corporate governance of Maxwell in the U.S. and the U.K., while the examiner would review, facilitate and, at times, consent to the action taken by the joint administrators.⁶⁰⁹Through this structure, the current management remained in place, and the two estates coordinated on financing and transactions affecting the debtor in both ju-risdictions.⁶¹⁰ It was generally recognized that the examiner and the joint administrators carried out the administration of Maxwell in an unprecedented manner under the protocol, achieving perhaps the "first worldwide plan of orderly liquidation ever achieved[.]"⁶¹¹

B. Difficulty in Cooperation: The Felixstowe Dock and Lernout & Hauspie Speech Products N.V Cases

While the Maxwell Communications case reflected a positive coordination between U.S. chapter 11 debtors on the one hand and foreign debtors on the other, such efforts do not always succeed, as is shown in two cases, Felixstowe Dock and Railway Co. v. U.S. Lines Inc.⁶¹² and Lernout & Hauspie Speech Prods. N.V.⁶¹³ These cases demonstrate that judicial negotiations do not always succeed and are not always possible. In the Felixstowe Dock case, U.S. Lines was a shipping company that carried out operations around the world and filed a chapter 11 petition in the U.S.⁶¹⁴ U.S. Lines owed money to the dock company at Felixstowe, a large container port in England, and once U.S. Lines filed chapter 11, the dock company sought an injunction to restrain the company from moving its money out of England back to the U.S., which was granted.⁶¹⁵ The U.S. debtor sought judicial cooperation from the English courts by moving to dissolve the injunction that had tied up the debtor's assets in England.⁶¹⁶ An attempt at negotiation between courts arose early in the case when the English court expressed concern that the creditors with claims in England might be subject to contempt orders in the U.S. for violating the stay.⁶¹⁷ The U.S. court sent a long essay explaining to the English court in simple language how the proceedings in a U.S. chapter 11 worked and entered an order, at the request of U.S. Lines's U.S. lawyers, that gave assurance that the prosecution of the English claims in the English courts would not give rise to contempt in the U.S. courts; this order was conditioned on the English court dissolving the injunctions.⁶¹⁸

While these communications resolved the English court's concern regarding contempt actions against English creditors, the English court declined to work with the U.S. court based on a perception that a U.S. reorganization would produce an arrangement that discriminated against those English creditors.⁶¹⁹ While some have suggested that this was justified since the U.S. debtor was going to withdraw from conducting business in Europe while taking European assets to the U.S. to fund a limited U.S.-based reorganization,⁶²⁰ others have suggested that if the U.S. case had been further along and the U.S. debtor could have offered assurances that its reorganization case would not discriminate against English creditors, judicial cooperation would have been possible.⁶²¹ But at a minimum, what the case shows is that relying on comity and cooperation alone in the absence of express authority being conveyed on the various courts does not guarantee harmonization in all situations of an insolvent global corporate enterprise.

In the case of Lernout & Hauspie Speech Prods., N.V., Lernout & Hauspie filed a bankruptcy case in the U.S., where many of its assets were located, then one day later filed a second plenary proceeding in Belgium, where it was incorporated.⁶²² In this case, Stonington sold Lernout a dictaphone company, after which Stonington sued Lernout for buying the company with worthless stock procured by fraud (the officers and directors of Lernout were ultimately arrested and jailed in Belgium for criminal offenses related to the transaction).⁶²³ Stonington sought to have its claims that arose on account of the alleged fraud enforced in the Belgium case, where they would be treated as general unsecured claims, rather than in the case in the U.S. where they would be statutorily subordinated.⁶²⁴ In the U.S. case, the bankruptcy court ruled that the Stonington claims would be subordinated, but left open the possibility that the Belgian court might rule differently, which it in fact did when the Belgian court ruled that there was no legal justification for subordinating the claims.⁶²⁵ Neither...