Curbing comity: the increasingly expansive public policy exception of Chapter 15.

Author:Buckel, Elizabeth
  1. INTRODUCTION II. GENERAL PRINCIPLE OF COMITY A. Hilton and Progeny B. Historical Considerations of Comity in Cross-Border Insolvency Cases III. UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY A. Purpose and Scope B. Key Provisions 1. Recognition of a Foreign Proceeding 2. Relief 3. Cross-Border Cooperation and Communication 4. The Public Policy Exception IV. U.S. BANKRUPTCY CODE--CHAPTER 15 A. Purpose and Scope B. The Public Policy Exception V. THE PUBLIC POLICY EXCEPTION IN PREVIOUS JURISPRUDENCE A. Public Policy Exception of Chapter 15 1. Not "Manifestly Contrary" to U.S. Public Policy 2. "Manifestly Contrary" to U.S. Public Policy B. Public Policy Exception of European Insolvency Regulation C. Public Policy Exception in International Arbitration VI. RECENT CASES IN RE QIMONDA & IN RE VITRO TEST THE LIMITS OF COMITY A. In re Qimonda B. In re Vitro C. The Untenable Expansion of Section 1506 1. In re Qimonda 2. In re Vitro VII. ALTERNATE GROUND FOR CREDITOR PROTECTION: SECTION 1522 A. Overview of Section 1522 B. Section 1522 Allows the Courts to Uphold Concept of Comity VIII. CONCLUSION "The dual impact of globalization and technological innovation has changed international commerce forever. Transactions involving multinational businesses can be carried out in mere seconds, regardless of the geographical location of the parties to the transaction ... but, where unforeseen or unfortunate circumstances lead to the need for reorganizations or restructurings, the pace of communication among jurisdictions reverts to the 19th century." (1)


    Increased financial globalization and technological innovation has resulted in the substantial expansion of corporate business across national borders. This expanded movement of goods, services, and capital has, in turn, created a complex web of transnational financial, legal, and political relationships, all functioning to create an efficient international economy through competition and specialization.

    The 2008 financial crisis and subsequent economic downturn, however, tested the strength of this web. As the flow of capital slowed and global trade shrank, global corporations increasingly turned to national and cross-border insolvency proceedings to restructure, and in some cases liquidate, their businesses. (2) These insolvency proceedings take place in multiple nations and involve numerous claims, subsidiaries, affiliated entities, assets, operations, and creditors. (3) They result in seized property, expropriated assets, broken contracts, frozen credit, lost jobs, and debased security interests. (4) In these situations, the two competing policies of insolvency law--the protection of creditors and the protection of debtors--collide, resulting in an uncertain and inefficient system of distribution.

    International law and the general principles of comity encourage states to recognize and enforce foreign judgments. (5) Historically, however, the fragmentation of national bankruptcy laws meant that states favored local bankruptcy laws while distrusting and dismissing the applicability of foreign law. (6) Because local bankruptcy laws reflect both the substantive structure of a state's economic and financial markets and the procedural structure of its legal system, states are hesitant to give effect to judgments that do not support their own economic, financial, and legal structures. (7) These considerations impede the efficient administration of insolvency proceedings and hamper the rescue of financially troubled businesses.

    To encourage international cooperation in cross-border insolvency proceedings, the United Nations Commission on International Trade Law (UNCITRAL) drafted the Model Law on Cross-Border Insolvency

    (Model Law). (8) Reflecting the principles of comity, the Model Law contains procedural guidelines for nations to follow in these proceedings with hope that adopting nations will be "consistent in their practical application." (9) In 2005, the United States incorporated the Model Law into Chapter 15 of the U.S. Bankruptcy Code (10) and adopted its main provisions, including a public policy exception that allows a state to refuse to recognize or enforce a foreign judgment if it would be "manifestly contrary" to its public policy.

    This Note contends that despite the goal of encouraging cooperation in cross-border insolvency proceedings, U.S. courts have increasingly disregarded comity and used the public policy exception of Chapter 15 to deny recognition and enforcement of foreign judgments. In re Qimonda (11) and In re Vitro (12) highlight the fact that courts are inconsistently applying this exception and are "stretching" the limits of what actually can be deemed a fundamental public policy of the United States. In actuality, however, the courts are merely looking to secure the interests of U.S. creditors and interested entities. Therefore, when looking to protect these interests, the courts should rather engage the stringent balancing test of section 1522 of the Bankruptcy Code.

    Part II of this Note discusses the general principle of comity, including its foundation and how courts have historically looked to the principle in cross-border insolvency cases. Part III then looks to UNCITRAL's Model Law on Cross-Border Insolvency, including its overall purpose, and how it reflects this general principle of comity. Part IV outlines how the United States has integrated this Model Law into Chapter 15 of the U.S. Bankruptcy Code, specifically focusing on the public policy exception, and Part V discusses how both U.S. and foreign courts have interpreted this exception. Part VI, then, discusses how recent U.S. courts in In re Qimonda and In re Vitro have inconsistently applied the exception merely to secure the interests of U.S. creditors and interested entities to the detriment of the general aims of comity. Finally, Part VII concludes by recommending courts rather look to the stringent balancing test of section 1522 when seeking to secure the interests of U.S. creditors and interested entities.


    Whereas the Full Faith and Credit clause requires each state in the United States to provide full faith and credit to the judicial proceedings of every other U.S. state, (13) the judgments of foreign states are not constitutionally entitled to recognition or enforcement in U.S. courts. (14) Additionally, the United States does not have a domestic statute governing, nor is it a party to any international treaty or convention regarding, the general recognition or enforcement of foreign judicial judgments. (15) When determining whether or not to recognize and give effect to the judgments of foreign states, however, U.S. courts have traditionally been guided by the principle of comity. (16) These courts have invoked comity to justify deference for foreign sovereignty, the protection of "parties' expectations in the interest of international commerce," and avoidance of conflict in foreign relations. (17) Despite "ubiquitous invocation" of this principle, however, "its meaning is surprisingly elusive." (18)

    1. Hilton and Progeny

      The foundational underpinning for this "ubiquitous" doctrine of comity comes from the 1895 case of Hilton v. Guyot. (19) There, the U.S. Supreme Court held that a U.S. court should, first, recognize and enforce a foreign judgment, and, second, not try the issue "afresh" when:

      [T]here has been opportunity for a full and fair trial before a foreign court of competent jurisdiction, conduction the trial on regular proceedings, after due citation of voluntary appearance of the defendant, and under a system of jurisprudence likely to secure an impartial administration of justice between the citizens of that country and those of other countries, and there is nothing to show either prejudice in the court, or in the system of laws under which it was sitting, or fraud in procuring the judgment, or any other special reason why the comity of the United States should not allow it full effect.... (20) While Hilton is "rarely dispositive," (21) U.S. courts are influenced by its holding and "recognize final country judgments that meet the requirements for recognizing sister-state judgments [under the Full Faith and Credit clause], without reviewing the merits." (22) Comity, then, has generally been understood as "the recognition that one nation allows within its territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." (23)

      However, deference to comity has its limitations. Predominately, courts are quick to assert that "[T]he principle of comity has never meant categorical deference to foreign proceedings. It is implicit in the concept that deference should be withheld where appropriate to avoid the violation of the laws, public policies, or rights of the citizens of the United States." (24) Where comity has been codified into state law, (25) various grounds for non-recognition have been espoused including: (1) the integrity of the rendering court and due process, (2) lack of jurisdiction, (3) insufficient notice, (4) fraud, (5) public policy, (6) inconsistent or conflicting judgments, (7) prior agreement between parties, and (8) inconvenient forum. (26) Courts seeking to apply the principle of comity constantly struggle with this "tension" between "respecting fair foreign proceedings" and shielding U.S. citizens from foreign laws. (27) To understand how the courts have grappled with this tension, particularly with respect to cases on cross-border insolvency, it is useful to analyze U.S. case law on the subject.

    2. Historical Considerations of Comity in Cross-Border Insolvency Cases

      Comity has been, and continues to be a fundamental principle underlying Chapter 15 of the Bankruptcy Code. (28) While U.S. bankruptcy laws have historically been...

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