Recognition and enforcement in cross-border insolvency law: a proposal for judicial gap-filling.

• Author: Gopalan, Sandeep
• Position: III. Cross-Border Insolvency Law in the United States A. Judicial Interpretation of the Model Law 3. In Re Metcalfe through VI. Conclusion, with footnotes, p. 1254-1284

3. In Re Metcalfe (124)

   This case concerned Metcalfe and Mansfield, which were investment vehicles designed to participate in the Canadian asset-backed commercial paper market. Following the financial crisis, amid concerns about transparency and liquidity, a petition was filed on behalf of Metcalfe in a court in Ontario for the restructuring of all outstanding non-bank sponsored asset-backed commercial paper obligations totaling about $32 billion. (125) A creditor-backed plan was voted on and approved, and the Ontario court entered an order implementing it. (126) The plan became effective in 2009 after the Canadian Supreme Court denied a review petition. (127) The disputed issue concerned releases and injunctions granted to third parties.

   Thereafter, a Chapter 15 petition was filed by the court appointed Monitor seeking recognition and enforcement of the global releases and injunctions. (128) The bankruptcy court noted that it was being asked to provide "additional assistance" under [section] 1507 and make an order enforcing the Canadian releases in the United States. (129) It acknowledged that the release and injunction provisions treated all claimants in the Canadian Proceedings similarly. The court cited Bear Stearns for the proposition that "relief [post-recognition] is largely discretionary and turns on subjective factors that embody principles of comity." (130) It then went on to consider the contours of the public policy exception in respect of the enforcement of relief. (131) Crucially, the court held that:

   relief granted in the foreign proceeding and the relief available in a U.S. proceeding need not be identical. A U.S. bankruptcy court is not required to make an independent determination about the propriety of individual acts of a foreign court. The key determination required by this Court is whether the procedures used in Canada meet our fundamental standards of fairness. (132) (emphasis added) In coming to this conclusion, the court was conscious of the limited meaning attributable to public policy given the inclusion of the word "manifestly" in the statute. (133) The court also considered enforcement under comity principles and opined that "[t]he [United States] and Canada share the same common law traditions and fundamental principles of law. Moreover, Canadian courts afford creditors a full and fair opportunity to be heard in a manner consistent with standards of U.S. due process. U.S. federal courts have repeatedly granted comity to Canadian proceedings." (134) It concluded that:

   Principles of comity in chapter 15 cases support enforcement of the Canadian Orders in the United States whether or not the same relief could be ordered in a plenary case under chapter 11. Therefore, the Court will enter an order recognizing this case as a foreign main proceeding and enforcing the Canadian Orders. (135) 4. In re Qimonda (136)

   The case concerned a German company that manufactured semiconductor chips that underwent insolvency proceedings in Germany. (137) The German liquidator filed a Chapter 15 petition in Virginia and, upon determination that the German proceeding was the foreign main proceeding, sought to terminate the use of 4,000 U.S. patent licenses, which was a substantial portion of the main assets of the company. (138) License holders objected to this, and the bankruptcy court held that [section] 365(n) would apply and that "deferring to German law, to the extent it allows cancellation of the U.S. patent licenses, would be manifestly contrary to U.S. public policy." (139)

   The decision was appealed to the Fourth Circuit. One of the key grounds concerned the test to be applied under [section] 1522. The court relied upon the Model Law's Guide to Enactment and stated "the Model Law makes '[t]he 'turnover' of assets to the foreign representative discretionary,' adding that 'the Model Law contains several safeguards designed to ensure the protection of local interests before assets are turned over to the foreign representative.'" (140) Chief among those "safeguards" is Article 22 of the Model Law, which is largely codified as [section] 1522." (141) Further, the court noted that "the Guide states, "[i]n addition to [Article 22's] specific provisions," Article 6 of the Model Law "in a general way provides that the court may refuse to take an action governed by the Model Law if the action would be manifestly contrary to the public policy of the enacting State." (142)

   Having summarized the legislative history, the court concluded that "Chapter 15 does not require a U.S. bankruptcy court, in considering a foreign representative's request for discretionary relief under [section] 1521, to blind itself to the costs that awarding such relief would impose on others under the rule provided by the substantive law of the State where the foreign insolvency proceeding is pending." (143) In addition, it clarified the limits of cooperation envisaged by the Model Law:

   [Chapter 15] represents a full commitment of the United States to cooperate with foreign insolvency proceedings, as called for by the U.N.'s Model Law on Cross-Border Insolvency. And at bottom, such cooperation will provide greater legal certainty for trade and business to the benefit of the global economy. But the United States' commitment is not untempered, as is manifested in both Chapter 15 and the Model Law. (144) The court went on to consider the public policy exception and affirmed the decision of the bankruptcy court ruling that it had correctly conducted a balancing test under section 1522(a). The court recognized that in affirming, it too would "further the public policy inherent in and manifested by [section] 365(n)." (145) The Qimonda decision has been criticized as an expansive interpretation of the public policy exception. (146)

5. In re Vitro (147)

   Vitro and its subsidiaries were the largest glass manufacturers in Mexico. (148) During a period from 2003-2007, it borrowed a sum of about $1.2 billion from various U.S. lenders by way of three series of unsecured notes. The unsecured loan was guaranteed by virtually all of the subsidiaries and contained a provision that the guarantors would not be released, discharged, or affected in any way by any settlement or release by virtue of the insolvency of Vitro. The guarantees were governed by New York law and provided that privileges under Mexican law were not applicable.

   In 2009, Vitro entered into various restructuring transactions with the objective of restructuring obligations under the above notes. The effect was that Vitro now had obligations to its subsidiaries amounting to about $1.5 billion.

   At the end of 2010, Vitro commenced a concurso (149) proceeding in Mexico under the Mexican Business Reorganisation Act. In 2011, a foreign representative filed a Chapter 15 petition in the United States seeking recognition of the concurso as a foreign proceeding. (150) In December 2011, a proposed restructuring plan was submitted to the concurso whereby the original notes would be extinguished, obligations of the guarantors would be discharged, new notes with a principal amount of $814,650,000 payable in 2019 would be issued to the creditors, etc. (151)

   Under Mexican law, the plan could be approved with the votes of 50 percent of the total principal amount of unsecured debt. Relying solely upon the votes of its subsidiaries, which owned $1.5 billion of debt, the concurso plan was approved by the creditors and subsequently affirmed by the Mexican court. (152) It went into effect in February 2013. Thereafter, Vitro sought recognition and enforcement of the plan in the United States. The bankruptcy court refused enforcement, and the matter was appealed to the Fifth Circuit. The appellate court noted that Chapter 15 embodies that notion of comity and reflects the principle that "the interests of the United States, the interests of the foreign state or states involved, and the mutual interests of the family of nations in just and efficiently functioning rules of international law," (153) and that "it is not necessary, nor to be expected, that the relief requested by a foreign representative be identical to, or available under, United States law." (154)

   In order to determine if a foreign order is to be enforced, the court engages in a three-step process: (1) a court should consider the specific relief set forth in Bankruptcy Code [section][section] 1521(a) and (b); [155] (2) if the relief is not explicitly provided for in the statute, the court should consider whether the relief is otherwise "appropriate relief' under [section] 1521(a); (156) and (3) if the relief is otherwise unavailable under Bankruptcy Code [section] 1521, a court may consider whether the relief is suitable as additional assistance under [section] 150 7. (157) In this case, the court found that the concurso order was not within the types of relief provided by [section][section] 1521(a) and (b). Under the second limb, the court ruled that the standard was whether the concurso order was "appropriate relief' under [section] 304 of the Bankruptcy Code or relief that was otherwise available in the United States. It ruled that non-debtor discharges were generally unavailable and did not reflect an appropriate balance between the interests of Vitro, its creditors, and its guarantors. Therefore, it was not "appropriate relief." (158) The court also found that enforcement was not possible under the third limb because Vitro's arguments did not show that nonconsensual third-party discharges were available in nonexceptional circumstances. Vitro had not shown what the exceptional circumstances were, and the court indicated that it had to meet the U.S. standard for extraordinary circumstances in order for the foreign order to be enforced. This conclusion is seemingly contrary to previous statements about the need for the foreign relief to be similar to relief available in the United States.

   4. RECOGNITION AND ENFORCEMENT IN THE UNITED...