PITFALLS OF MULTI-NATIONAL CORPORATION AND CROSS BORDER INSOLVENCIES PITFALLS OF MULTI-NATIONAL CORPORATION AND CROSS BORDER INSOLVENCIES

EVELYN H. BIERY FULBRIGHT & JAWORSKI L.L.P.

AUTHORS

Michael W. Anglin Evelyn H. Biery 2200 Ross Avenue, Suite 2800 1301 McKinney, Suite 5100 Dallas, Texas 75201 Houston, Texas 77010-3095 Telephone: 214.855.8054 Telephone: 713.651-5544 Facsimile: 214.855.8200 Facsimile: 713.651.5246

Gillian McPhee Steve Peirce 801 Pennsylvania Avenue, N.W. 300 Convent Street, Suite 2200 Washington, D.C. 20004-2615 San Antonio, Texas 78205-3792 Telephone: 202.662.4532 Telephone: 210.270.7179 Facsimile: 202.662.4643 Facsimile: 210.270.7205

1999 STATE BAR OF TEXAS ADVANCED BUSINESS BANKRUPTCY COURSE May 27 - 28, 1999 San Antonio, Texas

K Pitfalls of Multi-National Corporation and Cross Border Insolvencies K- i

Table of Contents

I. Personal Jurisdiction Over Non-U.S. Corporations ...... 1 A. General Principles of Personal Jurisdiction ...... 1 B. Specific Jurisdiction ...... 1 C. General Jurisdiction ...... 2 D. Other Activities Which May Support General or Specific Jurisdiction ...... 2 1. Sales Activity ...... 2 2. Ownership and Control of U.S. Subsidiaries ...... 3 3. Operation of Internet Sites ...... 4 E. Personal Jurisdiction in Claims Involving Federal Law ...... 4 F. Consent to Personal Jurisdiction ...... 5

II. Fifth Circuit Authority on Application of Federal Common Law for Alter Ego/Piercing Corporate Veil ...... 5 A. Summary ...... 5 B. Federal Corporate Veil Piercing Common Law ...... 6 C. The Cases ...... 6 1. Jon-T Chemicals ...... 6 2. Joslyn Manufacturing ...... 7 3. Wallace ...... 7 4. Fidelity & Deposit Company of Maryland ...... 7 D. Conclusion ...... 8

III. The Xacur case ...... 8

IV. International Insolvency ...... 10 A. Introduction ...... 10 B. Discussion ...... 10 1. Bankruptcy Code Section 304 ...... 10 2. Case Law ...... 11 a. Benefits and Burdens ...... 11 b. Comity ...... 12 c. Foreign Representative ...... 15 d. Foreign Law Experts ...... 16 e. Venue ...... 17 f. Automatic Stay and Injunctive Relief ...... 17 g. Turnover of Assets ...... 18 h. Avoidance Powers ...... 19 i. Discovery ...... 19 j. Maxwell: The Protocol ...... 19 3. The Future: UNCITRAL’S Model Law on Cross-Border Insolvency and Chapter 15 ...... 20 a. Chapter 15 History ...... 20 b. Chapter 15 Process ...... 21 c. Outbound Chapter 15 Cases: Sections 1505, 1514 ...... 23

i Pitfalls of Multi-National Corporation and Cross Border Insolvencies K- ii

d. Concurrent Proceedings Under Chapter 15 ...... 24 (1) Coordination with Pending Non-Chapter 15 Case .....24 (2) Filing a Non-Chapter 15 Case After Recognition of a Chapter 15 Case ...... 24 (3) Coordination with More Than One Foreign Proceeding .24 (4) Communication and Cooperation ...... 25 C. Conclusion ...... 25

ii Table of Authorities

CASES

A. Tarricone, Inc., 80 B.R. 21 (Bankr. S.D.N.Y. 1987) ...... 19

Agar Corp. v. Multi-Fluid, Inc., Civil Action No. 95-5105, 1997 U.S. Dist. LEXIS 17121 (S.D. Tex. June 25, 1997) ...... 4

Alberto v. Diversified Group, Inc., 55 F.3d 201 (5th Cir. 1995) ...... 6

Allstate Life Insurance Co. v. Linter Group, Ltd., 994 F.2d 996 (2d Cir. 1993), cert. denied, 510 U.S. 945 (1993) ...... 12

Angulo v. Kedzep Ltd., 29 B.R. 417 (S.D. Tex. 1983) ...... 19

Asahi Metal Industrial Co. v. Superior Ct. of California, 480 U.S. 102 (1987) ...... 1, 5

In re Banco de Descuento, 78 B.R. 337 (Bankr. S.D. Fla. 1987) ...... 12, 15

In re Banco Nacional De Obras Y Servicios Publicos, 91 B.R. 661 (Bankr. S.D.N.Y. 1988) ...... 14

In re Chase & Sanborn Corp., 835 F.2d 1341, 1345 (11th Cir. 1988), rev’d on other grounds sub nom. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989)) ...... 5 . Bank of Commonwealth v. Israel-British Bank (London) Ltd., 429 U.S. 978 (1976) ...... 15

Cabot Safety Intermediate Corp. v. Akron Safety Equip., Inc., 12 F. Supp. 2d 180, 181-2 (D.Mass. 1998) ...... 3

Canada Southern Railroad v. Gebhard, 109 U.S. 527 (1883) ...... 11

Canadian Group Underwriters Insurance Co. v. M/V "Arctic Trader,", No. 87-C9535, 1998 U.S. Dist. LEXIS 16293 (S.D.N.Y. Oct. 14, 1998) ...... 2

Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333 (1925) ...... 3

iii Charlesworth v. Marco Manufacturing Co., 878 F. Supp. 1196 (N.D. Ind. 1995) ...... 2

Chew v. Dietrich, 143 F.3d 24, cert denied, ____ U.S. ____, 119 S.Ct. 373 (1998) ...... 4

Cunard Steamship Co. Ltd. v. Salen Reefer Services AB, 773 F.2d 452 (2d Cir. 1985)...... 13

Dalton v. R. & W. Marine, Inc., 897 F.2d 1359 (5th Cir. 1990) ...... 1, 3

In re Enercons Virginia, Inc., 812 F.2d 1469 (4th Cir. 1987) ...... 13

Felch v. Transportes Lar-Mex SA DE CV, 92 F.3d 320 (5th Cir. 1996) ...... 1

Fidelity & Deposit Company of Maryland v. Commercial Casualty Consultants, Inc., 976 F.2d 272 (5th Cir. 1992) ...... 7

In re Goerg, 844 F.2d 1562 (11th Cir. 1988) ...... 16

Gundle Lining Constr. Corp. v. Adams Country Asphalt, 85 F.3d 201 (5th Cir. 1996) ...... 3

In re Hakim, 212 B.R. 632 (N.D. CA. 1997) ...... 18

Hanson v. Denckla, 357 U.S. 235 (1958) ...... 1

Helen Kaminski Pty. Ltd. Vss Marketing Australian Products, Inc., 1997 U.S. Dist. LEXIS 10630 (S.D.N.Y. 1997) ...... 17

Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408 (1984) ...... 2, 3

Hilton v. Guyot, 159 U.S. 113 (1895) ...... 12

Hosoya Fireworks Co. v. Barone, 513 U.S. 948 (1994) ...... 3

IDS Life Insurance Co. v. SunAmerica Life Insurance Co., 136 F.3d 537 (7th Cir. 1998) ...... 2

iv International Shoe Co. v. Washington, 326 U.S. 310 (1945) ...... 1, 2

In re Israel-British Bank (London) Ltd. v. Federal Deposit Insurance Corp., 536 F.2d 509 (2d Cir. 1976), cert. denied sub nom ...... 15

Joslyn Manufacturing Co. v. T.L. James & Co., Inc, 893 F.2d 80 (5th Cir. 1990) ...... 6, 7

Koreag, Controle Et Revision S.A. v. Refco F/X Assoc., Inc. (In re Koreag, Controle Et Revision S.A.), 961 F.2d 341 (2d Cir. 1992), cert. denied, 506 U.S. 865...... 18

L.H. Carbide Corp. v. Piece Maker Co., 852 F. Supp. 1425 (N.D. Ind. 1994) ...... 2

Matosantos Commercial Co. v. Applebee's Int'l, 2 F. Supp. 2d 191, 196 (D. P.R. 1998) ...... 3

Matter of Culmer, 25 B.R. 621 (Bankr. S.D.N.Y. 1982) ...... 12, 16

Matter of Rimsat, Ltd., 98 F.3d 1956 (7th Cir. 1996) ...... 17

Max Daetwyler Corp. v. R. Meyer, 762 F.2d 290 (3d Cir.), cert. denied, 474 U.S. 980 (1985) ...... 1

In re Maxwell Communication Corp. plc, 93 F.2d 1036 (2d. Cir. 1996) ...... 19

Metropolitan Life Insurance Co. v. Robertson-Ceco Corp., 84 F.3d 560 (2d Cir.), cert. denied, 519 U.S. 1006 (1996) ...... 2

Metzeler v. Bouchard Transport Co. (In re Metzeler), 78 B.R. 674 (Bankr. S.D.N.Y. 1987) ...... 19

Mid-America Tablewares v. Mogi Trading Co., 100 F.3d 1353 (7th Cir. 1996) ...... 2

Milliken v. Meyer, 311 U.S. 457, 463 (1940)...... 19

Northrup King Co. v. Compania Productora Semillas Algodoneras Selectas, S.A., 51 F.3d 1383 (8th Cir. 1995) ...... 2

OMI Holdings, Inc. v. Royal Insurance Co. of Canada, 149 F.3d 1086 (10th Cir. 1998) ...... 1, 5

v Omni Capital International, Ltd. v. Rudolf Wolff & Co., Ltd., 484 U.S. 97 (1987) ...... 1

Perkins v. Benguet Consolidated Mining Co., 342 U.S. 437 (1952) ...... 2

In re Petition of Davis, 191 B.R. 577 (Bankr. S.D.N.Y. 1996) ...... 18

In re Petition of Evans, 177 B.R. 193 (Bankr. S.D.N.Y. 1995) ...... 17

In re Petition of G. C. K. Tam, 170 B.R. 838 (Bankr. S.D.N.Y. 1994) ...... 15

In re Petition of Hourani, 180 B.R. 58 (Bankr. S.D.N.Y. 1995) ...... 15, 17

Pyrenee, Ltd. v. Wocom Commodities, Ltd., 984 F. Supp. 1148 (N.D. Ill. 1997) ...... 5

Republic of Panama v. BCCI Holdings (Luxembourg) S.A., 119 F.3d 935 (11th Cir. 1997) ...... 4, 5

Revlon, Inc. v. United Overseas Ltd., 93 Civ. 0863, 1994 U.S. Dist. LEXIS 220 ...... 3

Synatel Instrumentation v. Vandelune, ___ U.S. ___, 119 S. Ct. 543 (1998) ...... 3

United Rope Distributs., Inc. v. Kimberly Line, 770 F. Supp. 128 (S.D.N.Y. 1991) ...... 2

United States v. Jon-T Chemicals, Inc., 768 F.2d 686 (5th Cir. 1985) ...... 6, 7

United States v. Wallace, 961 F. Supp. 969 (N.D. Tex. 1996) ...... 6, 7, 8

United Trading Co. S.A. v. M.V. Sakura Reefer, No. 95 Civ. 2846, 1996 U.S. Dist. LEXIS 9190 (S.D.N.Y. June 28, 1996) ...... 2

Vandelune v. 4B Elevator Components Unltd., 148 F.3d 943 (8th Cir.), cert. denied sub nom...... 3

Vetrotex Certainteed Corp. v. Consolidated Fiber Glass Products Co., 75 F.3d 147 (3d Cir. 1996) ...... 2

vi Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117 (2d Cir. 1984) ...... 3

Weber v. Jolly Hotels, 977 F. Supp. 327 (D.N.J. 1997) ...... 4

World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980) ...... 1

Zippo Manufacturing Co. v. Zippo Dot Com, 952 F. Supp. 1119 (W.D. Pa. 1997) ...... 4

STATUTES

11 U.S.C. § 101 ...... 15, 21

11 U.S.C. § 103 ...... 24

11 U.S.C. § 109 ...... 10

11 U.S.C. § 303 ...... 10, 22

11 U.S.C. § 304 ...... passim

11 U.S.C. § 305 ...... 9, 24

11 U.S.C. § 362 ...... 13, 15, 23

11 U.S.C. § 365 ...... 23

11 U.S.C. § 502 ...... 20

11 U.S.C. § 541 ...... 24, 25

11 U.S.C. § 1501 ...... 21, 24, 25

11 U.S.C. §1502 ...... 22

11 U.S.C. § 1504 ...... 21

11 U.S.C. § 1505 ...... 24

11 U.S.C. § 1507 ...... 22

11 U.S.C. § 1509 ...... 22

11 U.S.C. § 1510 ...... 23

vii 11 U.S.C. § 1511 ...... 22

11 U.S.C. § 1512 ...... 22

11 U.S.C. § 1514 ...... 24

11 U.S.C. § 1515 ...... 21

11 U.S.C. § 1516 ...... 21, 22

11 U.S.C. § 1517 ...... 21, 22

11 U.S.C. § 1519 ...... 21, 23, 24, 25

11 U.S.C. § 1520 ...... 23, 24

11 U.S.C. § 1521 ...... 23, 24, 25

11 U.S.C. § 1522 ...... 23

11 U.S.C. § 1523 ...... 22

11 U.S.C. § 1524 ...... 22

11 U.S.C. § 1525 ...... 22, 24, 25

11 U.S.C. § 1526 ...... 22, 25

11 U.S.C. § 1527 ...... 22, 23, 24, 25

11 U.S.C. § 1528 ...... 22, 24, 25

11 U.S.C. § 1529 ...... 24

11 U.S.C. § 1530 ...... 24, 25

11 U.S.C. § 1531 ...... 22

28 U.S.C. § 1410 ...... 17

28 U.S.C. § 1477 ...... 19

28 U.S.C. § 1782 ...... 20

45 U.S.C. § 181 ...... 14

viii RULES

FED. R. CIV. P. 4(e)(1) ...... 1, 4

FED. R. CIV. P. 4(k)(1)(D) ...... 4

FED. R. CIV. P. 4(k)(2) ...... 4

MISCELLANEOUS

4 Arthur R. Miller, FEDERAL PRACTICE AND PROCEDURE § 1069, at 176 (Supp. 1999) ...... 1

ix Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-1

I. Personal Jurisdiction Over Non-U.S. requirement is satisfied if the assertion of Corporations jurisdiction comports with due process. See id. at Further to our conversations early this week, 174. The focus of a court’s inquiry will be on attached is a copy of a draft summary I have whether an assertion of personal jurisdiction prepared on the above subject. The summary begins satisfies the due process requirements of the 14th by setting forth some well established principles of Amendment. See id.; see also Dalton, 897 F.2d at personal jurisdiction and proceeds to a discussion of 1361. the types of activities which may result in non-U.S. The requirements of due process will be corporations being subject to the personal satisfied with respect to a non-U.S. corporation if jurisdiction of U.S. courts. the corporation has “certain minimum contacts with The summary may be overly comprehensive in [a forum state] such that the maintenance of the suit light of the intended audience, as I understand it. does not offend ‘traditional notions of fair play and The service-of-process issue, while technically a substantial justice.’” International Shoe, 326 U.S. component of the personal jurisdiction analysis, may at 316 (quoting Milliken v. Meyer, 311 U.S. 457, be of minimal interest to an audience interested in 463 (1940)). Minimum contacts must derive from the types of business activities that will subject a some conduct by which the defendant corporation corporation to jurisdiction. Nevertheless, I have “purposefully avails itself of the privilege of included it for the sake of completeness and on the conducting activities” in the forum, thereby theory that it would be easier for you to “edit down” “invoking the benefits and protections of its laws.” than to supplement any deficiencies in the analysis. Hanson v. Denckla, 357 U.S. 235, 253 (1958). The Please let me know if any revisions are needed. corporation’s conduct and connection with the forum must be such that it should reasonably A. General Principles of Personal Jurisdiction anticipate being subject to suit there. See World- Two requirements must be met in order for a Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, non-U.S. corporation to be subject to personal 297 (1980). Even if minimum contacts exist, the jurisdiction in a U.S. court. First, there must be a court must determine if requiring the corporation to statute or rule that authorizes jurisdiction by litigate in the forum would be unfair or establishing a basis for the corporation’s unreasonable. See Asahi Metal Indus. Co. v. amenability to service of summons. See, e.g., Omni Superior Ct. of California, 480 U.S. 102, 113–14 Capital Int’l, Ltd. v. Rudolf Wolff & Co., Ltd., 484 (1987)). U.S. 97, 104 (1987); Dalton v. R. & W. Marine, Inc., 897 F.2d 1359, 1361 (5th Cir. 1990). Second, B. Specific Jurisdiction the exercise of jurisdiction must comport with due The requirement of “minimum contacts” may process. See International Shoe Co. v. be met in two ways. A court may assert “specific Washington, 326 U.S. 310, 316 (1945). Except jurisdiction” over a nonresident defendant if i) the where otherwise noted, the principles and examples defendant has purposefully directed its activities at, discussed herein apply with equal force to any or availed itself of the privilege of doing business in, corporation that is not a resident of the forum state the forum state; ii) the plaintiff’s claim arises out of in question, whether it is a domestic corporation or those activities; and iii) the exercise of jurisdiction a corporation organized under the laws of a country is reasonable. See, e.g., OMI Holdings, Inc. v. other than the United States. Royal Ins. Co. of Canada, 149 F.3d 1086, 1091 Amenability to service is determined by the (10th Cir. 1998); Felch v. Transportes Lar-Mex SA long-arm statute of the state in which the federal DE CV, 92 F.3d 320, 323–24 (5th Cir. 1996) court sits. See Fed. R. Civ. P. 4(e)(1); see, e.g., (citations omitted). Max Daetwyler Corp. v. R. Meyer, 762 F.2d 290, One example of a claim which might arise out 293 (3d Cir.), cert. denied, 474 U.S. 980 (1985). A of a nonresident corporation’s activities in a forum state long-arm statute typically authorizes service on state is a claim for breach of contract. The making a nonresident corporation “doing business” in the of a contract in a forum state is insufficient, without state. The majority of such statutes have been more, to support personal jurisdiction. See, e.g., interpreted to extend to the limits of due process. Vetrotex Certainteed Corp. v. Consolidated Fiber See 4 Charles A. Wright & Arthur R. Miller, Glass Prods. Co., 75 F.3d 147, 151 (3d Cir. 1996) FEDERAL PRACTICE AND PROCEDURE § 1069, at (citations omitted). However, participation in 176 (Supp. 1999). As a result, the statutory substantial negotiations that are conducted in a K-2 1999 State Bar of Texas Advanced Business Bankruptcy Course forum state and lead to the formation of the contract businesses, insofar as the benefits they derive from at issue may suffice. See Mid-America Tablewares state services are concerned, that it would give them v. Mogi Trading Co., 100 F.3d 1353, 1361 (7th Cir. an undeserved competitive advantage if they could 1996) (citation omitted). A Spanish corporation escape having to defend their actions in the local was subject to the jurisdiction of a Minnesota court courts.” IDS Life Ins. Co. v. SunAmerica Life Ins. in a breach of contract action arising out of its Co., 136 F.3d 537, 540–41(7th Cir. 1998) (Posner, purchase of seed from a Minnesota company. The J.) (citations omitted). “Continuous and systematic president and vice president of the Spanish general business contacts” may exist if a corporation had visited Minnesota on two and three corporation maintains an office, bank accounts and occasions, respectively, over an eight-month period. other property, and/or employees and agents in a During these visits, extensive meetings were held at forum state. See, e.g., Canadian Group which all aspects of the parties’ business Underwriters Ins. Co. v. M/V “Arctic Trader,” No. relationship were discussed. The meetings were 87-C9535, 1998 U.S. Dist. LEXIS 16293, at *9–10 followed by extensive written communications that (S.D.N.Y. Oct. 14, 1998). Whether one of these were transmitted primarily by fax to Minnesota, activities will be sufficient by itself to constitute including purchase orders. The court concluded that “doing business” depends on the facts and the corporation had sought out and worked to foster circumstances. For example, the maintenance of a a business relationship with the plaintiff, thereby bank account, without more, is generally insufficient purposefully availing itself of the privilege of doing in New York. See United Trading Co. S.A. v. M.V. business in Minnesota. See Northrup King Co. v. Sakura Reefer, No. 95 Civ. 2846, 1996 U.S. Dist. Compania Productora Semillas Algodoneras LEXIS 9190, at *4–5 (S.D.N.Y. June 28, 1996). Selectas, S.A., 51 F.3d 1383, 1388–89 (8th Cir. However, a Liberian corporation was found to be 1995). doing business in New York where it received substantially all of its income into, and paid most of C. General Jurisdiction its expenses from, a New York bank account A defendant may be subject to the “general pursuant to an arrangement with a commonly owned jurisdiction” of a forum state, without regard to entity that held the account. See United Rope whether a claim arises out of its activities in the Distributs., Inc. v. Kimberly Line, 770 F. Supp. state, where the defendant has “continuous and 128, 132–33 (S.D.N.Y. 1991). systematic” contacts with the state. See Perkins v. Benguet Consol. Mining Co., 342 U.S. 437, 448 D. Other Activities Which May Support General (1952); International Shoe, 326 U.S. at 317. This or Specific Jurisdiction is a demanding standard, requiring a showing of “continuous and systematic general business 1. Sales Activity contacts” within a state. See Metropolitan Life Ins. Sales activity in a forum may confer Co. v. Robertson-Ceco Corp., 84 F.3d 560, 568 (2d jurisdiction over a nonresident defendant, but only Cir.), cert. denied, 519 U.S. 1006 (1996) (quoting where it is significant. See, e.g., Charlesworth v. Helicopteros Nacionales de Colombia, S.A. v. Marco Mfg. Co., 878 F. Supp. 1196, 1201 (N.D. Hall, 466 U.S. 408, 416 (1984)). In the leading Ind. 1995). A corporation that made eight per cent case on general jurisdiction, the Supreme Court held of its national sales for a given year in one state that a Texas court could not maintain jurisdiction could not be subject to personal jurisdiction there on over a Columbian corporation in a wrongful death the basis of the sales because they were deemed too action because the corporation's business activities insignificant to constitute “continuous and in Texas were insufficient. See Helicopteros, 466 systematic” contacts. See L.H. Carbide Corp. v. U.S. at 416. The corporation had sent its CEO to Piece Maker Co., 852 F. Supp. 1425, 1436 (N.D. Houston to negotiate a contract, it had purchased Ind. 1994). Purchasing activity, even if systematic four million dollars worth of helicopters, equipment and continuous and involving regular trips to the and training services from a Texas firm, and it had forum by corporate executives, is not a sufficient sent pilots, managers and maintenance personnel to basis for an assertion of jurisdiction. See Revlon, be trained in Texas. Inc. v. United Overseas Ltd., 93 Civ. 0863, 1994 “One way of thinking about the concept of U.S. Dist. LEXIS 220, at *9–10 (citing ‘doing business’ . . . is that it picks out those Helicopteros, 466 U.S. at 418). nonresident businesses that are so like resident Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-3

A corporation may also be subject to is common stock ownership and/or directors and jurisdiction in a state even it does not directly solicit officers, ii) whether the parent exercises total business there. See Vandelune v. 4B Elevator control over the general policies of the subsidiary or Components Unltd., 148 F.3d 943 (8th Cir.), cert. controls the subsidiary’s finances, iii) whether the denied sub nom. Synatel Instrumentation v. parent and subsidiary file consolidated financial Vandelune, ___ U.S. ___, 119 S.Ct. 543 (1998). If statements and tax returns, and iv) the degree to a corporation “‘pours its products” into a regional which the parent and subsidiary keep their daily distributor with the expectation that the distributor operations separate and observe corporate will penetrate a discrete” area, the corporation has formalities by, i.e., keeping separate books and purposefully availed itself of the privilege of doing records and holding separate shareholder and board business there for due process purposes. See meetings. See Gundle Lining Constr. Corp. v. Vandelune, 148 F.3d at 948 (citing Barone v. Rich Adams County Asphalt, 85 F.3d 201, 208–9 (5th Bros. Interstate Display Fireworks, 25 F.3d 610, Cir. 1996); Dalton, 897 F.2d at 1363. The presence 615 (8th Cir.), cert. denied sub nom. Hosoya of officers of a parent corporation on the board of a Fireworks Co. v. Barone, 513 U.S. 948 (1994). A subsidiary does not of itself demonstrate the British manufacturer was subject to personal subsidiary’s lack of independence. A parent’s jurisdiction in Iowa in a products liability suit even officers may control the subsidiary’s board as though it had no offices, agents, employees or representatives of the controlling stockholder. See property in Iowa and did no advertising or direct Volkswagenwerk Aktiengesellschaft v. Beech solicitation of business there. At the urging of Aircraft Corp., 751 F.2d 117, 121 (2d Cir. 1984). another British entity which had an affiliate in It is when the parent’s officers extend their control Illinois, the manufacturer had designed its product beyond that normally exercised by a board that their for U.S. markets. It agreed to distribute the product behavior will support an inference that the through the affiliate and shipped the product directly subsidiary is not an independent entity. See id. to the affiliate. Its employees attended technical Several of these factors contributed to a finding support meetings at the affiliate’s offices. Within a that a Canadian corporation exercised “pervasive one-year period, 81 of the approximately 600 units control” over its U.S. subsidiary and could be shipped to the affiliate were resold in Iowa. subject to personal jurisdiction in a U.S. court. The Notwithstanding the absence of a direct “marketing Canadian corporation owned 100% of the stock of presence” in Iowa, the court found that the its U.S. subsidiary; the two corporations had manufacturer had “purposefully marketed” its identical officers, all of whom resided in Canada; product there and could be subject to jurisdiction on and both corporations were engaged in the same that basis. See Vandelune, 148 F.3d at 948. business of selling safety protection equipment. See Cabot Safety Intermediate Corp. v. Akron Safety 2. Ownership and Control of U.S. Equip., Inc., 12 F. Supp. 2d 180, 181–2 (D.Mass. Subsidiaries 1998). It is well established that a foreign corporation will not be subject to the jurisdiction of a U.S. court merely because it has a subsidiary doing business in the United States. See generally Cannon Mfg. Co. v. Cudahy Packing Co., 267 U.S. 333 (1925). This is true even where the parent corporation is the sole owner of the subsidiary. See, e.g., Matosantos Commercial Co. v. Applebee’s Int’l, 2 F. Supp. 2d 191, 196 (D. P.R. 1998). However, the failure of a parent and subsidiary to maintain separate corporate identities may justify a finding that the parent is doing business through its subsidiary and that the parent is subject to the jurisdiction of a U.S. court. The factors that a court will consider in assessing whether a nonresident corporation should be subject to jurisdiction by virtue of the business activities of its subsidiary include: i) whether there K-4 1999 State Bar of Texas Advanced Business Bankruptcy Course

3. Operation of Internet Sites U.S. Dist. LEXIS 17121, at *8 (S.D. Tex. June 25, The operation of an Internet site may subject a 1997) (citation omitted). In a recent case, a plaintiff corporation to personal jurisdiction in those states in sought to assert general jurisdiction over an Italian which users of the site are located. As a general corporation in a New Jersey court. The Italian principle, the likelihood of jurisdiction is “directly corporation owned and operated several hotels proportionate to the nature and quality of located in Italy. Its only potential contact with New commercial activity that an entity conducts over the Jersey was an Internet site on which it posted Internet.” Zippo Mfg. Co. v. Zippo Dot Com, 952 photographs of and other information about its F. Supp. 1119, 1124 (W.D. Pa. 1997). hotels. The court concluded that the corporation’s A corporation will be subject to personal use of the website was for advertising purposes, that jurisdiction where it actively does business by this “contact” with New Jersey was not sufficient to “enter[ing] into contracts with residents of a foreign support general jurisdiction there, and that the jurisdiction that involve the knowing and repeated corporation had not directed its activity at New transmission of computer files over the Internet.” Jersey simply by advertising on the Internet. See Zippo, 952 F. Supp. at 1124 (citing CompuServe, Weber, 977 F. Supp. at 333–34. To conclude Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996)). otherwise would essentially permit worldwide This is simply an extension of the principle that a jurisdiction over anyone that established a website. corporation can be subject to personal jurisdiction in See id. at 333. those states where it chooses to do business, whether over the Internet or in a more traditional E. Personal Jurisdiction in Claims Involving fashion. See Zippo, 952 F. Supp. at 1124, 1126. Federal Law An out-of-state corporation was deemed to have Where a plaintiff brings a claim against a made “a conscious choice to conduct business” in nonresident corporation under federal law, it must Pennsylvania, id. at 1126, such that it was subject to still demonstrate that there is a statutory basis for jurisdiction there, where the corporation maintained jurisdiction and that the exercise of jurisdiction a website through which it sold passwords enabling comports with due process. In federal question cases, subscribers to view and download Internet service of process must be effected under the long- newsgroup messages stored on the corporation’s arm statute of the state in which the court sits, unless out-of-state server. Only two per cent of the total otherwise provided by federal law. See Fed. R. Civ. subscribers to the service were residents of P. 4(e)(1). In some cases, the federal legislation Pennsylvania, and the corporation had entered into under which suit is brought may provide for either seven contracts with service providers in nationwide or worldwide service of process. See Fed. Pennsylvania to furnish its services there. R. Civ. P. 4(k)(1)(D); Republic of Panama v. BCCI Notwithstanding the comparatively small number of Holdings (Luxembourg) S.A., 119 F.3d 935, 942 subscribers located in the forum, the court held that (11th Cir. 1997) (RICO statute provides for service of jurisdiction was proper because the corporation had process in any judicial district in which the defendant “repeatedly and consciously” chosen to process the is found). The Federal Rules of Civil Procedure also applications of Pennsylvania residents and assign authorize the exercise of jurisdiction over a defendant passwords to them. See id. at 1125–28. that would not otherwise be amenable to suit because By contrast, a corporation will not be subject to of its lack of contacts with any one state, but which personal jurisdiction where it uses its website as an nevertheless has sufficient contacts with the United advertisement rather than a “means of conducting States as a whole to support an assertion of business.” See Weber v. Jolly Hotels, 977 F. Supp. jurisdiction with respect to a claim arising under 327, 333 (D.N.J. 1997). The underlying rationale is federal law. See Fed. R. Civ. P. 4(k)(2). that a defendant does not direct its activity at a As a general rule, where a claim involves federal specific forum by maintaining a website with substantive law, the Fifth Amendment provides the information about its commercial activities. The relevant due process standard. See, e.g., Chew v. information “merely resides in ‘cyberspace’ waiting Dietrich, 143 F.3d 24, 27–28 & nn. 3 & 4 (2d Cir.), to be visited on the initiative of the Internet cert. denied, ___ U.S. ___,119 S.Ct. 373 (1998). explorer,” while the site “is available to all comers The due process inquiry under the Fifth Amendment and cannot be practically blocked from access by the may entail an examination of whether a defendant has citizens of particular locations.” Agar Corp. v. had sufficient contacts with the United States as a Multi-Fluid, Inc., Civil Action No. 95-5105, 1997 whole, rather than simply with a particular state. See Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-5 id.; Republic of Panama, 119 F.3d at 946–47. For weighed a number of factors, one factor that weighed example, two Hong Kong broker/dealers had strongly in favor of the corporations was the minimum contacts with the United States where they substantial burden of having to litigate in a U.S. court engaged in commodities trading on U.S. exchanges unfamiliar with the Canadian law governing the through a U.S. agent as a regular part of their dispute. See id. at 1096-98. business and where their customer agreements contained express acknowledgments that any trades F. Consent to Personal Jurisdiction placed were subject to applicable U.S. laws. See A non-resident corporation may consent to the Pyrenee, Ltd. v. Wocom Commodities, Ltd., 984 F. personal jurisdiction of U.S. court. This can be done Supp. 1148, 1160 (N.D. Ill. 1997). before a controversy arises by, for example, including The focus of the due process inquiry under the a forum selection clause in a contract. It can also be Fifth Amendment is on the “fairness and done once a dispute has begun by waiving any reasonableness” of requiring a defendant to appear challenge to the personal jurisdiction of a particular in the United States. See id. at 945–46 (quoting In court. re Chase & Sanborn Corp., 835 F.2d 1341, 1345 (11th Cir. 1988), rev’d on other grounds sub nom. II. Fifth Circuit Authority on Application of Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 Federal Common Law for Alter Ego/Piercing (1989)). A number of courts have held that Corporate Veil litigation against a foreign defendant creates a This memorandum addresses the recognition higher jurisdictional barrier and that courts must and application of federal common law by the Fifth apply a higher standard of review to the contacts of Circuit in the context of piercing the corporate veil international defendants. See, e.g., OMI Holdings, claims.1/ Inc., 149 F.3d at 1096. “When the defendant is from another country . . . ‘great care and reserve A. Summary should be exercised’” before personal jurisdiction is While the existence of federal common law on asserted. Id. (quoting Asahi Metal, 480 U.S. at 115 piercing the corporate veil is recognized by the Fifth (citation omitted)). This is due to the potential Circuit and Texas district courts, it has been applied burden on a non-U.S. defendant forced to litigate in only in a handful of reported decisions. In those a U.S. forum. See Asahi Metal, 480 U.S. at 114. decisions, and others comparing federal common law While “not dispositive,” this burden is “of primary and the law of Texas, Delaware and other states on concern” in determining the reasonableness of the subject, the courts find no appreciable difference personal jurisdiction. See id. at 1096 (quoting between federal common law and applicable state World-Wide Volkswagen, 444 U.S. at 292). law. Indeed, in non-diversity corporate veil piercing Thus, even where a defendant has the requisite cases, the decisions rarely state whether a federal or minimum contacts, an assertion of jurisdiction may state standard was applied and federal and state cases violate due process if found to be unreasonable. are cited interchangeably.2/ Thus, there is little Although the court in OMI Holdings, Inc. focused difference between the application of federal common on the defendants’ contacts with a particular state law on corporate veil piercing and the Texas (Kansas) rather than the United States as a whole, Supreme Court’s landmark Castleberry decision. the court found that several Canadian corporations While some reported decisions in other circuits had established minimum contacts by issuing may suggest that federal common law provides a insurance policies in which they agreed to defend an more lenient standard for piercing the corporate veil insured against legal proceedings brought in any U.S. forum. See OMI Holdings, Inc, 149 F.3d at 1092, 1095. However, the court also concluded that 1/ In preparing this memorandum approximately 150 Fifth jurisdiction over these corporations would violate Circuit cases involving alter ego and piercing of the due process. See id. at 1096. The Canadian corporate veil considerations were reviewed. Only a handful of these decisions mentioned that federal common corporations had no offices, employees or insureds law on the subject existed. located in Kansas. The corporations had issued insurance policies under Canadian law to a 2/ Although choice of law considerations are beyond the Canadian entity that sought coverage for the costs of scope of this memorandum, in diversity cases, the law of defending a lawsuit brought against its U.S. the state of incorporation of corporation whose corporate subsidiary in a Kansas court. While the court veil is being challenged controls. K-6 1999 State Bar of Texas Advanced Business Bankruptcy Course than its state counterparts, in the Fifth Circuit, that Chemicals is a good example of the broad discretion does not appear to be the case. Indeed, one Fifth vested in federal courts to pierce the corporate veil, Circuit opinion even opined that Delaware law on regardless of whether federal common law or state corporate veil piercing was “broader than federal law applies. common law.” Alberto v. Diversified Group, Inc., In Jon-T Chemicals, the Fifth Circuit 55 F3d 201,215 (5th Cir. 1995). Similar to veil recognized the similarities of federal common law piercing cases under state law, limited liability is the and state law (Texas) on corporate veil piercing. general rule, not the exception, and corporate form Although the facts are distinguishable from the is disregarded only in exceptional cases. matter at bar (the subsidiary clearly was dominated The decisions on piercing the corporate veil, and controlled by the parent in Jon-T Chemicals), the whether based upon federal common or state law, opinion is good precedent for two reasons. First, are fact specific. Although there is no suggestion unlike the laws of Delaware and other states, under that the application of federal common law makes it federal common law, a finding of fraud is not an any easier to pierce the corporate veil, federal essential element in piercing the corporate veil in tort common law certainly affords the courts with cases. Second, the Court identified the significance discretion to pierce the corporate veil if sufficient of the parent corporation’s actions to the evidence of misuse of corporate form or an overall subsidiaries’ tort in decision as an important factor in element of injustice or unfairness exists. determining whether to pierce the corporate veil. In this case, the United States, after obtaining B. Federal Corporate Veil Piercing Common Law criminal convictions against a corporation and Under federal common law, generally a individuals in connection with fraudulent corporate entity may be disregarded in the interest of misrepresentations to obtain certain agricultural public convenience, fairness and equity. United subsidies under a federal program, sought to hold the States v. Wallace, 961 F. Supp 969, 978 (N.D. Tex. corporation’s parent liable on the ground that it was 1996). In applying federal common law, however, the subsidiary corporation’s alter ego.3/ The district courts generally limit veil piercing to situations in court found that the corporate veil of the subsidiary which the corporate subsidiary is (1) established to corporation should be pierced and the Fifth Circuit perpetrate a fraud (or its shareholders drain the affirmed the decision. corporation’s assets) or (2) totally dominated and The Court noted the paucity of circuit court controlled by the parent corporation as its business opinions applying “an explicitly federal rule of conduit, as its alter ego. Joslyn Mfg. Co. v. T.L. decision” on corporate veil piercing and never James & Co., Inc, 893 F.2d 80 (5th Cir. 1990); reached the issue of whether federal common law or United States v. Jon-T Chemicals, Inc., 768 F.2d Texas law should be applied since it found the state 686, 691 (5th Cir. 1985). and federal test to be “essentially the same.” Jon-T No Fifth Circuit decisions recognizing or Chemicals, 768 F.2d at 690. Thus, the Court recited applying federal corporate veil piercing common the three most common situations justifying the law in claims asserted under the Clayton Act were piercing of the corporate veil: (1) the parent company located; however reported decisions discussing dominates its subsidiary, operating the subsidiary as federal common law involving claims under other its business conduit or agent; (2) the subsidiary federal statutes, including the Comprehensive corporation in established for a fraudulent purpose or Environmental Response, Compensation, and used to commit an illegal act; and (3) the subsidiaries Liability Act (“CERCLA”), The Upland Cotton shareholders drain the corporation’s assets. Id. at Price Support Program and Age Discrimination in 691. Employment Act were reviewed. The most relevant decisions by the Fifth Circuit, and two district court 2. Joslyn Manufacturing decisions are summarized below.

C. The Cases 3/ Many early decisions improperly viewed alter ego and piercing of the corporate veil to be synonymous terms. 1. Jon-T Chemicals Jon-T Chemicals was one such case. Subsequent cases, The Jon-T Chemicals case is the strongest such as Castleberry, correctly held that the corporate veil reported Fifth Circuit decision discussing federal could be pierced on several bases, including where the common law on corporate veil piercing. Jon-T subsidiary was the alter ego of the parent. Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-7

Joslyn illustrates that piercing the corporate veil subsidiary to be held liable for the subsidiaries under federal common law is no easier than under actions. applicable state law. In Joslyn the plaintiff contended that the parent of a subsidiary 4. Fidelity & Deposit Company of corporation that at one time owned a creosoting Maryland plant was liable for environmental cleanup costs Fidelity & Deposit Company of Maryland v. because it was “an owner or operator” of the plant Commercial Casualty Consultants, Inc.4/ involves under CERCLA. In granting the parent an appeal from the decision of the district court for corporation’s summary judgment motion, the the Western District of Texas (San Antonio Division) district court held that, in enacting CERCLA, piercing the corporate veil and holding the Congress did not intend an exception to the general shareholders of the corporation liable. rule in corporation law of limited liability. Id. The Fifth Circuit overruled the district court’s Joslyn, 893 F.2d at 82. The Fifth Circuit affirmed. decision that the corporate veil should be pierced. In Joslyn, the Court failed to follow precedent In Fidelity the Court applied Texas law to the in our circuits and found no support for the issue of whether the corporate veil should be pierced appellant’s contention that, in enacting CERCLA, and noted that Texas law provides three broad Congress intended to hold parents directly liable for theories of corporate disregard: (1) the corporation is subsidiaries’ actions. The Court stated that absent the alter ego of its owners or shareholders; (2) the sufficient evidence of control (which was not corporation is used for an illegal purpose; and (3) the present in the case) “veil piercing should be limited corporation is used as a sham to perpetrate a fraud. to situations in which the corporate entity is used as Id. at 274, 275. These three theories are virtually a sham to perpetrate a fraud.” Id. at 83. identical to those identified in Jon-T Chemicals, supra. Moreover, the Fifth Circuit stated that the 3. Wallace general purpose of corporate disregard under Texas Wallace involved federal and state government law is to “prevent use of the corporate entity as a actions filed under CERCLA concerning cleanup of cloak for fraud or illegality or to work an injustice.” a waste treatment and disposal facility. The Fidelity, 976 at 275. government entities argued that the subsidiary/ The purpose for corporate disregard under purchaser corporation operated as the alter ego of its federal common law is essentially the same. parent corporation so as to justify piercing the Wallace, 961 F. Supp at 978 (generally, a corporate corporate veil to hold the parent liable for cleanup entity may be disregarded in the interest of public response charges. The court denied the defendant convenience, fairness and equity). parent corporation’s motion for summary judgment on the veil piercing claims asserted by the D. Conclusion government. Federal common law on corporate veil piercing The parties stipulated that federal common law is rarely mentioned in reported Fifth Circuit applied on the issue of corporate veil piercing and decisions, and even more rarely applied. When it is further agreed that the subsidiary corporation was applied, there is no appreciable difference between it not established for purposes of perpetrating a fraud. and the laws of most states, including Texas, and the The Court opined that for liability to attach federal courts have considerable discretion to under the alter ego doctrine, the control of the parent consider those factors, and weigh them accordingly, corporation must amount to “total domination of the in deciding whether to pierce the corporate veil. subservient corporation, to the extent that the subservient corporation manifests no separate III. The Xacur case corporate interests of its own and functions solely to On September 18, 1996, seven leading Mexican achieve the purposes of the dominant corporation banks and one California bank (with Mexican with no separate mind, will or existence of its own.” ownership) filed involuntary petitions against three Id. at 978. Moreover, the Court noted that, under all brothers in Houston, Texas. These brothers (Felipe, theories of corporate veil piercing, the plaintiff Jacobo and José Maria Xacur) were citizens of must show “control of one corporation over the Mexico, and were residing in Houston at the time. other.” Id. at 979. The rationale underlying this principle is that the parent must be in control of the 4/ 976 F.2d 272 (5th Cir. 1992). K-8 1999 State Bar of Texas Advanced Business Bankruptcy Course

They had been co-makers (“avalistas” under Second, some of the borrowing companies used Mexican law) on a number of large bank loans to their loan proceeds to fund construction of a plant to their family’s corporations in Mexico (the “Xacur process soybeans. The brothers allege that the plant Companies”) totaling in excess of $300,000,000.00, did not function as intended and that the Xacur all of which were in default. On May 5, 1997, the Companies were therefore unable to repay the bankruptcy court in Houston commenced a lengthy plant’s construction loans. Though one of the and hotly contested trial to determine the existence companies filed suit against the plant’s manufacturer of federal court jurisdiction, the validity of the in the United States in July 1993, this action (still involuntary petitions, and the appropriateness of pending) seeks only $17 million in damages–a small orders for relief. fraction of the bank loans to the Xacur Companies. This was the first time the banks of Mexico At the end of February, 1995, after the Xacur had ever taken the extraordinary measure of Companies failed to make a number of required pursuing their borrowers into the courts of the payments on their debt to the banks, representatives United States using the rules of involuntary from Banamex went to meet with one of the brothers, bankruptcy to allow a trustee to take control of their Jacobo Xacur, in Merida, Yucatan, Mexico. Jacobo respective individual estates. Xacur was present in Merida that day, but refused to meet with the bank representatives. Next the A. Background Facts5/ representatives proceeded to the local Xacur From 1992 to 1994, the various banks Company warehouses in Merida and found no raw individually loaned more than $300 million (in U.S. materials present. This absence of raw materials dollars) to the Xacur Companies evidenced by was highly alarming to the bank because they various promissory notes (“pagares”). These notes constituted the bank’s primary collateral, and Jacobo were to be repaid in United States dollars. Xacur was responsible for their safekeeping. Each of the Xacur brothers gave his aval on Jacobo Xacur then abruptly departed Mexico in various notes to insure the payment of the March 1995, to take up residence at an expensive instruments so signed. Under Mexican law, an aval home in Houston with his wife and children. is a financial obligation equivalent to that of a co- In the months that followed, the banks filed at maker under United States law. For example, the least 27 actions in Mexican civil courts against the holder of a note bearing an aval can claim the Xacur Companies (and against the Xacur brothers amount due directly from the avalista (i.e., the giver individually on their aval) to collect the more than of the aval), without making any claim on the $300 million of debt. primary borrower. Indeed, this is true even if the Meanwhile, Jacobo Xacur, who was one of the primary borrower’s obligation on the note becomes, two chief spokesmen for the Xacur Companies, told for any reason, unenforceable. the Petitionary Creditors he would only meet with In late 1994 and early 1995, the Xacur them in the United States. At one such meeting, he Companies began defaulting on their Note was quoted as having said that he was “living very payments. The Xacur brothers claimed that two pleasurably in the United States and from here he events precipitated these defaults. could conduct all his businesses.” His two brothers First, in December 1994, the Mexican José Maria and Felipe Xacur had also taken up government devalued the peso, causing obligations residence in the United States during 1995 and 1996, repayable in U. S. dollars to be much more difficult purchasing homes near Jacobo. to meet. The first Xacur Company default actually On June 28, 1995, the Xacur Companies filed a preceded devaluation of the peso by about two “suspension de pagos,” (i.e., suspension of months, but certainly following devaluation, the payments) proceeding in Mexico (the “SOP”). An Xacur Companies made no significant payments on SOP is similar to Chapter 11 bankruptcy under the the Notes. United States Bankruptcy Code and is intended to permit reorganization of the debtor. The SOP is still pending in Mexico, but very little progress has been made in the case to date. With the Xacur Companies languishing in 5/ The facts recited here are based upon sworn testimony and documents admitted into evidence at trial, and upon the findings Suspension of Payments proceedings in Mexico, the and conclusions reached by the trier of fact. Some of the facts three Xacur brothers’ defaults on their aval and legal conclusions stated here were contested by witnesses and attorneys for the Xacur brothers. Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-9 obligations drug on for approximately two and one- evidence that Mexican law, half years. controlling for the Notes at Frustrated by their inability to enforce issue, observes no concept of collection against the individual co-makers who usury applicable to the continued to enjoy a luxurious lifestyle in Houston, underlying Notes.]; and Texas, the banks organized and retained the 4. whether the three Xacur Houston law firm of Fulbright & Jaworski L.L.P., brothers were “qualified to be for counsel as to their rights, if any, to seek remedies debtors” under U.S. bankruptcy in the American courts. The avenue selected was law [The banks presented the filing of involuntary bankruptcy petitions evidence showing that each of against each of the three Xacur brothers in the the three Xacur brothers was United States Bankruptcy Court in Houston. The residing in the United States, rationale behind this decision was that each of the each owned substantial requisites of involuntary bankruptcy were present, property in the United States, and the three brothers had placed themselves within and at least one of them had a the jurisdiction of the federal courts. Although it place of business in Houston.]. was an essentially Mexican problem (lenders, borrowers, co-makers, collateral, related C. In their defense, the Xacur brothers urged proceedings), it was felt that in the age of NAFTA the bankruptcy court to abstain under 11 the courts of each country should accommodate the U.S.C. § 305, which requires a finding that petitions of foreign nationals and foreign institutions abstention would be in the best interests of so long as the jurisdictional requirements laid down the debtor and creditors. The banks for the particular forum were clearly met. The countered that there was no bankruptcy petitioning banks, it was thought, would not be case in Mexico to supervise the Xacur turned away simply because they were from a brothers’ debt in favor of which the United neighboring country. States bankruptcy court might abstain. The evidence showed that: B. At trial, in May 1997, the banks and the three 1. The Three Xacurs had Xacur brothers presented expert witnesses who frustrated Mexican civil testified about such basic “involuntary petition collection actions on their issues” as these: aval by fleeing the jurisdiction of Mexico and 1. whether the alleged debtors had asserting various forms of been properly served with dilatory defenses. process; 2. whether debt on an aval is a 2. Civil collection actions contingent liability differ from a bankruptcy [Bankruptcy Judge Karen case, which provides a Brown relied upon the centralized forum to interpretation of Petitioning supervise the assets and Creditors’ expert, whose liabilities of persons who opinion was consistent with the generally stop paying their numerous United States federal debts as they come due. court opinions that have construed what an aval means 3. The Three Xacurs have under foreign law.]; never filed a bankruptcy 3. whether the obligations in case in Mexico or question were subject to a bona elsewhere to deal with their fide dispute because some of pattern of insolvency and the interest rates charged general non-payment of the would be considered usurious Debt. if undertaken in Texas [The banks presented uncontested K-10 1999 State Bar of Texas Advanced Business Bankruptcy Course

4. While the Xacur a place of business in Houston; and Companies have filed for (3) had substantial property in the Mexican insolvency United States. These facts, that proceeding, the Xacur qualified him to be a debtor under brothers were not parties Section 109 of the Bankruptcy Code, to those proceedings and also constituted the minimum are not subject to the contacts necessary to make it fair to supervision of any assert jurisdiction over him under the Mexican court. United States Constitution (i.e., that Sections 109 and 303 of the In August 1997, United States Bankruptcy Bankruptcy Code are constitutional). Judge Brown entered an Order for Relief against the three Xacur brothers under sections 303 and 109 of IV. International Insolvency the United States Bankruptcy Code. International Insolvency6/ On October 22, 1998, the United States District Court, sitting on appeal, entered its A. Introduction Memorandum Opinion and Final Order affirming More and more, we see the scenario of the bankruptcy court. The case is now pending on multinational corporations and even small companies appeal to the Fifth Circuit. and individuals who hold assets and have business dealings in more than one country. It is difficult D. There are three fundamental issues that were enough to collect assets in foreign countries and determined by the bankruptcy court and enforce foreign judgments. When such an entity files confirmed by the district court. an insolvency proceeding in either the United States 1. First, they both found that the or a foreign country, or both, special problems are Xacur brothers’ conduct justified created. placing them in involuntary bankruptcy in the United States. B. Discussion Both courts found that the Xacurs met the Bankruptcy Code section 1. Bankruptcy Code Section 304 303 standards for imposition of One international insolvency scenario arises involuntary bankruptcy because: (1) when there is a foreign insolvency proceeding and the they had generally failed to pay over foreign representative seeks relief in the United $300 million of Debt on their aval States. This has been termed an "inbound" scenario. for over 2-1/2 years; (2) they owed Section 304 of the bankruptcy code allows a foreign this Debt currently and its payment representative to institute an “ancillary” proceeding was not contingent upon anything, in a United States bankruptcy court to obtain relief in including the completion of the aid of the foreign proceeding. 11 U.S.C. § 304. Mexican bankruptcy case of the Section 304 was enacted with the 1978 Bankruptcy Xacur Companies that were co- Code and had no predecessor provision under the makers on this Debt; and (3) Texas Bankruptcy Act. Unchanged since 1978, it is printed usury law did not create a bona fide below: dispute about the Xacurs’ obligations on these Notes that had Sec. 304. Cases ancillary to foreign always been governed, instead, by proceedings Mexican law. 2. Second, the bankruptcy court (a) A case ancillary to a foreign proceeding is and the district court found they had commenced by the filing with the bankruptcy court of jurisdiction over Jacobo Xacur (the only brother to contest the court’s jurisdiction to determine the 6/ This article borrows heavily from “Assets Without Borders - International Developments” presented at the controversy). Both courts held that th Jacobo Xacur (1) had been residing University of Texas School of Law 17 Annual Bankruptcy Conference November 19-20, 1998, by Jay L. in Houston with his family; (2) had Westbrook, Evelyn H. Biery and Steve A. Peirce. Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-11 a petition under this section by a foreign in accordance with the order representative. prescribed by this title; (b) Subject to the provisions of subsection (c) (5) comity; and of this section, if a party in interest does (6) if appropriate, the provision of an opportunity not timely controvert the petition, or after trial, for a fresh start for the individual that such foreign the court may - proceeding concerns. (1) enjoin the 11 U.S.C. § 304. commencement or continuation of - 2. Case Law (A) any action against a. Benefits and Burdens (i) a debtor with respect to Over a century ago, the Supreme Court property involved in such articulated this concept in Canada Southern foreign proceeding; or Railroad v. Gebhard, 109 U.S. 527 (1883). In (ii) such property; or Gebhard, a Canadian railroad issued bonds to (B) the enforcement of American creditors. The Canadian railroad became any judgment against the insolvent and issued a “scheme of arrangement” debtor with respect to such approved by the Canadian government that provided property, or any act or the for new bonds. The American creditors did not commencement or participate in the Canadian proceedings. The continuation of any judicial American creditors then filed suit in the United States proceeding to create or on the old bonds. The American creditors contended enforce a lien against the that they were not bound by the Canadian scheme of property of such estate; arrangement. Disagreeing, the Supreme Court held (2) order turnover of the that the American creditors were bound by the property of such estate, or scheme of arrangement and that their suits in the the proceeds of such United States could not be maintained. In so holding, property, to such foreign the Court noted that: representative; or [E]very person who deals with a foreign corporation (3) order other appropriate impliedly subjects himself to such laws of the foreign relief. government, affecting the powers and obligations of (c) In determining whether the corporation with which he voluntarily contracts, to grant relief under as the known and established policy of that subsection (b) of this government authorizes. To all intents and purposes, section, the court shall be he submits his contract with the corporation such a guided by what will best policy of the foreign government, and whatever is assure an economical and done by that government in furtherance of that expeditious administration policy, which binds those in like situation with of such estate, consistent himself, who are subjects of the government, in with - respect to the operation and effect of their contracts (1) just treatment of all holders of claims with the corporation, will necessarily bind him. He is against or interests in such estate; conclusively presumed to have contracted with a view (2) protection of claim to such laws of that government, because the holders in the United States corporation must of necessity be controlled by them, against prejudice and and it has no power to contract with a view to any inconvenience in the other laws with which they are not in entire harmony. processing of claims in such It follows, therefore, that anything done at the legal foreign proceeding; home of the corporation, under the authority of such (3) prevention of preferential or fraudulent laws, which discharges it from liability there, dispositions of property of such estate; discharges it everywhere. (4) distribution of proceeds of such estate substantially 109 U.S. at 370. K-12 1999 State Bar of Texas Advanced Business Bankruptcy Course

One who invests in a foreign corporation nations.' Although subjects his investment to foreign law and may the phrase has not seek to obtain greater rights than his co- been often creditors by suing in a United States court. criticized, no Matter of Culmer, 25 B.R. 621 (Bankr. satisfactory S.D.N.Y. 1982). Every person who deals with substitute has been a foreign corporation impliedly subjects suggested. himself to such laws of the foreign 'Comity,' in the government, affecting the powers and legal sense, is obligations of the corporation with which he neither a matter of voluntarily contracts, as the known and absolute established policy of that government obligation, on the authorizes. In re Banco de Descuento, 78 one hand, nor of B.R. 337 (Bankr. S.D. Fla. 1987). mere courtesy and good will, upon the b. Comity other. But it is the Section 304 requires that the court consider recognition which notions of comity, but comity has been around much one nation allows longer than section 304. In Hilton v. Guyot, 159 within its territory U.S. 113 (1895), French creditors sued Americans to the legislative, in France for overdue payments. The Americans executive, or removed all of their assets from France before a judicial acts of judgment was rendered against them in France. The another nation, French representative then sued the Americans in having due regard the United States to enforce the French judgment. both to The Supreme Court held that: international duty and convenience, No law has any and to the rights of effect, of its own its own citizens, or force, beyond the of other persons limits of the who are under the sovereignty from protection of its which its laws. authority is derived. The 159 U.S. at 143. extent to which the law of one A circuit case analyzing the comity factors is nation, as put in Allstate Life Ins. Co. v. Linter Group, Ltd., 994 F.2d force within its 996 (2d Cir. 1993), cert. denied, 510 U.S. 945 territory, whether (1993). In Linter, an Australian company, Linter by executive Group, Ltd. (“Linter”) allegedly defrauded American order, by investors in a public offering, then went into legislative act, or insolvency proceedings in Australia. American by judicial decree, investors sued Linter (“Linter I”) and sued Linter and shall be allowed Linter’s banks (“Linter II”) in federal court in New to operate within York. On the motion of the foreign representative, the dominion of Linter I was dismissed on grounds of comity in favor another nation, of the Australian insolvency proceedings, and Linter depends upon II was dismissed on grounds of comity and forum non what our greatest conveniens. The American investors appealed. The jurists have been Second Circuit held that the lower court did not abuse content to call 'the its discretion in dismissing the American investors’ comity of actions on the grounds of comity and forum non Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-13 conveniens. The court held that comity is an assets of Salen located in the United States. Salen affirmative defense and the extension or denial of moved to vacate the federal attachment order because comity is within the court’s discretion. Comity is of the Swedish insolvency proceeding. Salen’s relief particularly appropriate where the court is was granted, and Cunard appealed. Cunard argued confronted with a foreign insolvency proceeding. that the granting of comity was improper because the To determine whether the Australian insolvency Swedish court lacked personal jurisdiction over proceedings warranted comity, the court focused on Cunard and lacked in rem jurisdiction of the assets in several factors as indicia of procedural fairness. the United States. The Second Circuit held, however, These factors included (1) whether creditors of the that jurisdiction over the debtor, Salen, was all that same class are treated equally in the distribution of was necessary for the granting of comity. No court assets; (2) whether the liquidators are considered has required that foreign insolvency courts obtain in fiduciaries and are held accountable to the court; (3) personan jurisdiction over each creditor. As to the whether creditors have the right to submit claims comity analysis, the granting of comity to a foreign which, if denied, can be submitted to a bankruptcy insolvency proceeding enables the assets of the court for adjudication; (4) whether the foreign debtor to be disbursed in an equitable, orderly, and liquidators are required to give notice to the debtor’s systematic manner, rather than in a haphazard, potential claimants; (5) whether there are provisions erratic, or piecemeal fashion. American courts have for creditors’ meetings; (6) whether a foreign consistently recognized the interest of foreign courts country’s insolvency laws favor its own citizens; (7) in liquidating or winding up the affairs of foreign whether all assets are marshaled before one body for business entities. It has long been established that centralized distribution; and (8) whether there are foreign representatives are granted standing as a provisions for an automatic stay and for the lifting matter of comity to assert the rights of the foreign of such stay to facilitate the centralization of claims. debtor in American courts. Although early cases The fact that the Australian law provided for a stay upheld the priority of local creditor attachments, the that was not “automatic” like 11 U.S.C. § 362, but modern trend has been toward a more flexible was rather subject to leave of court was irrelevant, approach that allows the assets to be distributed because there was no indication of prejudice to the equitably in the foreign proceeding. In analyzing the American plaintiffs. The court is not required to comity issue, the Second Circuit noted that split hairs to determine that Australian law in principles of Swedish insolvency law are not general provided a fair forum in which to litigate the dissimilar to those of the Bankruptcy Code. American investor’s claims. The Australian Although Cunard did business and had a presence in liquidation proceedings were not required to be the United States, it was incorporated and based in identical to United States bankruptcy proceedings. England. Furthermore, the contract at issue had no What was important was that the Australian connection with the United States. Even if Cunard proceedings generally comported with fundamental were viewed as a citizen of the United States, thus standards of procedural fairness and that the invoking the rule of not granting comity that is granting of comity to a foreign insolvency prejudicial to United States citizens, there was no proceeding would enable the assets of the debtor to indication that Cunard would be prejudiced or treated be disbursed in an equitable, orderly, and systematic unjustly if it were to participate in the Swedish manner, rather than in a haphazard, erratic or insolvency proceedings. There was no indication that piecemeal fashion. the Swedish insolvency proceedings would be inimical to the American policy of equality among The Second Circuit considered comity factors creditors. under section 304 in Cunard Steamship Co. Ltd. v. Salen Reefer Services AB, 773 F.2d 452 (2d Cir. Comity still lives outside the context of Section 1985) [“Salen I”]. Cunard involved a Swedish 304. In In re Enercons Virginia, Inc., 812 F.2d company, Salen R-S-AB (“Salen”). Cunard S-Co. 1469 (4th Cir. 1987), an Italian principal of an Italian Ltd. (“Cunard”) was an English contract creditor of corporation allegedly had defrauded creditors via his Salen. The Salen-Cunard contract provided for the corporation and was living in Virginia. Insolvency arbitration in London of any dispute arising under proceedings were filed against the Italian corporation the contract. Salen filed an insolvency proceeding in in Italy. An Italian representative was appointed and Sweden. Cunard then filed suit in federal court in given by Italian court order the sole authority to bring the United States and obtained an attachment of claims on behalf of the Italian corporation against the K-14 1999 State Bar of Texas Advanced Business Bankruptcy Course principal. The principal then filed for bankruptcy Servicios Publicos, 91 B.R. 661 (Bankr. S.D.N.Y. relief in Virginia. In the Virginia bankruptcy, the 1988). Banco National involved Aeronaves, the Italian representative and Italian banks both filed the Mexican company that operated Aeromexico same claims against the principal. The Italian Airlines. Aeronaves had 350 workers in the United representative argued that, under the Italian court States who were members of a union. Aeronaves had order, he had the exclusive authority to bring the a collective bargaining agreement with the union. claims. Accordingly, in a declaratory judgment There was a disagreement over the collective action, the Italian representative asked that the bargaining agreement that involved a question of United States bankruptcy court disallow any proofs whether there was a collective bargaining agreement of claims filed by the four Italian banks. The court at all. Accordingly, the union filed a declaratory applied the doctrine of comity to the Italian court judgment action against Aeronaves in federal court in order appointing the Italian representative. It held New York, contending that Aeronaves was a that the United States bankruptcy courts should common carrier under the Railway Labor Act respect the Italian representative’s authority to act (“RLA”), 45 U.S.C. § 181, and that, accordingly, as the exclusive representative of the Italian debtor there was a collective bargaining agreement. While corporation and its Italian creditors. Because the that action was pending, Aeronaves filed an objection to the proofs of claims was done by way insolvency proceeding in Mexico. The Mexican of a declaratory judgment action in a bankruptcy court permitted the rejection of labor contracts, case rather than a proceeding under 304, the Italian including the union contract with the American union banks argued that 304 was the exclusive or workers. The Mexican representative then filed a preferred remedy of a foreign representative who 304 action seeking to enjoin any creditors, including wished a United States bankruptcy court to the union, from pursuing any remedies in any court cooperate with the foreign court in its administration other than the Mexican court or the United States of a foreign debtor’s estate. The court disagreed, bankruptcy court in the 304 proceeding. The union holding that Section 304 is not an exclusive remedy argued that it should have the right to argue the because the section was not meant to abrogate the questions of American labor law in the United States doctrine of comity. The same comity analysis court and also that it is unfair to force individual applies regardless of whether a proceeding is workers who resided in the United States to litigate in brought under 304 or not, or whether it is brought in Mexico on whether there existed under United States a bankruptcy court or a nonbankruptcy court. The law a collective bargaining agreement and what its Italian banks also argued that it was error for the terms may have been. After weighing the factors for bankruptcy court to extend comity to the Italian granting or denying 304 relief, the court agreed with court order because the Italian proceedings were the union and held that the federal court proceeding unfair to the Italian banks. The Italian banks argued was the best proceeding to resolve the question of that the Italian court order was an ex parte order and whether there was a collective bargaining agreement they received no notice or opportunity to be heard. because these were issues that turned on the RLA, a The court noted that, it is true, in determining specialized area of law laced with strong policy whether to apply comity to a foreign court order, the considerations. The court held that a collective United States court must consider its own laws and bargaining agreement is not an ordinary contract for public policy, such as the principle of due process, the purposes of goods and services and it is not on the question of comity. On this point, however, governed by the traditional common law concepts the court found that the original Italian order that control private contracts. Congress fashioned a appointing the Italian representative was given with specialized statutory scheme to effectuate its policy due process to the Italian banks and that the second of self adjustment of the common carrier industry’s ex parte Italian order merely clarified the exclusive labor problems. If comity were granted, the result authority of the Italian representative inherent in his would be to force American creditors to participate in appointment. Therefore, comity was granted to the foreign proceedings in which their claims would be Italian order because the Italian proceedings were treated in some manner inimical to the United States sufficiently analogous to the fundamental concepts policy of equality among creditors. On the issue of of justice as to warrant an extension of comity. relative prejudice, the court noted that the prejudice One way to defeat comity is to show that the to the Mexican representative by litigating in New foreign court would not be able to apply the York is minimized by the presence of New York American law. In re Banco Nacional De Obras Y bankruptcy and labor counsel. On the other hand, Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-15

American creditors would be severely prejudiced the company. This winding up procedure is not done both if they must litigate individually their claims under the supervision of any court or regulatory emanating from a disputed collective bargaining agency, although a court supervised Cayman Islands agreement in Mexico and if the Mexican court is winding up proceeding was an available option. The called upon to construe and apply United States representative for the Cayman Islands filed a 304 labor law in an area in which traditional contract proceeding seeking to enjoin an action by an principles are not strictly applied and in which American creditor. The bankruptcy court dismissed policy considerations abound. the 304 proceeding, holding that the voluntary Another way to defeat comity in a section 304 winding up pursuant to Cayman Islands law was not scenario is to show that Americans would not be a “foreign proceeding” for the purposes of 304. The treated fairly in the foreign country. In In re Petition court noted that this proceeding is conducted without of Hourani, 180 B.R. 58 (Bankr. S.D.N.Y. 1995), any regulatory oversight and virtually no creditor an American creditor sued a Jordanian bank in New participation. The court compared other types of York federal court and attached the Jordanian winding up or liquidation proceedings that are at bank’s holdings in the United States. The Jordanian least supervised by a regulatory agency and also bank then went into insolvency proceedings in noted that a Cayman Islands court winding up Jordan. The Jordanian representative filed a 304 proceeding would have been a proper foreign proceeding in New York seeking turnover of the proceeding. attached funds. Comparing both United States In In re Banco de Descuento, 78 B.R. 337 bankruptcy law and United States bank liquidation (Bankr. S.D. Fla. 1987), an American bank financed laws to Jordanian law, the court refused to grant 304 Ecuadorian transactions guaranteed by an relief. In this regard, the court noted that Equadorian bank. The transactions failed and the predictability of claim treatment was missing in the American bank filed suit against the Ecuadorian bank Jordanian law because the Jordanian committee in federal court in New York and obtained a reviewing claims had broad power to dispose of prejudgment attachment. The Ecuadorian bank then assets and claims as it deemed appropriate, without went into a liquidation procedure with no court giving any reason. Also, there was no means to supervision, similar to an FDIC-type procedure in the equitably subordinate claims under Jordanian law. United States. The Ecuadorian representative then There were also no provisions for recovery of filed a 304 proceeding seeking to enjoin the fraudulent transfers under the Jordanian law. American bank from disposing of the assets it had Furthermore, there was no differentiation between seized. The court held that the Ecuadorian procedure secured claims and unsecured claims. Finally, under was a “foreign proceeding” within the meaning of the Jordanian law, the procedure for notice was 304 and ordered a 362 type stay prohibiting the inadequate in that it provided for only publication disposal of assets pending further order of the court notice in the Jordanian papers. Even though the based on what would best assure the economical and American creditor was known in this particular case, expeditious administration of the assets of the the American creditor found out about the case only Ecuadorian bank. Citing Canadian Southern through an informal inquiry. Railway vs. Gebhart, 109 U.S. 527 (1883) the court held that every person who deals with a foreign c. Foreign Representative corporation impliedly subjects himself to the laws of Only a foreign representative from a foreign the foreign government affecting the powers and proceeding is entitled to file a section 304 obligations of the corporation with which he proceeding. 11 U.S.C. §§ 304, 101(23), 101(24). voluntarily contracts, as the known and established It is not required, however, that a debtor in a Section policy of that government authorizes. 304 proceeding be eligible as a debtor under the In In re Israel–British Bank (London) Ltd. v. United States Bankruptcy Code. Federal Deposit Ins. Corp., 536 F.2d 509 (2d Cir. In In re Petition of G. C. K. Tam, 170 B.R. 1976), cert. denied sub nom. Bank of 838 (Bankr. S.D.N.Y. 1994), a Cayman Islands Commonwealth v. Israel–British Bank (London) corporation, by vote of a third of its shareholders, Ltd., 429 U.S. 978 (1976), a British bank did no pursuant to the Cayman Islands insolvency law, banking business in the United States and was not passed a special resolution that the company be licensed to do business in the United States; however, wound up voluntarily. Under this procedure, a it borrowed money from American banks and representative is appointed to wind up the affairs of maintained deposits in American banks. One K-16 1999 State Bar of Texas Advanced Business Bankruptcy Course

American bank obtained an attachment that would in the manner which effectuates, rather than have been voidable under the United States frustrates, the major purpose of the legislative Bankruptcy Act. In the meantime, the British bank drafters. The purpose of 304 was to help further the filed an insolvency proceeding in the United efficiency of foreign insolvency proceedings Kingdom. A representative was appointed in the involving worldwide assets. In aid of such British court with authority to institute a United proceedings, federal bankruptcy courts may, within States bankruptcy case for the British bank, which the constraints imposed by 304, apply their processes the representative did. The issue was whether the and expertise to marshal property of the foreign British bank was an eligible debtor under the United debtor’s estate located in this country. Because the States Bankruptcy Act, because the Act prohibited focus is on making the United States processes banking corporations from filing bankruptcy. The available in aid of foreign proceedings, not actual Court held that the British bank could be a debtor. bankruptcy administrations, it would make little The exclusion for banking corporations applied only sense to require that the subject of the foreign to American banks subject to American banking proceeding qualify as a debtor under United States regulations. Since the British bank was not subject bankruptcy law. Under 304, a debtor does not to those regulations or bound by them in the United receive the benefits of a full bankruptcy States, it could obtain bankruptcy relief in the administration. For example, in a 304 proceeding, United States. the debtor is not entitled to an automatic stay, nor is In re Goerg, 844 F.2d 1562 (11th Cir. 1988) the debtor entitled to discharge. Ultimately, in the involved a German, Guenther, who owned property 304 proceeding, a debtor may receive no relief at all in Georgia and Germany. Guenther died with an because any relief is within the discretion of the insolvent estate, and German insolvency bankruptcy court. Accordingly, debtor eligibility proceedings were instituted against his estate. under the Bankruptcy Code is not a prerequisite to Under the German law, insolvency proceedings are 304 ancillary assistance. permitted to be brought with respect to an insolvent decedent’s estate. A representative was appointed d. Foreign Law Experts in the German proceedings. In the meantime, the It is critical for almost every Section 304 comity Georgia probate court appointed an administrator to issue that the parties have an expert on the foreign administer the Georgia assets. The German law so that a comparative analysis can be made with representative filed a 304 ancillary proceeding in the domestic law. The cases analyzed below are good bankruptcy court in Georgia seeking to enjoin the examples. Georgia administrator from administering the estate. In Matter of Culmer, 25 B.R. 621 (Bankr. The issue was the propriety of filing a 304 action S.D.N.Y. 1982), a Bahamian bank was in an when the entity that is the subject of a foreign insolvency liquidation proceeding in the Bahamas. insolvency proceeding does not fall within the The Bahamian representatives filed a 304 Bankruptcy Code’s definition of “debtor”-- in that proceeding, essentially to obtain 362 type relief. the Bankruptcy Code does not recognize insolvent Some of the creditors supported the relief, but decedent’s estates as debtors under the Bankruptcy American bank creditors opposed the relief. The Code. The problem was that the definition of court went through an extensive analysis of foreign proceeding under the Bankruptcy Code Bahamian law as it compared to the United States makes reference to the term “debtor” and a bankruptcy laws. The court concluded that affording decedent’s estate is not a debtor under the comity to the Bahamian proceeding would not violate Bankruptcy Code. The court held that a 304 American law or public policy. The court noted that, proceeding could be filed by a foreign representative regardless of whether Bahamian law is identical in of a debtor who would not be eligible to be a debtor application to American law, there is nothing under the United States Bankruptcy Code. The inherently vicious, wicked, immoral or shocking to Code definition of “foreign proceeding” need not be the prevailing American moral sense in the Bahamian a “bankruptcy” proceeding either under foreign or laws. Like Canada, the Bahamas is a sister common United States law, and the definition of foreign law jurisdiction with procedures akin to the United proceeding includes a proceeding that is for the States procedures. purpose of liquidating an estate. The court also In In re Petition of Hourani, 180 B.R. 58 used the rule of statutory construction that a statute (Bankr. S.D.N.Y. 1995), an American creditor sued susceptible of more than one meaning must be read a Jordanian bank in New York federal court and Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-17 attached the Jordanian bank’s holdings in the United description of Nevis insolvency proceeding law and States. The Jordanian bank then went into there were also no assets of Rimsat except for $1,700 insolvency proceedings in Jordan. The Jordanian in a bank account in Nevis. representative filed a 304 proceeding in New York seeking turnover of the attached funds. Comparing e. Venue both bankruptcy law and United States bank In re Petition of Evans, 177 B.R. 193 (Bankr. liquidation laws to Jordanian law, the court refused S.D.N.Y. 1995) involved an issue of venue for a to grant 304 relief. In this regard, the court noted Section 304 proceeding. In Evans, a British that predictability of claim treatment was missing in insurance company was undergoing insolvency the Jordanian law because the Jordanian committee proceedings in the United Kingdom. The British reviewing claims had broad power to dispose of representative filed an ancillary proceeding under assets and claims as it deemed appropriate, without 304. The 304 proceeding was filed in New York giving any reason. Also, there was no means to because the insurance company’s principal place of equitably subordinate claims under Jordanian law. business and principal assets were located in New There were also no provisions for recovery of York. The British representative then commenced an fraudulent or preferential transfers under the adversary proceeding in the New York 304 Jordanian law. Furthermore, there was no proceeding to compel the turnover of escrowed funds differentiation between secured claims and located in San Francisco, California. The defendants unsecured claims. Finally, under the Jordanian law, argued that the turnover action should have been filed the procedure for notice was inadequate in that it as an independent ancillary proceeding in the only provided for publication notice in the Jordanian Northern District of California instead of in New papers. Even though the American creditor was York as part of the pending ancillary proceeding. known in this particular case, the American creditor The court held that once a foreign representative found out about the case through an informal commences an ancillary proceeding that is properly inquiry. venued under 28 U.S.C. § 1410(c), he may sue in his In Matter of Rimsat, Ltd., 98 F.3d 1956 (7th home court (here, New York) to recover estate Cir. 1996), an American citizen, Hilliard, was the property that is located in another district. director and shareholder of Rimsat, a corporation organized under the laws of Nevis in the West Indies f. Automatic Stay and Injunctive Relief but having its principal place of business in Indiana. Helen Kaminski Pty. Ltd. vs. Marketing Most of Hilliard’s financial assets were in Indiana, Australian Products, Inc., 1997 U.S. Dist. Lexis but its nonfinancial assets, principally leaseholds in 10630 (S.D.N.Y. 1997) held, that the automatic stay satellites, had no terrestrial site. Hilliard had a has extraterritorial effect. Kaminski involved an dispute with the other insiders of Rimsat over Australian corporation, Helen Kaminski Pty. Ltd. control of the corporation. In December 1994 (“Kaminski”). Kaminski was a manufacturer of Hilliard obtained an injunction in Nevis prohibiting fashion accessories. Marketing Australian Products Rimsat’s declaring bankruptcy and placing Hilliard (“MAP”) was an American company that had a in charge of Rimsat. Approximately two weeks distribution agreement contract with Kaminski later, creditors filed an involuntary chapter 11 whereby MAP had the exclusive right to distribute petition against Rimsat in Indiana. A chapter 11 Kaminski goods in America. On September 2, 1996, trustee was appointed and he filed an adversary Kaminski sued MAP in Australia seeking a proceeding against Hilliard and obtained orders declaration that the distribution agreement was requiring the turnover of assets and documents. invalid and terminated. On November 29, 1996, Hilliard refused to comply with the turnover order MAP filed for chapter 11 relief in New York. MAP and was held in contempt. On appeal, Hilliard then filed an adversary proceeding in bankruptcy argued that he was an organ of the foreign court and court to declare that the automatic stay of 362 that the bankruptcy court order conflicted with the applied to Kaminski. The court held that Kaminski Nevis order and that the Nevis order should be was bound by the automatic stay and that there was allowed comity. The Seventh Circuit held that there no authority cited that 362 of the bankruptcy code was jurisdiction over Hilliard because he was a should not have extraterritorial effect. The court United States citizen. It also held that comity was a noted that it is a general principle that all claims matter of discretion. There was no abuse of against a debtor should be handled in a single discretion, because Hilliard had provided no K-18 1999 State Bar of Texas Advanced Business Bankruptcy Course proceeding to insure equitable and orderly then dismissed the federal court litigation without distribution of the debtor’s property. prejudice, but indicated that he would file the In re Hakim, 212 B.R. 632 (N.D. CA. 1997), litigation again to seek relief against Davis in his concerned a dispute over entitlement to $12 million individual capacity for acts taken prior to his held in a Swiss bank account. The $12 million appointment as representative. The Court first constituted the proceeds of the secret activities of decided whether the matter was moot in light of the Iranian businessman Hakim and his partners, retired dismissal. The Court held that it was not moot, Air Force Major General Richard Secord and because the dismissal was without prejudice and Marine Corps Lieutenant Colonel Oliver North, in because Glorioso had conceded that it intended to connection with the events commonly known as the litigate against Davis in the United States, thus Iran Contra affair. The United States Department of presenting a real, substantial controversy between Justice claimed ownership of the $12 million, but parties having adverse legal interests. On the issue of creditors of Hakim had also attached the funds. The enjoining actions against Davis individually, the United States procured a Swiss court order freezing court noted that one factor that is considered when an the funds and also filed an action in federal court in injunction is requested to protect a nondebtor is the Eastern District of Virginia seeking similar whether the estate will bear the cost of any judgment relief. In the meantime, Hakim, who lived in the taken against the nondebtor. In this case, because of United States, filed for chapter 11 relief in the indemnification agreement with Hong Kong California. The United States sought relief from the Bank, the cost of defending Davis, even in his stay to continue the litigation in Switzerland or the individual capacity, would be applied to the Hong United States over entitlement to the funds. The Kong Bank’s secured claim and, according to the Court granted the relief from stay for the limited affidavit of Davis, would also be an administrative purpose of determining ownership of the $12 type claim in the Canadian bankruptcy proceeding. million. In so holding, the Court made an extensive Noting that the Canadian bankruptcy law was a sister analysis of various factors on the issue of granting common law jurisdiction with procedures similar to relief from the automatic stay to allow litigation to American proceedings, the court issued the injunction proceed elsewhere. In particular, the Court focused protecting Davis. on factors involving whether litigation should be allowed to continue in an international forum. g. Turnover of Assets Those factors are (1) whether the foreign court has Koreag, Controle Et Revision S.A. v. Refco F/X assumed jurisdiction over the res at issue; (2) the Assoc., Inc. (In re Koreag, Controle Et Revision inconvenience of the federal forum; (3) the S.A.), 961 F.2d 341 (2d Cir. 1992), cert. denied, 506 avoidance of piecemeal litigation;( 4) the order in U.S. 865. A United States creditor, Refco, did which the forums obtained jurisdiction; (5) which currency exchange business with a Swiss bank and law controls in a choice of law analysis; and (6) the was owed money by the Swiss bank. The Swiss bank adequacy of the alternative forum. filed an insolvency proceeding in Switzerland, and a In re Petition of Davis, 191 B.R. 577 (Bankr. Swiss representative was appointed. Refco then sued S.D.N.Y. 1996) involved two Canadian companies, the Swiss bank in federal court in New York and Polinex and Packman, who had hired Davis as a obtained an attachment of a New York bank account. consultant to deal with secured creditor Hong Kong The Swiss representative intervened and moved to Bank. Hong Kong Bank was obligated to indemnify dismiss the United States District Court action. The Davis for his actions taken while serving as federal court invited the Swiss representative to file consultant, and the indemnity would add to Hong a 304 proceeding in bankruptcy court, which he did, Kong Bank’s secured claim. Glorioso, a citizen of seeking turnover of the New York bank account and the United States, alleging that he was defrauded, an injunction against prosecuting the United States filed an action in federal court in New York seeking District Court case. The bankruptcy court granted damages from Davis and Packman under fraud and the 304 relief but, in the process, declined to decide RICO counts. Polinex and Packman then filed whether the New York bank account was owned by insolvency proceedings in Canada, and Davis was the Swiss bank, leaving that decision to the Swiss appointed representative in each case. Davis, as court. On appeal, the Second Circuit held that 11 Canadian representative, then filed a 304 action U.S.C. § 304(b)(2) required a determination of seeking to enjoin Glorioso from continuing with the ownership of the New York bank account. In making litigation anywhere in the United States. Glorioso such a determination, the court followed the New Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-19

York rules of conflicts of laws, which require the action under foreign law. Accordingly, the court application of the laws of the jurisdiction with the dismissed the adversary proceeding. greatest interest in the litigation. In this case, that was New York. Accordingly, the Second Circuit i. Discovery reversed and remanded for an analysis of the In Angulo v. Kedzep Ltd., 29 B.R. 417 (S.D. ownership of the New York bank account under Tex. 1983), a Canadian corporation. Kedzep, was the New York law. subject of a Canadian insolvency proceeding. Kedzep was a subsidiary of another corporation, ISC, h. Avoidance Powers which maintained its principal place of business in In Metzeler v. Bouchard Transp. Co. (In re Houston. Kedzep had no property in Houston except Metzeler), 78 B.R. 674 (Bankr. S.D.N.Y. 1987), a some accounts receivable; however, former officers United States creditor received a preferential and directors of Kedzep and ISC resided in Houston. transfer from a German company. The German The Canadian representative filed a 304 proceeding company then filed a German insolvency in the Southern District of Texas for the purpose of proceeding. The German representative then filed a obtaining discovery from the former officers and 304 action in New York bankruptcy court. The directors of Kedzep and ISC. The bankruptcy court German company had no place of business or assets allowed the discovery, and the deponents appealed. in the United States. The United States creditor The first issue was whether venue was proper in moved to dismiss the 304 proceeding on the grounds Houston. The court held that venue was proper that the German representative could not bring a because Kedzep owned accounts receivable located in 547 preference action in a 304 proceeding. The Houston. Alternatively, the court held that, under 28 bankruptcy court held that a foreign representative U.S.C. § 1477, even if the bankruptcy proceeding is may assert in a 304 proceeding only those avoiding filed in the wrong district, the bankruptcy court may powers vested in him by the law applicable to the retain the action if it is in the interest of justice and foreign country – here, German law. There was for the convenience of the parties. Here, the indeed a preference type action available under witnesses and assets relevant to the witnesses were German law, however. The bankruptcy court located in Houston. Venue was therefore proper. declined to dismiss the 304 action, holding that the The court also held that it was not an abuse of fact that the German preference action was in the discretion to order the discovery because 304's “other United States was enough under U.S. vs. Whiting appropriate relief” language was broad and flexible Pools to support jurisdiction in a United States enough to allow for an ancillary suit to be filed for bankruptcy case. The court also held that the filing the purpose of discovery. Letters rogatory and 28 of the 304 proceeding tolled limitations under the U.S.C. § 1782 were not the exclusive methods for German preference law. conducting international discovery. In A. Tarricone, Inc., 80 B.R. 21 (Bankr. S.D.N.Y. 1987), ATI, a United States corporation, j. Maxwell: The Protocol had received payments from a German company in In In re Maxwell Communication Corp. plc, 93 July of 1984. On July 24, 1984, the German F.2d 1036 (2d. Cir. 1996), British mediate magnate company filed an insolvency proceeding in Robert Maxwell controlled Maxwell Germany. In July of 1985, the German Communications Corp (“MCC”), an English representative filed a 304 petition in bankruptcy company. MCC functioned as a holding company for court in the Southern District of New York, and in Robert Maxwell’s public holdings. MCC was September 1986 he filed an adversary proceeding headquartered and managed in England, but 80% of against ATI seeking recovery of the 1984 transfers its assets were in the United States. These United under Sections 547 and 548 of the Bankruptcy States assets were held most notably through MCC Code. The court held that the German subsidiaries. Using the sale of MCC American representative was not a trustee under title 11 and subsidiaries (as going concerns) for funds, MCC could not file any avoidance actions under the made multimillion dollar transfers to several Bankruptcy Code, noting that a foreign European banks. MCC then filed a Chapter 11 representative has only those avoiding powers that petition in New York within 90 days of those the foreign law would give him and that it would be transfers, on December 16, 1991. The next day, it proper for a foreign representative to file a 304 filed an insolvency reorganization proceeding in action for the purposes of bringing an avoidance England. The United States bankruptcy court PitfallsK-20 of Multi-National Corporation and Cross1999 Border State Insolvencies Bar of Texas Advanced Business Bankruptcy CourseK-21 appointed attorney Richard Gitlin as examiner to A new "Chapter 15"7/ of the Bankruptcy Code deal with the dual case issue, and the British court was put before Congress in the 105th Legislature. appointed members of the London office of Price See H.R. 3150, which can be found at Waterhouse as representatives to manage the affairs http://thomas.loc.gov/. It is likely that such a bill of MCC in England. These two officers coordinated will be considered again. The proposed Chapter 15 their efforts into a “protocol.” This protocol of the Bankruptcy Code concerns foreign insolvency resulted in appointment of the British administrators proceedings. There are three circumstances that are as debtor in possession and a United States Plan of addressed in the chapter. The first arises when a Reorganization and an English scheme of representative designated in a foreign proceeding arrangement as interdependent documents that were seeks assistance in the United States. The second approved by both courts. The British and American arises when there are insolvency proceedings plan administrators then brought a 547 preference involving the same debtor in more than one country. action in the bankruptcy court against the European Sometimes this second circumstance will involve a banks. The plan and scheme of arrangement, bankruptcy in the United States and one or more however, did not specify which substantive law other countries, while other times there may be no would govern the resolution of disputed claims or proceedings in this country, but representatives seek the debtor’s ability to set aside prepetition transfers. assistance from more than one foreign proceeding. The issue of whether a 547 preference action could The third circumstance involves a United States be brought against the European banks was bankruptcy estate representative seeking assistance significant. The British equivalent of a preference in a foreign proceeding. action had a scienter requirement that likely would Where United States assistance is sought by one have provided a defense for the European banks. or more foreign representatives, a Chapter 15 case is Additionally, 11 U.S.C. § 502(d), requiring the commenced. Chapter 15 is essentially a means to disallowance of claims for nonreimbursing obtain a laundry list of orders, since most of the transferees of preferences, would have meant that ordinary features of administration of a bankruptcy the European bank’s claims would not be allowed. case are missing from a Chapter 15 case. Chapter 15 Using principles of comity and conflict of laws, the would repeal Section 304, while codifing many of the bankruptcy court, district court, and Second Circuit practices that have arisen under Section 304. The all agreed that the 547 preference action could not most important effect of its adoption will be to be brought. British law applied because England encourage other countries around the world to follow had a much closer connection to these disputes than suit. the United States. The debtor, most of the creditors, Chapter 15 is based on a United Nations’ and the transferees were British. MCC was sponsored Model Law for Cross-Border Insolvency incorporated under British laws, controlled by Cases (the "Model Law"). The Model Law had its British nationals, governed by a British board of beginnings in Vienna in April 1994 with the First directors, and managed in London by British Colloquium on Cross-Border Insolvencies sponsored executives. These same considerations had been the by the United Nations Commission on International basis for appointing the British liquidator as debtor Trade Law ("UNCITRAL"). In May 1997, in possession in the bankruptcy case. Most of the UNCITRAL officially adopted the Model Law and aspects of the preference transaction took place in recommended it to the member nations of the United England. The most substantial connection of the Nations. On December 19, 1997, UNCITRAL transaction to the United States was the fact that issued the Guide to Enactment of the UNCITRAL American subsidiaries were sold to create the fund Model Law on Cross-Border Insolvency (the "Model for the transfers. However, the impact on the United Law Guide"), which provides an extensive history of States was minimal, because the subsidiaries were sold as going concerns; therefore, the United States economy was not affected. 7/ An extensive statutory analysis of Chapter 15 can be found at Westbrook, Biery, and Peirce, "Assets Without 3. The Future: UNCITRAL’S Borders - International Development" presented at the University of Texas School at Law 17th Annual Model Law on Cross-Border Bankruptcy Conference on November 19-20, 1998. What Insolvency and Chapter 15 follows is a summary of its major points, with references to the H.R. 3150 version of Chapter 15 as if it had been a. Chapter 15 History incorporated into the bankruptcy code. Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-21 the negotiations and of the policies underlying bankruptcy as a collective debtor-creditor various provisions. proceeding) and whether the petitioner is a "foreign representative" within the meaning of 11 U.S.C. § b. Chapter 15 Process 101(24) (describing an entity like a trustee or debtor Like a section 304 ancillary proceeding, in possession). 11 U.S.C. § 1517(a)(1), (2). In Chapter 15 presumes the existence of a "foreign making the decision, the court may rely on the foreign proceeding.” See, e.g., 11 U.S.C. §§ 1501(b) court's characterization of the proceeding and the (concerning applicability of Chapter 15), 1502(1) representative as found in a decision or certificate ("Debtor" in chapter 15 means an entity that is the attached to the Petition for Recognition under Section subject of a foreign proceeding), 1515(a) (Foreign 1515(b)(1) and (2). 11 U.S.C. § 1516(a). representative initiates a Chapter 15 case.), 101(24) After deciding that the Petition for Recognition (Foreign representative is appointed in a foreign is in order, 11 U.S.C. § 1517(a)(2)(3), the court must proceeding.). A foreign proceeding is essentially a then decide whether the foreign proceeding is a foreign counterpart to a United States bankruptcy "foreign main proceeding" or a "foreign nonmain case. A "foreign proceeding" means a collective proceeding.” 11 U.S.C. § 1517(a)(1). A foreign judicial or administrative proceeding in a foreign proceeding is a main proceeding if that proceeding "is country, including an interim proceeding pursuant to taking place in the country where the debtor has the a law relating to insolvency in which proceeding the center of its main interests,” that is, the debtor's home assets and affairs of the debtor are subject to control country. 11 U.S.C. § 1517(b)(1). In the absence of or supervision by a foreign court, for the purpose of evidence to the contrary, the debtor's registered reorganization or liquidation. 11 U.S.C. § 101(23). office, or habitual residence in the case of an [as amended by H.R. 3150, 105th Cong. § ___ individual, is presumed to be the center of the 199_).]. debtor's main interests. 11 U.S.C. § 1516(c). If the In an inbound Chapter 15 case, the foreign foreign proceeding is not a foreign main proceeding, representative initiates a Chapter 15 case by filing it could be a "foreign nonmain proceeding.” A a Petition for Recognition. 11 U.S.C. §§ 1504, foreign nonmain proceeding is a foreign proceeding 1509, 1515. The court will need to make a decision taking place in a foreign country where the debtor has on whether to recognize the foreign proceeding, 11 an "establishment.” 11 U.S.C. § 1517(b)(2). A U.S.C. § 1517, and during the decision-making debtor's establishment means any place of operations process there will necessarily be a gap in time, 11 where the debtor carries out a nontransitory economic U.S.C. § 1519(a). There is no automatic stay as a activity. 11 U.S.C. § 1502(2). result of a Chapter 15 petition, but, at the request of Once a foreign proceeding is recognized, there the foreign representative, provisional relief is are certain provisions that become effective available during the Chapter 15 gap "where relief is automatically. Following is a list: urgently needed to protect the assets of the debtor or the interests of the creditors.” 11 U.S.C. § 1519(a). (a) Notice will presumably be given to The provisional relief available includes creditors. preservation of assets and taking of discovery. 11 (b) The foreign representatives' rights and U.S.C. § 1519. duties expand. A foreign representative The first step is to determine whether the becomes subject to the laws of the United Petition for Recognition meets the requirements of States of general applicability. 11 U.S.C. Section 1515 (basically, whether there is competent § 1509(b), (c). A foreign representative evidence of a foreign proceeding involving the has the capacity to sue and be sued. 11 debtor and whether the petitioner is a foreign U.S.C. § 1509(a). A foreign representative). 11 U.S.C. § 1517(a). In evaluating representative can apply directly to other the Petition for Recognition, the court can presume nonbankruptcy Federal and State courts that the documents submitted in support of the for appropriate relief. 11 U.S.C. Petition for Recognition are authentic, regardless of § 1509(a). A foreign representative may whether they have been legalized. 11 U.S.C. § intervene in any proceeding in a State or 1516(b). The court will still need to decide whether Federal court in the United States in which the proceeding described in the Petition for the debtor is a party. 11 U.S.C. § 1524. A Recognition is a "foreign proceeding" within the foreign representative may become a party meaning of 11 U.S.C. § 101(23) (describing in interest in a bankruptcy case (Chapter K-22 1999 State Bar of Texas Advanced Business Bankruptcy Course

15 or otherwise) regarding the debtor. 11 (d) A foreign representative does not become U.S.C. § 1512. The foreign subject to the jurisdiction of courts of the representative may commence an United States for nonchapter 15 purposes involuntary case under 11 U.S.C. § 303, simply by filing a Petition for Recognition, provided that the foreign representative although naturally the foreign previously advised the Chapter 15 court representative must obey the court’s orders of his intent to do so. 11 U.S.C. § in the Chapter 15 case and may be 1511(a)(1), (b). In this regard, in the subjected to conditions ordered by the absence of contrary evidence, recognition court in connection with the relief the of a proceeding as a foreign main foreign representative seeks. 11 U.S.C. § proceeding is proof that the debtor is 1510. This provision was taken from the generally not paying its debts as they existing 306 of the Code. become due. 11 U.S.C. § 1531. If the (e) Unless extended, the provisional relief case is recognized as a foreign main granted under Section 1519 terminates proceeding, the foreign representative upon a decision on recognition. 11 U.S.C. may also file a voluntary bankruptcy case § 1519(b). for the debtor under another chapter of (f) The standing given to the foreign the Bankruptcy Code, provided that the representative with respect to avoiding foreign representative previously advised powers, as listed above, is purely standing. the Chapter 15 court of an intent to do so. The provision does not grant any new right 11 U.S.C. § 1511(a)(2), (b). However, to avoid. It merely permits the foreign these non-Chapter 15 cases may be representative to assert in a full United commenced only if the debtor has assets States bankruptcy case whatever avoiding in the United States, and the effect of powers might be assertable by the trustee such a non-chapter 15 case shall be in such a case, applying whatever law the limited to United States assets, and – to court holds to be applicable to the the extent necessary to obtain cooperation challenged obligation, interest, or transfer. and coordination under sections 1525, 1526, and 1527 -- to other property of the Other relief available then depends on whether estate that is not subject to the control of the foreign proceeding is "main" or "nonmain.” The the recognized foreign main proceeding. following relief happens automatically under Section 11 U.S.C. § 1528. 1520 if the foreign proceeding is main: (c) The foreign representative will have (a) Section 362 applies with respect to the standing in a "pending case under another debtor and that property of the debtor that chapter" of the Bankruptcy Code to is within the territorial jurisdiction of the initiate actions under Sections 522 United States. 11 U.S.C. § 1520(a)(1). [concerning exemptions], 544 [strong (b) The transfer, encumbrance, or any other arm powers], 545 [avoidance of statutory disposition of an interest of the debtor in liens], 547 [voidable preference actions], property within the territorial jurisdiction 548 [fraudulent transfer actions], 550 of the United States is restrained as and to [recovery on voidable transfers], and the extent that is provided for property of 724(a) [avoidance of liens securing an estate under Sections 363, 549, and penalties]. 11 U.S.C. § 1523(a). 552. 11 U.S.C. § 1520(a)(2). However, if the proceeding is a foreign (c) Unless the court orders otherwise, the nonmain proceeding, the court must be foreign representative may operate the satisfied that these actions relate to assets debtor's business and may exercise the that should be administered in the foreign powers of a trustee under Sections 363 and nonmain proceeding. 11 U.S.C. 549, subject to Sections 363 and 552. 11 § 1523(b). The foreign representative U.S.C. § 1520(a)(2). may also get "additional assistance" under the conditions of Section 1507. Pursuant to Section 1521, the following relief is 11 U.S.C. § 1507. available in both main and nonmain proceedings, if requested by the foreign representative: (1) The commencement or continuation should not be understood as being within of individual actions or proceedings Section 1521(a)(7). may be stayed to the extent they (9) The court may entrust the distribution of have not been stayed under Section all or part of the debtor's assets located in 1520(a) (concerning the automatic the United States to the foreign application of Section 362 in a representative or another person, including foreign main proceeding). 11 an examiner, authorized by the court, U.S.C. § 1521(a)(1). provided that the court is satisfied that the (2) Execution against the debtor's assets may interests of creditors in the United States be stayed to the extent it has not been are sufficiently protected. 11 U.S.C. § stayed under Section 1520(a) (concerning 1521(b). the automatic application of Section 362 (10) In granting relief under Section 1521 as to in a foreign main proceeding). 11 U.S.C. a nonmain proceeding, the court must be § 1521(a)(2). satisfied that the relief relates to assets (3) The right to transfer, encumber or that, under the law of the United States, otherwise dispose of assets of the debtor should be administered in the foreign may be suspended to the extent they are nonmain proceedings or concerns not already suspended under Section information required in that proceeding. 1520(a) (concerning the automatic 11 U.S.C. § 1521(c). application of Section 362 in a foreign main proceeding). 11 U.S.C. § c. Outbound Chapter 15 Cases: Sections 1521(a)(3). 1505, 1514 (4) The court may provide for the An outbound case is one in which a United examination of witnesses, the taking of States bankruptcy representative, such as a trustee, evidence, or the delivery of information seeks assistance in a foreign proceeding. See 11 concerning the debtor's assets, affairs, U.S.C. §§ 1501(b)(2), 1505. Chapter 15 for the first rights, obligations or liabilities. 11 time provides statutory authority for a bankruptcy U.S.C. § 1521(a)(4). representative to act abroad. Section 1505 provides (5) An examiner may be appointed. 11 that a trustee or another entity (including an U.S.C. § 1522(d), 1527(1). examiner) authorized by the court may be authorized (6) The court may entrust the administration by the court to act in a foreign country on behalf of or realization of all or part of the debtor's an estate created under Section 541. 11 U.S.C. § assets within the territorial jurisdiction of 1505. An entity authorized to act under this section the United States to the foreign may act in any way permitted by the applicable representative or another person, foreign law. Id. Section 1505 is a stand-alone including an examiner, authorized by the provision; it does not require the initiation of a court. 11 U.S.C. § 1521(a)(5). Chapter 15 case to apply. It does presume that some (7) The court may extend any relief already type of bankruptcy case be pending. 11 U.S.C. §§ granted under Section 1519(a). 11 103(j), 1505. Ideally, there will be a similar Model U.S.C. § 1521(a)(6). Law enacted in the foreign country where the (8) The court may grant any additional relief representative is headed. Section 1514 requires that may be available to a trustee, except special notice to foreign creditors concerning the need for relief available under Sections 522 to file proofs of claims. 11 U.S.C. § 1514. [concerning exemptions], 544 [strong Presumably, the Federal Rules of Bankruptcy arm powers], 545 [avoidance of statutory Procedure and Official Forms will be modified to liens], 547 [voidable preferences], 548 take care of this requirement. [fraudulent transfers], 550 [recovery on voidable transfers], and 724(a) d. Concurrent Proceedings Under Chapter 15 [avoidance of liens securing penalties]. Chapter 15 also addresses the problem of 11 U.S.C. § 1521(a)(7). Note that there multiple proceedings affecting the same debtor. For is no reference to Section 365, but instance, there may be a Chapter 15 bankruptcy because that section is not an “avoiding proceeding, one or more foreign proceedings, and a power” and simply gives a trustee the U.S. Chapter 7 bankruptcy proceeding. right to perform or breach a contract, it K-24 1999 State Bar of Texas Advanced Business Bankruptcy Course

(1) Coordination other assets of the debtor that are within with Pending Non- the jurisdiction of the court under Section Chapter 15 Case 541. 11 U.S.C. § 1528. If a non-Chapter 15 bankruptcy case is (3) Coordination already on file when a Petition for with More Than One Recognition under Chapter 15 is filed, Foreign Proceeding there is no automatic relief under 1520, Section 1530 provides: even if the court recognizes a foreign In matters referred to in Section 1501, with main proceeding. 11 U.S.C. § respect to more than one foreign 1529(1)(B) Furthermore, any relief proceeding regarding the debtor, the court granted under Section 1519 (concerning shall seek cooperation and coordination discretionary provisional “gap” relief) or under Sections 1525, 1526, and 1527, and 1521 (concerning past recognition the following shall apply: discretionary relief) must be consistent with the relief granted in the pending non- (a) Any relief Chapter 15 bankruptcy case. 11 U.S.C. § granted under 1529(1)(A). Also, even if a foreign main Section 1519 or proceeding is recognized, Section 1520 Section 1521 to does not apply. 11 U.S.C. § 1529(1)(B). a representative When a non-Chapter 15 case is on file of a foreign when a Chapter 15 is filed, the court nonmain should look to Sections 1525 (concerning proceeding after cooperation and communication between recognition of a the court and the foreign courts or foreign main representatives) 1525 (concerning proceeding must cooperation and communication between be consistent the trustee and foreign courts or foreign with the foreign representatives) and 1527 (forms of main cooperation) for guidance. 11 U.S.C. §§ proceeding. 1529, 1530. Additionally, Section 305 of (b) If a foreign main the Bankruptcy Code remains in force. proceeding is 11 U.S.C. §§ 305, 1529(4). Under that recognized after section, the court is authorized to dismiss recognition, or the full bankruptcy case in favor of after the filing deference under Chapter 15. That will of a petition for often be the proper course, given the recognition, of a United States commitment to the ancillary foreign nonmain approach. proceeding, any (2) Filing a Non- relief in effect Chapter 15 Case After under Section Recognition of a Chapter 1519 or Section 15 Case 1521 shall be After recognition of a foreign main reviewed by the proceeding, a case under another court and shall bankruptcy chapter may be commenced be modified or only if the debtor has assets in the United terminated if States. 11 U.S.C. § 1528. The effect of inconsistent the non-chapter 15 case is restricted to with the foreign the assets of the debtor that are within the main territorial jurisdiction of the United proceeding. States, and, to the extent necessary to (c) If, after implement cooperation and coordination recognition of a under Sections 1525, 1526, and 1527, to foreign nonmain Pitfalls of Multi-National Corporation and Cross Border Insolvencies K-25

proceeding, of agreements another foreign concerning the nonmain coordination of proceeding is proceedings. 11 recognized, the U.S.C. § court shall 1527(4). grant, modify, (e) Coordination of or terminate concurrent relief for the proceedings purpose of regarding the facilitating same debtor. coordination of 11 U.S.C. § the 1527(5). proceedings. In order to accomplish cooperation, the (4) Communication bankruptcy court is entitled to and Cooperation communicate directly with, or to request Chapter 15 mandates that the bankruptcy information or assistance directly from, court and the trustees, examiners, and foreign courts or foreign representatives, others, cooperate with the foreign courts subject to the rights of parties in interest to and foreign representatives. 11 U.S.C. § notice and participation. 11 U.S.C. 1525(a), 1526(a). Examples of § 1525(b). Also, the trustee or other cooperation include: person, including an examiner, authorized (a) The by the court, is entitled, subject to the appointment of supervision of the court, to communicate a person or directly with foreign courts or foreign body, including representatives. 11 U.S.C. § 1526(b). an examiner, to act at the C. Conclusion direction of the In the area of international insolvency, the court. 11 careful practitioner would do well to become familiar U.S.C. § with the concepts of international comity, Section 1527(1). 304 ancillary proceedings, and the Model Law on (b) Communicatio Cross Border Insolvency; in addition, the practitioner n of should also perform with the assistance of an expert information by on the foreign law. any means considered appropriate by the court. 11 U.S.C. § 1527(2). (c) Coordination of the administration and supervision of the debtor's assets and affairs. 11 U.S.C. § 1527(3). (d) Approval or implementation