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Procedural Incrementalism: a Model for International Bankruptcy John A University of Michigan Law School University of Michigan Law School Scholarship Repository Articles Faculty Scholarship 2005 Procedural Incrementalism: A Model for International Bankruptcy John A. E. Pottow University of Michigan Law School, [email protected] Available at: https://repository.law.umich.edu/articles/619 Follow this and additional works at: https://repository.law.umich.edu/articles Part of the Bankruptcy Law Commons, Conflict of Laws Commons, Jurisdiction Commons, Legislation Commons, and the Transnational Law Commons Recommended Citation Pottow, John A. E. "Procedural Incrementalism: A Model for International Bankruptcy." Va. J. Int'l L. 45, no. 4 (2005): 935-1015. This Article is brought to you for free and open access by the Faculty Scholarship at University of Michigan Law School Scholarship Repository. It has been accepted for inclusion in Articles by an authorized administrator of University of Michigan Law School Scholarship Repository. For more information, please contact [email protected]. Procedural Incrementalism: A Model for International Bankruptcy JOHN A. E. POTTOW* TABLE OF CONTENTS I. Introduction ............................................................................... 936 II. The Transnational Insolvency Debate ....................................... 940 A. Insolvency Law Generally ............................................... 940 B. The International Perspective .......................................... 943 C. The Tradition: Territorialism ........................................... 944 D. The Promised Land: Universalism .................................. 947 E . M odifications ................................................................... 952 III. UNCITRAL Model Law: What It Purports to Do ..................... 957 A. Previous International Attempts at Reform ..................... 957 B. UNCITRAL Model Law ................................................. 959 1. Introduction ............................................................. 959 2. Core Provisions of the Model Law .......................... 963 a. One Part Universalism .................................... 963 b. One Part Territorialism ................................... 966 IV. UNCITRAL Model Law: What It Really Does ........................ 970 * Assistant Professor of Law, University of Michigan Law School. Without limiting the generality of my appreciation, I am grateful for specific comments and assistance from Barry Adler, Reuven Avi-Yonah, Eric Bergsten, Sam Bufford, Hannah Buxbaum, Einer Elhauge, Ian Fletcher, Richard Friedman, Andrew Guzman, Daniel Halberstam, Reshma Jagsi, Lynn LoPucki, Chuck Mooney, Ronald Mann, Soogeum Oh, lain Pester, Bob Rasmussen, Steven Ratner, Matthias Reimann, Mark Roe, Charles Tabb, Fred Tung, Benjamin Wagner, Elizabeth Warren, Bob Wessels, Jay Westbrook, and Tobias Wolff, as well as participants at legal workshops at the Georgetown University Law Center, Harvard Law School, the University of Hawaii at Manoa William S. Richardson School of Law, University of Illinois College of Law, The University of Iowa College of Law, University of Michigan Law School, New York University School of Law, University of Pennsylvania Law School, The University of Texas School of Law, Vanderbilt University Law School, the first Arthur Moller Bankruptcy Workshop at University of Texas, and the Academics Meeting at the INSOL Las Vegas 2003 conference. I am additionally grateful for research assistance from Drew Foster, Mike Murphy, and Ryan Woodward, as well as administrative support from Janis Proctor. 936 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 45:4 A. Jurisdiction-Selecting Choice-of-Law Rule ....................970 B. Acceptance of Outcome Differences ...............................976 1. A rticle 3 1 .................................................................977 2. A rticle 14 .................................................................980 V. Modeling Transnational Reform: Procedural Incrementalism.. 984 A. The Appeal of the Model Laws .......................................984 B . A cclim ation .....................................................................988 C. The "Procedural" Character of the Model Law ...............992 VI. Deploying the Model: Analyzing Subsequent Insolvency R eform ....................................................................................100 1 A. Center of Main Interests Test ........................................1001 B. Acceptance of Outcome Differences .............................1003 1. Acceptance of Outcome Differences Begetting Further A cceptance ................................................1003 2. Evidence of Increased Acceptance of Outcome Differences and Harmonization .............................1006 C . V ector of R eform ...........................................................1009 V II. C onclusion ...............................................................................10 11 I. INTRODUCTION The headline-grabbing business failures of late have brought increased attention to the relatively unresolved area of multinational bankruptcies. Parmalat, Global Crossing, and United Airlines are among the few international juggernauts that have foundered. In the financial meltdowns of these cross-border institutions, assets and creditors are dispersed throughout commercial environments that rarely end neatly at national borders. There has been heated debate, both in scholarly literature and the practical battlefield, over how best to resolve these transnational insolvencies, and there is nothing yet approaching a consensus. Reform efforts of various stripes have almost uniformly failed to gain meaningful international support. At the hub of this inability to generate international consensus is a theoretical rift. The essence of disagreement revolves around the competing theories of "territorialism" and "universalism" as the 1. Treaties proved unavailing. See Jay L. Westbrook, Theory and Pragmatism in Global Insolvencies: Choice of Law and Choice of Forum, 65 AM. BANKR. L.J. 457, 487 (1991) (discussing the Strasbourg Convention and the failed Brussels Convention). So did other attempts. See Todd Kraft & Allison Aranson, Transnational Bankruptcies: Section 304 and Beyond, 1993 COLUM. BUS. L. REv. 329 (1993) (discussing the challenges facing adoption of the International Bar Association's largely ignored Model International Insolvency Cooperation Act). 2005] A MODEL FOR INTERNATIONAL BANKRUPTCY 937 preferred normative models for resolving multinational failures.2 While territorialism counsels following strict sovereign borders in allocating regulatory jurisdiction among nations over globally dispersed assets,3 universalism embraces a one-law approach: the application of one "exporting" country's law extraterritorially to other "receiving" jurisdictions.4 Given that this theoretical debate between territorialism and universalism remains ongoing and unresolved, we should be unsurprised at the historic inability to craft an international agreement among nations, by treaty or other means. Indeed, we should remain pessimistic in our prognosis. Nevertheless, an important and fresh development in international bankruptcy has recently defied our bearish expectations. After decades of disagreement, one recent attempt at reform has bucked the trend of failure and actually won widespread international support: the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (Model Law).5 Since the Model Law, there has been an explosion of international bankruptcy reform.6 These efforts include UNCITRAL's best practices Draft Legislative Guide, designed for countries seeking to revise their insolvency laws;7 the American Law Institute's (ALI's) Transnational Insolvency Project (TIP), a series of proposals for cross- border insolvencies in the three NAFTA countries;8 and the European 2. See Ian F. Fletcher, The European Convention on Insolvency Proceedings: Choice-of-Law Provisions, 33 TEX. INT'L. L.J. 119, 124 (1998) (characterizing universalism and territorialism as "essentially rival schools of thought about the 'correct' way to govern transnational insolvency"). See generally Robert K. Rasmussen, Colloquy, International Bankruptcy: Resolving Transnational Insolvencies Through Private Ordering, 98 MICH. L. REV. 2252 (2000) [hereinafter Colloquy] (discussing difficulties with both theories). 3. See, e.g., Lynn M. LoPucki, Cooperation in InternationalBankruptcy: A Post-Universalist Approach, 84 CORNELL L. REV. 696 (1999). 4. See, e.g., Westbrook, supra note 1, at 461. 5. U.N. COMM. ON INT'L TRADE LAW, MODEL LAW ON CROSS-BORDER INSOLVENCY WITH GUIDE TO ENACTMENT, U.N. Sales No. E.99.V.3 (1999) [hereinafter MODEL LAW]. 6. See, e.g., Bob Wessels, The European Union Insolvency Regulation: An Overview with Trans-Atlantic Elaborations, in ANNUAL SURVEY OF BANKRUPTCY LAW 494 (William L. Norton, Jr. ed., 2003) (describing the provisions and limitations of the recently adopted EU Insolvency Regulation). 7. UNCITRAL Draft Legislative Guide on Insolvency Law, 24th Sess., U.N. Doc. A/CN.9/WG.VIWP.54 (2001) [hereinafter UNCITRAL Draft Legislative Guide]. 8. AM. L. INST., TRANSNATIONAL INSOLVENCY: COOPERATION AMONG NAFTA COUNTRIES. INTERNATIONAL STATEMENT OF UNITED STATES BANKRUPTCY LAW, GENERAL PRINCIPLES VOLUME (2003) [hereinafter ALI TIP], cited in Jay L. Westbrook, Multinational Enterprises in General Default: Chapter 15, The ALl Principles, and The EU Insolvency 938 VIRGINIA JOURNAL OF INTERNATIONAL
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