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Chapter 15 Cross-Border Insolvency Means Comity and Cooperation; Not Necessarily Comedy and Concern

Chapter 15 Cross-Border Insolvency Means Comity and Cooperation; Not Necessarily Comedy and Concern

After taking the last train into the small Italian town of Vernazza, my travelling party soon came to realize that our booked inn had given away our rooms and that there were no available rooms in town and no more trains out. Facing language barriers, cultural barriers, and the real risk that we may be stuck overnight on the streets in a foreign place, it appeared we were without remedy. After much anxiety, an older lady, realizing our distress, mumbled some Italian to us and signaled for us to follow her to the basement where she would allow us to stay. Relief, protection, and gorgeous views out over the Mediterranean Sea!

Today, more likely than not, your business or business client is engaged in international business, whether it is foreign operations and ventures, importing or exporting products, or investments in foreign businesses. There is an allure to these international endeavors and potentially big profits too. Many find international business to be natural extensions of their domestic interests but also realize that there are common and unique risks. One of the principle risks concerns cash flow and insolvency, and foreign businesses are not immune from these risks and in some nations may be more prone to them. Add on cultural, language, and legal barriers that differ from understood American practices and an insolvent foreign business or trade partner quickly becomes a real anxiety to domestic businesses and their executives, especially if a Chapter 15 bankruptcy proceeding is filed or threatened. Do I send someone abroad, hire foreign counsel, and deal with unfamiliar courts to pursue collection of my claims or to protect my own assets and interests? You and your business or business client may feel stuck with no place to go and no train out.

A year after impressing upon a young nation the idea of judicial review in Madison v. Marbury, Chief Justice John Marshall in Murray v. Schooner Charming Betsy, 6 U.S. 64, 118 (1804), tread softly into international law and held that “an act of congress ought never to be construed to violate the law of nations if any other possible construction remains.” Thus, comity of nations became a real and present concern for American courts attempting to adjudicate issues commingling domestic and foreign interests. Comity simply means civility or courtesy and it implies collective solutions and cooperation amongst interests.

Nothing is less civil that a pack of dogs fighting over the last scraps. Though we attribute better graces to ourselves, a struggling or dying business may give rise to the same carnal instincts for creditors to fight for any remaining assets. It is to avoid this very abuse that American bankruptcy law is a federal interest and not regulated state by state. For the same reasons, the United Nations and many of its member nations (a list that includes the United States, Australia, Canada, Chile, Columbia, Greece, Japan, Mauritius, Mexico, Montenegro, New Zealand, Philippines, Poland, Korea, Romania, Serbia, Slovenia, South Africa, Uganda, and the United Kingdom) have adopted the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law. The Model Law is domestically known as Chapter 15 of the United States Bankruptcy Code and its stated purpose is “cooperation” between domestic and foreign courts to assure all parties to cross-border insolvency cases receive fair administration of their claims, assets, and other interests.

Chapter 15 of the Bankruptcy Code is designed to alleviate anxiety and to orderly coordinate cross-border insolvency issues. It protects American interests by prohibiting any action that would be manifestly contrary to the public policy of the United States while recognizing that there must be comity and cooperation with the foreign interests to achieve a collectively beneficial outcome. It provides access to American bankruptcy courts in order to coordinate the foreign insolvency case pending in the foreign court. Business leaders and counsel can benefit from understanding that there are legal rules and processes in place that allow American businesses to protect their foreign interests, and Chapter 15, though initially intimidating, may be a valuable tool towards those ends.

Chapter 15 may provide guidance on how to stay or continue litigation, conduct discovery, suspend transfers or disposition of assets, file claims, and seek and receive other relief where a foreign business interest is insolvent. Do not abandon a foreign business deal gone bad or going bad without first consulting whether there are legal remedies inside or outside of a Chapter 15 bankruptcy proceeding. Though not as charming as an older lady mumbling Italian, Chapter 15 may provide your business or business client just the relief and protection needed to coordinate the allure and profitability of your international business interests.

Adam M. Langley

Butler/Snow Adam Langley092314©2014 ALL RIGHTS RESERVED