Chapter 15 of the U.S. Bankruptcy Code: Ancillary and Cross-Border Cases
CRS Report for Congress
Chapter 15 of the U.S. Bankruptcy Code:
Ancillary and Cross-Border Cases
July 14, 2006
Georgine Marie Kryda
Law Clerk
American Law Division
Congressional Research Service ˜ The Library of Congress
Chapter 15 of the U.S. Bankruptcy Code:
Ancillary and Cross-Border Cases
Summary
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added
chapter 15 to the U.S. Bankruptcy Code. Chapter 15 implements the United Nations
Commission on International Trade and Investment’s Model Law on Cross-Border
Insolvency. In so doing, chapter 15 (1) retains the Code’s focus on the role of the
foreign representative, initially introduced in 1978; (2) clarifies procedural
cooperation between U.S. and foreign courts; and (3) promotes comity and
reciprocity, wherever possible, with respect to the interpretation and application of
substantive law. Chapter 15 applies to international bankruptcy cases involving
individuals or businesses; however, multinational banks and corporations have had
a higher profile. This report summarizes the evolution and the content of chapter 15.
This report was prepared by Georgine Kryda, Law Clerk, under the general
supervision of Robin Jeweler, Legislative Attorney.
Contents
In troduction ..................................................1
Evolution of Chapter 15.........................................1
Three Critical Cases in the Mid-1970s.............................3
The Bankruptcy Reform Act of 1978...............................6
The U.S. Bankruptcy Code from 1978 to the BAPCPA................8
Development of the Model Law..................................9
Content of Chapter 15 .........................................11
Definitions ..............................................11
Application for Recognition................................11
Recognition of Main and Ancillary Proceedings.................12
Treatment of Creditors.....................................13
Cooperation and Coordination...............................14
Conclusion ..................................................15
Chapter 15 of the U.S. Bankruptcy Code:
Ancillary and Cross-Border Cases
I ntr oducti on1
Chapter 15 of the U.S. Bankruptcy Code, 11 U.S.C. §§ 1501-1532, was enacted
pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(BAPCPA).2 It was designed to facilitate cooperation between U.S. and foreign
courts and to clarify administration of three types of international insolvency
proceedings: (1) full or “main” bankruptcy proceedings, commenced either in the
U.S. with cooperation sought from foreign courts or vice versa; (2) ancillary
proceedings, such as limited requests to administer specific assets under U.S.
jurisdiction; and (3) requests to suspend or dismiss U.S. proceedings so as to avoid
conflicts with foreign proceedings already in progress. Provisions addressing these3
situations in current law first appeared in the Bankruptcy Reform Act of 1978 and
were codified primarily at 11 U.S.C. §§ 303-306. In response to practitioner requests
for greater multilateral cooperation, from 1994 to 1997 the United Nations
Commission on International Trade Law (UNCITRAL) developed a Model Law on4
Cross-Border Insolvency (Model Law). The BAPCPA implemented the Model Law
by adding chapter 15 to the Code.5 Chapter 15 replaced 11 U.S.C. § 304, which was
repealed; modified 11 U.S.C. §§ 303, 305, and 306; and addressed other concerns.
This report summarizes the evolution and content of chapter 15.
Evolution of Chapter 15
All international insolvency cases possess a tension between the: (1) principal
objective of the insolvency proceeding, which is to preserve the maximum value of
the debtor’s assets wherever those assets are located, and (2) jurisdictional reach of
a state or nation’s enforcement powers, which is limited to territorial borders.
Cooperation between courts of different jurisdictions is essential to efficiently
identify, preserve, manage, and allocate the debtor’s dispersed assets. Such
cooperation between courts is called “comity” or “reciprocity” and may be procedural
or substantive in form.
1 This report was prepared by Georgine Kryda, Law Clerk, under the general supervision of
Robin Jeweler, Legislative Attorney.
2 P.L. 109-8, 119 Stat. 23 (April 20, 2005).
3 P.L. 95-598, 92 Stat. 2549 (November 6, 1978).
4 UNCITRAL, 1997-UNCITRAL Model Law on Cross-Border Insolvency with Guide to
Enactment [http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model.html].
5 Title VIII of P.L. 109-8, 119 Stat. 134.
Comity is the voluntary consideration of laws or judicial decisions made in
another jurisdiction. Reciprocity is the recognition and enforcement of laws,
privileges, or judicial decisions made in another jurisdiction. In cross-border
insolvency proceedings, procedural cooperation can give the foreign creditor or
trustee: (1) the right to appear and request that the host court declare a debtor
insolvent, (2) the ability to enforce a foreign court order for turnover of assets in the
host jurisdiction, and (3) assurance that the assets within the host jurisdiction will be
preserved until a final ruling is issued. Procedural cooperation also involves
communication (e.g., notifying creditors of proceedings and deadlines, exchanging
transcripts and documentation, updating other courts with new information,
overseeing administration of reorganization or liquidation plans).
Substantive cooperation has been the principal obstacle for foreign creditors and
trustees who may find their claims unrecognized by the host court or subordinated
to those of domestic parties in interest. U.S. creditors and trustees encountered such
problems abroad. Likewise, foreign creditors and trustees found their claims against
a debtor’s assets impacted by U.S. state statutes — depending on the nature of the
claim (e.g., wages, mortgages) or by its timing (e.g., local parties in interest usually
were the first to file their claims) — rather than participating in a single pro rata
distribution among all parties who filed claims by a set deadline.
In the late 19th and early 20th centuries, several nations entered into bankruptcy
treaties or held international conferences in order to facilitate the handling of
concurrent bankruptcies in multiple jurisdictions.6 The U.S. did not enter into these
treaties, opting instead to maximize judicial discretion for the relatively few
international insolvency cases that U.S. courts encountered.7 This ad hoc system
existed until three high-profile cases in the mid-1970s gave impetus to the 1978
reforms regarding international insolvency.8 The discussion below summarizes the
developments from the mid-1970s through 2005 that led to the enactment of chapter
6 See Kurt H. Nadelmann, Bankruptcy Treaties, 93 U. PA. L. REV. 58 (1944). See also, Jan
Hendrik Dalhuisen, DALHUISEN ON INTERNATIONAL INSOLVENCY AND BANKRUPTCY (New
York: M. Bender, 1980 — ).
7 Hilton v. Guyot, 159 U.S. 113 (1895), is the U.S. Supreme Court decision which is
generally interpreted to extend formal recognition of comity and reciprocity by U.S. courts
to foreign courts. Yet, states such as California and New York were not bound by the
doctrine if their statutes did not recognize reciprocity. See Willis L. M. Reese, The Status
in This Country of Judgments Rendered Abroad, 50 COLUM. L. REV. 783, 790 n.39 (1950).
8 The Congress appointed a bankruptcy review commission in 1970. P.L. 91-354, 84 Stat.
OF THE COMMISSION ON BANKRUPTCY LAWS, H.R. DOC. NO. 137, parts I and II, 93d Cong.,
1st Sess. (1973). However, legal scholars usually cite these three cases as the genesis for
the 1978 reforms regarding international insolvency. See Kurt H. Nadelmann,
Rehabilitating International Bankruptcy Law: Lessons Taught by Herstatt and Company,
Three Critical Cases in the Mid-1970s
Three high-profile cases gave impetus to the enactment of 11 U.S.C. §§ 303-306
in 1978. These cases involved foreign banks that were declared insolvent abroad but
held assets in the U.S.9 Prior to 1978, “[f]oreign banks desiring to establish a direct
U.S. presence obtained state licenses”10 and fell under separate rules for insolvent
banks. However, none of the three banks (Herstatt,11 IBB,12 or Finabank13) had a
direct presence in the U.S. None had an office or had done business in the U.S.; they
only had accounts with major U.S. banks in order to settle foreign exchange
contracts. Were the three entities banks or corporations under U.S. law? Confusion
arose because the foreign banks’ structure did not clearly correspond to U.S. forms
of business organization (e.g., corporation, partnership).
The central issue in all three cases was whether the foreign bank was covered
by or exempt from the predecessor to the 1978 Bankruptcy Code, the Bankruptcy Act
of 1898.14 If the banks were subject to the 1898 Act, then they would be entitled to
file a petition for voluntary bankruptcy, just like any other corporation, and benefit
from the fact that certain claims made against their assets within four months prior
to filing would be voidable preferences under U.S. law.15 Voiding transactions made
within four months prior to the debtor’s filing was intended to promote equity among
all creditors, rather than favoring those creditors who first sensed that the debtor was
going to declare bankruptcy.
The 1898 Act, as amended, was silent regarding Congress’ intended coverage
of foreign banks. If the foreign banks were “banking corporations” under U.S. law,
then they would be exempt from coverage under the 1898 Act and would be subject
9 Domestic banks are not eligible to file under the U.S. Bankruptcy Code. 11 U.S.C. §
10 Joseph J. Norton & Christopher D. Olive, A By-product of the Globalization Process: The
Rise of Cross-Border Bank Mergers and Acquisitions — The U.S. Regulatory Framework,
BANKS: ASSESSING THEIR ROLE IN THE U.S. BANKING SYSTEM 47 (GAO/GGD-96-26,
11 In re Bankhaus I.D. Herstatt KGaA i.L. (Herstatt), Bankruptcy No. 74-1134 (S.D.N.Y.
involuntary bankruptcy petition filed on Aug. 6, 1974, dismissal order issued May 7, 1975).
See Joseph D. Becker, Transnational Insolvency Transformed, 29 AM. J. COMP. L. 706, 707
(1981).
12 In re Israel-British Bank (London) Ltd., (IBB), 1 BANKR. CT. DEC. 428 (S.D.N.Y. 1974),
rev’d 401 F. Supp. 1159 (S.D.N.Y. 1975), rev’d sub. nom. Israel-British Bank (London) Ltd.
v. Federal Deposit Ins. Corp., 536 F.2d 509 (2d Cir. 1976), cert. denied, 429 U.S. 978
(1976).
13 In re Banque de Financement, S.A. (Finabank), 2 BANKR. CT. DEC. 83 (S.D.N.Y. 1976),
aff’d No. 75 B764 (S.D.N.Y. 1976), rev’d sub. nom. Banque de Financement v. First
National Bank of Boston, 568 F.2d 911 (2d Cir. 1977).
14 30 Stat. 544 (July 1, 1898).
15 30 Stat. 562, § 60(b) (1898).
to the separate regime for insolvent banks.16 If the banks were simply foreign
corporations, akin to a partnership, then they would be eligible to file a petition under
the bankruptcy law.17
Major U.S. banks attached claims to the foreign banks’ U.S. accounts, arguing
that the foreign banks were banking corporations, ineligible to file for bankruptcy.
The three foreign banks tried to have the U.S. attachments voided and the funds
turned over to their respective liquidators, each of whom had been appointed by a
non-U.S. court. If the U.S. banks prevailed, their claims would have been satisfied
in full, outside of bankruptcy, in the order in which their attachments had been made
— until the foreign banks’ assets were exhausted.18 If the foreign banks prevailed,
then all of the U.S. banks would be required to participate in the foreign liquidation
plan in which creditors would receive pro rata distribution, most likely partial
recoupment or “pennies on the dollar.” Decisions by the Southern District Court for
New York and the U.S. Court of Appeals for the Second Circuit regarding this
central issue, and others, would inform §§ 303-306.
The American and German parties in Herstatt settled, but the Second Circuit
issued decisions in IBB and Finabank to (1) assert the 1898 Act’s coverage over
foreign banks holding assets, but not doing business, in the U.S., and (2) set a tone
of comity, if not reciprocity, in concurrent international insolvency proceedings. In
IBB, the Second Circuit viewed its role “to be in aid of the order of the High Court
[of England].”19 In Finabank, the Second Circuit acknowledged the pending Swiss
proceeding and noted the Swiss proceeding’s stated objective to ensure an equitable
outcome for all of Finabank’s creditors.20 Congress incorporated these criteria — the
Second Circuit’s sense of comity and assurance of protection of U.S. creditors — in
§ 304 of the Bankruptcy Reform Act of 1978.
In IBB, the English Receiver and Provisional Liquidator filed the voluntary
bankruptcy petition in New York with the express intention of preserving IBB’s U.S.
assets for distribution among all of the bank’s creditors. The Second Circuit not only
relied on the High Court’s order appointing New York counsel to file the petition, but
also on the reciprocity that would exist if the situations were reversed. Under English
law, an English court could void attachments made within six months prior to a
petition for “winding up.”21
The Second Circuit reversed the lower courts’ dismissal of Finabank’s chapter
11 petition and remanded the case to the bankruptcy court.22 Finabank had filed the
U.S. petition while a Swiss proceeding determined Finabank’s prospects for
16 30 Stat. 547 § 4(a) (1898).
17 30 Stat. 547 § 5 (1898).
18 Nadelmann (1977), supra note 8, at 7.
19 536 F.2d at 511.
20 568 F.2d at 917.
21 536 F.2d at 511 (citing Companies Act, 11 & 12 Geo. 6, c. 38 § 320(1) (1948)).
22 568 F.2d at 922.
rehabilitation.23 (A Swiss court ultimately ordered Finabank to be liquidated.24) The
petition was incomplete because Swiss banking law prohibited Finabank from
revealing the names and addresses of depositors and creditors.25 The Second Circuit
held that Finabank’s filing of the chapter 11 petition in order to frustrate the U.S.
creditors’ attachments was insufficient to prove that Finabank did not truly intend to
seek rehabilitation,26 but failure to file a complete list of creditors was fatal because
that requirement had never been waived for any debtor.27 “Flexibility in the
international context of course should not come at the expense of the orderly
administration of the [Bankruptcy] Act.”28 Nevertheless, the Second Circuit
acknowledged that Finabank was atypical and opened the door to two options upon
remand: (1) permitting assets in the U.S. to be administered by a Swiss proceeding,
or (2) coordinating a full proceeding in the U.S. with a Swiss court.29
By the conclusion of these three cases in 1977, additional cross-border
insolvency cases involving non-banks and complicated fact patterns were emerging.30
The circumstances were ripe for Congress to clarify procedures for administering
cross-border insolvency cases. Congress responded with §§ 303-306 of the
Bankruptcy Reform Act of 1978.31
23 Id. at 913.
24 Id.
25 Id. at 914-15.
26 Id. at 917.
27 Id. at 917-18.
28 Id. at 919.
29 Id. at 919-20.
30 See e.g., Cornfeld v. Investors Overseas Services, Ltd., 471 F. Supp. 1255 (S.D.N.Y.
1979), aff’d without opinion 614 F.2d 1286 (2d Cir. 1979); Fluger v. Clarkson Company
Ltd., 86 F.R.D. 388 (N.D. Tex. 1980); Clarkson Co. Ltd. v. Shaheen, 544 F.2d 624 (2d Cir.
31 Congress also passed the International Banking Act (IBA) of 1978. P.L. 95-369, 92 Stat.
607 (September 17, 1978) (codified at 12 U.S.C. § 3101). The IBA was the first act to
subject foreign banks to federal supervision. See Patricia S. Skigen & John D. Fitzsimmons,
The Impact of the International Banking Act of 1978 on Foreign Banks and Their Domestic
and Foreign Affiliates, 35 BUS. LAW. 55 (1979).
The Bankruptcy Reform Act of 1978
Sections 303-306 of the Bankruptcy Reform Act of 1978 focused on the role of
the foreign representative.32 Specifically, a duly-appointed foreign representative
now had standing in a U.S. court to (1) file a petition for involuntary bankruptcy
against a party already involved in foreign proceedings (§ 303),33 (2) file a petition
for ancillary proceedings to administer U.S. assets (§ 304), or (3) request that the
U.S. court suspend or dismiss its proceedings in deference to the foreign lead court
(§ 305). Section 306 granted the foreign representative the right to make a limited
appearance (i.e., not be subject to a court’s jurisdiction for any proceeding unrelated
to the bankruptcy).
Section 303 responded directly to the three banking cases. In order to thwart the
use of U.S. law to force a foreign bank into bankruptcy, § 303(k) prohibited a foreign
bank from being placed in bankruptcy in the U.S. unless a foreign proceeding was
already pending against the bank.34
Before the enactment of § 304, a foreign representative seeking relief involving
assets located in the United States had two choices: “resort to litigation in state or
federal nonbankruptcy courts or subject the debtor’s estate to a full bankruptcy
case.”35 Section 304(c) enumerated six factors that the court could consider to
determine whether to grant relief in addition to formally recognizing “principles of
international comity and respect for the judgments and laws of other nations”:36
In determining whether to grant relief ... the court shall be guided by what will
best assure an economical and expeditious administration of such estate,
consistent with
(1) just treatment of all holders of claims against or interests in such estate;
(2) protection of claim holders in the United States against prejudice and
inconvenience in the processing of claims in such foreign proceeding;
(3) prevention of preferential or fraudulent dispositions of property of such
estate;
(4) distribution of proceeds of such estate substantially in accordance with the
order prescribed by this title;
(5) comity; and
32 P.L. 95-598, 92 Stat. 2549 (November 6, 1978). See Charles F. Miller, Jr., Bankruptcy
Reform Act Bibliography, 85 COM. L.J. 373 (1980).
33 11 U.S.C. § 301 permitted any party that qualified as a debtor under any chapter of Title
34 92 Stat. 2560, § 303(k). However, “only a foreign bank receives this protection. The
protection does not extend to a foreign savings bank, or cooperative bank or any ‘near
bank’.” John D. Honsberger, Conflict of Laws and the Bankruptcy Reform Act of 1978, 30
CASE W. RES. L. REV. 631, 640 (1980).
35 Richard A. Gitlin & Evan D. Flaschen, The International Void in the Law of Multinational
Bankruptcies, 42 BUS. LAW. 307, 316 (1987).
36 92 Stat. 2561, § 304(c).
(6) if appropriate, the provision of an opportunity for a fresh start for the37
individual that such foreign proceeding concerns.
“The U.S. Bankruptcy Code [became] one of the few national bankruptcy laws
in the world to deal directly with the effect of foreign bankruptcies, and specifically
with the recognition to be given to the representative of a foreign bankruptcy in
court.”38 The role of the foreign representative would prove to be quite valuable, as39
illustrated by the Singer reorganization of 1999-2001. The Singer Company, N.V.,
successor in interest to the Singer Sewing Machine Company, and 46 affiliates filed40
chapter 11 petitions in 1999. The bankruptcy judge appointed two of Singer’s
lawyers to act as foreign representatives, pursuing “the essential objective of ensuring41
that all creditors, wherever located, were treated equally.”
The lawyers were already familiar with Singer’s situation. In their capacity as
foreign representatives, they took steps to prevent local creditors from attaching
Singer’s assets and to negotiate a global agreement among Singer’s creditors that
leveraged the creditors’ other business relationships in the U.S.42 “[N]ot once did
Singer actually need to seek bankruptcy court relief with respect to potential
violations of the automatic stay.”43 Upon filing in bankruptcy, the automatic stay44
immediately enjoins all entities from collection activities against a debtor or the
debtor’s property. To be effective in international insolvency, an automatic stay
imposed by a court in one country must be recognized and enforced by courts in other
countries. 45
Despite these provisions in the 1978 Act, the original tensions remained
between the principal objective of preserving assets wherever located and the
territorial limitations on courts’ jurisdiction. Lawyers, regulators, judges, and
academics working in the field of bankruptcy called for improved multilateral
cooperation. Their efforts led to UNCITRAL’s Model Law on Cross-Border
Insolvency, which ultimately was enacted as chapter 15 of the Bankruptcy Code.
37 Id.
38 Stephen B. James, International Bankruptcy: Limited Recognition in the New U.S.
Bankruptcy Code, 3 HOUS. J. INT’L L. 241, 244 (1981).
39 Evan D. Flaschen, Anthony J. Smits, & Leo Plank, Foreign Representatives in U.S.
Chapter 11 Cases: Filling the Void in the Law of Multinational Insolvencies, 17 CONN. J.
INT’L L. 3 (2001).
40 Id. at 3; In re Singer Company N.V., 262 B.R. 257 (Bankr. S.D.N.Y. 2001).
41 Id. at 21. The authors note that, at the time of their writing, nine Chapter 11 cases had
“Singer-style Foreign Representative[s]” appointed, all with similarly defined roles. Id. at
42 Id. at 21.
43 Id.
44 11 U.S.C. § 362.
45 See e.g., In re Nakash, 190 B.R. 763, 767 & 770 (Bankr. S.D.N.Y. 1996).
The U.S. Bankruptcy Code from 1978 to the BAPCPA
Cross-border insolvency cases increased in their complexity. Protocols were
used successfully to coordinate multiple main proceedings for multinational
bankruptcies, such as Maxwell Communication Corporation PLC.46 Yet, uncertainty
remained regarding substantive cooperation in areas such as foreign recognition of
U.S. judgments regarding chapter 11 reorganization plans and U.S. authority to
pursue violations of the automatic stay.47 Other countries, such as England and
Canada (two of the United States’ largest trade and investment partners), did not
recognize discharges of indebtedness as orders of U.S. courts.48 Thus, a final
judgment rendered in one country might not settle the case in all jurisdictions. The
following excerpt from a statement before a congressional subcommittee illustrates
these problems.
In a case known as Paolo Gucci, we, for example, discovered real estate, very
valuable real estate in England held in a Liberian corporation.... We retained
solicitors only to learn that the U.S. bankruptcy and the U.S. bankruptcy trustee
was not entitled to recognition [in England], the law was not clear, and that we
would have to commence litigation.... Also in this Paolo Gucci case, during the
case, post-bankruptcy, in violation of our automatic stay, a party in Korea
attached valuable Korean trademarks which belonged to the estate. We are now
litigating that issue in the Korean courts. Our Korean counsel advised us that our
automatic stay would not be recognized and that attachment is holding up a very
large sum of money which we are due to receive under a sale of assets, but we49
need to clear up the attachment first.
Harmonizing substantive bankruptcy law on a global, or even regional scale,
would be very difficult. Although the Europeans did not implement the European50
Union Regulation on Insolvency until May 2002, their dual-approach of
harmonizing international procedures while acknowledging differences in individual
nation’s substantive laws inspired three other multilateral initiatives to harmonize
bankruptcy laws: (1) the American Law Institute (ALI)’s Transnational Insolvency
46 Flaschen et al., supra note 39, at 9. “Protocols, entered into during bankruptcy
proceedings, may cover any range of issues. The substance of the Maxwell Protocol
concerned the coordination of the two insolvency proceedings in the United Kingdom and
the United States.” Id. See In re Maxwell Communication Corp., 93 F.3d 1036, 1041-42
(2d Cir. 1996).
47 See e.g., Robert B. Chapman, Recent Developments in U.S. Bankruptcy Cases Affecting
Foreign Creditors, Debtors and Assets, 8 INT’L INSOLVENCY REV. 61 (1999).
48 Honsberger, supra note 34, at 650.
49 U.S. Congress, Senate Subcomm. on Admin. Oversight and the Courts of the Comm. on
the Judiciary, Examining the Need to Make Changes to Our Bankruptcy Laws to Facilitatethst
International Trade, S. Hrg. 105-473, 105 Cong., 1 sess., December 4, 1977 (Washington:
GPO, 1998), pp. 13-14 (statement of Jonathan L. Flaxer, Esq.).
50 Council Regulation (EC No. 1346/2000) on insolvency proceedings at
[http://ec.europa.eu/j ustice_home/fsj / civil/insolvency/printer/fsj _civil_1346_en.htm] .
Project, in conjunction with NAFTA;51 (2) the International Bar Association’s
Committee J Cross-Border Insolvency Concordat;52 and (3) the United Nations
Conference on International Trade and Investment’s (UNCITRAL’s) Model Law of
Cross-Border Insolvency.
Development of the Model Law
The need for comity in international insolvency had long been acknowledged
by the parties most directly involved in such proceedings, but practical considerations
lay between conceptualization and implementation. UNCITRAL’s decision to
undertake work on cross-border insolvency was in response to suggestions made by
practitioners directly concerned with the problem, particularly those expressed at the
UNCITRAL Congress, “Uniform Commercial Law in the 21st Century,” held in May
1992.53 In April 1994, UNCITRAL and the International Association of Insolvency
Practitioners (INSOL) held a Colloquium on Cross-Border Insolvency for judges,
lawyers, regulators, bankers, and academics.54 The Working Group on Insolvency
met from 1994 to1997 in order to achieve cooperation between courts, recognition
of foreign proceedings, and access to foreign proceedings by estate representatives.55
From its inception, the Working Group recognized that “it would be desirable
to harmonize ground rules in some areas of insolvency law,” ... but “that it may be
unrealistic to suppose that any principle of universality of insolvency proceedings
could be attained at the global, or even at the regional, level in the foreseeable
future.”56 Hence, the Working Group focused on harmonizing procedural rather than
substantive law. The Working Group opted for a model law rather than a convention
51 The American Law Institute’s Transnational Insolvency project promulgated “principles
and procedures for managing the general default of an economic enterprise having its center
of interest in a NAFTA country and having assets, creditors, and operations in more than
one NAFTA country.” Page 2 at [http://www.ali.org/ali/InsolvencyPrinciples.pdf]. See also
Jay L. Westbrook, The Transnational Insolvency Project of the American Law Institute, 17
CONN. J. INT’L L. 99 (2001).
52 The International Bar Association’s COMMITTEE J CROSS-BORDER INSOLVENCY
CONCORDAT was “prepared to provide a framework of general principles for addressing
cross-border insolvencies.” Page 3 at [http://www.iiiglobal.org/international/projects/
concordat.pdf].
53 UNCITRAL Working Group on Insolvency Law, 18th Sess., Cross-Border Insolvency,
Possible issues relating to judicial cooperation and access and recognition in cases of
cross-border insolvency, at 3, ¶ 2, U.N. Doc. A/CN.9/WG.V/WP.42 (September 26, 1995)
at [http://www.uncitral.org/pdf/english/travaux/insolvency/acn9-wg5-wp42-e.pdf].
54 Id. at ¶ 3. The Colloquium Report is contained in U.N. Doc. A/CN.9/398 (1994).
55 S. Hrg. 105-473, supra note 49, at 12 (statement of Judge Tina L. Brozman).
56 UNCITRAL WORKING GROUP ON INSOLVENCY LAW, 26TH SESS., Possible Future Work,
Note by the Secretariat, Addendum, Cross-border Insolvency, at 11, ¶¶ 50-51, U.N. Doc.
A/CN.9/378/Add.4 (June 23, 1993), at [http://www.uncitral.org/pdf/english/travaux/
insolvency/acn9-378-add4-e.pdf].
because the former offers greater flexibility.57 A nation can incorporate sections of
a model law and tailor it to complement its existing law, whereas ratifying and
executing treaties tends to be a more formal and rigid process.
The issue of automatic stays illustrates the difficulties encountered and
compromises reached in harmonizing the ground rules.
It was noted that the main purpose of the stay of individual action was to prevent
the debtor’s assets from being dispersed through enforcement measures ordered
in individual actions. While there was general support for the need to stay all
individual actions that could lead to such a situation, different views were58
expressed as to how the scope of the stay ... should be defined.
The Working Group compromised by agreeing that an automatic stay should be
imposed when a court recognizes a foreign main proceeding, but should be subject
“to any limitations or exceptions to a stay which occur under local law.”59
UNCITRAL approved and adopted the Model Law on May 30, 1997.60 On
December 15, 1997, without a vote, the U.N. General Assembly adopted Resolution
52/158 recommending that all members review their insolvency laws in light of the
Model Law.61 To further its objective of providing a prototype for procedural
cooperation between national governments, UNCITRAL subsequently released a
legislative guide. On June 25, 2004, UNCITRAL adopted its 400-page Legislative
Guide on Insolvency Law with the intention that it “be used as a reference by national
authorities and legislative bodies when preparing new laws and regulations or
reviewing the adequacy of existing laws and regulations.”62 On December 2, 2004,
the United Nations General Assembly passed Resolution 59/40 requesting the
57 UNCITRAL WORKING GROUP ON INSOLVENCY LAW, 20TH SESS., at 6, ¶¶ 16-20, U.N.
Doc. A/CN.9/433 (October 24, 1996). See also S. Hrg. 105-473, supra note 49, at 39
(remarks by Harold S. Burman, Executive Dir., Advisory Comm. on Private Int’l Law, Dep’t
of State).
58 UNCITRAL Working Group on Insolvency Law, 20th Sess., at 28, ¶ 116, U.N. Doc.
A/CN.9/433 (October 24, 1996).
59 UNCITRAL Working Group Will Meet in N.Y. on Model Insolvency Law, 9 BNA BANKR.
L. REPTR. No. 3 (January 16, 1997) at
[ht t p://pubs.bna.com/NWSST ND/IP/BNA/ bky.nsf/SearchAllV iew/71A217439E99E9118
60 UNCITRAL, 1997 - UNCITRAL Model Law on Cross-Border Insolvency with Guide to
Enactment, at
[http://www.uncitral.org/ uncitral/en/uncitral_texts/insolvency/1997Model.html ].
61 G.A. Res. 158, U.N. GAOR, 52nd Sess., Agenda Item 148, U.N. Doc. A/RES/52/158
(1998), at [http://www.un.org/ga/documents/gares52/res52158.htm].
62 UNCITRAL, 2004 - UNCITRAL Legislative Guide on Insolvency Law, at
[http://www.uncitral.org/ uncitral/en/uncitral_texts/insolvency/2004Guide.html ].
Secretary-General publish the legislative guidelines and endorsing further adoption
of the Model Law.63
On December 4, 1997, the U.S. Senate Subcommittee on Administrative
Oversight and the Courts held a hearing regarding UNCITRAL’s Model Law and
other requests for reform of § 304 of the U.S. Bankruptcy Code.64 Unanimous
endorsements by the National Bankruptcy Review Commission and by the State
Department Advisory Committee on Private International Law facilitated the
introduction of UNCITRAL’s Model Law into the U.S. legislation, which culminated
in its adoption through the BAPCPA. As of July 2006, the U.S. was one of 11
countries and territories with legislation based on the Model Law.65
Content of Chapter 15
Chapter 15 may be divided into five categories: definitions, application for
recognition, recognition of main and ancillary proceedings, treatment of creditors,
and cooperation and coordination.
Definitions. The BAPCPA amended several definitions. Changes to 11
U.S.C. § 101(23): (1) recognize a foreign court’s interim proceedings (not only final
decisions), (2) dispense with the difficulty of defining the location of a debtor’s
“principal” assets, and (3) use the terms “liquidation” and “reorganization,” which
correspond directly with Chapters 7 and 11, respectively, of the U.S. Bankruptcy
Code. Likewise, § 101(24) expands the definition of “foreign representative” to
include any “person or entity” appointed on an interim basis to administer the66
liquidation or reorganization or to act as a representative. Section 109, “who may
be a debtor,” is explicitly linked with the International Banking Act of 1978 in order
to maintain consistency in the definitions of banks and of bank-like enterprises
covered by federal regulation.67
Application for Recognition. The application for recognition of a foreign
proceeding under § 1515 is the starting point for a foreign representative for any type
of proceeding. Failure to file an application does not terminate the foreign
63 G.A. Res. 40, U.N. GAOR, 59th Sess., Agenda Item 143, U.N. Doc. A/Res/59/40 (2004),
at [http://daccessdds.un.org/doc/UNDOC/GEN/N04/478/66/PDF/N0447866.pdf].
64 The National Conference of State Legislatures asked Congress to modify § 304 of the
federal Bankruptcy Code. Section 304 had allowed foreign insurance companies to remove
trust fund assets (serving as collateral in the U.S.) to the foreign country and had exempted
foreign insurance companies from state solvency regulations. 11 U.S.C. § 1501(d) now
prohibits a court from granting relief involving any deposit/fund/security under state
“insurance law or regulation for the benefit of claim holders in the United States.”
65 UNCITRAL, Status, 1997 — Model Law on Cross-border Insolvency, at
[http://www.uncitral.org/ uncitral/en/uncitral_t exts/insolvency/1997Model_status.html ].
66 11 U.S.C. § 101(24). The new § 1505 explicitly authorizes a trustee of an estate
appointed by a U.S. court to act in a foreign country “in any way permitted by the applicable
foreign law.” 11 U.S.C. § 1505.
67 11 U.S.C. § 109(b).
representative’s rights to sue or collect a claim from the debtor, but it will forestall
future action.68 The act of filing an application does not subject the applicant to any
other U.S. jurisdiction for any other purpose.69
In filing the application for recognition, the foreign representative provides the
U.S. district court70 with certification, translated into English, of the foreign court’s:
(1) commencement of the foreign proceeding, and (2) appointment of the foreign
representative.71 The foreign representative must identify for the U.S. court all
known foreign proceedings involving the debtor.72 Section 1516 presumes: (1) the
authenticity of the documents provided, and (2) that a debtor’s registered office or
habitual residence is the center of the debtor’s main interests.73
The court may grant limited relief as soon as the petition for recognition of the
foreign proceeding is filed.74 Public policy concerns may override any relief;75
however, few courts have relied on public policy concerns to justify denying relief.
Courts that have denied relief have defined the public policy exception narrowly.76
Recognition of Main and Ancillary Proceedings. Section 1517 covers
orders granting recognition of the foreign proceeding. Such orders may be granted
subject to the public policy exception described above and after notice and a77
hearing. If the foreign proceeding is in the same country as the center of the
debtor’s interests, then the U.S. recognizes it as the foreign main proceeding;78
otherwise, as a foreign nonmain proceeding. Upon recognition of a foreign main
proceeding, adequate protection of the property (§ 361) and an automatic stay (§ 362)
68 11 U.S.C. § 1509(f). See United States v. J.A. Jones Construction Group, LLC., 333 B.R.
637, 639 (E.D.N.Y. 2005) (holding that the Eastern District Court of New York had no
authority to consider a foreign representative’s request for a stay “[i]n the absence of
recognition under chapter 15” by the bankruptcy court).
69 11 U.S.C. § 1510.
70 119 Stat. 145-46, §802(c) modified 28 U.S.C. 1334(c) to make the district court the sole
starting point for an application to recognize a foreign proceeding. The district court may
refer the case to a bankruptcy court under 28 U.S.C. § 157(a). The appropriate district court
or venue for chapter 15 cases is determined by: (1) the debtor’s principal place of business
or assets in the U.S.; (2) other proceedings against a debtor without a business or assets in
the U.S.; and (3) the interests of justice and convenience of the parties. 28 U.S.C. § 1410(a).
71 11 U.S.C. § 1515(b).
72 11 U.S.C. § 1515(c).
73 11 U.S.C. § 1516(b)&(c).
74 11 U.S.C. § 1519.
75 11 U.S.C. § 1506.
76 Stonington Partners, Inc. v. Lernout & Hauspie Speech Products, N.V., 310 F.3d 118, 127
(3d Cir. 2002).
77 11 U.S.C. § 1517(a).
78 11 U.S.C. § 1517(b). The debtor must be conducting “nontransitory economic activity”
in the foreign country where the proceeding is pending. 11 U.S.C. §§ 1502 & 1517(b)(2).
apply to the debtor’s assets under U.S. territorial jurisdiction.79 The foreign
representative may also operate the debtor’s business, including leasing or selling
property within the territorial jurisdiction of the U.S. or making other transfers of
interest under §§ 363, 549, and 552 of Title 11.80 These provisions do not
automatically accompany recognition of a nonmain proceeding.
Upon recognition of any foreign proceeding, the court may grant other forms of
relief as it deems appropriate, either to respond to a petitioner’s request or to
coordinate with other proceedings.81 All forms of relief are subject to the public
policy exception, described above. Upon recognition of the foreign proceeding, the
foreign representative in that proceeding may participate as a party in interest in any
case under Title 11 regarding the debtor.82
Treatment of Creditors. Upon recognition of any foreign proceeding, the
U.S. court may entrust the debtor’s assets located in the U.S. to the foreign trustee or
to a third party, “provided that the court is satisfied that the interests of creditors in83
the United States are sufficiently protected.” Foreign and domestic creditors have
the same rights to commence or to participate in a case against a debtor.84 Their
claims follow the same priority of claims as under §§ 507 or 726, “except that the
claim of a foreign creditor under those sections shall not be given a lower priority
than that of general unsecured claims without priority solely because the holder of
such claim is a foreign creditor.”85
When deciding whether to provide assistance to a foreign body, the U.S. court
shall consider whether U.S. claim holders will be prejudiced and inconvenienced in
the processing of claims abroad.86 This language drew the attention of the courts in8788
the matters of Artimm, S.r.L. and Board of Directors of Multicanal, S.A. The
court in Artimm applied § 304 because the case had been filed prior to the BAPCPA
taking effect on October 17, 2005; however, the court was informed by the new
chapter 15’s principles. “The ‘provided that’ language in § 1521(b) seems to make
79 11 U.S.C. § 1520(a)(1).
80 11 U.S.C. §§ 1520(a)(2)-(4).
81 11 U.S.C. § 1521.
82 11 U.S.C. § 1512.
83 11 U.S.C. § 1521(b).
84 11 U.S.C. § 1513(a).
85 11 U.S.C. § 1513(b)(1). The House Judiciary Committee Report on the BAPCPA noted
that, “The law as to priority for foreign claims” under § 507 “is unsettled. This section
permits the continued development of case law on that subject and its general principle of
national treatment should be an important factor to be considered.” H.R. REPT. 109-31, Part
1, 111 (2005). National treatment is the principle whereby the host nation does not
discriminate against the foreign interest solely because the party is foreign.
86 11 U.S.C. § 1507(b)(2).
87 335 B.R. 149 (Bankr. C.D. Cal. 2005).
88 340 B.R. 154 (Bankr. S.D.N.Y. 2006).
the protection of the interests of creditors in the United States a mandatory condition
on the turnover of U.S. assets to a foreign representative. The language of § 304(c)
is less demanding.”89
The court in Multicanal, though, found that its authority to assist foreign
representatives and to protect all claim holders “is even clearer under Chapter 15”
than it had been under § 304.90 Multicanal’s board of directors initiated the ancillary
proceeding in the U.S. to enjoin prosecution of U.S. lawsuits and to dismiss an
involuntary chapter 11 petition against the firm.91 One issue in the case concerned
the bankrupt Multicanal’s subsequent offer to exchange securities initially purchased
by U.S. investors. Section 3(a)(10) of the Securities Act of 1933 requires a fairness
hearing to protect investors affected by such exchanges.92 The court in Multicanal
found that, “There is no sound reason why a foreign representative should not be
entitled to seek a § 3(a)(10) fairness hearing in connection with an ancillary petition,
and every reason why this relief should be available.”93 The court then reiterated its
acknowledgment that U.S. securities law might impede a foreign restructuring;
hence, a fairness hearing could simultaneously satisfy U.S. securities law (give voice
to affected investors) and bankruptcy law (give assistance to foreign representatives,
just treatment of all claim holders, and protection of U.S. investors during the foreign
restructuring). 94
Cooperation and Coordination. Chapter 15 directs courts to cooperate95
with foreign courts and representatives to the maximum extent possible — subject
to the public policy exception and other specific considerations — in order “to96
provide effective mechanisms for dealing with cases of cross-border insolvency.”
Such cooperation may include, but is not limited to, direct communications,
personnel appointments, approval or implementation of agreements, and coordination
of administration, supervision, or concurrent proceedings.97
Coordination of concurrent cases considers scenarios in which: (1) cases are
filed or relief is granted in the U.S. before or after recognition of a foreign
proceeding, and (2) multiple foreign proceedings occur. Essentially, all relief must98
be consistent with the relief granted in any U.S. case. Once the U.S. recognizes a
89 335 B.R. at 160.
90 340 B.R. at 167.
91 Id. at 154.
92 Codified at 15 U.S.C. § 77(c)(a)(10).
93 340 B.R. at 166.
94 Id. at 166-67.
95 11 U.S.C. §§ 1525-1526.
96 11 U.S.C. § 1501.
97 11 U.S.C. § 1527.
98 11 U.S.C. § 1529(1)&(2). Even if the foreign proceeding is a foreign main proceeding,
the adequate protection, automatic stay, right to operate a business, and right to use or
(continued...)
foreign main proceeding pursuant to chapter 15, a case under another chapter of Title
11 (e.g., chapter 7, 11) may be commenced against the same debtor only if that debtor
has assets in the United States.99
If no U.S. case is pending and a foreign main proceeding is recognized (either
before or after a foreign nonmain proceeding), then relief granted upon filing for or
granting recognition of a foreign nonmain proceeding must be consistent with the
foreign main proceeding.100 If no U.S. case is pending and no foreign main
proceeding has been recognized, then relief granted to multiple foreign nonmain
proceedings must be done so as to best facilitate coordination between the
proceedings.101 A creditor who receives payment out of one foreign insolvency
proceeding may not collect on the same claim so long as creditors of the same class
receive “proportionately less than the payment the creditor has already received.”102
Conclusion
The BAPCPA added chapter 15 to the U.S. Bankruptcy Code in order to
implement UNCITRAL’s Model Law on Cross-Border Insolvency. By modifying
and expanding §§ 303-306 of the 1978 Act, chapter 15 continues to focus on the role
of the foreign representative and clarifies procedural cooperation in full/main,
ancillary, and suspension/dismissal proceedings. Chapter 15 also aspires to promote
comity and reciprocity with regard to the substantive law in order to enhance the
efficiency and equity of international insolvency proceedings.
98 (...continued)
transfer property do not automatically apply. 11 U.S.C. § 1529(1)(B).
99 11 U.S.C. § 1528.
100 11 U.S.C. § 1530(1)&(2).
101 11 U.S.C. § 1530(3).
102 11 U.S.C. § 1532.