An overview, survey, and critique of administrating cross-border insolvencies.

• Author: Farley, Chris

1. INTRODUCTION II. INTERNATIONAL PROVISION WITHIN THE U.S. BANKRUPTCY CODE: SECTION 304 A. Limited Jurisdiction of a Bankruptcy Court B. The International Provision in the Code: Scope and Purpose of Section 304 C. Why Section 304 Works: Positive Aspects of Section 304 D. Why Does the U.S. Bankruptcy Code Need Anything More Than Section 304?: The Negative Aspects of Section 304 E. Conclusion Regarding Section 304: It Works III. TWO CONCEPTS AT ODDS: TERRITORIALISM AND UNIVERSALISM A. Territorialism: Wherever an Asset May Be Is Where It Will Stay 1. Criticisms of Territorialism: Why Not Act Selfishly? 2. Cooperative Territoriality: An Area of Compromise B. Universalism: The Holy Grail of International Insolvency 1. The Virtues of Universalism 2. The Downside to Universalism 3. Modified Universalism: Another Form of Compromise 4. An Example of Modified Universalism: Applying the Compromise IV. OTHER APPROACHES TO TRANSNATIONAL BANKRUPTCY. A. Contractualism: Choice of Law by Contract B. The UNCITRAL Model Law: A Universal Law Once and For All 1. Effect of the Model Law Principles: Does the Model Law Substantially Change the Current Situation? V. CONCLUSION I. INTRODUCTION

   Globalization is ever increasing in our society and based upon the economic success of the United States in the twentieth century, capitalism is a driving force behind globalization. (1) The size and scope of the world market, along with the power of capitalism, are evidenced by recent international trade statistics. (2) In September of 2003, the United States exported $82.3 billion in goods and services. (3) Imports were even greater at $118.9 billion. (4) Additional evidence of the pervasive power of globalization and the world market is demonstrated by the interdependency of multinational corporations and foreign markets. (5)

   Cross-border commerce represents significant revenue and profit to some stalwarts of the U.S. economy. (6) The Coca-Cola Company, an icon of American culture and a member of the Dow Jones Industrial Index, (7) reported in 2002 that 66.9% of its net operating revenue was generated outside of North America. (8) A full 50.0% of Coke's capital expenditures occurred outside of North America in 2002, (9) while nearly 86.0% of its operating income was generated from business segments in Africa, Europe, Eurasia, the Middle East, Latin America, and Asia in 2002. (10) Arguably, this type of expansion raises the standard of living throughout the world by increasing economic growth for people at all income levels. (11) This increase in economic growth has diffused economic and political power resulting in greater international stability. (12)

   Today's multinational conglomerates, however, face a world economy depressed by business cycles, political uncertainty, terrorism, and a post-investment "bubble." (13) These factors can combine to make seemingly the most financially sound companies become unstable. In fact, thirteen of the largest corporate bankruptcies since 1980 were filed in this decade, including the three largest bankruptcies in history. (14)

   As an example of how the mighty can fall quickly, now infamous, Enron Corporation (Enron) was named America's Most Innovative Company by Fortune Magazine for six consecutive years from 1996-2000. (15) Enron also placed eighteenth on Fortune's list of Most Admired Companies for the year 2000. (16) This information was touted in an Enron press release on February 6, 2001. (17) Later that year on December 2, 2001, Enron petitioned for protection under Title 11 of the Bankruptcy Code. (18)

   As the discussion above illustrates, international trade affects a multitude of businesses. But what happens to these multinational companies when they turn to the bankruptcy system for protection? What is the choice of law when companies have assets, creditors, vendors, customers, and stakeholders that span the globe? Surprisingly, there is not an all-encompassing international bankruptcy law. (19) There are, however, a number of methods and proposals concerning how to most effectively administrate a bankruptcy proceeding. (20) This Comment will survey and critique the various approaches including: 1) the U.S. Bankruptcy Code [section] 304, 2) territorialism, 3) universalism, 4) contractualism, and 6) the UNCITRAL model. Throughout the discussion, this Comment will highlight the positive and negative aspects of the various approaches to administrating cross-border insolvencies and use recent case law to demonstrate the complexity and difficulty of developing a coherent system for transnational bankruptcy. Ultimately, however, this Comment concludes that none of the proposed theories or solutions provide a sufficient resolution to the transnational bankruptcy problem. Therefore, the current state of international bankruptcy law will continue indefinitely.

2. INTERNATIONAL PROVISION WITHIN THE U.S. BANKRUPTCY CODE: SECTION 304

   1. Limited Jurisdiction of a Bankruptcy Court

      Before delving into the international provision contained in the United States Bankruptcy Code (the Code), one should have a general understanding of the context in which a bankruptcy court sits. Bankruptcy courts, in general, are courts of equity because "they characteristically proceed in summary fashion to deal with the assets of the bankrupt they are administering." (21) In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., the U.S. Supreme Court held that congressional delegation of sweeping jurisdiction to the bankruptcy courts was unconstitutional. (22)

      Faced with the possibility that all matters previously delegated to bankruptcy courts would again be borne by the ... overburdened Article III courts, Congress enacted [the Bankruptcy Amendments of 1984] "to conform the bankruptcy statute to the dictates of Marathon" by excluding from bankruptcy court jurisdiction subject matter that is not specifically derived from the bankruptcy laws. (23) Title 28 of the U.S. Code [section] 1334 is the source of subject matter jurisdiction in bankruptcy matters. (24) This section gives bankruptcy courts jurisdiction of civil proceedings "arising under," "arising in," or "related to" cases under title 11. (25)

      For the purpose of determining whether a particular matter falls within bankruptcy jurisdiction, it is not necessary to distinguish between proceedings "arising under", "arising in a case under", or "related to a case under", title 11. These references operate conjunctively to define the scope of jurisdiction. Therefore, it is necessary only to determine whether a matter is at least "related to" the bankruptcy. (26) "Related to" proceedings are those whose outcome could conceivably have an effect on the bankruptcy estate and that involve either causes of action owned by the debtor that became property of a title 11 estate, or suits between third parties that, in the absence of bankruptcy, could have been brought in a district court or a state court. (27)

      In an international proceeding, a bankruptcy court's subject matter jurisdiction is less clear; but, a bankruptcy court has the power to:

      (1) enter a nationwide injunction for purposes of gathering information and protecting the foreign estate's property, (2) preside over a turnover action based on foreign law and (3) order discovery on behalf of a foreign debtor that has no assets in the United States so long as the nexus created by the debtor's business in the United States is not frivolous. (28) Note that in the case of an international debtor, the bankruptcy court's jurisdiction is not limited to situations in which there is debtor-owned property in the United States. (29)

   2. The International Provision in the Code: Scope and Purpose of Section 304.

      Under title 11 of the U.S. Code [section] 304, a foreign representative involved in a foreign bankruptcy case may file an ancillary proceeding in a U.S. bankruptcy court as opposed to initiating a full bankruptcy case against a debtor. (30) Under [section] 304, the qualifications of a foreign representative are broadly construed. (31) "The purpose of [an ancillary] case is to assist a foreign court in its administration of a foreign proceeding of liquidation or reorganization." (32) A case ancillary to a foreign proceeding "serves as a jurisdictional aid for a foreign representative to facilitate the administration of a bankruptcy or similar proceeding pending abroad. It allows a foreign representative to marshal U.S. assets and eventually repatriate them, to obtain discovery and to otherwise protect and facilitate the administration of the foreign proceeding." (33) As mentioned earlier, however, [section] 304 is not limited only to foreign proceedings that concern assets within the United States. (34) In Haarhuis v. Kunnan Enterprises, Ltd., the court utilized the broad scope of [section] 304 to obtain jurisdiction over an ancillary proceeding where a Taiwanese debtor did not have assets within the United States. (35)

   3. Why Section 304 Works: Positive Aspects of Section 304

      Now that [section] 304 is defined, one question is, does it work? The answer to that question lies in the functionality and application of [section] 304.

      Section 304 is '"designed to give the [bankruptcy] court the maximum flexibility in handling ancillary cases,' and in applying its provisions, courts should 'be guided by what will best assure an economical and expeditious administration of the estate."' (36) Bankruptcy judges, therefore, presiding over courts of equity, have tremendous power and authority to do justice under [section] 304.37 Section 304(b)(3) allows a bankruptcy court to "order other appropriate relief." (38) In determining whether to grant such relief, the court must consider six factors. (39) These factors include:

      1) just treatment of all holders of claims against or interests in such [bankrupt] estate;

      2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such...