|
Article Excerpt
TABLE OF CONTENTS
I. INTERNATIONAL BANKRUPTCY THEORY II. LOCAL INTERESTS: DEFINING THE PROBLEM A. Introduction B. The Interests of Local Creditors 1. Content-Neutral Interests: Asset Coverage Ratio ("ACR") 2. Content-Based Interests: The Content of Local Bankruptcy Law C. The Interests of Local Sovereigns 1. The Problem: Sovereignty and Territorialism's Allure 2. Semi-Solutions: Universalism's Olive Branch to Sovereignty 3. Pride in Action D. Summary III. PROPOSED SOLUTIONS TO PROTECT LOCAL INTERESTS UNDER UNIVERSALISM A. First-Best: Recharacterizing the Debate 1. Diffuse Reciprocity 2. Bankruptcy Meta-Norms B. Second-Bests: Current and New Pragmatic Proposals 1. Liens 2. Circumscription 3. Carve-Outs C. Could It Ever Happen? IV. SUMMARY, FURTHER COMMENT, AND CONCLUSION
The collapses of Yukos, Parmalat, and other international juggernauts have focused scholarly attention on the failure of multinational enterprises. Even what one might consider "American" companies, such as Chicago-based United Airlines, have made clear in their restructuring plans that their operations have profound effects on the dozens of nations around the globe where they transact business. (1) Government and quasi-government reform efforts to regulate these cross-border insolvencies have abounded, including among others, the UNCITRAL Model Law on Cross-Border Insolvency. (2) UNCITRAL is also building on World Bank and INSOL (3) efforts at promulgating a Legislative Guide for "best practices" bankruptcy codes. (4)
Scholars vary in their enthusiasm toward these reform efforts, but most will agree that these initiatives should be grounded in a coherent theory of cross-border financial distress. (5) Debate to date in international bankruptcy theory has centered on two competing paradigms, universalism and territorialism. (6) This rich scholarly discussion is replete with complex overlays, such as the proper role of private ordering by parties within either proposal. (7) One of the principal sticking points of this debate, however, has been how best to protect what are often called "local interests." (8) While scholars and courts are not as precise in their use of this term as they might be, they express serious concern over the perils local creditors and small-country sovereigns face in trying to design a viable international bankruptcy system. (9)
The purpose of this Article is twofold. First, it explores what exactly we mean in cross-border insolvency law when we talk about "local" creditors and protecting "local interests." Because these local interests are crucial to the debate between universalists and territorialists (with the latter claiming that the former cannot protect these interests sufficiently), (10) rigorous analysis is imperative to permit meaningful critique. Second, this Article advances policy recommendations to address the problems of local interests (as properly understood) and suggests the next stage in designing a theoretically sound but pragmatically functional international bankruptcy system.
The Article proceeds as follows: Part I summarizes briefly the universalist-territorialist debate in international bankruptcy theory. Part II first looks at the concern of protecting "local creditors" and unpacks that concept into its constitutive parts. It argues that this construct is actually an amalgam of what is called the local asset-claims ratio (a legally neutral, unpredictable-before-bankruptcy happenstance) and the content of the local state's substantive bankruptcy laws (an arguably predictable factor ex ante to any given debtor's default). These components both affect the overriding motivation of the local creditor in a cross-border insolvency, which I characterize as "greed." Part II further explores the idea of protecting "local states" and argues that these are distinct concerns from the problems of local creditors. These state-specific interests present separate obstacles for international bankruptcy that operate on a parallel but distinct track from greed. The related vice of these local sovereign policymakers that matches their local constituents' greed is what I loosely call "pride."
Armed with a more accurate and honest understanding of the challenges local greed and local pride present in cross-border insolvencies, Part III turns to policy recommendations, focusing on the more intractable but at least more predictable problem of pride. It offers a first-best resolution from a theoretical standpoint, contending that recharacterization of the conflicts of laws presented by cross-border disputes--by focusing on diffuse reciprocity and the identification of bankruptcy meta-norms--provides the clearest path to taming the problem of sovereign pride. It suggests that the project of substantive harmonization, especially the reduction of priority payout provisions within domestic bankruptcy laws, begins this task. Because international bankruptcy is an inchoate and fluctuating field, however, Part III also offers some second-best, pragmatically oriented policy alternatives. It first critiques two of the dominant proposals, liens and circumscription. It then proposes a new and arguably better idea: a substantive carve-out in favor of the local territorial state within an overarching universalist framework. The carve-out proposal, while directed at pride, may have spillover potential that will help with greed; it thus takes aim at two birds with one stone.
I. INTERNATIONAL BANKRUPTCY THEORY
In broad summary, international bankruptcy creates enormous problems for commercial actors because of a combination of at least three general attributes of insolvency law. First, insolvency laws have an expansive reach. That is, when an entity commits general default on its various financial obligations, the resolution of that failure requires that all participants be bound to the legal outcome. Accordingly, bankruptcy proceedings are in rem and bind all potential stakeholders in the debtor's property. (11) This broad-sweeping and compulsory law corrals those constituents who would prefer to defer collective resolution and deal with their debts on an individual in personam basis. All must join a group resolution. (12)
In addition to this breadth, bankruptcy law intrudes upon another axis: it invades and displaces pre-existing legal relationships. What otherwise is a perfectly enforceable executory contractual obligation can find itself dishonored or modified by a debtor under the jurisdiction of a bankruptcy court, often to the dismay of the contractual counterparty. Some have termed bankruptcy a type of "meta-law" that swoops in and trumps baseline legal relationships in the unusual circumstance of general financial default. (13)
In addition to being invasive along these two axes, bankruptcy law is also "prickly." That is, despite the protestations of many scholars who insist (with some merit) that the principal focus of a bankruptcy law should be the efficient resolution of financial distress, (14) the bankruptcy laws on the books in myriad jurisdictions around the globe unabashedly contain a panoply of redistributive provisions. (15) Among the most vivid of these are the priority payout rules of estate distribution. Although the baseline norm of bankruptcy distribution is "equality is equity," and therefore that limited assets should be distributed pro rata to share the burden of nonrecovery equally, the norm is most often honored in the breach. (16) For example, employee-creditors owed back wages for unpaid services are arguably no different from a bank owed back payments for unpaid loan invoices; yet many systems advance the employees to the front of the line, offering them special, preferred payment before the garden-variety creditors (or, as Professor White prefers, the "dross") (17) scrounge for the scraps. (18) While scholars differ in their views as to what these priority payout provisions represent--important normative policy preferences regarding conceptions of fairness, economic assessments of comparative bargaining ability, or simply the spoils of domestic rent-seeking contests--the point is that these provisions implicate prickly issues that reveal a legislator's redistributive values in a sensitive legal context in which insufficient assets guarantee that unhappiness and pain will abound. (19)
Given this combination of attributes--broad-reaching scope, invasively displacing power, and normatively touchy legal rules--that characterize a typical bankruptcy code, it should not be surprising that international coordination engenders some difficulties. (20) And in an increasingly globalized economy, cross-border failures are becoming more and more common. When an international enterprise fails, several jurisdictions plausibly can lay claim to resolving the dispute. (21) Because bankruptcy laws tend to be broad-reaching, conflicting claims are likely. Because bankruptcy laws are invasive and prickly, these conflicts are likely to be thorny.
To illustrate with a quick example, consider a Canadian-based manufacturer (incorporated in Ontario) with a plant, workforce, accounts, and sales force in Canada that also has a branch office and warehoused inventory in the United States (perhaps Michigan). Both Canada and the United States have colorable claims to regulate the resolution of that debtor's distress. The claims to jurisdiction are greatest regarding the assets located in the Michigan warehouse: Canada is presumably interested in governing the resolution of a "Canadian" debtor, and the United States in adjudicating property rights of assets located within her physical territory. This is a potential zone of conflict in which two sovereigns could both seek to exert regulatory control. (22)
Bankruptcy scholars have coalesced around a discussion of two dominant forms of international regulation under such a scenario. ("Regulation" is being used loosely to refer to the systematic resolution of these situations, beyond the baseline quagmire of international comity.) The first approach is called "territorialism." Finding its animation in traditional rules of private international law, this approach advocates the bright-line rule of strict territorial jurisdiction. In the example above, the Canadian-situated assets would be administered in a Canadian bankruptcy proceeding under Canadian bankruptcy law to whichever creditors participated, and the American assets would be dealt with in an American proceeding under American law. Good borders make good neighbors: international tension is minimized, and commercial actors have ex ante clarity regarding which substantive law will govern the resolution of any given asset (even though that asset's location may change ex post to lending). (23) Many countries' extant bankruptcy laws reflect territorialist conceptions of jurisdiction. (24)
The competing paradigm, "universalism," probably enjoys a privileged academic status inversely proportionate to its current acceptance by policymakers in countries around the world. In their theoretical critique, universalists contend that the territorial regime begets inefficiencies in a variety of ways, including skewing investment patterns, imposing transaction costs (from the opening of multiple bankruptcy proceedings), raising information costs of mastering different insolvency laws, and inflicting monitoring or covenanting costs regarding the international movement of assets. (25) The universalists posit that a more desirable system would be a "one law" approach where in any given bankruptcy, one substantive bankruptcy law would be chosen to control resolution of the worldwide dispute. (26) Assets located in "ancillary jurisdictions"--countries other than the primary one whose laws were chosen to control--would either be repatriated to that controlling jurisdiction for administration or be subject to ancillary proceedings conducted under the substantive bankruptcy law of the controlling jurisdiction. (27) The choice of law rule favored by universalists to select the controlling jurisdiction is based on the "home" jurisdiction of the debtor. (28)
Thus in the example above, in a universalist system of international bankruptcy, the assets would be administered according to Canadian bankruptcy law, including those assets physically located in the United States. This global application of Canadian law to the debtor's collapse minimizes the necessity to monitor the interjurisdictional movement of assets because Canadian insolvency law will always apply, regardless where the debtor's assets may travel. This reduced monitoring expenditure should theoretically reap, among other benefits, a cheaper cost of capital for debtors whose creditors pass along their ex ante savings (as they presumably must in a competitive lending environment). To follow the previous example under universalism, a Canadian bankruptcy representative would make a limited appearance in U.S. bankruptcy court to seek a so-called "turnover" order of the American assets so that they could be administered under Canadian substantive bankruptcy law in a Canadian court notwithstanding their initial physical location in the United States. (29)
II. LOCAL INTERESTS: DEFINING THE PROBLEM
A. Introduction
If scholars tend as a majority to support the enhanced efficiency (and, at some level, fairness) of universalism, (30) then why has such a supposedly superior international regime not come into being? Critics cite at least two roadblocks, although to be sure these are not the sole challenges. (31) The first is simply operational: universalism, as fashioned above, requires a viable choice of law rule to select the jurisdiction entitled to control the worldwide bankruptcy. Thus, a choice of law rule must be crafted--and accepted--to anchor a universalist regime. This challenge has generated considerable discussion in its own right. Suffice it to say that territorialist critics who find such a rule elusive or unattainable may overstate their case. (32)
The second problem with universalism is what Professor Westhrook, universalism's primary academic champion, calls the "acceptance of outcome differences," (33) whereby the application of different insolvency law (the home jurisdiction's) to a different asset base (all global assets) under universalism creates the potential that local creditors fare worse than they would under local law. Professor Guzman aptly summarizes this collection of concerns by concluding that "territorialist objections to universalism center on the treatment of small, local creditors." (34) The thrust of the concerns is that local creditors dealing with a local branch office of an international debtor presumably expect the application and related protections of local commercial law in the event of financial default. (35) As Professor LoPucki explains: "Yet in a universalist system, the priority of Mexican workers' employment claims against a U.S. firm operating in Mexico would be determined by U.S. rules of priority--much to the disappointment of the affected Mexican workers." (36) He concludes: "As a practical matter, the Mexican employee, the Mexican trade creditor, and even their U.S. counterparts are unlikely to know enough about the foreign insolvency laws to adjust to them." (37) Moreover, the concern over universalism's ability to protect these "local interests" is not confined to American scholars. One of the leading European bankruptcy authors, Bob Wessels, also makes clear that territorial proceedings "protect local interests." (38) This involves not only the individual creditors themselves but also the deferring states, which must suppress their own bankruptcy policies when universalism's choice of law rule dictates that another state will be exporting its bankruptcy law to regulate the case.
In sum, "Political judgments about local asset disposition and allocation of local losses from the foreign firm's demise are left in the hands of a foreign court [applying foreign law]. Universalism effectively requires a state's precommitment to wholesale deferral to other states' various prescriptions for financial distress." (39) Thus, it can be fairly said that strong concern exists that universalism's broad-sweeping application of one law to worldwide financial failure has the potential to subjugate "local interests" (40) and that "[t]he protection of local creditors and local policies is the most common justification for denying the effects of [universalist] foreign bankruptcy proceedings." (41)
The problem of "local interests," on closer scrutiny, is actually a multifaceted matter that combines both the interests of local creditors (real, live claimants in a bankruptcy proceeding) and the interests of local governments (the sovereign states whose laws must be suppressed pursuant to universalism's choice of law rule). Both of these "stakeholders" are deemed to be potentially disadvantaged, albeit under differing theories, by the resolution of cross-border insolvencies under the universalist system. Moreover, the arguments of how these constituencies might fare worse under universalism compared to territorialism only partially overlap, making it difficult to keep clear which problems implicate which group. Several, but not all, of these problems depend upon the content of local substantive bankruptcy law. Accordingly, this Part will try to address more rigorously the concerns commentators have raised regarding universalism's impact on "local interests" in an effort to create a more coherent analytical framework. This analysis reveals that "local interests" actually shift from bankruptcy to bankruptcy, with sovereigns and their subjects sometimes clashing in what they prefer.
B. The Interests of Local Creditors
1. Content-Neutral Interests: Asset Coverage Ratio ("ACR")
a. The Problem
One of the most important concerns of local creditors pertains to the payoff they may expect to receive on account of their insolvency claims under a territorialist regime as opposed to a universalist one. Under the most uncooperative form of territorialism, local creditors seize local assets within their country and divide them up in local bankruptcy proceedings; this results in a separate proceeding in each of the several jurisdictions where an international debtor has assets. (42) (The assumptions underlying this extreme case, such as the inability of creditors to travel to and participate in proceedings outside their home countries, are addressed below, but for simplicity the extreme case is considered at the outset.) Universalism, by contrast, takes an "everyone in" approach and pools all the internationally dispersed assets (and claims) together to be administered collectively under one substantive bankruptcy law--that of the controlling jurisdiction. It is like a giant potluck where all the debtor's worldwide creditors are invited, bringing with them various assets from around the globe. As a result, if we control for any substantive differences in bankruptcy law, "local creditors" under universalism who anticipate they have a high ratio of local assets to local claims, or, more precisely, a higher ratio of local assets to local claims than the global average, would rationally prefer the isolated distribution of territorialism to the collective distribution of universalism. The creditors who would so prefer would be in a "surplus" jurisdiction. They would gain nothing from sharing their local assets of the debtor with their international creditor colleagues, even if those international colleagues brought other assets of the debtor to the table for sharing. A good chef hates potluck; he is happy to stay home and cook for himself. (43)
By corollary, creditors who anticipate that the debtor's asset base located within their country's territory will generate a lower coverage ratio than the global average are in a "deficit" jurisdiction. They would happily and anxiously seek universal pooling; while potluck is the gourmet's bane, it is the graduate student's feast. This ratio of local-debtor assets to local-creditor claims is what I refer to as the local "Asset Coverage Ratio" ("ACR"). What is important is that the ACR, from an analytical standpoint, is independent of the content of local law. (44) In other words, the ACR of local creditors is theoretically "content-neutral" regarding the substantive content of their governing domestic bankruptcy law. ACR varies only as a function of assets and claims by jurisdiction, and thus it can vary from bankruptcy to bankruptcy in an unpredictable manner.
Injecting some numbers from the ongoing example, if the American inventory is worth $100,000 and all the American creditors together only have claims totaling $50,000, then they would recover fully in an American-only territorial bankruptcy (without Canadian creditor participation) because the ACR would exceed 1.0. (45) If the Canadian assets amounted to $1.0 million but the Canadian debts against the company totaled $3.0 million, then the Canadians' ACR of 0.33 would pale in comparison to their southern creditor-neighbors under territorialism. The Americans would be surplus-ACR creditors who would favor strict territorialism and its full payout, and the Canadians would be deficit-ACR creditors who would seek universalism and its more attractive 0.36 dividend.
An American court--facing American creditors objecting to a turnover order to a Canadian "home" bankruptcy under universalism (46)--would undoubtedly feel the pain of universalism. Instead of fully satisfying the American creditors, as territorialism would enable, the American judge under universalism would have to order the $100,000 worth of American assets to join the Canadian proceeding (raising the global bankruptcy estate to $1.1 million) and have the Americans join the Canadian creditor queue. Adding the Americans' $50,000 would make the global claim pool $3.05 million--a universalist dividend of 0.36. The asset-rich American creditors lose in such a case under universalism.
b. Current Responses: Rough Wash and Universal Filing
Universalist scholars' standard answer to this scenario is the "rough wash." They contend that there is, at least theoretically, no reason for a creditor to anticipate that he or she routinely will be in a surplus or deficit jurisdiction--and by extension, no reason for policymakers or judges within a state to think that their country tends to be a high- or a low-ACR jurisdiction. "The central argument for the Rough Wash is that a universalist rule will roughly even out benefits and losses for local creditors, who will gain enough from foreign deference to the local forum in one case to balance any loss from local deference to the foreign forum in another." (47) A judge should steel herself to potential complaining from local creditors seeking territorialist payout in a high-ACR bankruptcy proceeding and remember the pie-increasing "transactional gains" from universalism over the long haul. (48)
A separate response to the ACR concern is to note that its anchoring premise--that only American creditors participate in the American bankruptcy proceeding and Canadian creditors participate in the Canadian one--may well be inapt. To be sure, there may be indirect burdens on participation: it may be inconvenient and expensive for an American creditor to retain counsel and file a claim in a Canadian proceeding. (49) But there is often no jurisdictional impediment from doing so, and double recovery is mitigated by traditional adjustment rules. (50) The problem is that this theoretical ability of cross-border participation is unlikely to be distributed uniformly. Sophisticated multinational creditors can likely file claims in either proceeding relatively painlessly compared to their smaller counterparts. (51) So it is not so much "local" creditors who are sensitive to ACR, but "locally filing creditors" or "smaller state" creditors. (52) This explains the principle behind "universal filing" policy recommendations, whose advocates recommend that all creditors be deemed to have filed everywhere as a matter of law in an international bankruptcy. If there is universal cross-filing, where every claim in a domestic bankruptcy is an automatic claim in all the jurisdictions where the debtor's assets are being divided, the arbitrage potential of the ACR distribution is substantially diminished. (53)
2. Content-Based Interests: The Content of Local Bankruptcy Law
All of the foregoing analysis assumes that domestic ACR is functionally dispositive of local creditors' interests. But when that assumption is relaxed, the situation of the "local creditors" becomes immediately more complicated. Recalling that bankruptcy laws vary from country to country in their pricey redistributive priority provisions, it is entirely possible that the payoff of a filing creditor may vary not solely as a function of ACR richness but also as a function of the creditor's substantive legal endowment under controlling bankruptcy law. For example, it could be that local creditors are benefited under a priority distribution provision of local law that would be lost were the creditors subjected to foreign law that has no such priority provision. It is therefore only the interactive effect of both (content-neutral) ACR and (content-based) substantive legal entitlement under local law that can truly determine local creditors' preferences for universalism or territorialism.
From a theoretical standpoint, there is no intrinsic reason to assume that domestic priority rules will privilege a given domestic creditor any more than foreign law will. That is, controlling for ACR, it could conceivably be that otherwise unremarkable domestic creditors would find themselves subject to a better priority rule under the application of foreign law--a priority benefit wholly unknown under their own law. (54) Such "local creditors" would actually be universalism's most enthusiastic proponents if the regime presented a realistic shot at the application of such favorable foreign law. (55) This is not mere theory. Consider the recent important cross-border dispute of In re Aerovias Nacionales de Colombia S.A. Avianca. (56) In Avianca, a Colombian company filed for reorganization proceedings in the United States. In fighting U.S. jurisdiction (over the objection of the Colombian debtor), a group of U.S. creditors railed against the affront to comity that the U.S. proceedings would have and insisted that reorganization of this Colombian debtor proceed in Colombia under a Colombian reorganization law "section 550 proceeding." These worldly, cosmopolitan creditors, however, were lessors of the debtor's aircraft. As such, they were likely animated by the fact that U.S. chapter 11 law allowed the debtor to terminate its unprofitable aircraft leases, a right unavailable in a Colombian 550 proceeding. To be sure, Avianca may be an unusual case, and there are some public-choice reasons why that might in fact be so, but it serves as a stark example to point out the lack of necessary preference for local law by local creditors.
Indeed, because ACR is presumptively independent from local legal content, it could well be that specific subsets of local creditors, even in a routinely ACR-surplus jurisdiction, might nevertheless prefer the potential application of foreign law that arises under universalism. This possible preference for universalism by ACR-surplus creditors would equate to a conclusion that the comparatively favorable content of foreign law relative to local law offsets the ACR advantage enjoyed by being located in a surplus jurisdiction. No one who is hungry likes to share his food with a larger pool of diners, but few mind if, in exchange for such sharing, they are allowed to eat to their fill first. Alternatively, local constituents in ACR-deficit jurisdictions might equally...
|
