Badges Badges We Dont Need No Stinking Badges1Or Do We
The U.S. Bankruptcy Code knows no boundaries. It does not recognize international borders, assumes that property of the estate includes property wherever in the world it is located and applies the automatic stay equally to creditors in Dallas or Guadalajara. But does bankruptcy court jurisdiction cross borders, and, more importantly for increasing trade with Mexico, do U.S. bankruptcy laws cross the bridge into Mexico? Will the badges of power we acknowledge as bankruptcy jurisdiction be recognized in Mexico?
The questions are significant because U.S. businesses doing business in Mexico are beginning to deal with cross-border insolvency issues every day. These aren't issues of major international conglomerates trying to reorganize in multiple jurisdictions; the issues are more similar to how your client recovers its collateral in Mexico or gets paid when all of the debtors' assets are in Mexico. Some businesses are finding that doing business in Mexico is less of un gran fiesta and more a walk through a dangerous neighborhood. To ease their anxiety, there are a few things you can tell your clients about insolvency and Mexico.
Mexico is a union of states with a constitution and federal and state laws. It has a court system that parallels the U.S. system with some notable exceptions, and it has a great body of law controlling all manner of commercial transactions. Parties extending credit and doing business in Mexico must realize that in attempting to document and secure transactions in Mexico, they must comply with the Mexican Civil Law. Mexican Civil Law is based upon the Napoleonic Code rather than the English common law, and is substantially different from laws in the United States. Moreover, the familiar and comfortable Uniform Commercial Code is not part of Mexican jurisprudence.
Doing business in Mexico and insulating businesses from insolvency risk is not an impossible task. Commerce has flourished for thousands of years between nations and people of different races, cultures, religions and economic structures. In many instances, these differences are much greater than those existing between Mexico and the United States. Although Mexicans and Americans have different customs, language, beliefs, values and, generally, a different culture, understanding how business is conducted in the United States and Mexico is not a matter of being bilingual. It is a matter of understanding the essential elements needed to assure the success of an enterprise.
Mexican Bankruptcy Law
When dealing with cross-border insolvency issues in Mexico, it is nice to know that Mexico does have its own bankruptcy laws. Business bankruptcies (for individuals in business and corporations) are governed primarily by the Law of Bankruptcy and Suspension of Payments (Ley de Quiebras y Suspensión de Pagos, LQSP). The LQSP, a federal law enacted in 1943, has been amended only once, and the modification was not substantial. The LQSP translated into English can be found in Bonime-Blanc and Mooz, Doing Business in Mexico, Appendix 8 (1994). State and federal courts share jurisdiction over bankruptcy proceedings. There are no bankruptcy courts per se in Mexico; however, there are certain judges in Mexico City with special expertise in bankruptcy laws.
In some respects, the Mexican bankruptcy laws are similar in theory to the Bankruptcy Code. The overall concepts and many specific provisions of the Mexican liquidation and suspension of payments proceedings are similar to those of chapter 7 and chapter 11 of the Bankruptcy Code. Due to the age and history of the Mexican law, however, many of the law's provisions and applications will seem (appropriately) foreign to a U.S. bankruptcy practitioner.
Mexican liquidation and suspension of payments proceedings have not been utilized to the extent of their American counterparts. Historically, few businesses voluntarily file bankruptcy or suspension of payments proceedings because criminal penalties and jail time have often awaited the debtor and its officers. In addition to the low number of filings, there are few successful reorganizations.
Use of International Treaties
It is rare that a U.S. creditor will actually find itself in a Mexican bankruptcy proceeding. The more likely scenario is that an attempt will be made to enforce orders issued by a U.S. bankruptcy court in Mexico. To enforce U.S. court orders in Mexico, it is necessary to turn to international treaties. In an attempt to resolve international jurisdictional matters, the Inter-American Convention on the Jurisdiction in the International Sphere for the Extraterritorial Efficiency of Foreign Judgments was executed in La Paz, Bolivia on May 24, 1984 ("the La Paz Convention"). Mexico and the United States are parties to the La Paz Convention.
Pursuant to the La Paz Convention, jurisdictional matters are to be resolved on the following terms:
- For economic personal claims, the court holding jurisdiction shall be that of the defendant's domicile or normal place of residence if he or she is an individual; the place of the main business establishment, if a commercial entity; or if dealing with agencies or branches of companies, the place where the activities that originated the claim took place. For claims dealing with specific goods, the court holding jurisdiction would be that of the place where the assets are located at the time the suit is filed, or jurisdiction may be established following the previously described rules. Additionally, the jurisdiction of a court may be agreed upon in writing by the parties.
- For real property and related judicial actions, the court of the place where the real property is located is the appropriate court.
- For commercial agreements, jurisdiction may be established by the parties if they agree, in writing, to submit to the jurisdiction of a certain court unless the agreement was obtained by duress or undue influence.
Pursuant to Section E, Article 6 of the La Paz Convention, the bankruptcy and insolvency procedures are excluded from the jurisdictional bases. Consequently, for bankruptcy and insolvency issues, the jurisdictional matters are not resolved through the La Paz Convention.
Nevertheless, Mexican courts may recognize some U.S. bankruptcy court orders based on two alternate theories. First, the Inter-American Convention on Extraterritorial Efficiency of Foreign Judgments and Arbitration Awards, approved in Montevideo, Uruguay, on May 8, 1979 ("the Montevideo Convention"), and ratified by both Mexico and the United States, prescribes enforcement procedures for judgments and arbitration awards in civil, commercial and labor proceedings unless expressly reserved at the time of ratification. Under Mexican law, bankruptcy matters are considered commercial proceedings. Consequently, at least some judgments issued in bankruptcy proceedings in the United States may be respected pursuant to the Montevideo Convention. At the time of ratification of the Montevideo Convention, Mexico made an express reservation to limit the effect of the Montevideo Convention only to foreign money judgments. Accordingly, Mexican courts will only recognize a judgment issued by a U.S. court when it contains a judgment against a party for a fixed amount of money. A Mexican court may decline to enforce a bankruptcy court order providing for any other form of relief.
A second theory for the enforcement of a bankruptcy court order is found in the LQSP. Article 14 of the LQSP appears to provide some relief from the confines of the Montevideo Convention because it provides for recognition of foreign bankruptcy decrees. Article 14 relief is probably illusory, however, because such decrees must fully comply with the formalities and preconditions of applicable provisions of the LQSP. A party seeking to enforce such a decree would have to follow the procedures for issuance of letters rogatory in the U.S. court to have the decree recognized by a Mexican court. The Mexican Ministry of Foreign Affairs and the Mexican court receiving the letters rogatory will both review them and determine whether the order is enforceable under Mexican law. The Mexican Ministry of Foreign Affairs or the Mexican court can proceed to allow the enforcement of the order, or determine that enforcement of the order is against Mexican public policy and refuse to enforce the order. Because of the number of governmental entities involved, and the inherent bureaucratic red tape of two federal governments, this procedure is fairly complicated and time-consuming. Even if it would be enforced in Mexico, an automatic stay order will not seem so automatic six months after a bankruptcy filing. Moreover, it is likely that any assets a party may be trying to reach in Mexico will be long gone before this procedure can be completed.
Even though the theories and treaties don't work as efficiently as bankruptcy practitioners may like, it has not stopped insolvencies on the U.S./Mexico border. The lack of a comfortable interplay between the insolvency laws of Mexico and the United States has just added a little salsa to cross-border insolvencies.
Recent Cross-border Cases
Over the last few years a number of companies and individuals doing business in the United States and Mexico have sought bankruptcy relief in the United States. To be eligible to file a bankruptcy petition, a person or entity need only reside, have a domicile, a place of business or property in the United States. 11 U.S.C. §109. Accordingly, almost any company or individual with operations or property on both sides of the border is eligible to file bankruptcy in the United States, even if the debtor is a foreign citizen or a foreign corporation. See, e.g., In re Guardia, Case No. 96-50744 (Memorandum Opinion June 3, 1997, 5th Cir. 1997); In re Echegaray, Case No. 36-30367 (Bankr. W.D. Tex. 1996); In re Axona International Credit and Commerce, 88 B.R. 597, 606 (Bankr. S.D. N.Y. 1989).
Foreign companies and individuals with assets in the United States may even find themselves subject to involuntary bankruptcy proceedings in U.S. bankruptcy courts. See, e.g., In re Xacur, 219 B.R. 956 (Bankr. S.D. Tex. 1998) and In re Xacur, 216 B.R. 187 (Bankr. S.D. Tex. 1997). In the Xacur cases, several Mexican banks, frustrated by the movement of individuals and their assets from Mexico to the United States, brought involuntary bankruptcy proceedings against their Mexican customers in bankruptcy court in Houston. In one case, the Mexican banks were unsuccessful in obtaining relief against one of the Xacur brothers. In the other Xacur case against the other Xacur brothers, the bankruptcy court granted involuntary relief. The bankruptcy court held that it had jurisdiction over the Mexican citizens because they had assets in the United States. Moreover, the bankruptcy court granted the involuntary relief despite the fact that the obligations were between Mexican banks and Mexican citizens. It is interesting to contrast the attitude of the court in Xacur in granting involuntary relief against Mexican citizens with the statements of the court in Sunbelt Industries Inc. v. Inmobiliaria Axial, S.A. de C.V., et al. (In re Sunbelt Industries Inc.), Case No. 98-03020, in an instance in which a debtor was seeking to recover assets held by a Mexican creditor in Mexico.2
Regardless of whether bankruptcy relief is voluntary or involuntary, cross-border bankruptcy teaches lawyers, judges and creditors that there is some merit to that childhood maxim of law: "Possession is nine-tenths of the law." Creditors in Mexico who have no intention of appearing in the U.S. bankruptcy proceedings, have access to assets located in Mexico, and who can take action against the assets under color of Mexican law, can and often do ignore the jurisdiction of the U.S. bankruptcy court. This consequence can profoundly and adversely affect creditors in the United States who have no choice but to obey U.S. laws. The Bankruptcy Code was designed to equitably treat the claims of all creditors subject to certain rules of priority. To be equitable, the Bankruptcy Code assumes that all creditors will participate in the bankruptcy, and that all assets of the debtor will be available for the treatment of creditor claims. Additionally, the equitable treatment assumed by the Bankruptcy Code includes the disparate treatment of creditor claims. Some creditors will have priority over other creditors depending on contractual rights or liens granted on certain assets. Additionally, the Bankruptcy Code describes certain types of claims that shall have priority over other types of claims. The ability of the Mexican creditor to sever from a debtor's estate assets located in Mexico, especially if they are significant, upsets the equitable balance contemplated by the Bankruptcy Code. It grants the creditor that ignores the U.S. bankruptcy proceeding a distinct advantage over creditors participating in the proceeding.
As a practical matter, even the suggestion that Mexican creditors will not participate in the U.S. bankruptcy proceeding, and will rely upon the laws of Mexico for collection of monies due, has altered how U.S. bankruptcy courts have treated Mexican creditors. Some courts have recognized that their jurisdiction to control the assets stops at the border, and the ability to recover assets in Mexico for distribution or treatment of the claims of creditors in the United States requires the cooperation of the Mexican creditor. Often that means the payment in full or sufficient satisfaction of the Mexican creditor. When dealing with sparse assets, this preferential treatment of Mexican creditors adversely affects creditors participating in the U.S. bankruptcy proceeding.
The only protection provided by the Bankruptcy Code to the creditor is contained in §508. In the event foreign assets are collected by a creditor, §508 will prevent such a creditor from collecting from the estate to the extent such creditor received prior payment. 11 U.S.C. §508. Pursuant to §508, if a creditor receives payment of a claim in a foreign proceeding, the creditor is not entitled to payment in the bankruptcy proceeding until the other holders of claims that are entitled to share equally with the creditor receive an amount equal in value to the consideration received by the creditor in the foreign proceeding. This remedy is useless in many cross-border bankruptcies because many of the valuable assets are in Mexico—far from the reach of U.S. creditors.
Other issues also abound. Is a discharge granted by a U.S. bankruptcy court to a Mexican citizen of obligations created in Mexico enforceable in Mexico? Are bankruptcy causes of action, such as preference and fraudulent transfer actions, viable against Mexican defendants? If so, what defenses should apply to such actions? May a bankruptcy court find that a debt that is dischargeable under Mexican law is non-dischargeable in the United States?
The U.S. bankruptcy courts and parties before them, and those who choose not to appear before them, will struggle to resolve these issues and others for years. Careful planning can alleviate some of the problems, but not all. Relief will occur only when the United States and Mexico mold the insolvency legal framework into a better fit. Until then, badges may be necessary in Mexico, but may not necessarily be respected.
2 Excerpts of the transcript of a hearing held on June 24, 1998, Sunbelt Industries Inc. v. Inmobiliaria Axial, S.A. de C.V., et al., (In re Sunbelt Industries Inc.), Case No. 98-03020, U.S. Bankruptcy Court, W.D. Texas, El Paso Division.
THE COURT: So [why did you] let people move stuff to Mexico?
DEBTOR'S COUNSEL: We trusted people.
THE COURT: Well,...that kind of puts you in this position. But I can't change it. I can't go to Mexico. I don't go to Mexico....You chose to go. I have no authority in Mexico. No matter what I do, the Mexican Government or courts or citizens or corporations can choose to [ignore me]. Return to article