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Breakthroughs in Court-to-court Communications in Cross-border Cases

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As previously reported in the ABI Journal (see Volume XVIII, No. 10, December/January 2000), the American Law Institute (ALI), in its precedent-setting Transnational Insolvency Project, produced a Statement of Principles of Cooperation in Transnational Cases involving the North Atlantic Free Trade Agreement (NAFTA) countries of the United States, Canada and Mexico.

One of the most important elements in the Transnational Insolvency Project was the preparation of guidelines dealing with the communications that must take place between jurisdictions in order to enhance coordination and harmonization of administrations in cross-border or multinational insolvency cases. The project consequently produced its Guidelines for Court-to-court Communications in Cross-border Cases. The guidelines are, in fact, largely based on examples from actual cross-border cases involving cross-border insolvency protocols entered into between courts in different countries. The text of the ALI's Guidelines for Court-to-Court Communications in Cross-Border Cases is set out in full in the Journal article referred to above and appears on ABI World in the International Committee's home pages (www.abiworld.org/abidata/online/journaltext/99decintl.html).

The guidelines recognize that one of the most essential elements of cooperation in cross-border cases is communication among the administrating authorities of the countries involved. Because of the importance of the courts in insolvency and reorganizational proceedings, it is essential that the supervising courts be able to coordinate their activities to assure the maximum available benefit for the stakeholders of financially troubled enterprises.

The guidelines are intended to encourage communications and to permit rapid cooperation in a developing insolvency case while ensuring due process to all concerned. The concept of court-to-court communications is better seen as a linking of two concurrent court hearings, all conducted in accordance with proper systems and procedures. The only change from a purely domestic hearing is the technological link to the other court.

In a recent precedent-setting ruling, the Guidelines for Court-to-court Communications in Cross-border Cases from the Transnational Insolvency Project were adopted and approved in a cross-border case between Canada and the United States. The case, Re Matlack Systems Inc., involved a former NYSE-listed transportation company that had filed under chapter 11 in Delaware. The company had Canadian operations, which it carried on directly (as contrasted with carrying on business through subsidiaries incorporated in Canada).


The guidelines are intended to encourage communications and to permit rapid cooperation in a developing insolvency case while ensuring due process to all concerned.

Local Canadian creditors (i.e., those not having a presence in the United States) were not subject to the automatic stay of proceedings created by the chapter 11 case. There was considerable potential for Canadian creditors in this category to take action and to effect attachments that would have had a highly negative effect on the company's attempts to carry on its business in the normal course, and a creditor seizure of corporate assets had in fact been carried out.

Consequently, the company resorted to the international insolvency provisions of the Canadian Companies' Creditors Arrangement Act (CCAA), which allow Canadian courts to assist with reorganizations and insolvencies in other jurisdictions. On an application by the company, the Ontario Superior Court of Justice (Mr. Justice J.M. Farley) granted a stay of proceedings against Canadian creditors to aid the chapter 11 proceedings in Delaware. Mr. Justice Farley also approved, from the Canadian side, a cross-border insolvency protocol to coordinate the insolvency administrations in the two countries. The precedent-setting feature about the protocol in Matlack is that it specifically incorporated the ALI guidelines, and Mr. Justice Farley took the opportunity to provide his approval for the guidelines from the Canadian side.

In accordance with the procedural suggestions contained in the ALI Transnational Insolvency Statement, the guidelines were approved by the Canadian court on the basis that they would not be effective until they were approved from the U.S. side by the bankruptcy court in Delaware. The Delaware bankruptcy court subsequently approved the protocol and the guidelines from the U.S. side, and consequently, the guidelines were set formally in place for the first time in a cross-border case. See Re Matlack Inc. (Unreported: Ontario Superior Court of Justice: Case No. 01-CL-4109, April 19, 2001) and Re Matlack Systems Inc. (U.S. Bankruptcy Court for the District of Delaware (Hon. Mary F. Walrath), Case No. 01-01114 (MFW), May 24, 2001).

The full texts of the summary reports on U.S., Mexican and Canadian insolvency law and practice from the ALI's Transnational Insolvency Project, together with the Statement of Principles of Cooperation in Transnational Insolvency Cases, can be ordered from the American Law Institute. Ordering information can be found on the ALI's web site at www.ali.org. (The author was the chair for Canada on the Transnational Insolvency Project and the project reporter for Domestic Aspects of Canadian Insolvency Law).

ABI Members, of course, played a prominent role in the Matlack proceedings. Counsel for Matlack in its chapter 11 proceedings was a team from Klett, Rooney, Lieber, & Schorling ably led by William H. Schorling of Philadelphia and including Richard S. Cobb of the firm's Delaware office, and James D. Newell and James H. Joseph from Pittsburgh. Acting for Matlack on the Canadian side were the author and Shahana Kar of Cassels Brock & Blackwell LLP in Toronto. Financial advisors to the debtor in the transaction were John Swidler and Andrew Addesky of Montreal-based Richter & Associates Inc.

In a subsequent cross-border reorganizational proceeding between the United States and Canada, the ALI guidelines were also approved and adopted by the U.S. Bankruptcy Court for the Southern District of New York (Hon. Robert E. Gerber) and the Ontario Superior Court of Justice in Toronto (Mr. Justice J.M. Farley). In the New York bankruptcy case, PSINet and 25 of its subsidiaries filed for chapter 11 protection, while in Canada, PSINet Ltd. and four of its major subsidiaries sought protection under the CCAA. The business of the Canadian companies was fully integrated with the business of the chapter 11 debtors and there was a significant degree of interrelatedness and interconnectedness between the business operations in each country.

Both courts approved a cross-border insolvency protocol to coordinate the administrations in the two countries, which provided that particular matters arising in the case would be dealt with in joint hearings between the bankruptcy court in New York and the commercial court in Canada. The protocol contemplated that matters relating to the sale of the assets of the business, the allocation of proceeds between the companies in the chapter 11 proceedings and the companies in the CCAA case, and matters relating to issues arising from Indefeasible Rights of Use, a concept of increasing significance in telecom reorganizations, would be dealt with in joint cross-border court hearings. To provide a framework for the joint hearings, the protocol included, verbatim, the text of the ALI Guidelines for Court-to-court Communications in Cross-Border Cases.

Again, ABI members were highly prominent in the PSINet reorganizations. Counsel for the reorganizing companies in the chapter 11 case was a team from Wilmer, Cutler and Pickering led by William J. Perlstein of Washington, and a team from Osler, Hoskin & Harcourt in Toronto led by ABI Vice President-International Affairs Steven G. Golick advised the reorganizing Canadian companies. See PSINet Inc. et al., (Bankr. S.D.N.Y.) (Hon. Robert E. Gerber), Case No. 01-13213, July 10, 2001, and Re PSINet Ltd. (Ontario Superior Court of Justice: Hon. Mr. Justice J.M. Farley: Case No. 01-CL-4155, July 10, 2001).

The application of the ALI guidelines in the Matlack and PSINet cases represents a significant step forward in international cooperation in cross-border cases. Cross-border insolvency protocols are becoming the norm in significant international cases (see "The International Year in Review," ABI Journal, Vol. XIX, No. 10, December/January 2001), and it would seem that the courts that are involved in cross-border cases are becoming confident of the utility and constructiveness of using the ALI's Guidelines for Court-to-court Communications in Cross-border Cases as a means of facilitating communications between courts in different countries that are dealing with the same business enterprise. The use of the guidelines in Matlack and PSINet will set a very prominent example for other courts in other significant cross-border cases.

Author's Note: The full text of the ALI guidelines, as indicated above, appears in The International Scene column of the December/January 2000 issue of the ABI Journal. Readers with other experiences in cross-border insolvency protocols and, in particular, the application of the ALI Guidelines for Court-to-court Communications in Cross-border Cases, are highly encouraged to communicate the details to Bruce Leonard at [email protected] or by fax at (416) 640-3027.

Journal Date: 
Saturday, September 1, 2001

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