To the extent the cases reflecting this activity have been analyzed, it has been in the context of traditional, unilateral perspectives on doctrines like reciprocity and comity. That is, each court has been treated as making a decision about a matter wholly independent of the future actions of the other court. The prior actions of the other court may be scrutinized for propriety of jurisdiction and fairness of process, for example, but the assumption has been that the court now acting does so entirely on the basis of that historical record and without reference to the future activity of the other court in the pending matter.3
That assumption, and the accompanying perspective and doctrines, are no longer universally true. In bankruptcy cases, they are simply out of date. Increasingly, the courts are interacting with regard to specific cases in real time.
Insolvency cases have provided the vehicles for issues of international judicial cooperation and coordination for a long time. Not everyone remembers that Hilton v. Guyot, 159 U.S. 113 (1895), the classic U.S. case for the enforcement of judgments through "comity," was an insolvency case. So too was Canadian Southern Ry. Co. v. Gebhard, 109 U.S. 527 (1883), in which a Canadian reorganization plan for a Canadian railroad was held binding on U.S. bondholders even though the bonds were payable in New York. Although a worldwide insolvency reorganization is the classic case requiring real-time cooperation, and therefore potential negotiation, among courts, liquidation cases as well as reorganizations require judicial interaction when the estate overlaps national borders.
One of the earliest of the contemporary negotiation cases was Blanco v. Banco Industrial De Venezuela S.A., 997 F.2d 974 (2d Cir. 1993). In that case, a Venezuelan company filed a New York lawsuit against a Venezuelan development bank in connection with a development in Venezuela. The case involved substantial non-Venezuelan elements, including a consortium of Middle Eastern banks. One of the key financing agreements had a permissive forum clause, permitting suit in New York, London or Caracas. English law was to govern, but payment was to be made in New York in U.S. dollars. After the suit was brought in New York, the plaintiff company went into bankruptcy in Venezuela and trustees were appointed, ousting the shareholders from control. The bankruptcy trustees sought dismissal of the New York suit. The shareholders then intervened in the New York action, claiming they could not get justice in the Venezuelan courts.
The Second Circuit disagreed, granting over a vigorous dissent a motion to dismiss in favor of the Venzuelan bankruptcy court on the grounds of forum non conveniens. However, the dismissal was not unconditional. The court majority imposed a condition: that the Venezuelan bankruptcy court would appoint a new co-trustee reasonably acceptable to the shareholders. If it did not, the suit could be reopened in the United States. The condition was imposed in response to claims by the shareholders that the trustees appointed by the Venezuelan court were hostile and unfair to them. The decision, in effect, opened a negotiation with the other court by making an offer: Appoint an acceptable co-trustee in the bankruptcy, and we will not reinstate the U.S. lawsuit.
This sort of result may be very intrusive, even offensive, to the foreign court. The very idea of negotiation may be unattractive to both courts. But these sorts of solutions are becoming more common because the alternatives seem worse. These cases present the local court (that is, the court that is not primarily in charge of the case) with unattractive choices. It can (1) dismiss the claim and hope that the foreign insolvency court will act properly and fairly; (2) permit litigation of the claim in its courtroom, ignoring the strong policy in favor of comity and giving a distinct "back of the hand" to the foreign court; or (3) follow a middle ground, with dismissal conditioned on some action by the foreign court, risking the sort of intrusiveness illustrated by Blanco.
Another alternative is to talk. One way to achieve that result is for the parties to enter into a "protocol" and ask the court to "so order" it, thus creating by agreement the otherwise-missing transnational bankruptcy law. Protocols have become enormously important in cross-border cases. Indeed, the recently published American Law Institute Principles of Transnational Cooperation in Insolvency Cases attaches a special appendix with exemplary protocols.4 Very often, the parties in such cases are serving as conduits between the courts, who have the final say.
The most famous protocol case was In re Maxwell Communication Corp., 93 F.3d 1036, 1051 (2d Cir. 1996). The Maxwell proceedings involved a major portion of the collapse of the media and publishing empire of Robert Maxwell. A chapter 11 case was filed in New York, and an "administration" case (a form of reorganization proceeding) in London. A protocol was agreed to between a "special examiner" appointed by the bankruptcy court in New York and the administrators appointed in London, allocating functions and providing for a cooperative administration. The protocol was approved by the English and American courts and thereby acquired the force of law for that case. The case resulted in a combined reorganization plan that is believed to have been the first successful plan adopted on a worldwide basis.
A more recent version of such a protocol arose in a liquidation case, illustrating that the importance of cooperation is not limited to reorganizations. In In re Inverworld, 267 B.R. 732, 740 n. 10 (Bankr. W.D. Tex. 2001), the debtor defrauded hundreds of Latin American investors of hundreds of millions of dollars. The investors were carried on the company's books as owning stock and other investments worth more than US$400 million, but PricewaterhouseCoopers, the liquidator, was able to find only about US$100 million in valuable shares. The debtor had its main offices in Texas and many assets in New York, but put its transactions with investors through its Cayman Islands and English subsidiaries. Insolvency cases were filed for the parent company and certain subsidiaries in Texas, the Cayman Islands and England. The contracts with investors (and other contracts among the affiliates) had various and conflicting choice-of-law and choice-of-forum clauses. The result was a remarkable tangle of choice-of-law and forum questions. The case was rife with possibilities for extremely expensive litigation in three national courts and for conflicting decisions, leaving the residue for the victims much reduced. Insolvency cases have provided the vehicles for issues of international judicial cooperation and coordination for a long time.
To avoid that result, the representatives of various parties created a "protocol" that was accepted by each of the courts involved. In summary, the protocol led to dismissal of the English insolvency proceeding, upon certain conditions about the treatment of claimants therein, and the allocation of functions among the two remaining courts. Each court was to take the other court's actions as binding and thus prevent parallel litigation. Ultimately, the operation of the protocol led to a worldwide settlement at a cost far less than would have attended a three-court struggle.
Thus, the parties can serve, in effect, as a negotiation pipeline between courts, who are the ultimate dealmakers. There is, however, a major problem with this approach to international judicial negotiation: It depends on agreement among the parties, which will often be unobtainable. It also risks a miscommunication between courts because of the party filter, which is necessarily self-interested. For both reasons, it may be necessary for courts to be actively involved in such agreements. But to do so, the courts must communicate with each other—in effect, entering into direct negotiations. Both the Model Law on Cross-Border Insolvencies, which is to be adopted as chapter 15 of the Bankruptcy Code, and the ALI Principles of Cooperation, encourage direct communication among responsible courts.5 The Principles even attach an appendix (Appendix 2) with guidelines for such communications, although obviously each jurisdiction will impose such requirements as due process suggests in that legal culture. Thus, for example, a U.S. court might permit counsel to join the judges on the telephone or provide a stenographic record of the conversation.
There have already been live video-conferenced hearings held simultaneously in Canada and the United States in cross-border bankruptcies. In a recent U.S.-U.K. case, a potential confrontation between courts was avoided by direct communication between the judges by telephone. Direct communication can build trust and confidence and can transmit key information far more quickly and cheaply than exchanges of paper. Negotiation among courts—civilized, tactful and mutually deferential—permits the courts to resolve the problems of globalization by the use of the same marvelous technology and lowering of barriers that created globalization in the first place.
Last year saw an important breakthrough in the Third Circuit, Stonington Partners Inc. v. Lernout & Hauspie Products N.V., 2002 WL 31445305 (3d Cir. Oct. 4, 2002). The debtor, Lernout, filed for chapter 11 in Delaware and the next day for a second insolvency proceeding in Belgium, its home. Stonington had a claim for fraud in the stock deal by which it sold Dictaphone to Lernout. Its fraud claim had been asserted in the Belgian insolvency case, where it is a legally valid claim. In the U.S. proceeding, its fraud claim would almost certainly be subordinated under §510. Thus, a fascinating and difficult choice-of-law issue was presented, although our focus in this discussion is on the process question.
The debtor sought and got an order from the U.S. court choosing U.S. law as controlling as to subordination. The U.S. court also enjoined Stonington from presenting its case to the Belgian court, although it was supposedly allowed to "participate" in that proceeding. The Third Circuit threw out the injunction. As to the choice-of-law issue, the court endorsed a "dialogue" between the Delaware and Belgian courts on the comity issues, citing Maxwell and Judge Bufford's international handbook for the Federal Judicial Center.
Because "The parties have indicated that...a protocol was attempted but was not achievable in the instant situation," the circuit panel "strongly" recommended that the Delaware and Belgian courts make an effort to reach an agreement as to how to proceed or, at the very least, an understanding as to the policy considerations underpinning salient aspects of the foreign laws. Id. at 11. They cited Maxwell as their exemplar, going on to say:
Even if cooperation could not be achieved, it would be valuable to communicate regarding the policies animating a certain law so as to be better able to perform a choice-of-law analysis. While not required by our case precedent or any principle of law, we urge that, in a situation such as this, communication from one court to the other regarding cooperation or the drafting of a protocol could be advantageous to the orderly administration of justice. Id.
The concurrence agreed wholeheartedly, while objecting to a remand on the injunction issue, which it saw as unnecessary.
A new day is dawning in the courts of the world, and the bankruptcy judges and lawyers of the United States find themselves at the cutting edge. As Joan Rivers used to say, "Can we talk?"
1 As with each of our columns this year, we presented an earlier version of this column to the Annual Bankruptcy Conference at the University of Texas Law School at its November 2002 meeting. Return to article
3 Reciprocity always involves some element of concern that the courts of the other jurisdiction will defer and cooperate in future cases, but that is necessarily a hope or a prediction, not a condition of the present action of the court now acting. Return to article