Vol 1 (2004) - Issue 6

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Section 304 of the US Bankruptcy Code: Current Developments

Introduction

United States courts have long adhered to a broad interpretation of the doctrine of international comity and have generally recognized proceedings in foreign courts so long as they comport with American notions of due process and afford procedural protections similar to those under United States law.

Comity has been held to be particularly important in relation to cross-border insolvency cases, as recognition of such proceedings ‘enables the assets of a debtor to be dispersed in an equitable, orderly, and systematic manner, rather than in a haphazard, erratic or piecemeal fashion.’ Where a foreign company is reorganizing rather than liquidating, US courts have long recognized that the failure to afford comity may well defeat the company’s ability to reorganize. As the US Supreme Court explained more than 100 years ago in Canada S. Ry. Co. v. Gebhard:

Unless all parties in interest, wherever they reside, can be bound by the [foreign reorganization] arrangement which it is sought to have legalized, the scheme may fail ... Under these circumstances, the true spirit of international comity requires that schemes of this character, legalized at home, should be recognized in other countries.

This consideration has become more pressing in recent years given the trend toward globalization and the marked increase in cross-border insolvencies. As the court noted in one leading case arising out of the Maxwell bankruptcy:

Lurking in all transnational bankruptcies is the potential for chaos if the courts involved ignore the importance of comity. As anyone who has made even a brief excursion into this area of insolvency practice will report, there is little to guide practitioners or the judiciary in dealing with the unique problems posed by such bankruptcies. Yet it is critical to harmonize the proceedings in the different courts lest decrees at war with one another result.

The US policy favoring comity for foreign bankruptcy proceedings is expressed in section 304 of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq. (the ‘Bankruptcy Code’), which grants bankruptcy courts broad authority to grant relief, including injunctive relief, to assist a foreign bankruptcy court in the debtor company’s home jurisdiction. The fundamental purpose of section 304 is to ‘provide a statutory mechanism through which United States courts may defer to and facilitate foreign insolvency proceedings.’ Since the enactment of section 304 in 1978, along with the trend toward globalization in the world economy, there has been a concomitant expansion in the use of section 304 and a greater emphasis by US courts on deference to the debtor’s ‘home’ jurisdiction in cross-border insolvencies. The 2001 decision of the US Court of Appeals for the Second Circuit (the federal appellate district that encompasses New York) in In re Treco, in which the appellate court reversed a section 304 order requiring the turnover of US assets to the liquidator of a Bahamian company based on the treatment of a secured creditor under Bahamian law, caused several commentators to predict a curtailment of this trend and prompted many US creditors to assert objections to section 304 relief on the basis of minor differences between US and foreign distribution schemes.