Vol 12 (2015) - Issue 6

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Preserving a Single Forum for Corporate Rescue

The United States is an important jurisdiction for most large international insolvency cases. But, unlike many jurisdictions, the United States bankruptcy process requires a high degree of judicial involvement. While other jurisdictions may allow an insolvency practitioner to make important decisions with little or no active supervision by a judge, the United States Bankruptcy Code requires advance court approval of asset sales, most significant actions in the bankruptcy case, and all business transactions that are outside of the ordinary course of business. In addition, the bankruptcy courts are given very broad jurisdiction over non-bankruptcy matters. The goal when the current Bankruptcy Code was enacted in 1978 was to achieve greater judicial efficiency by creating a single forum with comprehensive jurisdiction that could handle any matter affecting the bankruptcy estate. Thus, the status of the United States bankruptcy courts is a critically important issue for cross-border insolvency practice.
Unfortunately, the United States bankruptcy courts have been operating under a cloud of uncertainty since they were first established in 1978. The original system was ruled unconstitutional by the United States Supreme Court shortly after it became effective. A revised jurisdictional scheme adopted in 1984 preserved much of the single forum concept, leaving the bankruptcy judges with broad jurisdiction over matters closely related to estate administration, but involving the district courts in less central matters. That scheme functioned reasonably well until four years ago, when the Supreme Court ruled that part of the remaining bankruptcy court jurisdiction was unconstitutional. The Supreme Court’s reasoning was unclear and lower
courts adopted widely divergent interpretations of the decision. The more restrictive interpretations cast doubt on the bankruptcy judges’ ability to adjudicate routine matters and threatened to disrupt the bankruptcy system.
That threat was significantly reduced by the recent May decision of the Supreme Court in Wellness International Network, Ltd. v Sharif. Although the Wellness Court did not resolve whether the bankruptcy courts’ jurisdictional grant was constitutional, it held that the parties to a proceeding before the bankruptcy court could consent to adjudication of the dispute by a bankruptcy judge. This consent approach should allow the bankruptcy courts to function normally in most cases. Parties generally will consent to adjudication by the bankruptcy judge because there is little incentive to withhold consent. However, there will be situations where the power to withhold consent may provide a party with a significant advantage. In those cases, the district court must become involved. The added expense, delay and uncertainty will diminish the benefits of the single forum concept. In addition, the line between matters that can be handled by a bankruptcy judge and those that must involve a district judge remains unclear, raising the risk of wasteful litigation over jurisdictional questions.

The 'single forum' concept
One of the hallmarks of the United States’ bankruptcy system is its specialised bankruptcy courts. Unlike the insolvency systems of many nations, bankruptcy matters generally are not assigned to the courts of general jurisdiction or handled by judges who lack special expertise in bankruptcy matters.