The End of Bankruptcy
The End of Bankruptcy
“Bob Rasmussen, call the Chapter 11 Desk.” Two recent decisions, one on each side of the Atlantic, have enshrined contract bankruptcy—or at least the defeat of bankruptcy law by contract. Although the context for both was international, in principle they could work for domestic cases as well and at last achieve the demise of bankruptcy law proclaimed in the above-titled 2002 article by Rasmussen and Douglas Baird. The analysis is complex, so this brief note will focus on results and implications.
The cases are Bakhshiyeva in London [Bakhshiyeva -and- Sberbank of Russia, et al.,  EWHC 59 (Ch).] and Sun Edison in Manhattan [In re SunEdison, 577 B.R. 120 (2017). Their common ground is that a choice of law clause in a contract may trump the applicability of bankruptcy law to that contract. In the hands of any competent lawyer, the result may be party autonomy in the application of bankruptcy law to contractual obligations, making bankruptcy law largely irrelevant.
Although the opinion contains some hints that the judge thought a 21st Century view might be preferable (including a courteous reference to something I had written), he felt constrained by the English cases—especially the Rubin and Pan Ocean cases—to follow the rule in Gibbs. Thus the moratorium granted by the UK version of the Model Law, which temporarily prevented the enforcement of the contract obligations at issue in the case, could not be extended beyond the close of the reorganization in Azerbaijan. Blessed be the holdouts.
More surprising was the ruling in a US-Korean contract case: choice of New York law in a contract permitted exercise of its ipso facto clause, even though that clause would be voided by Korean bankruptcy law. The ruling came in a Double Debtor case in which both parties to the intellectual property license were in bankruptcy in their respective countries. The US proceeding was a liquidating Chapter 11 while the Korean case was apparently a genuine attempt at rehab.
The US debtor had sold its assets and the buyer wanted to reclaim the license from the Korean party by terminating the license according to its terms. The contract was admittedly executory, but apparently the only ground for termination by the US party was the clause giving each party the power to terminate it upon the other’s bankruptcy. Although the court did not mention it, there may have been a realization that a section 365 rejection of the contract by the US debtor could not be used to “vaporize” the grant of the license, to use the term immortalized by Judge Easterbrook in Sunbeam. (Rejection is not an avoiding power!) Instead, the court gave the US DIP-liquidator the power to use the ipso facto clause to terminate the contract and thus reverse the grant of the license. The liquidator could thereby maximize the value received by the buyer of the American assets while impoverishing the prospects of the reorganizing Korean debtor.
With great respect for the excellent judges involved, the problem with both these cases is that they permit a contract choice of law to defeat application of a bankruptcy rule that voids contract obligations. The bankruptcy choice of law rule should govern. A terrific article from Singapore makes exactly that point as to the Gibbs rule. Kannan Ramesh, The Gibbs Principle, (2017) 29 SAcLJ 42, ¶21 (making the case for abolishing Gibbs in English and Commonwealth jurisprudence). In a related vein, I have argued that bankruptcy is an exceptional legal tool whose purposes require a broad understanding of the traditional in rem concept of rights “good against the world,” including discharge. Interpretation Internationale, 87 Temp. L. Rev. 739, text at nn. 37-39 (2015). In particular, the final judicial resolution of contract obligations must be uniformly enforced everywhere or the promise of modified universalism cannot be achieved.
While the full analysis awaits a deeper discussion, the central result of these cases is that the judge in New York must assume that a Chapter 11 confirmed at Battery Park will fail to discharge any English-law contract obligations, while a judge in Fetter Lane in London would logically expect the same as to any contract governed by New York law. That is pure territorialism, sometimes masquerading under the phrase modified universalism. (I am guilty of coining that phrase, although Lord Hoffman is the one who made it famous.) In theory, it could elevate contract over bankruptcy law even domestically.