The Mother of All Cross-Border Bankruptcies?

No, not Lehman.  Though  much smaller in monetary terms (probably), a filing by BP would likely be the biggest international insolvency case in engaging the U.S. public interest, and probably its ire.  And what of a BP filing in its jurisdiction of registry?  A BP filing in the U.K. seems sure to create a cross-the-Pond furor not seen since the late 1700s, or so this BusinessWeek article suggests.  One line from that article particularly intrigued me:  "No doubt London courts would deliver an outcome more favorable to BP. And they’re apt to be less generous when it comes to paying damages to folks three times removed from directly affected claimants."  No doubt, eh???  This is, of course, the primary concern in cross-border cases, generally, but I think this worry is overblown (sensationalist journalism from BW--go figure!).

First, British reorg/rescue law still remains less debtor-friendly (and decidedly less management-friendly) than the U.S. Chapter 11 system (see, e.g., this very useful comparison), and management decides where to file.  While a U.S. DIP might well be able to maneuver the proceedings to low-ball Gulf-area claimants, I doubt a U.K. administrator would be willing to face the international backlash of such a tactic, especially since the adminsitrator would not be biased by his or her own participation in the creation of the catastrophe (unlike the DIP) and would have no reputational "sunk costs" to attempt to salvage (again, unlike a DIP).

Second, to the (unlikely) extent that the Businessweek article is making the sophisticated suggestion that British law would be chosen to control matters of claims administration and distribution, this is probably just wrong.  Cross-border insolvency law doesn't deal with such matters, and Jay Westbrook has written some very thoughtful analyses of the sticky choice-of-law issues in this context (I couldn't find any public hyperlinks, but see especially 23 Penn State Int'l L. Rev. 625 (2005); 33 Texas Int'l L.J. 27 (1998); and 65 American Bankruptcy L.J. 457 (1991)).  Any reasonable choice of law analysis would lead to application of U.S. law to the Gulf disaster, and a U.K. judge would be very hard-pressed to "deliver an outcome more favorable to BP" if that meant doing anything that remotely resembled flouting the governing law.

Might BP avoid punitive damages and other uniquely U.S. craziness by filing in the U.K.?  Probably, but my sense is BP would not face such emotion-driven madness in U.S. Bankruptcy Court, either.  State court tort trials get big headlines, but the bankruptcy cases that bring those damage awards back down to earth seldom catch the public's attention.  A long line of cases beginning with Maxwell suggests that U.K. and U.S. bankruptcy judges are more or less of one mind, so the only remaining questions concern choice of adminitration and choice of law.  The former strongly favors a U.S. filing (if any), and the latter should be indifferent to the choice of forum (no, I'm not being Pollyanna-ish here, I really do believe the choice of law would work out the same on either side of the Pond).  So, John Conyers, put down that silly bill to prohibit U.S. cooperation with a U.K. filing by BP, and focus on helping to clean up the mess down in the Gulf! 

What's Wrong with PIGS?

The financial and economic woes of the Southern European bloc of Greece, Italy, Portugal, and Spain have been constantly in the headlines recently (just this morning, the ABI's quite useful Global Insolvency daily headlines included just such a story).  Indeed, I learned that the cognoscenti call this group by an acronym:  PIGS (PIIGS if you add also struggling Ireland).  What do these countries have in common that might bear some causal relationship (forward or backward) with their money trouble?  I now have proof positive that I am a certifed weirdo, because the first thing that popped into my head when I saw these countries grouped together was that they are unique in Europe in not having a consumer insolvency system (or at least any reasonably functioning system).  For a long time, these countries had no robust consumer borrowing that might lead to consumer insolvency, but lots of data (no hyperlinks come readily to mind) indicate that those days are over, and it's high time for PIGS to respond to a growing incidence of consumer financial distress. The NYT story linked above suggests that geography, culture, religion, and history might tie these countries together and distinguish them from the rest of Europe.  Now I'm really intrigued by the causation-correlation issue here:  I suspect the lack of an effective consumer bankruptcy system is a result of unique cultural, religious, etc., characteristics of PIGS (and PIIGS), but I can't help wondering if there might be a causal effect the other direction, or at least that the conspicious absence of a serious effort to deal with consumer financial distress is a canary in the coal mine revealing the pernicious effects of certain other, otherwise unobjectionable cultural tendencies.  Hmmmmmm . . .

New Reorganization Law Imminent in United Arab Emirates

The key word in the title to this post is "reorganization," as opposed to what one generally finds in the context of laws on business failure--liquidation or "bankruptcy" laws.  The U.A.E.'s current bankruptcy law is a relic of the (British influenced) past, clearly designed more to punish debtors than to protect creditors (yes, I do mean to suggest that these goals have virtually no cause-and-effect relationship, despite constant unsupported rhetoric to the contrary among some commentators).  For several months now, U.A.E. authorities have been promising a new reorganization law to deal with recent spectactular financial collapses in what may well be the Arab world's most advanced and diversified economy.  Along with an advanced economy, they have implicity acknowledged, goes advanced failure, and a safety valve for treating that failure is a must for disciplining creditors and investors at both the investment and the recovery stages.  Even the insolvency law in the Dubai International Financial Center is not particularly forward-thinking, so even though reports are that the new U.A.E. law will not be as reorg-friendly as U.S. law, I hope the drafters drew their inspiration from sources other than British law (no "anti-British" sentiment is intended here).

Islamic Finance v. Islamic Bankruptcy

As Bob mentioned in his introduction, I have spent many hours over the past year-and-a-half studying Arabic as a prelude to exploring the Islamic and Modern Middle Eastern law of financial distress--by far the most intense intellectual challenge of my life.  I've only begun to scratch the surface (the language alone is fiendishly difficult), but this promises to be a very interesting and productive project.

While most Credit Slips readers have heard of or, indeed, know some of the detail of the modern movement known as Islamic finance, I suspect virtually none of us knows anything about the way in which Islamic law deals with financial distress and bankruptcy.  The only non-Arabic source on this subject I have found is an early 1900s doctoral disssertation from the University of Paris, and it is largely a French summary of the bankruptcy law of Morocco at the time (heavily influence by Hanafi Islamic doctrine).  We've probably also all read the stories of ex-pats leaving their cars at the Dubai airport, fleeing to avoid imprisonment for debt, but even in places like Saudi Arabia, where shari'a is supposed to be the law of the land (and where a kind of nascent debt settlement system is developing, albeit slowly), I haven't see any evidence of serious engagement with the notion of bankruptcy as it appears in the primary Islamic law sources.

And appear it does!  One rather famous verse of the Qur'an, 2:280, directs (liberally translated) "If [he, the debtor] is in a difficult situation, let there be a postponement until easier times [and he is able to repay,] and if you were to remit [forgive] the debt [as charity,] it would be better for you, if you only knew."  And in the other major source of Islamic law, the sunna (tradition) of the Prophet (pbuh), one finds at least one story where a creditor is ordered to forgive half of his claim against a distressed debtor.  There are other similar stories in the sunna, and I very much look forward to sifting through the scholarly commentary on this issue, a process that I've begun with halting success.  If any Credit Slips readers are familiar with what Hanifa or Shafi'i or Hanbal or Malik or Ja'far or any other authoritative commentator has to say about this specific issue, any input would be welcome.  My greatest point of curiosity is why we don't see any serious treatment of bankruptcy in modern Middle Eastern law, despite its treatment in Islamic doctrine.  This is one of many interesting facets of my longer-term project.  As I've said before, we in "the West" have so much to learn, both about and from, "the Rest" of the world.

The Forum Shopping Debate Heats Up for In-Bound Cross-Border Cases?

Thanks so much to Bob and the rest of the Credit Slips crew for having me back!  For my first post, I thought I'd draw some attention to what seems to be the latest in the forum shopping (corruption?) wars in the U.S. Bankruptcy Courts (which also ties in my new Arabic study a bit).  Many people, including myself, have written on the seemingly foreign-insolvency unfriendly decisions out of the Southern District of New York involving the Bear Stearns and Basis Yield collapsed hedge funds.  Relatively few people seem to have picked up the latest, a decision from traditionally more friendly Delaware in a case involving a Saudi-owned, Cayman-registered hedge fund called Saad Investments Finance Co. (No. 5) Ltd. (Case No. 09-13985) ("SIFCO").  Ironically, SIFCO's name (sa'd) means, in Arabic, “good luck” or “good fortune.”  As it turns out, the liquidators’ choice of the District of Delaware to seek cooperation in this cross-boder bankruptcy case was, indeed, fortunate.  Not only did the Delaware court not go out of its way sua sponte to find reasons to reject SIFCO's liquidators' petition for recognition (as the New York court had done), it seems to have almost glibly concluded that SIFCO's "center of main interests" was in the Cayman Islands, despite circumstantial evidence to the contrary (as discussed in the Bear Stearns and Basis Yield cases) and without citing either the controlling law or any particular fact that supported this crucial finding (see p. 2, finding "I").  This decision, in stark contrast to the New York holdings, seems rather transparently based on public policy and comity, rather than (and perhaps in derogation of) the new governing statute, Chapter 15 of the U.S. Bankruptcy Code.  While a few commentators have tried to rationalize this case by contrasting SIFCO with the Bears Stearns and Basis Yield hedge funds, the only explanation that seems at all persuasive to me is that the Delaware court has once again positioned itself as the "debtor-friendly" (or now, foreign-representative-of-the-debtor friendly) forum for U.S. bankruptcy proceedings.  I'll leave it to those who are both more expert (see also here and here) and much braver than I to conclude whether this is in fact the meaning of the latest Delaware decision and, if so, whether that represents a good or not-so-good development for U.S. cross-border bankruptcy policy.  I'll have more to say about this decision in the next issue of the Cayman Financial Review, for which I have been invited to write a bankruptcy column this year (thanks so much to Andy Morriss for the invitation).  Thanks once again to Credit Slips for having me back!