Plain Meaning and Chapter 15

I’m on my way to the Choice of Law in Cross-Border Bankruptcy Cases symposium at Brooklyn Law School that Susan Block-Lieb mentioned in her post earlier this week, so I have Chapter 15 on the brain.

I posted earlier about a Second Circuit case that held that a debtor’s center of main interests is to be determined as of the time it files a Chapter 15 petition, instead of the time at which it sought bankruptcy relief abroad. That decision effectively opens the door for forum shopping in a way inconsistent with the Model Law.

Another recent Second Circuit decision applied a plain meaning analysis to reach a conclusion that is likewise out of sync with the purpose of Chapter 15, a decision that is likely of great interest to foreign representatives and their counsel.

Cooperation and Tolerance in Chapter 15

Chapter 15’s modified universalism structure requires cooperation between courts in different countries as well as tolerance for outcome differences under different bankruptcy laws. While in general it’s fair to say U.S. courts have been cooperative and tolerant, for some reason the issue of intellectual property licenses in bankruptcy brings out the worst in us.

In the appeal of Jaffe v. Samsung (the appeal of a case called In re Qimonda in the courts below), the Fourth Circuit recently held that a U.S. bankruptcy court can require a German court overseeing the liquidation of a German company to apply U.S. law when dealing with licenses of U.S. patents.

Congress is considering amending Chapter 15 to mandate a similar  result through the proposed Innovation Act, which would add the following language to Section 1522:

Bernie Madoff, Haven Jurisdiction, and the End of COMI?

The liquidation of the largest Madoff feeder fund, Fairfield Sentry, recently made a major mark on Chapter 15 of the Bankruptcy Code. The lynchpin of Chapter 15 (and the Model Law on Cross-Border Insolvency) is the ability to locate a debtor’s center of main interests (COMI). If a debtor files for bankruptcy in the location of its COMI, then it is entitled to certain automatic protections from ancillary proceedings in other countries, e.g., the imposition of the automatic stay to bar all collection activities.

Fairfield Sentry is being liquidated in the British Virgin Islands, its place of incorporation. Prior to its liquidation, its day-to-day operations were conducted in New York. When the Madoff scheme imploded, Fairfield's shareholders commenced a liquidation proceeding in the BVI and all operations in New York ceased. Roughly a year later, the BVI liquidators filed a Chapter 15 petition in the New York bankruptcy court, arguing that the debtor’s COMI was in the BVI.

About four years ago, I predicted that following the Bear Stearns decision, courts would no longer find a debtor’s COMI to be in a haven jurisdiction.  Haven incorporated companies do not conduct business there, and thus in no way could they be said to have a center of main interests there based solely on their place of incorporation. The Second Circuit's recent decision in In re Fairfield Sentry Ltd.,  however, proves that prediction flat wrong.

Worker Representation in Bankruptcy

Thank you to the Credit Slips team and, in particular, Bob, for inviting me to guest blog.

The recent news about the Tennessee Volkswagen workers’ voting against UAW representation fits into some of my current research looking at worker representation in bankruptcy. Interestingly, VW itself favored the unionization effort and, despite the rejection, VW has stated its intention to continue to find ways to create something akin to a German works council, which provides a way to incorporate employee voice into corporate governance.

Would something like a works council also improve governance in bankruptcy?