Am Montag, den 30. Oktober 2000 fand statt: U.S. Bankruptcy/Insolvency Laws and foreign Proceedings Rodolfo Pittaluga, Jr. Akerman Senterfitt & Eidson, P.A.

I. U.S. BANKRUPTCY/INSOLVENCY LAWS

A. A Brief History. Article 1, Section 1, Clause 4 of the United States Constitution authorizes the Congress of the United States to establish uniform laws concerning bankruptcy. In 1800, the U.S. Congress first exercised its power under the Constitution and established the first bankruptcy law of the United States. Since 1800, Congress has enacted different bankruptcy laws. Title 11 of the Code of the United States is better known as the United States Bankruptcy Code (hereafter referred to as the "Bankruptcy Code").

B. What are the Bankruptcy Laws? In the United States, the Bankruptcy Code is simply a federal law which protects creditors and debtors alike.

(1) How Does the Bankruptcy Code Protect Creditors? The Bankruptcy Code requires that all assets of a debtor be administered and distributed in an orderly manner for the benefit of creditors.

(2) How Does the Bankruptcy Law Protect Debtors? The Bankruptcy Code contains several methods to protect debtors. The two more important protections for a debtor are: (a) the automatic stay (injunction) provisions of Section 362, and (b) the discharge provisions contained in Section 727, 901, 1141, 1228, and 1328 of the Bankruptcy Code.

(a) The Automatic Stay (Injunction): Section 362(a) permits a debtor a brief reprieve from the actions of its creditors. Upon the commencement of a bankruptcy case, and without the necessity of a formal order of the Bankruptcy Court, Section 362 of the Bankruptcy Code provides for an automatic stay or injunction against acts of or by creditors against the debtor. The automatic stay automatically stays numerous types of acts which creditors may take against the debtor; seven of those automatically stayed are:

(i) the commencement or continuation of judicial or administrative proceedings against the debtor based on a claim which exists against the debtor prior to the commencement of the bankruptcy proceedings [Section 362(a)(1)];

(ii) the enforcement of a judgment contained prior to the commencement of the bankruptcy case against the debtor or against property of the debtor [Section 362(a)(2)];

(iii) any act to obtain possession or control over property of the debtor [Section 362(a)(3)];

(iv) any act to create, perfect or enforce any lien against property of a debtor [Section 362(a)(4)];

(v) any act to collect or recover a claim against the debtor that arose prior to the commencement of the bankruptcy case [Section 362(a)(6)];

(vi) the set off of any debt owing to a debtor that arose prior to the commencement of the bankruptcy proceeding [Section 362(a)(7)]; and

(vii) the commencement or continuation of a proceeding before the United States Tax Court [Section 362(a)(8)]. Section 362(b) excludes 17 acts from the provisions of the automatic stay (injunction) covered under 362(a). Of the 17 acts which are not subject to the automatic stay provisions, two (2) of the more important ones are: (1) criminal proceedings against the debtor [Section 362(b)(1)] and (2) the commencement or continuation of a proceeding for the collection of alimony, maintenance, or support [Section 362(b)(2)]. In addition to accepting certain acts in the provisions of the automatic stay, the Bankruptcy Code also allows for the modification, termination, or annulment of the automatic stay provisions under certain conditions. One such example under which the automatic stay provisions may be modified, terminated, or annulled, is if a bankruptcy petition is filed in "bad faith."

(b) The Discharge: The principal purpose and the most important protection provided under the Bankruptcy Code is the discharge of the honest debtor from his/her oppressive debts so as to permit the debtor to commence a "fresh start." Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230, 1235 (1934). The honest debtor is discharged from the oppression of his/her debt and is permitted to have a fresh start under the discharge provisions of the Bankruptcy Code contained in Section 727, 901, 1141, 1228, and 1328. Although not specifically defined in the Bankruptcy Code, Section 727 establishes that, in general, an honest debtor is to be discharged of all of his/her debts that exist as of the date of the filing of the bankruptcy petition. The discharge is the principal reason for which individual debtors file for bankruptcy in the U.S.

(c) Who is Eligible to be a Debtor? Section 109 of the Bankruptcy Code establishes which entities are eligible to be a "debtor" under the Bankruptcy Code. Only those persons which reside in or maintain a domicile, place of business, or property in the United States, are eligible to be debtors. There is no provision in the Bankruptcy Code which requires that a debtor be "insolvent" as a condition to being able to file a bankruptcy petition. The term "person" is defined in Section 101(41) of the Bankruptcy Code and it includes individuals, corporations and partnerships.

(d) Types of Bankruptcies: In general, there are two types of bankruptcies: (i) Liquidation (Chapter 7) and (ii) Reorganization (Chapter 11).

(i) Liquidation (Chapter 7):

a) In General, A Brief Overview: Chapter 7 of the Bankruptcy Code is entitled "Liquidations." The majority of all bankruptcy cases filed in the United States are Chapter 7 liquidations. In a Chapter 7 case, a trustee (fiduciary) is automatically appointed by the Bankruptcy Court and is the person responsible for collecting the non-exempt assets of the debtor, converts those assets to cash, and distributes the cash to the creditors and shareholders of the debtor in accordance with the distribution scheme set forth in the Bankruptcy Code.

b) Who is Eligible to be a Debtor under Chapter 7? Section 109 (b) of the Bankruptcy Code provides that all "persons" can be debtors under Chapter 7 provided they are not (1.) a railroad [Section 109(b)(1)]; (2) a domestic insurance company, (3) bank or similar institution which is an insured bank as defined in Section 3(h) of the Federal Deposit Insurance Act; or (4) a foreign insurance company, bank, or credit union engaged in such business in the United States [Section 109(b)(3)]. An example: a foreign corporation doing business in the United States is ineligible to be a "debtor" under the Bankruptcy Code. However, if that foreign corporation is not conducting business in the United States, but maintains a bank account in the United States, then that foreign corporation is eligible to be a debtor under Chapter 7 of the Bankruptcy Code. Bank of America, N.T. and S.A. v. World of English, N.V., 23 BR 1015 (ND 1982). See also Banco Latino International.

c) What Happens in a Chapter 7 Case? The typical Chapter 7 case has five (5) stages.

1) The Commencement of the Case: A Chapter 7 case is commenced with the filing of a bankruptcy petition under Chapter 7 with a Bankruptcy Court. The petition may be voluntary (if filed by the debtor) or involuntary (typically filed by three or more creditors of the debtor).

2) Securing the Debtor's Assets: After the commencement of the case, a Trustee (fiduciary) is named by the Court [Section 701(a)(1)]. At the first meeting of creditors, creditors vote for a final trustee, which can be the trustee initially appointed by the Court or the creditors have the right to elect a new trustee. (Section 702). Section 704 enumerates those obligations of a trustee under Chapter 7, and the more important obligations of the trustee are: securing and liquidating the non-exempt assets of the debtor and distributing the proceeds from the liquidation of the debtor's non-exempt assets to the creditors, as set forth under the distribution scheme enumerated in the Bankruptcy Code.

3) Liquidating the Non-Exempt Assets of a Debtor: All distributions to creditors are to be made in the form of cash. As a result, it is necessary for the trustee to sell all of the debtors non-exempt assets (Section 522 enumerates those assets of a debtor which are exempt and which are not the subject of the debtor's bankruptcy proceedings.)

4) Distributions to Creditors.

a) Secured Creditors: A creditor, which has a properly perfected lien against assets of a debtor is more commonly referred to as a "secured creditor" of the debtor and that creditor is entitled to the proceeds from the liquidation of that collateral or the collateral itself.

b) General Unsecured Creditors: Section 726 of the Bankruptcy Code governs the manner in which proceeds form the liquidation of the sale of the debtors non-exempt assets are to be distributed to general unsecured creditors. That section requires that unless all creditors are to be paid in full, the proceeds from the liquidation of the debtor's non-exempt assets are to be distributed in a pro rata (proportional) manner. At the same time, Section 726 provides that certain general unsecured creditors have priority in terms of distribution and requires that those creditors be paid prior to such time as other unsecured creditors are paid. Section 507 of the Bankruptcy Code lists those general unsecured creditors that have priority, and those include: 1.) Administrative Claim Creditors, including those claims which arise during the liquidation of the debtor's estate. 2.) Fees and Commissions to employees of the debtor earned during the 90 days immediately preceding the filing of the bankruptcy which claims are not to exceed the sum of $4,300 per individual [Section 507(a)(3)]; 3.) Allowed Unsecured claims of individuals arising from the deposit of money in connection with the purchase, lease or rental of personal property not delivered or provided for, not to exceed the sum of $1,950 for each individual asserting such a claim [Section 507(a)(6)]; and 4.) Certain unsecured tax claims of governmental units incurred prior to the bankruptcy [Section 507(a)(8)].

5) The Bankruptcy Code discharges the honest debtor from those debts that exist up until the time that the bankruptcy petition is filed. If the debtor is discharged by the Bankruptcy Court, his/her creditors are limited to receiving a distribution as may be permitted from the liquidation of the debtor's assets.

However, not all debtors receive a discharge. Section 727(a) enumerates 10 grounds upon which a debtor will not be discharged, and in certain cases, even if the debtor is to be discharged, Section 523 of the Bankruptcy Code excepts certain types of debts from the discharge provisions of the Bankruptcy Code (Section 727, 901, 1141, 1228 and 1328). The grounds upon which to deny a debtor a discharge include:

a) If the debtor is not an individual, then there is no need for a discharge because that entity, given the fact that it is going to be liquidated, will no longer exist and therefore there is no need for the discharge [Section 727(a)(1)];

b) If the debtor, with the intent to hinder, delay or defraud a creditor or others, transfers, removes, destroys or conceals property of the debtor within one year before the date of the filing of the petition, or after the filing of the petition, that person is denied a discharge [Section 727(a)(2)];

c) If the debtor fails to satisfactorily explain any loss or deficiency of assets [Section 727(a)(5)];

d) If during the bankruptcy, the debtor commits certain criminal acts, perjury, or fails to comply with orders of the Bankruptcy Court [Section 727(a)(6)];

e) If the debtor receives a discharge in a bankruptcy proceeding commenced six (6) years before the date of the filing of the new petition, the debtor is not entitled to a discharge [Section 727(a)(8)].

6) Debts which are not dischargeable in a bankruptcy proceeding include:

a) Priority tax claims specified under Section 507(a) [Section 523(a)(1)];

b) Debts fraudulently incurred or under false pretenses [Section 523(a)(2)];

c) Alimony or child support ordered to be paid by a debtor in a divorce proceeding [Section 523(a)(5)];

d) Any debt based on a willful or malicious act by the debtor to another entity or property of another entity [Section 523(a)(6)];

e) Debts created by the death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was legally intoxicated (using alcohol, drugs, or another illegal substance).

(ii) Reorganizations (Chapters 9, 11, 12 and 13):

a) In General: Chapters 9, 11, 12 and 13 of the Bankruptcy Code address reorganization by certain types of debtors. In reorganization cases, creditors look to the debtor's future income to satisfy their claims. In most of these cases, the debtor retains control and possession over its assets and pays its creditors based upon future income.

b) Who is Eligible to be a Debtor under Chapter 11? Chapter 11 is entitled "Reorganization." All individuals, partnerships and corporations which may be debtors under Chapter 7, with the exception of a stockbroker, commodity broker and railroad, are eligible to be debtors under Chapter 11. The typical Chapter 11 case involves a commercial enterprise.

c) What Happens in a Chapter 11 Case?

1) Chapter 11: The typical Chapter 11 case involves the reorganization of a commercial debtor and has five (5) stages.

a) The Commencement of the Case: A Chapter 11 case is commenced with the filing of a bankruptcy petition under Chapter 11 with the Bankruptcy Court. The petition may be voluntary or involuntary. (Sections 301 and 303).

b) Operation of the Debtor's Business: A successful reorganization of a commercial enterprise generally requires that the debtor continue with the operation and management of the debtor's affairs and business. In the majority of the cases under Chapter 11, the debtor continues to operate the business and manages its affairs on a day-to-day basis. [Section 1107(a)]. However, in certain cases, the Bankruptcy Court, after notice and hearing and for "cause" (which includes fraud, gross mismanagement or incompetence by debtor's management), may appoint a trustee or an examiner to operate the business of the debtor. [Section 1104(a)].

c)Formulation of the Plan of Reorganization: The principal document in a Chapter 11 case is the Plan of Reorganization. The plan lists, among other things, the claims that exist against the debtor and establishes the manner in which those claims will be paid or satisfied. Section 1123(a) specifies the elements which a plan must contain and Section 1123(b) specifies those elements that a plan may contain. If the court does not appoint a trustee, then during the first 120 days after the filing of the bankruptcy petition, the only person which may formulate and file a Plan or Reorganization is the debtor. [Section 1121(b)]. If the debtor files its Plan of Reorganization in those 120 days, no other plan may be filed during the next 60 days. Thus, during the first 180 days of the case, the debtor is typically the only entity which has the right to formulate, file, and negotiate the terms of a Plan or Reorganization. However, the Bankruptcy Court does have the power to reduce or extend the 120 day and 180 day time periods previously mentioned. However, if the court does name a trustee, or if the debtor fails to file its Plan or Reorganization within the first 120 days after the filing of the bankruptcy petition, any party of interest may file a Plan of Reorganization with the court. [Section 1121(b)].

d) Acceptance of the Plan: In the majority of cases, after the plan has been filed with the Bankruptcy Court, the plan proponent must obtain the acceptance of the plan by the creditors and shareholders of the debtor entity. However, before the plan proponent may solicit acceptance of the plan, the plan proponent must provide to creditors and shareholders of the debtor with a copy of the plan and a disclosure statement which must contain "adequate information" as provided for in the Bankruptcy Code. (Section 1125).

e) Confirmation of the Plan: The acceptance of the plan by all creditors and shareholders does not necessarily guarantee that the Bankruptcy Court will confirm or approve the plan of Reorganization. Section 1129 of the Bankruptcy Code establishes the requirements for confirmation of a plan. Two (2) of the more important requirements are 1) the plan must be in the "best interest" of the creditors. In order to satisfy this test, the distributions to be made to creditors in a Chapter 11 plan must be no less than the amount that creditors would receive in the event that the debtor were to be liquidated and distributions were to be made under a Chapter 7 proceedings. [Section 1129(a)(7)]. In addition, the plan must also be "fair and equitable" - the plan may not unfairly discriminate against similarly situated creditors. [Section 1129(b)(2)]. More importantly, the effect of confirmation of a plan discharges the debtor of all of its debts that exist up to the date of confirmation and requires all creditors to comply with the terms and conditions of the plan, including those creditors which may have voted against the plan. [Section 1141(a)].

II. RECOGNITION OF FOREIGN BANKRUPTCY PROCEEDINGS

A. The International Problem. With the ever increasing expansion in technology, many corporations have extended their operations and markets overseas. This expansion into foreign markets has resulted in the creation of many multinational corporations and has required that these corporations maintain assets in many foreign countries. This situation has presented a unique and difficult problem within the international bankruptcy arena; mainly, what legal affect, if any, shall be given to foreign bankruptcy proceedings?

B. The U.S. Solution

(1) Section 304 of the Bankruptcy Code. In 1978, the Congress of the United States presented new legislation, Section 304 of the Bankruptcy Code. This section is not only an acknowledgment by the United States of the existence and validity of foreign bankruptcy proceedings, but is at the same time an attempt to assist in the administration of those foreign bankruptcy proceedings where assets of the foreign debtors are located in the U.S. Section 304 permits a "foreign representative" of a debtor to file a petition under Section 304 with the bankruptcy court to obtain orders to assist in the administration of those foreign bankruptcy proceedings. Cunard S.S. Co. v. Salen Reefer Services A.B., 773 F.2d 452 (2d Cir. 1985) and In Re: Gee, 53 BRA 91 (Bankrtcy. 7th Dist. NY 1995). Examples where Section 304 petitions may be of benefit include cases where it is necessary to administer assets of a foreign debtor which has assets located within the United States, enjoining legal actions pending in the United States against the debtor or property of the debtor, and obtain necessary assistance by the courts in the U.S. in the administration of the foreign bankruptcy proceeding.

C. The Section 304 Case

(1) The Commencement. The case under Section 304 is commenced by the filing of a petition under Section 304 with the Bankruptcy Court. The petition should be filed by the "foreign representative" of the debtor. The term "foreign representative" is defined in Section 101(24) of the Bankruptcy Code as a "duly selected trustee, administrator, or other representative of an estate in a foreign proceeding." The term "foreign proceeding" is defined in Section 101(23) as a proceeding, where the "judicial or administrative, and whether or not under bankruptcy law, in a foreign country in which the debtor's domicile, residence, principal place of business, or principal assets are located at the commencement of such proceeding, for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge or affecting the reorganization." In the majority of these cases, the petition is filed with the bankruptcy court in the district where the foreign debtor has a principal place of business in the United States, maintains a business operation in the United States, or where the principal assets of that foreign debtor are located in the United States. [28 U.S.C. Section 1410(c)].

(2) The Grant or Denial of Requested Relief.

(a) What relief is available? Section 304(b) enumerates the types of relief available to a foreign representative under Section 304. The Bankruptcy Court may order (i) an injunction against any act against the debtor or property of the debtor which is located in the U.S., (ii) the return of property of the foreign debtor which may be in the possession of a U.S. entity, or (iii) other appropriate relief which would enable the foreign representative to administer those assets of the foreign debtor which may be located in the United States.

(3) When is the available relief ordered? If no party or interest objects to the Section 304 petition, then the Bankruptcy Court, without notice or hearing, may order the relief requested in the petition. If the relief sought is an injunction against an action or proceeding or the enforcement of a judgment against the debtor or property of the debtor, the petition must be commenced in the district court for the district where the action or proceeding against which the injunction is sought. [28 U.S.C. Section 1410(a)]. If the relief sought is to enjoin the enforcement of a lien against property, or require the turnover of the debtor's property, the petition must be commenced in a district court for the district where the property is located. [28 U.S.C. Section 1410(b)]. If some other form of relief (other than that sought in 28 U.S.C. Section 1410(a) and (b)] is sought, then the Section 304 petition must be filed in the district court for the district where for foreign debtor's principal business is, or where its principal assets, in the United States are located.

(a) Effect of Filing a Section 304 Petition. A Section 304 petition is not an independent bankruptcy proceeding, but rather is an ancillary proceeding to the foreign bankruptcy proceeding in the debtor's home country. If, however, one or more of the interested parties objects to the petition, the requested relief may be ordered only after notice and a hearing is conducted on the objection. [Section 304(b)].

(b) Factors Considered by the Court in Granting Relief Under Section 304(b). Although the U.S. Bankruptcy Courts recognize the economic and efficient administration associated with foreign bankruptcy proceedings, Section 304(c) enumerates six (6) factors which the bankruptcy court must consider in determining which relief, if any, it is to grant under the Section 304 petition. Those six (6) factors enumerated under Section 304(c) are:

(i) The just treatment of all holders of claims against their interest in such estate;

(ii) The protection of U.S. creditors against prejudice and inconvenience in the foreign bankruptcy proceedings;

(iii) The prevention of preferential or fraudulent dispositions of property in the foreign proceedings;

(iv) Whether the distribution of proceeds of such estate is substantially in accordance with the order prescribed by U.S. bankruptcy laws;

(v) Comity - the legal doctrine which recognizes that one country recognizes within its own jurisdiction the legislative acts and judicial principles of other countries; and

(vi) Whether there exists the provision of an opportunity for a fresh start for the individual in such foreign proceedings.

(c) Alternatives to a Section 304 Petition. The Bankruptcy Code does not expressly provide that a Section 304 petition is the only available relief for a foreign debtor. Provided that a foreign debtor can qualify as a "debtor" under Section 109 of the Bankruptcy Code, a foreign debtor or its representative may, in addition to filing a Section 304 petition -

(i) file a voluntary petition under Chapters 7, 11, 12 or 13 of the bankruptcy code; or

(ii) an involuntary petition for relief may be commenced againsst the foreign debtor.

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