INTRODUCTION TO FOREIGN PROCEEDINGS &
SECTION 304 OF THE BANKRUPTCY CODE
Francisco Vazquez1

As a general rule, the laws or orders of one country are not automatically enforced in another. This should not be interpreted as limiting the applicability of the laws of a country to its borders. Laws may apply extraterritorially. For example, the automatic stay imposed by section 362(a) of the Bankruptcy Code has been held to apply outside the United States. See United States Lines, Inc. v. Gas Marine Fuels, Ltd. (In re McLean Indus., Inc.), 68 B.R. 690 (Bankr. S.D.N.Y. 1986); In re McLean Indus., 74 B.R. 589 (Bankr. S.D.N.Y. 1987). However, simply because a law is theoretically applicable outside the United States does not necessarily make it enforceable against parties outside the United States. Until a specific law of the United States is granted recognition by a foreign court, said law will generally not be enforced in that foreign country. Similarly, courts in the United States will generally not enforce the law of another country absent formal (United States) court recognition of the relevant foreign law.

In practice and absent domestic court recognition, parties can generally ignore the laws of a foreign country, including foreign bankruptcy laws, without fear. Thus, United States creditors not subject to the jurisdiction of a foreign court can elect to commence collection remedies in the United States against a foreign debtor in defiance of a foreign stay and/or ahead of other creditors. Of course, such actions would appear to be inconsistent with a primary policy of bankruptcy law--similar treatment to similarly situated creditors. In order to remedy this unfairness, (a) a foreign debtor (if eligible under section 109 of the Bankruptcy Code) may file a concurrent chapter 11 case; or (b) a foreign representative may commence an ancillary proceeding under section 304. Each is addressed briefly below.

In order to protect its assets and estate, a foreign debtor (provided it qualifies as a debtor under section 109 of the Bankruptcy Code) may elect to commence a concurrent chapter 11 case under the Bankruptcy Code. See, e.g., Maxwell Comm. Corp. v. Societe Generale (In re Maxwell Comm. Corp. PLC), 93 F.3d 1036 (2d Cir. 1996). In such situations, the foreign court and the United States court supervising the concurrent proceedings can enter into agreements in order to coordinate the administration of the proceedings (i.e., protocols). However, given the complex issues involved, including the scope of jurisdiction of each sovereign nation and their courts, such agreements are not always possible. Moreover, given the possibility of conflicting court decisions and the added costs associated with administering dual or concurrent bankruptcy cases, concurrent proceedings may be undesirable, if not impracticable. In light of these factors, in most instances rather than commencing a full blown bankruptcy case in the United States, relief will be sought under section 304 of the Bankruptcy Code.

As discussed in more detail below, section 304 of the Bankruptcy Code authorizes United States Bankruptcy Courts to assist in the administration of insolvency, bankruptcy or debt restructuring proceedings pending in foreign courts. A petition under section 304 commences a proceeding ancillary to the foreign proceeding “designed to function in aid of" the court in that proceeding. See In re Axona Int’l Credit and Commerce Ltd., 88 B.R. 597, 606 (Bankr. S.D.N.Y. 1988), aff’d, 115 B.R. 442 (S.D.N.Y. 1990). Unlike in a typical chapter 7 or 11 bankruptcy case, a petition commencing a section 304 proceeding does not give rise to an automatic stay or the creation of an estate. In fact, the filing of a 304 petition does not confer any automatic rights on to the foreign debtor. However, under section 304, a court is permitted to grant relief that would assist in the administration of the foreign proceeding. Pursuant to section 304(b), a foreign representative may seek three forms of relief: (i) an injunction to restrain proceedings against a debtor with respect to assets involved in the foreign proceeding, (ii) turnover of assets of a debtor for disposition under the auspices of the foreign court supervising the foreign proceeding, and (iii) "other appropriate relief." Section 304 permits the United States Bankruptcy Court to enter orders that would assist in the economical and expeditious administration of the foreign debtor's estate.

THE REQUIREMENTS FOR RELIEF UNDER SECTION 304

The initial requirements for commencing a section 304 proceeding are set forth in section 304(a) of the Bankruptcy Code:

A case ancillary to a foreign proceeding is commenced by the filing with the bankruptcy court of a petition under this section by a foreign representative.

11 U.S.C. § 304(a). Notably, section 304 does not require that the foreign debtor qualify as a debtor under section 109. Accordingly, orders can be obtained under section 304 in connection with the foreign insolvency, bankruptcy or restructuring of an insurance company or bank, neither of which is eligible to be a debtor in a chapter 11 case. Thus, to consider whether relief under section 304(b) is appropriate, a court must conclude initially that (a) the debtor is the subject of a foreign proceeding and (b) the petition is filed by a foreign representative.

The Bankruptcy Code defines a “foreign proceeding” as a:

proceeding, whether 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 were located at the commencement of such proceeding, for the purpose of liquidating an estate, adjusting debts by composition, extension, or discharge, or effecting a reorganization

11 U.S.C. § 101(23). Courts have interpreted this definition to mean “a foreign judicial or administrative process whose end it is to liquidate the foreign estate, adjusts its debt or effectuate its reorganization.” In re Board of Directors of Hopewell Int’l Ins. Ltd., 238 B.R. 25, 49 (Bankr. S.D.N.Y. 1999), aff'd, 275 B.R. 699 (2002).

Although relatively broad, the definition of a foreign proceeding does not encompass all bankruptcy, insolvency or restructuring cases pending in every country. Before granting relief under section 304, a United States Bankruptcy Court will analyze whether "the amount of judicial involvement and supervision or, conversely, the degree of access to the [foreign] court available at various stages to creditors [is such] that [creditors] may voice any objections they may have." Id. at 50 (citations omitted). Accordingly, if the court determines that the law of the foreign jurisdiction does not provide sufficient court supervision or access to the courts by creditors, it is highly unlikely that the foreign case would be found to be a foreign proceeding as defined by the Bankruptcy Code. See In re G.C.K. Tam, 170 B.R. 838 (Bankr. S.D.N.Y. 1994). However, if a court concludes that creditors have a right to request court intervention or that a foreign court is supervising the case, it is likely that the foreign case will be found to constitute a foreign proceeding as defined by the Bankruptcy Code. See e.g., Hopewell, 258 B.R. at 49-50; In re Ward, 201 B.R. 357 (Bankr. S.D.N.Y. 1996).

As described above, only a foreign representative can commence a 304 proceeding. The Bankruptcy Code defines a foreign representative as a “duly selected trustee, administrator, or other representative of an estate in a foreign proceeding.” 11 U.S.C. § 101(24). In essence, the foreign representative must be a party that is authorized to take action on behalf of the estate. Courts have interpreted the term "foreign representative" broadly and found it to include both entities appointed by the foreign court as well as others (e.g. the board of directors of a foreign debtor).

Simply because the foreign representative is eligible for relief under section 304(a), does not guarantee that a court will automatically grant or deny any specific relief. In determining whether to grant relief under section 304(b) of the Bankruptcy Code, “the court shall be guided by what will best assure an economical and expeditious administration of [the foreign] estate.” 11 U.S.C. § 304(c). Section 304(c) of the Bankruptcy Code further provides that the court’s decision to grant relief under section 304 must be consistent with the following six factors:

(1) just treatment of all holders of claims against or interests in such estate;

(2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;

(3) prevention of preferential or fraudulent dispositions of property of such estate;

(4) distribution of proceeds of such estate substantially in accordance with the order prescribed by this title;

(5) comity; and

(6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.

11 U.S.C. § 304(c). In determining the form of relief to be granted under section 304(b) a Court must analyze each of the foregoing factors. See Official Liquidators of Thornhill Global Deposit Fund, Ltd. v. Eagle Fund, Ltd. (In re Thornhill Global Deposit Fund, Ltd.), 245 B.R. 1, 13 (Bankr. D. Mass 2000) (“The determination of the appropriate ancillary relief depends on the collective degree to which the criteria of section 304(c) are satisfied.”), aff’d sub nom Mercurius Inv. Holdings Ltd. v. Aranha, 247 F.3d 328 (1st Cir. 2001). Although comity is cited as the most important section 304(c) factor, the consensus appears to be that section 304(c) requires "a case-specific exercise of discretion in light of all of the circumstances.” International Bank Ltd. v. Treco (In re Treco & Hamilton), 240 F.3d 148, 156 (2d Cir. 2001) (citation omitted).

RELIEF AVAILABLE UNDER SECTION 304

Section 304(b) of the Bankruptcy Code permits a court to grant three (3) different types of relief--injunctive, turnover, and "other appropriate relief." Under section 304(b)(1) of the Bankruptcy Code, a court may enjoin actions (i) against a debtor with respect to property “involved in a foreign proceeding,” (ii) against the property itself that is “involved in a foreign proceeding” and (iii) seeking the enforcement of a judgment against property “involved in a foreign proceeding” or the creation or enforcement of a lien against property of a foreign estate. The broad injunctive relief available under section 304 has been characterized as being similar to the automatic stay under section 362(a) of the Bankruptcy Code. See In re Banco Nacional de Obras y Servicios Publicos, S.N.C., 91 B.R. 661 664 (Bankr. S.D.N.Y. 1988) (“This broad injunctive relief…is not unlike the injunction which is automatic in a chapter 7 or 11 case pursuant to section 362 of the Code.”). Further, much like the automatic stay, an injunction under section 304 can be modified to permit certain claims to be liquidated, while continuing to prevent the enforcement of all other claims against the foreign debtor in the United States. See In re NBK Bank, 274 B.R. 583 (Bankr. S.D.N.Y. 2002) (granting an injunction under section 304 but permitting certain litigation to the extent of liquidating the amount of the claim).

Under section 304(b)(2) of the Bankruptcy Code, a court may order turnover of property to the foreign representative but only if it is property of the estate. In determining whether to order turnover, a United States court will analyze the law of the foreign jurisdiction on the parameters of a foreign estate and what constitutes property of the estate. However, the court must apply local law to determine “whether the debtor has a valid ownership interest in (the relevant) property.” Koreag, Controle ET Revision S.A. v. Refco F/X Assocs., Inc. (In re Koreag, Controle Et Revision S.A.), 961 F.2d 341, 348 (2d Cir.), cert denied, 506 U.S. 865 (1992). Only after determining that the debtor has a valid ownership interest in the property will the court consider the foreign law to determine if it is also property of the foreign debtor’s estate. Id. at 548-49.

A court is not limited to entering injunctions under section 304(b)(1) or ordering turnover under section 304(b)(2); it may also “order other appropriate relief” under section 304(b)(3) of the Bankruptcy Code. Courts have described this provision as a grant of authority to broadly fashion relief. See In re Culmer, 25 B.R. 621, 624 (Bankr. S.D.N.Y. 1982) (noting that section 304 grants courts “blank-cheque” to order relief). Other appropriate relief could include (i) request that identity of creditors appearing in the section 304 proceeding be kept confidential, (ii) request for appointment of a co-trustee and (iii) permission to maintain foreign causes of action, such as avoidance actions under the laws of the situs of the foreign main proceeding. In addition, under section 304(b)(3), courts have permitted discovery pursuant to rules of civil procedure. See, e.g., In re Carolina Reinsurance Ltd., 281 B.R. 224 (Bankr. S.D.N.Y. 2002).

PRACTICE POINTERS

Where a foreign debtor or trustee seeks advice on how to proceed in the United States, the commencement of an ancillary proceeding under section 304 should not automatically be recommended. It is true that under section 304, a United States Bankruptcy Court can recognize a foreign proceeding in a relatively short time frame without the added costs and burdens of filing a full blown chapter 11 case. In some circumstances, however, the benefits of a chapter 11 case may be more beneficial than the relief available under section 304. For example, the ability to reject leases and executory contracts under section 365 or the ability to sell assets free and clear of liens and encumbrances under section 363, both of which are not generally available under the laws of other countries, may outweigh the benefits of section 304. Accordingly, counsel should always consider whether the foreign debtor (assuming it is eligible under section 109) would be better off filing for chapter 11.

As with all bankruptcy cases, counsel should also consider the venue for filing. Section 1410 of title 28 of the United States Code governs the venue of a section 304 proceeding. Unlike a case under chapter 11, venue of a section 304 proceeding cannot be based on the venue of an affiliated debtor's case. Ideally, and consistent with 28 U.S.C. §1410, the foreign representative should select a venue that has some experience and developed case law, if not practice, in dealing with foreign debtors and section 304 proceedings.

Frank is an associate in the New York office of Chadbourne & Parke LLP. The author has represented foreign debtors in chapter 11 and foreign representatives in section 304 cross-border ancillary proceedings. Frank can be reached by phone at (212) 408-5111 or by e-mail at fvazquez@chadbourne.com. The views expressed in this article are those of the author and do not necessarily reflect the views of Chadbourne & Parke LLP or its clients.