The Increasing International Cooperation in Cross-border Cases

<p>This month's column looks at several recent cases between Canada and the United States that

continue to demonstrate a trend toward increasing cooperation between the bankruptcy courts of

the two countries.

</p><h3>Canadian Enforcement of a Chapter 11 Stay</h3>

<p>In a major internationally oriented decision, the Alberta court of Queen's Bench (Mr. Justice

G.R. Forsyth) recognized and enforced a stay of proceedings arising out of a chapter 11

reorganization against a plaintiff who had sued the reorganizing debtor in Canada. This is more

significant than might first appear because, while the Bankruptcy Code applies worldwide,

internationally, orders of domestic courts are not automatically enforceable in other countries

and may not be enforceable in other countries at all without the assistance of the local court,

unless the party affected has a presence within the jurisdiction of the domestic court.

</p><p>The proceedings arose out of the Dow Corning Corp. (DCC) chapter 11 case. The plaintiff was an

implant claimant who had started proceedings against DCC prior to its chapter 11 filing. DCC

brought an application in Alberta for an order staying the plaintiff's proceedings. The

application was heard subsequent to DCC's first plan of reorganization but before its amended

plan had been presented. On the merits, the plaintiff alleged, among other things, that the plan

was inequitable because her recoveries would be less than recoveries offered to comparable

claimants in the United States.

</p><p>The Alberta court applied Canadian principles of comity to stay the plaintiff's proceedings. The

Supreme Court of Canada has ruled that a domestic Canadian court must, as a matter of comity,

take cognizance of the orders of a foreign court that has assumed jurisdiction over an issue on

principles of <i>forum non conveniens.</i> Under Canadian principles, if the foreign court could

reasonably have concluded that there was no alternative forum that was clearly more

appropriate, a Canadian court should respect that decision unless the foreign court had acted on

principles that were not consistent with principles that Canadian courts would accept.

</p><p>The Alberta court cited the decision of the U.S. District Court for the Southern District of New

York in <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&amp;vr=1.0&amp;cite=… re American Sensors Inc.</i> (31 B.C.D. 273 (1997))</a>, in which the district court stayed

proceedings against a Canadian corporation that had filed under the Canadian Companies'

Creditors Arrangement Act (CCAA). In <i>Dow Corning,</i> the court concluded that matters relating to

claims against DCC would be best dealt with by one court, and "in the interest of promoting

international comity, it seems the forum for this case is in the U.S. bankruptcy court."

Although the plaintiff had filed a proof of claim in the DCC chapter 11 proceedings, the court

indicated that it would have reached the same result whether or not there had been an

attornment to the jurisdiction through the filing of a proof of claim. <i>(Roberts v. Picture Butte

Municipal Hospital et al:</i> Unreported: Alta. Q.B., July 10, 1998).

</p><h3>Dismissal of a "Filing of Convenience"</h3>

<p>Another recent decision seems to have been intended to discourage filings in "jurisdictions of

convenience." The bankruptcy court for the Western District of New York in Buffalo dismissed

chapter 11 proceedings that had been filed by several Canadians who were Lloyds' "Names."^{<small><a href="#1" name="1a">1</a></small>}

("Convenience" in this case includes the geographical convenience that Buffalo is only a

relaxing 90-minute drive from Toronto). The arrangements between the Names and Lloyds

required that disputes between them be heard in England. The court seemed to feel that the

strategy of the Names who had filed in New York was likely an attempt to have Lloyds file proofs

of claim in the U.S. proceedings, which would then give the Names the ability to commence

adversary proceedings against Lloyds in a jurisdiction that they hoped would be friendlier than

England.

</p><p>The Names obtained U.S. mailing addresses and opened small bank accounts in the United States to

attempt to establish jurisdiction for the chapter 11 proceedings. They also contended that the

fact that they had all done extensive business in the United States should be treated as equivalent

to having property in the United States for purposes of jurisdiction under the Bankruptcy Code.

The court concluded that the debtors could not "manufacture eligibility" for purposes of chapter

11 proceedings by the pretext of having U.S. mailing addresses and small bank accounts. The

court dismissed the proceedings not for "bad faith," but for failing to proceed "in a

fundamentally fair manner, with honesty of intention and with a...reasonably founded proposal."

Thus the Names involved were presumably left to their own devices in Canadian or U.K.

proceedings involving Lloyds. <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&amp;vr=1.0&amp;cite=… re Head et al.,</i> 223 B.R. 648 (Bankr. W.D.N.Y. 1998</a>).

</p><h3>Cross-border Comity Between the State of Washington and British Columbia</h3>

<p>Another recent cross-border reorganization reached an advantageous conclusion for the

stakeholders involved because of the cooperation between the bankruptcy court for the Western

District of Washington in Seattle (Hon. Karen Overstreet) and the Supreme Court of British

Columbia (Madam Justice Mary Saunders). The reorganization involved a corporate group

consisting of a Canadian public company with one subsidiary in British Columbia and another in

Washington. When the group encountered financial difficulties, it filed under Canada's curious<i>

</i>CCAA and under chapter 11 in Seattle. Because of the complexities of the situation, the

company's objective was to use a single forum, and it ultimately abandoned the three chapter 11

proceedings it had commenced in Washington and instead brought an application for relief under

§304 of the Bankruptcy Code.

</p><p>The bankruptcy court recognized the CCAA proceedings as "foreign proceedings" within the

meaning of §101(23) of the Bankruptcy Code and recognized the agent of the monitor appointed

in the CCAA proceedings (an officeholder with responsibilities akin to those of an examiner) to

be a "foreign representative" within the meaning of §101(24). The bankruptcy court

consequently issued a permanent injunction prohibiting actions against the company except as

those actions were authorized in the Canadian proceedings on the basis of its conclusion that

there were adequate provisions to protect the interests of all interested parties in the Canadian

proceedings. The bankruptcy court further ordered creditors to comply with both its own orders

and orders entered in the Canadian proceedings. The bankruptcy court order was an

extraordinarily constructive and innovative response to a highly complex and fragile

commercial situation, which was a major benefit to all of the stakeholders involved in the case

as well as being an exceptional contribution to the development of international comity in

cross-border cases between the United States and Canada. (<i>In re Starcom Services Corp.,</i> Bankr.

W.D. Wash., Case No. M-98-60005, Nov. 20, 1998.)

</p><h3>Cross-border Plans of Arrangement</h3>

<p>Two-country plans of reorganization are still relatively rare, but two recent cases show that

cross-border plans can be concluded successfully: <i>In re Everfresh Beverages</i> and <i>In re Starcom

Services Corp.</i> In <i>Everfresh,</i> the debtor had filed reorganizational proceedings under chapter 11

in New York and under the Canadian Bankruptcy and Insolvency Act in Toronto. The proceedings

resulted in a Cross-border Insolvency Protocol between Canada and the United States in the case.

The protocol mandated levels of cooperation on major aspects of the reorganization that were

occurring in both countries and, as the reorganizational process proceeded in both countries, it

became clear that a single distribution to creditors would be an efficient and fair conclusion to

the proceedings.

</p><p>The concept of a single distribution to creditors seemed workable based on the terms of the

Cross-border Insolvency Protocol, which allowed creditors to file claims in either jurisdiction.

Factually, the position of the unsecured creditors of the company in the United States was

relatively stronger than it was in Canada. In the Toronto proceedings, the Canadian court had

recognized the validity of a general security agreement held by the company's major lender

which covered all of the company's Canadian assets and, consequently, the most logical source

for funds for a plan of arrangement was in the United States.

</p><p>The company consequently proceeded with a reorganizational plan in Canada that provided that

Canadian creditors would accept in satisfaction of their claims their proportionate share of a

distribution of the assets available in the United States. Properly explained and informed, the

creditors in Canada voted by a wide margin to accept the plan and it was approved by the Ontario

court.

</p><p>In <i>Starcom,</i> the reorganizational plan was designed to pool all of the assets of the company in

both Canada and the United States and to provide a single plan for all of the company's creditors.

The plan created a pot for general creditors and a separate pot for executory contract creditors.

There were two areas of sensitivity because of the cross-border nature of the reorganization,

<i>i.e.,</i> the treatment of executory contract creditors and the priority of IRS claims in a Canadian

reorganization. In Canadian reorganizations, it is not necessary that executory contract

creditors be paid in full or continued in order for the plan to succeed and, under general

Canadian law, most governmental claims are general unsecured claims. The ultimate plan

adopted the U.S. position in relation to executory contracts such that all arrears were paid in

full, and the plan accepted the Canadian position in relation to general tax claims, which were

compromised. The bankruptcy court concluded that it had authority to allow the proceedings to

be carried forward in Canada on the basis that the Canadian proceedings fulfilled the

requirements of §304 of the Bankruptcy Code.

</p><p>There are several other current cross-border situations extant between Canada and the United

States that, if successful, may lead to comparable two-country plans or dual concurrent plans.

"The International Scene" reiterates its interest in learning of cross-border protocols and

other kinds of cooperative arrangements between courts in multinational cases. Please advise

Bruce Leonard c/o Cassels Brock &amp; Blackwell at (fax) 416-360-8877 or by e-mail at <a href="mailto:bleonard@casselsbrock.com">bleonard@casselsbrock.com</a&gt;.

</p><p><i>Author's Note:</i> Copies of the bankruptcy court order made in the Washington/British Columbia

proceedings in <i>Starcom</i> and of the decision of the Alberta court in <i>Roberts</i> (in which the author

assisted in the representation of Dow Corning) are available from the author. The author

acknowledges and appreciates the assistance of Michael A. Fitch of Vancouver in the analysis of

<i>Starcom.</i>

</p><hr>

<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} Lloyds is a celebrated U.K. insurer. Until recently it was a limited liability association, and the backup for its policies came from wealthy investors, <i>i.e.,</i> "Names," who

promised to stand behind the policies. Lloyds underwent severe losses in the mid-1980s and took the position that the Names should cover the losses, which dismayed the Names

and led to some very significant lititagion and many personal bankruptcies of Names. <a href="#1a">Return to article</a>