Court-to-court Negotiation

Journal Issue

Nov 2003

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Recent years have seen the development of real-time reciprocity among courts in different countries, including
international judicial negotiation as to which court will handle a particular cross-border bankruptcy or other
litigation. The trend can be seen in a number of areas of litigation, but transnational bankruptcy cases (or
"insolvency" cases, as most of the world would put it) are leading the way.<a href="#2" name="2a">2</a>

To the extent the cases reflecting this activity have been analyzed, it has been in the context of traditional,
unilateral perspectives on doctrines like reciprocity and comity. That is, each court has been treated as making a
decision about a matter wholly independent of the future actions of the other court. The prior actions of the other
court may be scrutinized for propriety of jurisdiction and fairness of process, for example, but the assumption has
been that the court now acting does so entirely on the basis of that historical record and without reference to the
future activity of the other court in the pending matter.<a href="#3" name="3a">3</a>

That assumption, and the accompanying perspective and doctrines, are no longer universally true. In bankruptcy
cases, they are simply out of date. Increasingly, the courts are interacting with regard to specific cases in real time.

Insolvency cases have provided the vehicles for issues of international judicial cooperation and coordination for a
long time. Not everyone remembers that <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… v. Guyot, 159 U.S. 113 (1895)</a>, the classic U.S. case for the
enforcement of judgments through "comity," was an insolvency case. So too was <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… Southern Ry. Co. v.
Gebhard, 109 U.S. 527 (1883)</a>, in which a Canadian reorganization plan for a Canadian railroad was held binding
on U.S. bondholders even though the bonds were payable in New York. Although a worldwide insolvency
reorganization is the classic case requiring real-time cooperation, and therefore potential negotiation, among courts,
liquidation cases as well as reorganizations require judicial interaction when the estate overlaps national borders.

One of the earliest of the contemporary negotiation cases was <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=9… v. Banco Industrial De Venezuela S.A., 997
F.2d 974 (2d Cir. 1993)</a>. In that case, a Venezuelan company filed a New York lawsuit against a Venezuelan
development bank in connection with a development in Venezuela. The case involved substantial non-Venezuelan
elements, including a consortium of Middle Eastern banks. One of the key financing agreements had a permissive
forum clause, permitting suit in New York, London or Caracas. English law was to govern, but payment was to be
made in New York in U.S. dollars. After the suit was brought in New York, the plaintiff company went into
bankruptcy in Venezuela and trustees were appointed, ousting the shareholders from control. The bankruptcy trustees
sought dismissal of the New York suit. The shareholders then intervened in the New York action, claiming they
could not get justice in the Venezuelan courts.

The Second Circuit disagreed, granting over a vigorous dissent a motion to dismiss in favor of the Venzuelan
bankruptcy court on the grounds of forum non conveniens. However, the dismissal was not unconditional. The
court majority imposed a condition: that the Venezuelan bankruptcy court would appoint a new co-trustee
reasonably acceptable to the shareholders. If it did not, the suit could be reopened in the United States. The
condition was imposed in response to claims by the shareholders that the trustees appointed by the Venezuelan court
were hostile and unfair to them. The decision, in effect, opened a negotiation with the other court by making an
offer: Appoint an acceptable co-trustee in the bankruptcy, and we will not reinstate the U.S. lawsuit.

This sort of result may be very intrusive, even offensive, to the foreign court. The very idea of negotiation may be
unattractive to both courts. But these sorts of solutions are becoming more common because the alternatives seem
worse. These cases present the local court (that is, the court that is not primarily in charge of the case) with
unattractive choices. It can (1) dismiss the claim and hope that the foreign insolvency court will act properly and
fairly; (2) permit litigation of the claim in its courtroom, ignoring the strong policy in favor of comity and giving a
distinct "back of the hand" to the foreign court; or (3) follow a middle ground, with dismissal conditioned on some
action by the foreign court, risking the sort of intrusiveness illustrated by Blanco.

Another alternative is to talk. One way to achieve that result is for the parties to enter into a "protocol" and ask the
court to "so order" it, thus creating by agreement the otherwise-missing transnational bankruptcy law. Protocols
have become enormously important in cross-border cases. Indeed, the recently published American Law Institute
Principles of Transnational Cooperation in Insolvency Cases attaches a special appendix with exemplary
protocols.<a href="#4" name="4a">4</a> Very often, the parties in such cases are serving as conduits between the courts, who have the final say.

The most famous protocol case was <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=9… re Maxwell Communication Corp., 93 F.3d 1036, 1051 (2d Cir. 1996)</a>. The

Maxwell proceedings involved a major portion of the collapse of the media and publishing empire of Robert
Maxwell. A chapter 11 case was filed in New York, and an "administration" case (a form of reorganization
proceeding) in London. A protocol was agreed to between a "special examiner" appointed by the bankruptcy court in
New York and the administrators appointed in London, allocating functions and providing for a cooperative
administration. The protocol was approved by the English and American courts and thereby acquired the force of
law for that case. The case resulted in a combined reorganization plan that is believed to have been the first
successful plan adopted on a worldwide basis.

A more recent version of such a protocol arose in a liquidation case, illustrating that the importance of cooperation
is not limited to reorganizations. In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… re Inverworld, 267 B.R. 732, 740 n. 10 (Bankr. W.D. Tex. 2001)</a>, the debtor
defrauded hundreds of Latin American investors of hundreds of millions of dollars. The investors were carried on
the company's books as owning stock and other investments worth more than US$400 million, but
PricewaterhouseCoopers, the liquidator, was able to find only about US$100 million in valuable shares. The debtor
had its main offices in Texas and many assets in New York, but put its transactions with investors through its
Cayman Islands and English subsidiaries. Insolvency cases were filed for the parent company and certain
subsidiaries in Texas, the Cayman Islands and England. The contracts with investors (and other contracts among the
affiliates) had various and conflicting choice-of-law and choice-of-forum clauses. The result was a remarkable tangle
of choice-of-law and forum questions. The case was rife with possibilities for extremely expensive litigation in three
national courts and for conflicting decisions, leaving the residue for the victims much reduced. Insolvency cases have provided the vehicles for issues of international judicial cooperation and coordination for a long time.

To avoid that result, the representatives of various parties created a "protocol" that was accepted by each of the
courts involved. In summary, the protocol led to dismissal of the English insolvency proceeding, upon certain
conditions about the treatment of claimants therein, and the allocation of functions among the two remaining courts.
Each court was to take the other court's actions as binding and thus prevent parallel litigation. Ultimately, the
operation of the protocol led to a worldwide settlement at a cost far less than would have attended a three-court
struggle.

Thus, the parties can serve, in effect, as a negotiation pipeline between courts, who are the ultimate dealmakers.
There is, however, a major problem with this approach to international judicial negotiation: It depends on agreement
among the parties, which will often be unobtainable. It also risks a miscommunication between courts because of
the party filter, which is necessarily self-interested. For both reasons, it may be necessary for courts to be actively
involved in such agreements. But to do so, the courts must communicate with each other—in effect, entering into
direct negotiations. Both the Model Law on Cross-Border Insolvencies, which is to be adopted as chapter 15 of the
Bankruptcy Code, and the ALI Principles of Cooperation, encourage direct communication among responsible
courts.<a href="#5" name="5a">5</a> The Principles even attach an appendix (Appendix 2) with guidelines for such communications, although
obviously each jurisdiction will impose such requirements as due process suggests in that legal culture. Thus, for
example, a U.S. court might permit counsel to join the judges on the telephone or provide a stenographic record of
the conversation.

There have already been live video-conferenced hearings held simultaneously in Canada and the United States in
cross-border bankruptcies. In a recent U.S.-U.K. case, a potential confrontation between courts was avoided by direct
communication between the judges by telephone. Direct communication can build trust and confidence and can
transmit key information far more quickly and cheaply than exchanges of paper. Negotiation among
courts—civilized, tactful and mutually deferential—permits the courts to resolve the problems of globalization by
the use of the same marvelous technology and lowering of barriers that created globalization in the first place.

Last year saw an important breakthrough in the <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2… Circuit, Stonington Partners Inc. v. Lernout & Hauspie
Products N.V., 2002 WL 31445305 (3d Cir. Oct. 4, 2002)</a>. The debtor, Lernout, filed for chapter 11 in Delaware
and the next day for a second insolvency proceeding in Belgium, its home. Stonington had a claim for fraud in the
stock deal by which it sold Dictaphone to Lernout. Its fraud claim had been asserted in the Belgian insolvency case,
where it is a legally valid claim. In the U.S. proceeding, its fraud claim would almost certainly be subordinated
under §510. Thus, a fascinating and difficult choice-of-law issue was presented, although our focus in this
discussion is on the process question.

The debtor sought and got an order from the U.S. court choosing U.S. law as controlling as to subordination. The
U.S. court also enjoined Stonington from presenting its case to the Belgian court, although it was supposedly
allowed to "participate" in that proceeding. The Third Circuit threw out the injunction. As to the choice-of-law
issue, the court endorsed a "dialogue" between the Delaware and Belgian courts on the comity issues, citing
Maxwell and Judge Bufford's international handbook for the Federal Judicial Center.

Because "The parties have indicated that...a protocol was attempted but was not achievable in the instant
situation," the circuit panel "strongly" recommended that the Delaware and Belgian courts make an effort to
reach an agreement as to how to proceed or, at the very least, an understanding as to the policy
considerations underpinning salient aspects of the foreign laws. Id. at 11. They cited Maxwell as their
exemplar, going on to say:

<blockquote>
Even if cooperation could not be achieved, it would be valuable to communicate regarding the policies animating a
certain law so as to be better able to perform a choice-of-law analysis. While not required by our case precedent or
any principle of law, we urge that, in a situation such as this, communication from one court to the other regarding
cooperation or the drafting of a protocol could be advantageous to the orderly administration of justice. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…;
</blockquote>

The concurrence agreed wholeheartedly, while objecting to a remand on the injunction issue, which it saw as
unnecessary.

A new day is dawning in the courts of the world, and the bankruptcy judges and lawyers of the United States find
themselves at the cutting edge. As Joan Rivers used to say, "Can we talk?"

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> As with each of our columns this year, we presented an earlier version of this column to the Annual Bankruptcy Conference at the University of Texas Law School at its November 2002 meeting. <a href="#1a">Return to article</a>

<a name="2">2</a> See, generally, Westbrook, Jay L., International Judicial Negotiation, 38 Tex. Int. L.J. 567 (2003). <a href="#2a">Return to article</a>

<a name="3">3</a> Reciprocity always involves some element of concern that the courts of the other jurisdiction will defer and cooperate in future cases, but that is necessarily a hope or a prediction, not a condition of the present action of the court now acting. <a href="#3a">Return to article</a>

<a name="4">4</a> See, generally, Leonard, E. Bruce, "The Coming Revolution in U.K. Insolvency Law: Part II," Am. Bankr. Inst. J. (June 2003). <a href="#4a">Return to article</a>

<a name="5">5</a> Model Law, art. 28; Chapter 15, §1528; ALI Principles, §§I.B.(8), (10). <a href="#5a">Return to article</a>

Journal Authors

Elizabeth Warren

Jay L. Westbrook

Journal Date

Saturday, November 1, 2003 - 12:00

Bankruptcy Rule

2003