Breakthroughs in Court-to-court Communications in Cross-border Cases

Journal Issue

Sep 2001

Column Name

Journal HTML Content

As previously reported in the ABI Journal (see Volume XVIII, No. 10,
December/January 2000), the American Law Institute (ALI), in its
precedent-setting Transnational Insolvency Project, produced a Statement of Principles
of Cooperation in Transnational Cases involving the North Atlantic Free Trade
Agreement (NAFTA) countries of the United States, Canada and Mexico.

One of the most important elements in the Transnational Insolvency Project was the
preparation of guidelines dealing with the communications that must take place between
jurisdictions in order to enhance coordination and harmonization of administrations in
cross-border or multinational insolvency cases. The project consequently produced its
Guidelines for Court-to-court Communications in Cross-border Cases. The guidelines
are, in fact, largely based on examples from actual cross-border cases involving
cross-border insolvency protocols entered into between courts in different countries. The
text of the ALI's Guidelines for Court-to-Court Communications in Cross-Border
Cases is set out in full in the Journal article referred to above and appears on
ABI World in the International Committee's home pages
(<a href="99decintl.html">www.abiworld.org/abidata/online/journaltext/99decintl.html</a>).

The guidelines recognize that one of the most essential elements of cooperation in
cross-border cases is communication among the administrating authorities of the countries
involved. Because of the importance of the courts in insolvency and reorganizational
proceedings, it is essential that the supervising courts be able to coordinate their
activities to assure the maximum available benefit for the stakeholders of financially
troubled enterprises.

The guidelines are intended to encourage communications and to permit rapid cooperation
in a developing insolvency case while ensuring due process to all concerned. The
concept of court-to-court communications is better seen as a linking of two concurrent
court hearings, all conducted in accordance with proper systems and procedures. The
only change from a purely domestic hearing is the technological link to the other
court.

In a recent precedent-setting ruling, the Guidelines for Court-to-court
Communications in Cross-border Cases from the Transnational Insolvency Project were
adopted and approved in a cross-border case between Canada and the United States.
The case, Re Matlack Systems Inc., involved a former NYSE-listed transportation
company that had filed under chapter 11 in Delaware. The company had Canadian
operations, which it carried on directly (as contrasted with carrying on business
through subsidiaries incorporated in Canada).

<blockquote><blockquote>
<hr>
<big><center>
The guidelines are intended to encourage
communications and to permit rapid cooperation in
a developing insolvency case while ensuring due
process to all concerned.
</center></big>
<hr>
</blockquote></blockquote>

Local Canadian creditors (i.e., those not having a presence in the United
States) were not subject to the automatic stay of proceedings created by the chapter
11 case. There was considerable potential for Canadian creditors in this category
to take action and to effect attachments that would have had a highly negative effect
on the company's attempts to carry on its business in the normal course, and a
creditor seizure of corporate assets had in fact been carried out.

Consequently, the company resorted to the international insolvency provisions of the
Canadian Companies' Creditors Arrangement Act (CCAA), which allow Canadian
courts to assist with reorganizations and insolvencies in other jurisdictions. On an
application by the company, the Ontario Superior Court of Justice (Mr. Justice J.M.
Farley) granted a stay of proceedings against Canadian creditors to aid the chapter
11 proceedings in Delaware. Mr. Justice Farley also approved, from the Canadian
side, a cross-border insolvency protocol to coordinate the insolvency administrations in
the two countries. The precedent-setting feature about the protocol in Matlack is that
it specifically incorporated the ALI guidelines, and Mr. Justice Farley took the
opportunity to provide his approval for the guidelines from the Canadian side.

In accordance with the procedural suggestions contained in the ALI Transnational
Insolvency Statement, the guidelines were approved by the Canadian court on the basis
that they would not be effective until they were approved from the U.S. side by the
bankruptcy court in Delaware. The Delaware bankruptcy court subsequently approved the
protocol and the guidelines from the U.S. side, and consequently, the guidelines were
set formally in place for the first time in a cross-border case. See Re Matlack
Inc. (Unreported: Ontario Superior Court of Justice: Case No. 01-CL-4109,
April 19, 2001) and Re Matlack Systems Inc. (U.S. Bankruptcy Court for
the District of Delaware (Hon. Mary F. Walrath), Case No. 01-01114
(MFW), May 24, 2001).

The full texts of the summary reports on U.S., Mexican and Canadian insolvency
law and practice from the ALI's Transnational Insolvency Project, together with the
Statement of Principles of Cooperation in Transnational Insolvency Cases, can be
ordered from the American Law Institute. Ordering information can be found on the
ALI's web site at <a href="http://www.ali.org" target="window2">www.ali.org</a>. (The author was the chair for Canada on the
Transnational Insolvency Project and the project reporter for Domestic Aspects of
Canadian Insolvency Law).

ABI Members, of course, played a prominent role in the Matlack proceedings.
Counsel for Matlack in its chapter 11 proceedings was a team from Klett, Rooney,
Lieber, & Schorling ably led by William H. Schorling of Philadelphia and including
Richard S. Cobb of the firm's Delaware office, and James D. Newell and James
H. Joseph from Pittsburgh. Acting for Matlack on the Canadian side were the
author and Shahana Kar of Cassels Brock & Blackwell LLP in Toronto. Financial
advisors to the debtor in the transaction were John Swidler and Andrew Addesky of
Montreal-based Richter & Associates Inc.

In a subsequent cross-border reorganizational proceeding between the United States
and Canada, the ALI guidelines were also approved and adopted by the U.S.
Bankruptcy Court for the Southern District of New York (Hon. Robert E. Gerber)
and the Ontario Superior Court of Justice in Toronto (Mr. Justice J.M. Farley).
In the New York bankruptcy case, PSINet and 25 of its subsidiaries filed for
chapter 11 protection, while in Canada, PSINet Ltd. and four of its major
subsidiaries sought protection under the CCAA. The business of the Canadian
companies was fully integrated with the business of the chapter 11 debtors and there
was a significant degree of interrelatedness and interconnectedness between the business
operations in each country.

Both courts approved a cross-border insolvency protocol to coordinate the
administrations in the two countries, which provided that particular matters arising in
the case would be dealt with in joint hearings between the bankruptcy court in New
York and the commercial court in Canada. The protocol contemplated that matters
relating to the sale of the assets of the business, the allocation of proceeds between
the companies in the chapter 11 proceedings and the companies in the CCAA case,
and matters relating to issues arising from Indefeasible Rights of Use, a concept of
increasing significance in telecom reorganizations, would be dealt with in joint
cross-border court hearings. To provide a framework for the joint hearings, the
protocol included, verbatim, the text of the ALI Guidelines for Court-to-court
Communications in Cross-Border Cases.

Again, ABI members were highly prominent in the PSINet reorganizations. Counsel
for the reorganizing companies in the chapter 11 case was a team from Wilmer,
Cutler and Pickering led by William J. Perlstein of Washington, and a team from
Osler, Hoskin & Harcourt in Toronto led by ABI Vice President-International
Affairs Steven G. Golick advised the reorganizing Canadian companies. See PSINet
Inc. et al., (Bankr. S.D.N.Y.) (Hon. Robert E. Gerber), Case No.
01-13213, July 10, 2001, and Re PSINet Ltd. (Ontario Superior Court
of Justice: Hon. Mr. Justice J.M. Farley: Case No. 01-CL-4155, July
10, 2001).

The application of the ALI guidelines in the Matlack and PSINet cases represents
a significant step forward in international cooperation in cross-border cases.
Cross-border insolvency protocols are becoming the norm in significant international cases
(see "The International Year in Review," ABI Journal, Vol. XIX, No. 10,
December/January 2001), and it would seem that the courts that are involved
in cross-border cases are becoming confident of the utility and constructiveness of
using the ALI's Guidelines for Court-to-court Communications in Cross-border
Cases as a means of facilitating communications between courts in different countries
that are dealing with the same business enterprise. The use of the guidelines in
Matlack and PSINet will set a very prominent example for other courts in other
significant cross-border cases.

Author's Note: The full text of the ALI guidelines, as indicated above, appears
in The International Scene column of the December/January 2000 issue of the ABI
Journal. Readers with other experiences in cross-border insolvency protocols and, in
particular, the application of the ALI Guidelines for Court-to-court
Communications in Cross-border Cases, are highly encouraged to communicate the
details to Bruce Leonard at <a href="mailto:bleonard@casselsbrock.com">bleonard@casselsbrock.com</a> or by fax at (416)
640-3027.

Journal Authors

Bruce E. Leonard

Journal Date

Saturday, September 1, 2001 - 12:00

Bankruptcy Rule

2001