CURBING COMITY: THE INCREASINGLY
EXPANSIVE PUBLIC POLICY EXCEPTION OF
CHAPTER 15
ELIZABETH BUCKEL*
ABSTRACT
Reflecting the general principle of comity, the UNCITRAL Model Law on
Cross-Border Insolvency encourages international cooperation in cross-border
insolvency proceedings. The United States incorporated the main provisions of
the Model Law into Chapter 15 of the U.S. Bankruptcy Code, including a public
policy exception that allows enacting courts to deny recognition or relief to a
foreign proceeding if the proceeding is “manifestly contrary” to the public policy of
the enacting country. Most courts have interpreted the exception narrowly and
hold that it should only be reserved for “exceptional circumstances.” However,
recent cases In re Qimonda and In re Vitro have unjustifiably “stretched” the
exception to include circumstances where the interests of U.S. creditors and
interested parties are impaired by the foreign proceeding. This threatens the
promotion of comity, international cooperation, and legal consistency in crossborder insolvency proceedings by increasing the inconsistency and unpredictability of U.S. recognition. Therefore, when looking to secure the interests of U.S.
creditors and interested parties, courts should rather refer to section 1522 of the
Bankruptcy Code, and engage in a stringent balancing test that looks at, and
allows the court to tailor relief to, the interests of both U.S. creditors and foreign
debtors.
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
II. GENERAL PRINCIPLE OF COMITY . . . . . . . . . . . . . . . . . . . . . . . .
A. Hilton and Progeny . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Historical Considerations of Comity in Cross-Border
Insolvency Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
III. UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY . . . . .
A. Purpose and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Key Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1. Recognition of a Foreign Proceeding . . . . . . . . . .
2. Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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* J.D., Georgetown University, 2013; B.S.F.S., Georgetown University, 2008. The author
thanks Professor David Stewart for his comments and support, as well as the editors and staff of the
Georgetown Journal of International Law for their assistance. © 2013, Elizabeth Buckel.
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IV.
V.
VI.
VII.
VIII.
3. Cross-Border Cooperation and Communication . .
4. The Public Policy Exception . . . . . . . . . . . . . . . . .
U.S. BANKRUPTCY CODE—CHAPTER 15 . . . . . . . . . . . . . . . . . .
A. Purpose and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. The Public Policy Exception. . . . . . . . . . . . . . . . . . . . . . . .
THE PUBLIC POLICY EXCEPTION IN PREVIOUS JURISPRUDENCE . . .
A. Public Policy Exception of Chapter 15. . . . . . . . . . . . . . . . .
1. Not “Manifestly Contrary” to U.S. Public Policy. . .
2. “Manifestly Contrary” to U.S. Public Policy . . . . . .
B. Public Policy Exception of European Insolvency Regulation .
C. Public Policy Exception in International Arbitration . . . . . .
RECENT CASES IN RE QIMONDA & IN RE VITRO TEST THE
LIMITS OF COMITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. In re Qimonda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. In re Vitro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. The Untenable Expansion of Section 1506 . . . . . . . . . . . . .
1. In re Qimonda . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. In re Vitro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ALTERNATE GROUND FOR CREDITOR PROTECTION:
SECTION 1522 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Overview of Section 1522 . . . . . . . . . . . . . . . . . . . . . . . . .
B. Section 1522 Allows the Courts to Uphold Concept
of Comity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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“The dual impact of globalization and technological innovation has
changed international commerce forever. Transactions involving multinational businesses can be carried out in mere seconds, regardless of the
geographical location of the parties to the transaction . . . but, where
unforeseen or unfortunate circumstances lead to the need for reorganizations or restructurings, the pace of communication among jurisdictions
reverts to the 19th century.”1
I.
INTRODUCTION
Increased financial globalization and technological innovation has
resulted in the substantial expansion of corporate business across
national borders. This expanded movement of goods, services, and
1. E. Bruce Leonard, Cross-Border Bankruptcy: Current Issues and Trends, American Bar Association, 2011 ABA Annual Meeting (May 2011), available at http://www2.americanbar.org/calendar/
2011-aba-annual-meeting-business-law/Meeting%20Materials/1948.pdf.
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capital has, in turn, created a complex web of transnational financial,
legal, and political relationships, all functioning to create an efficient
international economy through competition and specialization.
The 2008 financial crisis and subsequent economic downturn, however, tested the strength of this web. As the flow of capital slowed and
global trade shrank, global corporations increasingly turned to national and cross-border insolvency proceedings to restructure, and in
some cases liquidate, their businesses.2 These insolvency proceedings
take place in multiple nations and involve numerous claims, subsidiaries, affiliated entities, assets, operations, and creditors.3 They result in
seized property, expropriated assets, broken contracts, frozen credit,
lost jobs, and debased security interests.4 In these situations, the two
competing policies of insolvency law—the protection of creditors and
the protection of debtors— collide, resulting in an uncertain and
inefficient system of distribution.
International law and the general principles of comity encourage
states to recognize and enforce foreign judgments.5 Historically, however, the fragmentation of national bankruptcy laws meant that states
favored local bankruptcy laws while distrusting and dismissing the
applicability of foreign law.6 Because local bankruptcy laws reflect both
the substantive structure of a state’s economic and financial markets
and the procedural structure of its legal system, states are hesitant to
give effect to judgments that do not support their own economic,
financial, and legal structures.7 These considerations impede the efficient administration of insolvency proceedings and hamper the rescue
of financially troubled businesses.
To encourage international cooperation in cross-border insolvency
proceedings, the United Nations Commission on International Trade
Law (UNCITRAL) drafted the Model Law on Cross-Border Insolvency
2. In the United States alone, cross-border insolvency filings under Chapter 15 of the U.S.
Bankruptcy Code increased from 65 in 2008 to 124 in 2010. Chapter 15 Quarterly Filings, AMERICAN
BANKRUPTCY INSTITUTE, available at http://www.abiworld.org/statcharts/Chapter15Filings.pdf.
3. LOOK CHAN HO, Overview, in CROSS BORDER INSOLVENCY: A COMMENTARY ON THE UNCITRAL
MODEL LAW 7 (3d ed. 2012).
4. PHILIP R. WOOD, PRINCIPLES OF INTERNATIONAL INSOLVENCY 3 (2007).
5. See SYMEON C. SYMEONIDES, AMERICAN PRIVATE INTERNATIONAL LAW 327 (2008).
6. Kevin J. Beckering, United States Cross-Border Corporate Insolvency: The Impact of Chapter 15 on
Comity and the New Legal Environment, 14 L. & Bus. Rev. Am. 281, 282 (2008).
7. BOB WESSELS ET AL., INTERNATIONAL COOPERATION IN BANKRUPTCY AND INSOLVENCY MATTERS
11 (2009).
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(Model Law).8 Reflecting the principles of comity, the Model Law
contains procedural guidelines for nations to follow in these proceedings with hope that adopting nations will be “consistent in their
practical application.”9 In 2005, the United States incorporated the
Model Law into Chapter 15 of the U.S. Bankruptcy Code10 and
adopted its main provisions, including a public policy exception that
allows a state to refuse to recognize or enforce a foreign judgment if it
would be “manifestly contrary” to its public policy.
This Note contends that despite the goal of encouraging cooperation in cross-border insolvency proceedings, U.S. courts have increasingly disregarded comity and used the public policy exception
of Chapter 15 to deny recognition and enforcement of foreign
judgments. In re Qimonda11 and In re Vitro12 highlight the fact that courts
are inconsistently applying this exception and are “stretching” the
limits of what actually can be deemed a fundamental public policy of
the United States. In actuality, however, the courts are merely looking
to secure the interests of U.S. creditors and interested entities. Therefore, when looking to protect these interests, the courts should rather
engage the stringent balancing test of section 1522 of the Bankruptcy
Code.
Part II of this Note discusses the general principle of comity, including its foundation and how courts have historically looked to
the principle in cross-border insolvency cases. Part III then looks to
UNCITRAL’s Model Law on Cross-Border Insolvency, including
its overall purpose, and how it reflects this general principle of
comity. Part IV outlines how the United States has integrated this
Model Law into Chapter 15 of the U.S. Bankruptcy Code, specifically
focusing on the public policy exception, and Part V discusses how
both U.S. and foreign courts have interpreted this exception. Part VI,
then, discusses how recent U.S. courts in In re Qimonda and In re Vitro
have inconsistently applied the exception merely to secure the interests of U.S. creditors and interested entities to the detriment
of the general aims of comity. Finally, Part VII concludes by recommending courts rather look to the stringent balancing test of section 1522
8. Guide To Enactment of the UNCITRAL Model Law On Cross-Border Insolvency, ¶ 8, U.N. Doc.
A/CN/422 (1997) [hereinafter Guide to Enactment].
9. Beckering, supra note 6, at 281.
10. Chapter 15 of the U.S. Bankruptcy Code deals with ancillary and other cross-border cases
of bankruptcy. 11 U.S.C. §§ 1501-1532 (2012).
11. In re Qimonda AG, 462 B.R. 165 (Bankr. E.D. Va. 2011).
12. In re Vitro, S.A.B. de C.V., 473 B.R. 117 (Bankr. N.D. Tex. 2012).
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when seeking to secure the interests of U.S. creditors and interested
entities.
II.
GENERAL PRINCIPLE OF COMITY
Whereas the Full Faith and Credit clause requires each state in
the United States to provide full faith and credit to the judicial
proceedings of every other U.S. state,13 the judgments of foreign states
are not constitutionally entitled to recognition or enforcement in U.S.
courts.14 Additionally, the United States does not have a domestic
statute governing, nor is it a party to any international treaty or
convention regarding, the general recognition or enforcement of
foreign judicial judgments.15 When determining whether or not to
recognize and give effect to the judgments of foreign states, however,
U.S. courts have traditionally been guided by the principle of comity.16
These courts have invoked comity to justify deference for foreign
sovereignty, the protection of “parties’ expectations in the interest of
international commerce,” and avoidance of conflict in foreign relations.17 Despite “ubiquitous invocation” of this principle, however, “its
meaning is surprisingly elusive.”18
A.
Hilton and Progeny
The foundational underpinning for this “ubiquitous” doctrine of
comity comes from the 1895 case of Hilton v. Guyot.19 There, the U.S.
Supreme Court held that a U.S. court should, first, recognize and
enforce a foreign judgment, and, second, not try the issue “afresh”
when:
[T]here has been opportunity for a full and fair trial before a
foreign court of competent jurisdiction, conduction the trial on
regular proceedings, after due citation of voluntary appearance
of the defendant, and under a system of jurisprudence likely to
secure an impartial administration of justice between the citi-
13. U.S. CONST. art. IV, § 1.
14. David Stewart, Recognition and Enforcement of Foreign Judgments in the United States,
12 Y.B. PRIVATE INT’L L. 179, 179 (2010).
15. Id.
16. Joel R. Paul, Comity in International Law, 32 HARV. INT’L L.J. 1, 2 (1991).
17. Id. at 6.
18. Id. at 4.
19. Hilton v. Guyot, 159 U.S. 113 (1895).
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zens of that country and those of other countries, and there is
nothing to show either prejudice in the court, or in the system
of laws under which it was sitting, or fraud in procuring the
judgment, or any other special reason why the comity of the
United States should not allow it full effect . . . .20
While Hilton is “rarely dispositive,”21 U.S. courts are influenced by its
holding and “recognize final country judgments that meet the requirements for recognizing sister-state judgments [under the Full Faith
and Credit clause], without reviewing the merits.”22 Comity, then, has
generally been understood as “the recognition that one nation allows
within its territory to the legislative, executive, or judicial acts of
another nation, having due regard both to international duty and
convenience, and to the rights of its own citizens or of other persons
who are under the protection of its laws.”23
However, deference to comity has its limitations. Predominately,
courts are quick to assert that “[T]he principle of comity has never
meant categorical deference to foreign proceedings. It is implicit in
the concept that deference should be withheld where appropriate to
avoid the violation of the laws, public policies, or rights of the citizens
of the United States.”24 Where comity has been codified into state
law,25 various grounds for non-recognition have been espoused including: (1) the integrity of the rendering court and due process, (2) lack
of jurisdiction, (3) insufficient notice, (4) fraud, (5) public policy,
(6) inconsistent or conflicting judgments, (7) prior agreement between parties, and (8) inconvenient forum.26 Courts seeking to apply
the principle of comity constantly struggle with this “tension” between
“respecting fair foreign proceedings” and shielding U.S. citizens from
20. Id. at 158.
21. Most federal courts hold that “in the absence of a federal statute or treaty or some other
basis for federal jurisdiction . . . recognition of foreign country judgments is a matter of state law.”
SYMEONIDES, supra note 5, at 333-34.
22. Id. at 334.
23. General Definitions, 44B AM. JUR. 2D International Law § 8 (2012).
24. In re Treco, 240 F.3d 148, 157 (2d Cir. 2001).
25. A majority of states have adopted either the 1962 Uniform Foreign Money-Judgments
Recognition Act or the 2005 Uniform Foreign Money-Judgments Recognition Act which “provide
the substantive rules for recognition of foreign judgments that either grant or deny a sum of
money.” Stewart, supra note 14, at 181-82.
26. See id. at 184-90.
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foreign laws.27 To understand how the courts have grappled with this
tension, particularly with respect to cases on cross-border insolvency, it
is useful to analyze U.S. case law on the subject.
B.
Historical Considerations of Comity in Cross-Border Insolvency Cases
Comity has been, and continues to be a fundamental principle
underlying Chapter 15 of the Bankruptcy Code.28 While U.S. bankruptcy laws have historically been “hostile” towards claims against U.S.
property because “the bankruptcy law of a foreign country is incapable
of operating a legal transfer of property in the United States,”29
considerations of comity have more recently played an essential role in
cross-border insolvency cases. Chapter 15’s predecessor in the Bankruptcy Code, section 304, governed U.S. proceedings commenced by
foreign representatives that were ancillary to foreign insolvency proceedings. When a court was deciding whether to grant relief under the
Code, section 304 specified that the court must “be guided by what will
best assure an economical and expeditious administration of such
estate,” consistent with various factors including, “comity.”30
Courts, interpreting this provision, strongly encouraged U.S. cooperation with foreign proceedings.31 With the objective of creating “judicial
certainty and stable expectations in the event of international insolvency,”32 courts generally agreed comity should be granted when the
foreign proceeding and foreign insolvency laws are consistent with U.S.
principles of justice, including notions of due process.33 While “the
priority rules of a foreign jurisdiction need not be identical to those of
27. See Daniel Nolan IV, A “Fundamental” Problem: The Vulnerability of Intellectual Property
Licenses in Chapter 15 and the Meaning of § 1506, 28 EMORY BANKR. DEV. J. 177, 191 (2011).
28. Mark G. Douglas & Nicholas C. Kamphaus, Cross-Border Bankruptcy Battleground: The
Importance of Comity (Part II), JONES DAY, http://www.jonesday.com/cross-border-bankruptcybattleground-the-importance-of-comity-part-ii-05-31-2010.
29. In re Toga Mfg. Ltd., 28 B.R. 165, 167 (Bankr. E.D. Mich. 1983) (quoting Harrison v.
Sterry, 9 U.S. 289, 302 (1809)).
30. Cases Ancillary to Foreign Proceedings, 11 U.S.C. § 304(c)(5) (1978) (repealed 2005).
31. Because Ҥ 304(c) supplants the federal common law comity analysis conducted by
courts,” it directed courts to “use the statutory factors to balance the reasons for and against
affording comity.” In re Treco, 240 F.3d 148, 158 (2d Cir. 2001). However, the statutory factors
“reflect[ed] the considerations that ‘have historically been considered within a court’s determination whether to afford comity to a proceeding in a foreign nation.’” Id. (quoting In re Culmer,
25 B.R. 621, 629 (Bankr. S.D.N.Y. 1982)).
32. Beckering, supra note 6, at 297.
33. See In re Hourani, 180 B.R. 58, 65 (Bankr. S.D.N.Y. 1995).
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the United States,”34 they should be “substantially in accordance” with
U.S. law.35 If comity, however, “would be contrary or prejudicial to the
interest of the nation called upon to give it effect,”36 including that the
application therein would be “inherently vicious, wicked, immoral . . .
shocking to the prevailing American moral sense . . . or repugnant
to [U.S.] ideas of justice,”37 it should be withheld and recognition
denied.
Based on this principle, courts came to inconsistent results. When a
distribution to a domestic creditor was not substantially similar under a
foreign law and the U.S. Bankruptcy Code, the court in Culmer upheld
recognition38 while the court in In re Treco relied on an equal creditor
distribution standard39 to hold a similar factual scenario violated U.S.
public policy.40 Therefore, the overall objectives of judicial certainty
and stable expectations were not “well served” by judicial analysis,
which “yield[ed] unpredictable results.”41
III.
UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY
Treaties and protocols historically governed foreign recognition
and enforcement of cross-border insolvency proceedings. However,
national insolvency laws became increasingly seen by other states as
“ill-equipped” to handle these cross-border proceedings, and states
used “inadequate and inharmonious legal approaches” when adjudicating the same issue.42 This “absence of predictability,” acted “as a
disincentive to cross-border investment” and ultimately hindered global
capital flow.43 In response, UNCITRAL adopted the Model Law on
Cross-Border Insolvency in May 1997.44 Seeking to promote the efficient, fair, and cost-effective management of cross-border insolvency
proceedings, the Model Law draws on the principles of comity to
34. In re Treco, 240 F.3d at 158.
35. Id.
36. Cunard S.S. Co. v. Salen Reefer Servs. AB, 773 F.2d 452, 457 (2d Cir. 1985) (quoting
Somportex Ltd. v. Philadelphia Chewing Gum Corp., 453 F.2d 435, 440 (3d Cir. 1971)).
37. In re Culmer, 25 B.R. 621, 631 (Bankr. S.D.N.Y. 1982).
38. Id.
39. Beckering, supra note 6, at 297. The equal creditor distribution standard directs the court
to consider the “effect of the difference in the law on the creditor in light of the particular facts
presented.” In re Treco, 240 F.3d at 158.
40. In re Treco, 240 F.3d at 160.
41. Beckering, supra note 6, at 297 (citing Paul, supra note 16, at 3-4).
42. Guide to Enactment, supra note 8, ¶ 13.
43. Id.
44. Id. ¶ 8.
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provide an interface that assists countries in administering cross-border
insolvency proceedings.45
A.
Purpose and Scope
The Model Law was adopted with the objective of encouraging
cooperation and coordination between foreign states.46 More specifically, it aims to foster cooperation between states, provide legal certainty for trade and investment, protect and maximize the value of a
debtor’s assets, and fairly administer the interests of creditors and
other interested parties, including the debtor.”47 Domestic courts, it
mandates, are to cooperate “to the maximum extent possible” with
foreign courts and representatives.48
As a procedural guide,49 the Model Law aims to assist states in the
process of equipping their national insolvency laws to efficiently and
effectively address cases of cross-border insolvency.50 It is designed to
apply to insolvency proceedings that include most debtor entities51 in a
number of situations, including:
(i) [A]n inward-bound request for recognition of a foreign
proceeding; (ii) an outward-bound request from a court or an
administrator in the State that has enacted the Model Law for
recognition of an insolvency proceeding commenced under
the laws of the enacting state; (iii) coordination of concurrent
proceedings in two or more States; and (iv) participation of
foreign creditors in insolvency proceedings taking place in the
enacting State.52
45. Tanner DeWitt, Key Provisions of the Model Law on Cross-Border Insolvency, INTERNATIONAL
LAW OFFICE, 2009, http://www.internationallawoffice.com/newsletters/Detail.aspx?g⫽cb208e8629d6-427e-8986-a4c29093bfa8.
46. Guide to Enactment, supra note 8, ¶ 17.
47. U.N. Comm’n on Int’l Trade Law, G.A. Res. 52/158, U.N. GAOR, 30th Sess., Supp.
No. 17, U.N. Doc. A/52/17, art. 21(2) (Jan. 30, 1998) [hereinafter Model Law on Cross-Border
Insolvency].
48. Id. art. 26.
49. The Model Law does not, however, “attempt a substantive unification or harmonization
of national insolvency laws.” WESSELS ET AL., supra note 7, at 200.
50. Guide to Enactment, supra note 8, ¶ 12.
51. Model Law on Cross-Border Insolvency, supra note 47, art. 1(2). Article 1(2) outlines an
exclusion for banks and insurance companies that are subject to special local insolvency regimes.
See id.
52. WESSELS ET AL., supra note 7, at 204 (quoting Guide to Enactment, supra note 8, ¶ 22).
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While the Model Law encourages states to adopt the text of the law in
its entirely, it also provides the flexibility for states to modify the text to
best incorporate it into their existing insolvency laws.53 However,
Article 8 makes clear to states that in interpreting the Model Law,
“regard is to be had to its international origin and to the need to
promote uniformity in its application.”54 Legislation based on the
Model Law has been adopted in nineteen states,55 and all states have
implemented the Article 8 mandate, making it “imperative for national
courts to consider how the Model Law is implemented and interpreted
in other jurisdictions.”56
B.
Key Provisions
The Model Law contains a number of provisions that play an
essential role in the administration of a cross-border insolvency proceeding, the most important of which delineate (1) the recognition of
a foreign proceeding, (2) granting relief, (3) cross-border cooperation
and communication and (4) the public policy exception.
1.
Recognition of a Foreign Proceeding
Foreign representatives may apply to the enacting state for recognition of the foreign proceeding.57 If the foreign proceeding meets
various criteria,58 the court must recognize the proceeding as either
(i) a foreign main proceeding—a foreign proceeding taking place in
the state where the debtor has its center of main interests— or (ii) a
foreign non-main proceeding—a foreign proceeding other than a
foreign main proceeding that takes place in a state where the debtor
has an establishment.59
53. Guide to Enactment, supra note 8, ¶ 12. The Model Law, however, recommends that
modifications be kept to a minimum to ensure a degree of certainty and predictability.
54. Model Law on Cross-Border Insolvency, supra note 47, art. 8.
55. Status: 1997—UNCITRAL Model Law on Cross-Border Insolvency, UNCITRAL, http://www.
uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html.
56. HO, supra note 3, at 7-8.
57. Model Law on Cross-Border Insolvency, supra note 47, art. 15(1).
58. The proceeding must be verified to be (i) a foreign proceeding, (ii) applied for by a
foreign representative, (iii) whose application requirements meets certain evidentiary requirements and (iv) has been submitted to the competent court or authority. Id. art. 17(1).
59. Id. art 17(2).
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2.
Relief
Upon application for recognition, the court of the enacting state
may grant certain interim, or provisional, relief needed to protect the
assets of the debtor or interests of the creditor, including staying
execution against the debtor’s assets and entrusting the administration
of the debtor’s assets in the state.60 This provisional relief, however,
terminates immediately upon recognition of the foreign proceeding.61
The effect of recognition, and consequent relief afforded, depends
on whether the foreign proceeding is determined to be a foreign main
or non-main proceeding. Upon recognition of a foreign main proceeding, certain relief automatically ensures including, (i) a stay of actions
or proceedings concerning the debtor’s assets, rights, obligations, or
liabilities, (ii) a stay of execution against the debtor’s assets, and (iii) a
suspension of the right to transfer, encumber, or otherwise dispose of
any assets of the debtor.62
The court is then allowed to grant discretionary relief to foreign
representatives of both foreign main and non-main proceedings. This
relief must be necessary and appropriate to protect the debtor’s assets
or the creditor’s interests, and includes the staying of proceedings and
actions, suspension of the transfer assets, and examination of witnesses
and the taking of evidence concerning the debtor’s assets and obligations.63 The list provided, however, is not comprehensive; it allows the
court to grant any additional relief specific to the proceeding’s unique
circumstances.64
As the Model Law aims to create relief that provides a “sufficient
freeze or holding of the assets to protect the business interests of the
debtor without unnecessarily interfering with the interests of creditors
and traders,”65 it includes provisions intended to protect the interests
of the creditors and other interested persons when it grants or denies
relief to the debtors.66 The court may modify or terminate such relief,
or, in the alternate, subject the relief granted to conditions it considers
appropriate.67
60.
61.
62.
63.
64.
65.
66.
67.
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Id. art. 19(1).
WESSELS ET AL., supra note 7, at 219.
Model Law on Cross-Border Insolvency, supra note 47, art. 20(1).
Id. art. 21(1).
Id. art. 21(1)(g).
WESSELS ET AL., supra note 7, at 217.
Model Law on Cross-Border Insolvency, supra note 47, art. 22(1).
Id. art. 22(2).
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3.
Cross-Border Cooperation and Communication
Reflecting the general principles of comity, the Model Law mandates
local courts and insolvency representatives to “cooperate to the maximum extent possible with foreign courts or foreign representatives.”68
The courts and representatives are authorized to communicate directly
with their foreign counterparts,69 and the Model Law contains a nonexclusive list of forms of cooperation, including the appointment of a
person to act at the direction of the court and coordination of
concurrent proceedings.70
4.
The Public Policy Exception
While the Model law was intended to foster cooperation and coordination in cross-border bankruptcy proceedings, it also recognizes
the need for states to protect their differing public policies. Article 6,
the public policy exception, provides, “[n]othing in this Law prevents the court from refusing to take an action governed by this Law if
the action would be manifestly contrary to the public policy of this
State.”71
Highlighting that “international cooperation would be unduly hampered if ‘public policy’ were to be understood in an extensive manner,”72 the UNCITRAL Guide to Enactment affirms that the public
policy exception should “[be] restricted to fundamental principles of
law, in particular constitutional guarantees”73 and includes the word
“manifestly” to highlight that it is “only intended to be invoked under
exceptional circumstances concerning matters of fundamental importance for the enacting State.”74 UNCITRAL, then, recommends that
Article 6 should be interpreted in a way that balances general public
policy goals75 with “the goals of insolvency and predictability in commer-
68. Id. art. 25-26.
69. Id.
70. Id. art. 27.
71. Id. art. 6.
72. Guide to Enactment, supra note 8, ¶ 88.
73. Id. ¶ 87.
74. Id. ¶ 89.
75. While UNCITRAL does not define public policy, the UNCITRAL Legislative Guide posits
two examples of public policy interests that would squarely fall within this sphere: (i) environmental damage, and (ii) activities detrimental to public health and safety. U.N. Comm’n on Int’l Trade
Law, G.A. Res. 59/40, ¶ 86, U.N. GAOR, 37th Sess., Supp. No. 17, U.N. Doc. A/55/17 (June 24,
2004) [hereinafter Legislative Guide on Insolvency Law].
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cial relations.”76 Because of this narrow interpretation, it is expected
that the exception “will rarely be used.”77
IV.
U.S. BANKRUPTCY CODE—CHAPTER 15
The Model Law was incorporated as Chapter 15 of the U.S. Bankruptcy Code by title VIII of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005.78 Chapter 15 incorporates the majority of the Model Law verbatim, thus “parallel[ing] the procedural
law of all adopting nations.”79
A.
Purpose and Scope
Proclaiming that the purpose of the Chapter is to “incorporate
the [Model Law] so as to provide effective mechanisms for dealing
with cases of cross-border insolvency,”80 Chapter 15 allows a foreign
representative of a foreign proceeding access to U.S. courts to obtain
assistance, including certain rights and benefits, in connection with
that foreign proceeding.81
Reflecting the objective of comity as outlined in the Model Law
without explicitly prescribing comity as a guiding principle,82 Chapter 15 aims to promote cooperation and communication between U.S.
courts and parties of interests with foreign courts and parties of interest
in cross-border cases.83 To that end, it affirms that the court should
“consider its international origin, and the need to promote an application of this Chapter that is consistent with the application of similar
statutes adopted by foreign jurisdictions.”84 Additionally, it specifies
that the court and representatives must communicate, coordinate, and
“cooperate to the maximum extent possible” with foreign courts and
foreign representatives.85 However, Chapter 15 does not adopt the
Model Law in its entirety; rather, it “retain[s] a certain amount of
76. Id. ¶ 110.
77. Guide to Enactment, supra note 8, ¶ 20(e).
78. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8,119
Stat. 23 (2005).
79. Beckering, supra note 6, at 300.
80. 11 U.S.C. § 1501(a) (2012).
81. 11 U.S.C. § 1501.
82. Beckering, supra note 6, at 300.
83. Ancillary and Other Cross-Border Cases, U.S. COURTS, http://www.uscourts.gov/Federal
Courts/Bankruptcy/BankruptcyBasics/Chapter15.aspx.
84. 11 U.S.C. § 1508 (2012).
85. 11 U.S.C. §§ 1525-27 (2012).
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territorialism to ensure U.S. creditors are sufficiently protected by the
foreign proceedings.”86
B.
The Public Policy Exception
Chapter 15 incorporates the exact language of the Model Law’s
public policy exception, declaring “Nothing in this Chapter prevents
the court from refusing to take an action governed by this Chapter
if the action would be manifestly contrary to the public policy of the
United States.”87 Therefore, a court has complete discretion to refrain
from acting under the Chapter, including recognizing a foreign proceeding or providing relief, if it would be “manifestly contrary” to
public policy.88
Congress, reflecting the spirit of the Model Law, expressed its intent to limit the exception to “the most fundamental policies of the
United States,”89 but did not provide a definition of “public policy” in
the Bankruptcy Code. Courts, therefore, must determine what exact
public policy is embodied in this section.
V.
THE PUBLIC POLICY EXCEPTION IN PREVIOUS JURISPRUDENCE
The interpretation of the Model Law’s public policy exception has
been a widely litigated matter in U.S. courts following the enactment
of Chapter 15 in 2005. Indeed, several federal courts have confronted
and evaluated various challenges to foreign insolvency proceedings
under section 1506, as litigants are quick to invoke the public policy
exception as a defense to enforcement or relief following foreign
insolvency judgments.90
After evaluating U.S. interpretations of the Model Law’s public
policy exception, it is prudent to compare them to interpretations of
courts or legislative bodies in other nations that have adopted the
Model Law. The exception, however, is curiously not as widely liti-
86. Ksenia Proskurchenko, Cross-Border Insolvency Basics: Summary, Purpose, Application, and
When it is Appropriate, ASPATORE, 2012 WL 3279178, at *2 (2012).
87. 11 U.S.C. § 1506 (2012).
88. Id.
89. 109 H.R. Rep. No. 31 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 172.
90. See, e.g., RSM Richter Inc. v. Aguilar, 349 B.R. 333 (S.D.N.Y. 2006); In re Ernst & Young,
Inc., 383 B.R. 773 (D. Colo. 2008); In re Metcalfe & Mansfield Alternative Invs., 421 B.R. 685
(S.D.N.Y. 2010); In re Fairfield Sentry, Ltd., 440 B.R. 60 (S.D.N.Y. 2010); In re Sivec SRL, WL
3651250 (E.D. Okla. Aug. 18, 2011); In re Toft, 453 B.R. 186 (S.D.N.Y. 2011).
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gated— or litigated at all for that matter—in other adopting nations.91
Therefore, here the interpretation of the public policy exception of
Chapter 15 is compared with the interpretations of the public policy
exceptions of, first, the European Insolvency Regulation,92 and, second, the 1958 Convention on the Recognition and Enforcement of
Arbitral Awards (New York Convention).93
A.
Public Policy Exception of Chapter 15
The public policy exception has been invoked as a defense to
recognition and enforcement of a foreign insolvency proceeding in a
variety of factual situations. U.S. courts, citing to both the UNCITRAL
Guide to Enactment of the Model Law and legislative history of
Chapter 15, have reiterated that “manifestly contrary to public policy”
should be “narrowly interpreted” and “restrict[ed] to the most fundamental policies of the United States.”94 This exception, they highlight,
is meant to be invoked under “exceptional circumstances”95 when
“fundamental policies of the United States are at risk.”96 Most courts
have applied this language to hold that the recognition and enforcement of a foreign proceeding would not be manifestly contrary to U.S.
public policy,97 but other courts have held that certain circumstances
91. Lo Chan Ho’s treatise on the adoption of the Model Law provides an overview of
the relevant laws of the adopting nations— both the textual adoption and various interpretative mechanisms. See generally HO, supra note 3. A review of these overviews illuminates
the fact that no other adopting nation, even common law jurisdictions such as England and
Australia, litigates the interpretation of the public policy exception as much as the United States.
While the exception has been brought up as a defense to enforcement in various Australian cases such as In re HIH Casualty and General Insurance, the courts have dismissed the
defense without much discussion. Id. See also, In re HIH Casualty & General Insurance, [2008]
U.K.H.L. 21, 1 W.L.R. 852 (Aust.) (holding that it is not a violation of public policy to sanction a
distribution of local assets in accordance with a foreign insolvency law which has a different
ranking of creditors).
92. Council Regulation 1346/2000 on Insolvency Proceedings, 2000 O.J. (L 160) 1-3 [hereinafter EC Regulation].
93. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10,
1958, 21 U.S.T. 2517, 330 U.N.T.S. 38 [hereinafter New York Convention].
94. Id. at 336 (quoting H.R. Rep. No. 109-31(I), at 109, reprinted in 2005 U.S.C.C.A.N. 88,
172).
95. In re Iida, 377 B.R. 243, 259 (B.A.P. 9th Cir. 2007).
96. In re Gold & Honey, Ltd., 410 B.R. 357, 372 (Bankr. E.D.N.Y. 2009).
97. See RSM Richter Inc. v. Aguilar, 349 B.R. 333 (S.D.N.Y. 2006); In re Ernst & Young, Inc.,
383 B.R. 773 (D. Colo. 2008); In re Metcalfe & Mansfield Alternative Invs., 421 B.R. 685 (S.D.N.Y.
2010); In re Fairfield Sentry, Ltd., 440 B.R. 60 (S.D.N.Y. 2010).
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fit this narrow exception and recognition and enforcement would
therefore be contrary to U.S. public policy.98
1.
Not “Manifestly Contrary” to U.S. Public Policy
The majority of cases have held that recognition and enforcement of
a foreign insolvency proceeding would not be manifestly contrary to
U.S. public policy. First, in the seminal case discussing the public policy
exception—In re Ephedra Products Liability Litigation99—the court held
that the lack of a jury trial in Canada does not inherently make a
foreign procedure manifestly contrary to U.S. public policy, even if the
objectors would have the right to a jury trial in the United States under
the exact same circumstances.100 The Court opined that a fundamental
policy such as the right to a jury trial “is not contravened merely
because one possible means for enforcing it is denied.”101 Certainly, a
fair and impartial verdict still could be rendered in the absence of a
jury.102
Second, variations in amounts creditors may recover from foreign
bankruptcy proceedings are not grounds for non-recognition. The
court in In re Ernst & Young103 held that the fact that certain U.S.
investors would recover less under a Canadian receivership proceeding
than under a proceeding in U.S. Bankruptcy Court is not, by itself,
manifestly contrary to U.S. public policy.104 Or, more broadly, a foreign
proceeding does not violate a fundamental policy of the U.S. and is
therefore not manifestly contrary to U.S. public policy, just because it
produces a different result than the proceeding would under U.S.
law.105
Lastly, recognition and enforcement of proceedings whose conclusions of substantive law differ from U.S. law would not be deemed to be
manifestly contrary to U.S. public policy. First, In re Metcalfe & Mansfield
Alternative Investments106 involved a Canadian third-party release that
may be unenforceable in a parallel U.S. Chapter 11 proceeding be-
98. See In re Sivec SRL, WL 3651250 (E.D. Okla. Aug. 18, 2011); In re Toft, 453 B.R. 186
(S.D.N.Y. 2011).
99. RSM Richter Inc. v. Aguilar, 349 B.R. 333 (S.D.N.Y. 2006).
100. Id.
101. Nolan, supra note 27, at 203.
102. RSM Richter Inc., 349 B.R. at 337.
103. In re Ernst & Young, Inc., 383 B.R. 773 (D. Colo. 2008).
104. Id. at 781.
105. Id.
106. In re Metcalfe & Mansfield Alternative Invs., 421 B.R. 685 (S.D.N.Y. 2010).
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cause releases under U.S. bankruptcy law may only be approved if
necessary to the success of a reorganization plan.107 Even though the
court had not established whether the release was necessary to the
success of the reorganization plan, it was not held to be unenforceable
on grounds of public policy.108 Second, the court in In re Fairfield
Sentry109 held that the sealing of court files by a foreign court, even
though the sealing may be broader than specifically provided by U.S.
law, was not manifestly contrary to U.S. public policy.110
Citing to the principles of comity, the Metcalfe court explained that,
“[t]he relief granted in the foreign proceeding and the relief available
in a U.S. proceeding need not be identical.”111 Courts should determine whether the procedures used in the foreign court meet our
fundamental standards of fairness,112 rather than access the appropriateness of the foreign court proceedings. In other words, “fairness was
not threatened merely because the foreign court did not provide the
same solution as a [U.S.] court.”113
2.
“Manifestly Contrary” to U.S. Public Policy
While most courts have held that the recognition and enforcement
of most foreign proceedings is not manifestly contrary to U.S. public
policy, two prominent courts have deemed certain foreign insolvency
proceedings as within the narrow public policy exception.
First, denial of due process and notice is held to be manifestly
contrary to public policy. The court in In re Silvec114 modified an automatic stay after an Italian debtor did not give a U.S. creditor notice of
Italian insolvency proceedings, holding that fundamental public policy
under U.S. law is that parties in a legal proceeding are entitled to due
process and notice.115 Denying those rights, therefore, is manifestly
contrary to that policy. Here, the court noted that there were no
procedures in Italy that would allow for the protection of the creditor’s
107.
108.
109.
110.
111.
112.
1985)).
113.
114.
115.
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Id. at 694.
Id. at 697-99.
In re Fairfield Sentry, Ltd., 440 B.R. 60 (S.D.N.Y. 2010).
Id. at 67.
In re Metcalfe & Mansfield Alternative Invs. 421 B.R. at 697.
Id. (quoting Cunard S.S. Co. Ltd. v. Salen Reefer Servs. AB, 773 F.2d 452, 457 (2d Cir.
Nolan, supra note 27, at 201.
In re Sivec SRL, WL 3651250 (E.D. Okla. Aug. 18, 2011).
Id. at *7.
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rights of notice and opportunity to be heard.116
Second, the denial of privacy rights under the Fourth Amendment
is held to be manifestly contrary to public policy. In In re Toft,117 the
foreign representative in a Germany Insolvency proceeding sought
Chapter 15 protection to gain access to the debtor’s e-mail accounts,
which were stored on servers in the United States.118 While German
law permitted such mail interception,119 the ex parte interception of
electronic communications is illegal under two U.S. statutes.120 Here,
the Court held that the relief sought would be manifestly contrary to
public policy because “the relief sought would directly compromise
privacy rights subject to a comprehensive scheme of statutory protection, available to aliens, built on constitutional safeguards incorporated in the Fourth Amendment as well as the constitutions of many
[s]tates.”121
Therefore, courts have generally held that only under narrow circumstances, such as the violation of a Constitutional protection, will the
recognition and enforcement of a foreign proceeding be deemed to be
manifestly contrary to U.S. public policy.
B.
Public Policy Exception of European Insolvency Regulation
The public policy exception of the European Insolvency Regulation
is interpreted in the same way as the public policy exception of
Chapter 15. While the European Insolvency Regulation is not an
adoption of the Model Law,122 it, in fact, contains many of the same
provisions, including the public policy exception. The Regulation
provides:
Any Member State may refuse to recognize insolvency proceedings opened in another Member State or to enforce a judgment
handed down in the context of such proceedings where the
effects of such recognition or enforcement would be manifestly
contrary to that State’s public policy, in particular its fundamen-
116. Id.
117. In re Toft, 453 B.R. 186 (S.D.N.Y. 2011).
118. Id. at 188-89.
119. Id. at 197-98.
120. The Wiretap Act, 18 U.S.C. § 2511 (2012) and the Privacy Act, 18 U.S.C. § 2701 (2012).
See In re Toft, 453 B.R at 196-97.
121. Id. at 198.
122. The European Insolvency Regulation was enacted in 2000 and influenced much of the
Model Law. See Guide to Enactment, supra note 8, ¶ 18.
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tal principles or the constitutional rights and liberties of the
individual.123
The primary case interpreting the public policy exception is In Re
Eurofood.124 There, the European Court of Justice held that the public
policy exception was reserved for only “exceptional” cases, including
cases involving the right to be notified of procedural documents and
the fundamental right to be heard, as “these rights occupy an eminent
position in the organization and conduct of a fair legal process.”125
The court continued, “any restriction on the exercise of that right must
be duly justified and surrounded by procedural guarantees ensuring
that persons concerned by such proceedings actually have the opportunity to challenge the measures adopted in urgency.”126 Here, the
court seems to echo both the holding of In re Silvec127 and the general
language of the U.S. courts urging a narrow interpretation of the
exception.128
C.
Public Policy Exception in International Arbitration
Most treaties and conventions governing international arbitration
contain public policy exceptions that also are interpreted in the same
way as the public policy exception of Chapter 15. For example, the New
York Convention contains a public policy exception that provides that
confirmation of a foreign arbitral award may be refused if “the recognition and enforcement of the award would be contrary to the public
policy of that country.”129 When confronted with enforcing judgments
rendered in other jurisdictions under the Convention, courts have
resoundingly interpreted this language narrowly. Citing to the New
York Convention’s aims of “removing preexisting obstacles to enforce-
123. EC Regulation, supra note 92, art. 26.
124. Case C-341/04, In re Eurofood IFSC, 2006 E.C.R. I-3813.
125. Id. The right to be heard, however, does not extend to before the commencement of
insolvency proceedings. See WOOD, supra note 4, at 934.
126. In re Eurofood IFSC, 2006 E.C.R. I-3813.
127. See supra pp. 1297-98 (holding fundamental public policy under U.S. law is that parties
in a legal proceeding are entitled to due process and notice).
128. See supra pp. 1295-96.
129. New York Convention, supra note 92, art. V(2)(b). The Supreme Court acknowledged
this exception. See Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 614, 638
(1985) (recognizing that under Article V(2)(b) the “Convention reserves to each signatory
country the right to refuse enforcement of an award”).
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ment,”130 courts have clarified that the exception should only apply in
situations where enforcement of the award would “violate most basic
notions of morality and justice” of the forum where enforcement is
sought.131 In these situations, the public policy must be “well defined
and dominant, and is to be ascertained by reference to the laws and
legal precedents and not from general considerations of supposed
public interests.”132
The broad range of jurisprudence on the issue confirms that courts
have abided by this narrow interpretation. Foreign arbitral awards
have been upheld and confirmed when enforcement of the award
conflicted with U.S. foreign policy,133 the award was contrary to federal
or state law,134 the prevailing party committed fraud,135 or the arbitrators did not follow agreed-upon arbitral rules and standards.136 Courts,
however, have vacated awards “if it is penal only and relates to the
punishing of public wrongs.”137
130. Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie du Papier
(RAKTA), 508 F.2d 969, 973 (2d Cir. 1974).
131. Karen Maritime Ltd. v. Omar Int’l Inc., 322 F. Supp. 2d 224 (E.D.N.Y. 2004) (quoting
Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310, 315 (2d Cir. 1998)).
132. W.R. Grace & Co. v. Local Union 759, 461 U.S. 757, 766 (1983) (quoting Muschany v.
United States, 324 U.S. 49, 66 (1945)).
133. See, e.g., Parsons & Whittemore Overseas Co., Inc. v. Societe Generale De L’Industrie
Du Papier, 508 F.2d 969 (2d Cir. 1974) (confirming arbitration award in favor of an Egyptian
corporation against American company that failed to fully execute a contract to construct a plant
in Egypt when all Americans except those holding special visas were ordered to leave the country
after the Six Days War and the Agency for International Development withdrew its financing of
the project).
134. See, e.g., McDermott Int’l, Inc. v. Underwriters at Lloyd’s, 1996 WL 291803 (E.D. La.
1996), decision aff’d on other grounds, 120 F.3d 583 (5th Cir. 1997) (holding that enforcement of
an arbitration award does not violate public policy despite contravening a Louisiana statute that
prohibited insurance policies from divesting courts of actions against insurers).
135. See Indocomex Fibres Pte., Ltd. v. Cotton Co. Int’l., 916 F. Supp. 721 (W.D. Tenn. 1996)
(confirming arbitration award in favor of purchaser despite the fact that purchaser was guilty of
fraud by failing to provide a required letter of credit).
136. See, e.g., Waterside Ocean Navigation Co., v. Int’l Navigation Ltd., 737 F.2d 150 (2d Cir.
1984) (arbitrators considered improper testimony or evidence); In Matter of Andros Compania
Maritima, S.A, 579 F.2d 691 (2d Cir. 1978) (arbitrators were biased or prejudiced); Saudi Iron &
Steel Co. v. Stemcor USA Inc., 1997 WL 642566 (S.D.N.Y. Oct. 17, 1997) (arbitrators improperly
relied upon prior court arbitrations).
137. See Laminoirs-Trefileries-Cableries de Lens, S. A. v. Southwire Co., 484 F. Supp. 1063
(N.D. Ga. 1980). For an organized review of cases in which confirmation of a foreign arbitral
award was challenged as contrary to U.S. public policy, including the cases in notes 133-36, supra,
see Andrew M. Campbell, Refusal to Enforce Foreign Arbitration Awards on Public Policy Grounds,
144 A.L.R. FED. 481 (2013).
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While it is important to note that in the arbitration context, there
is a competing public policy in favor of enforcing arbitration agreements,138 and parties may agree in arbitration to something that a
statute would otherwise prohibit,139 judicial interpretation of the public policy interpretation is strikingly similar. Even in the absence of the
“manifestly” modifier, courts still interpret the public policy exception
in a very narrow light, and are extremely hesitant to vacate an arbitration award based on public policy grounds. Additionally, one may
argue that the public policy in favor of recognizing cross-border
insolvency proceedings is just as strong, if not stronger, than the public
policy in favor of enforcing arbitration agreements. Cross-border insolvency proceedings affect a multitude of parties across a multitude of
nations, and their efficient and consistent resolution is necessary to
continue the global flow of capital.
VI.
RECENT CASES IN RE QIMONDA & IN RE VITRO TEST THE
LIMITS OF COMITY
While earlier cases reiterated Congressional intent to “apply a narrow construction to the term ‘public policy,’” the recent cases of In re
Qimonda and In re Vitro have seemingly broadened the exception.
A.
In re Qimonda140
Qimonda, a German manufacturer of semiconductor memory devices, commenced a German insolvency proceeding in 2009.141 Holding
approximately 12,000 patents (including at least 4,000 U.S. patents),
Qimonda142 entered into various joint venture and patent crosslicensing agreements with numerous international electronics companies that manufacture and sell semiconductors both in the United
States and abroad.143 In accordance with the terms of the agreements,
Qimonda and the electronics companies “have perpetually and irrevocably cross-licensed tens of thousands of patents.”144
138. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625 (1985).
139. See Prudential–Bache Sec., Inc., v. Tanner, 72 F.3d 234, 242-43 (1st Cir. 1995) (confirming award of attorney fees when parties agreed to follow New York Stock Exchange arbitration
rules that authorized an award of fees).
140. In re Qimonda AG, 462 B.R. 165 (Bankr. E.D. Va. 2011).
141. In re Qimonda AG, 433 B.R. 547, 552 (Bankr. E.D. Va. 2010).
142. Or its predecessor companies.
143. In re Qimonda AG, 433 B.R. at 552.
144. Id.
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GEORGETOWN JOURNAL OF INTERNATIONAL LAW
In July 2009, Qimonda obtained recognition of the German proceeding as a foreign main proceeding in the United States under Chapter
15.145 Pursuant to section 1521(a),146 section 365(n) (providing that if
the debtor or trustee rejects a license, a licensee can elect to retain its
rights to the licensed intellectual property, including a right to enforce
an exclusivity provision) became applicable in the Chapter 15 proceeding.147 However, the German administrator filed a motion to amend
the order to which the Bankruptcy Court granted, stating in part that
“[t]he application of Section 365 to the instant proceeding shall not in
any way limit or restrict . . . the right of the Administrator to elect
performance or nonperformance of agreements under § 103 of the
German Insolvency Code or such other applicable rule of law in the
Foreign Proceeding.”148 Accordingly, the German administrator elected
“non-performance” of the debtor’s licenses, pursuant to German law,
wherein the licensees could no longer use the debtor’s licensed technology.149 The U.S. patent licensees asserted their rights under
section 365(n) of the U.S. Bankruptcy Code to be able retain their
license rights.150
The Bankruptcy Court considered whether this inability of patent
licensees to exercise license retention protections under section 365(n)
is manifestly contrary to U.S. public policy.151 In analyzing the public
policy exception, the Bankruptcy Court focused on two factors:
“(i) whether the foreign proceeding was procedurally unfair and
(ii) whether the application of foreign law or the recognition of a
foreign main proceeding under Chapter 15 would ‘severely impinge
the value and import’ of a U.S. statutory or constitutional right, such
that granting comity would ‘severely hinder United States bankruptcy
courts’ abilities to carry out . . . . the most fundamental policies and
purposes of these rights.”152
The court concluded that Congress enacted section 365(n) to protect American technology, and that this is direct evidence of a “strong”
145. Id.
146. Section 1521 provides a non-exclusive list of discretionary additional relief that may be
granted “where necessary to effectuate the purpose of [Chapter 15] and to protect the assets of the
debtor or the interests of the creditor.” 11 U.S.C. § 1521(a) (2012).
147. In re Qimonda AG, 433 B.R. 547, 553 (Bankr. E.D. Va. 2010) (citation omitted).
148. Id.
149. Id.
150. Id.
151. In re Qimonda AG, 462 B.R. 165, 183 (Bankr. E.D. Va. 2011).
152. Id.
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U.S. policy favoring technological innovation.153 In reaching this conclusion, the Court noted that failure to apply section 365(n) would
“slow the pace of innovation, to the detriment of the U.S. economy”
and “would severely impinge an important statutory protection . . . and
thereby undermine a fundamental U.S. public policy.”154
B.
In re Vitro155
Vitro, S.A.B. de C.V. (Vitro) is a Mexican holding company that
conducts substantially all of its multinational operations through subsidiaries.156 The multinational subsidiaries combine to make Vitro Mexico’s largest manufacturer of glass containers and flat glass.157 After the
global financial crisis in 2008 and corresponding downturn in business,
Vitro stopped making interest payment on its debt and began negotiations with its creditors to restructure all of its outstanding debt.158 In
2010, it filed a voluntary judicial reorganization proceeding in Mexico
and sought approval of a pre-packaged “concurso,” or restructuring,
plan.159
The plan was approved in April 2011.160 Notably, the approval
order extinguished the guarantee obligation of Vitro’s non-debtor subsidiary guarantors, effectively discharging the obligations to the noteholders.161 However, Vitro’s noteholders attempted to collect their
debts owed under the guarantee obligations in New York, and Vitro’s
foreign representative filed a motion seeking recognition of the Mexican proceeding.162 The foreign representative sought the full force and
effect of the approval order in the United States, including a permanent injunction prohibiting the noteholders from taking actions in the
United States against Vitro and its non-debtor subsidiary guarantors.163
The noteholders objected, claiming in part that the Mexican plan was
manifestly contrary to U.S. public policy because it discharges obligations held by non-debtor guarantors and does not provide the protec-
153.
154.
155.
156.
157.
158.
159.
160.
161.
162.
163.
2013]
Id. at 185.
Id.
In re Vitro, S.A.B. de C.V., 473 B.R. 117 (Bankr. N.D. Tex. 2012).
In re Vitro, S.A.B. de C.V., 455 B.R. 571, 574 (Bankr. N.D. Tex. 2011).
Id.
Id. at 574-75.
Id. at 575.
Id. at 576.
In re Vitro, S.A.B. de C.V., 473 B.R. 117, 120 (Bankr. N.D. Tex. 2012).
In re Vitro, 455 B.R. at 576.
In re Vitro, 473 B.R. at 120.
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tions afforded to creditors under the Bankruptcy Code.164
The Court agreed. Here, it pointed to section 524 of the Bankruptcy
Code, which prevents the discharge of claims for entities other than a
debtor in an insolvency proceeding, absent the existence of extraordinary circumstances, and Fifth Circuit precedent that has foreclosed
non-consensual, non-debtor releases and permanent injunctions.165
The code and the precedent, the Court held, revealed a “fundamental
U.S. policy” to protect third party claims in a bankruptcy case.166
Therefore, the concurso plan cannot be enforced in the United States.167
C.
The Untenable Expansion of Section 1506
Both the In re Qimonda and In re Vitro courts clearly note that section
1506 should be interpreted narrowly. Past jurisprudence has elaborated that the exception is “intended to be invoked only under exceptional circumstances concerning matters of fundamental importance
for the United States,”168 and “is to be used sparingly.”169 Additionally,
“the mere fact that [U.S.] law differs from foreign law with respect to
the relief sought by [the] foreign representative . . . does not mean that
relief sought by foreign representative cannot be granted as ‘manifestly
contrary’ to [U.S.] public policy; foreign law need not be identical to
United States law.”170 Indeed, “every substantive rule of U.S. law need
not be followed in a Chapter 15 ancillary proceeding.”171
In contrast to the above stated principles, both In re Qimonda and
In re Vitro seem to conflate “fundamental notions” of public policy
with simple statutory manifestations of current U.S. policy. While
sections 365(n) and 524 do indeed express a policy the United States
would like to uphold, the courts fail to adequately express how the
policies are truly “fundamental.” In other words, they do not explain
why failing to uphold the policy is “manifestly contrary” to the overarching public policies of the United States. Here, not only are the
164. Id.
165. Id. at 125-27.
166. Id. at 120.
167. Id. The district court’s decision was affirmed on other grounds by the Fifth Circuit in a
November 2012 decision. The Court did “not reach whether the Concurso plan would be
manifestly contrary to a fundamental public policy of the United States.” In re Vitro S.A.B. de C.V.,
701 F.3d 1031, 1070 (5th Cir. 2012).
168. In re Ran, 607 F.3d 1017, 1021 (5th Cir. 2010).
169. In re Toft, 453 B.R. 186, 196 (Bankr. S.D.N.Y. 2011).
170. Id. at 195.
171. Id. at 200.
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courts at odds with prior jurisprudence interpreting the public policy
exception in Chapter 15 cases, they are also at odds with courts interpreting similar public policy exceptions in both the European
Insolvency Regulation and international arbitral proceedings.
1. In re Qimonda
The court in In re Qimonda relied on broad assertions of this
“fundamental U.S. policy” without providing much background, precedent, or evidentiary showing.172 The cited language in part A173 is the
court’s only justification for holding the provision to be “fundamental.”
This conclusion is in stark contrast to the rest of the opinion, which
opined on the narrowness of the exception and general principles of
comity embedded in Chapter 15.174
The court, indeed, noted “[t]here can be little doubt that the whole
purpose of [C]hapter 15 would be defeated if local or parochial
interests routinely trumped the forum law of the main proceeding.”175
It correctly pointed out that while no Constitutional right is implicated
in this case, that the relevant statutory right might fall under the public
policy exception if it is deemed to be fundamental.176 Additionally, the
court commented that “[i]t is curious that if Congress believed the
protection conferred by [section] 365(n) to be fundamental, it did not
include it among the Bankruptcy Code provisions that apply automatically once an order of recognition is entered in a cross-border case.”177
Instead, Congress made the application of section 365 completely
discretionary, and despite the discretionary nature of the provision, the
Court somehow deemed the provision to be necessary because it would
prevent the slowing of the “pace of innovation.”178
The U.S. patent licensees clearly prefer that the disposition of
their executory contracts and rights be managed by section 365(n) of
the U.S. Bankruptcy Code, as they fear that they will be treated less
favorably if section 524 of the German Insolvency Code controls.179
However, as the district court explains, it “is an unfortunate but an
inevitable result of the bankruptcy of any company. Parties with whom
172.
173.
174.
175.
176.
177.
178.
179.
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In re Qimonda AG, 462 B.R. 165, 183-85 (Bankr. E.D. Va. 2011).
See supra p. 1303.
In re Qimonda, 462 B.R. at 183-85.
Id. at 183.
Id. at 184.
Id.
Id. at 184-85.
In re Qimonda AG, 2009 WL 4060083, at *1 (Bankr. E.D. Va. Nov. 19, 2009).
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a debtor has dealt may be adversely affected by the bankruptcy.”180
In this case, it is important to look at the nature of the legal instrument as issue: the patent. One idea, process, or invention may have
multiple international patents that are each issued under the law of the
various nations.181 If each nation claims that their patent law best
reflects their policy of technological innovation, and thus claims that
their law would be applicable, each patent licensed by Qimonda will be
treated in different ways, and will result in “different and inconsistent
results throughout the world.”182 This result directly conflicts with the
stated purposes of Chapter 15.183
The Qimonda court, therefore, expanded the public policy exception
to include policies that promote technological innovation merely in
order to protect the U.S. patent licensees, ultimately to the detriment
of the general aims of comity expressed in both the Model Law and
Chapter 15.
2.
In re Vitro
While the Vitro court cited previous decisions that affirmed both that
the public policy exception applied only to the most fundamental
policies of the United States and that the mere fact that the application
of foreign law would lead to a different result is not sufficient to hold as
manifestly contrary to U.S. public policy, it failed to address how its
holding differed. Like In re Qimonda, it did not provide any discussion
or evidentiary showing implicating any procedural due process concerns, or exactly how the wider public interest is affected by this
decision. Additionally, the court did not cite any Constitutional provisions, or even any other statutory provisions beyond section 524.
Most importantly, however, the court glossed over the fact that
cases outside the Fifth Circuit have permitted non-debtor releases in
Chapter 11 and 13 plans. In re Metcalfe & Mansfield, for instance,
permitted the enforcement of third party releases.184 While the Vitro
court tried to distinguish the facts at issue, explaining that in Metcalfe,
“there was near unanimous approval of the plan by the creditors, who
were not insiders of the debtor,” “the plan was negotiated between the
parties,” there was not a timely objection to the order, and the release
180.
181.
182.
183.
184.
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Id. at *2.
See id.
Id.
See id.
In re Metcalfe & Mansfield Alternative Invs., 421 B.R. 685 (Bankr. S.D.N.Y. 2010).
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was not complete,”185 it neglected to explain how these differences
reflected a fundamental public policy of the United States. While
small factual variations may be sufficient to deem something contrary
to a specific public policy such as a specific statute, mere variations are
patently insufficient to deem the same “manifestly” contrary to fundamental U.S. public policy without further support. Clearly, if other
courts have permitted non-debtor releases, it is not a fundamental U.S.
policy to disallow such provisions in restructuring plans. On appeal,
even the Fifth Circuit questioned the bankruptcy court’s reasoning in
dicta despite that fact that it did “not reach whether the [c]oncurso
plan would be manifestly contrary to a fundamental public policy of the
United States.”186 It noted, “[section] 1506 was intended to be read
narrowly, a fact that does not sit well with the bankruptcy court’s broad
description of the fundamental policy at stake as ‘the protection of
third party claims in a bankruptcy case.’”187
Predominately, however, the Vitro court failed to consider the effects
of its holding and how they would directly contravene the aims and
objectives of Chapter 15 to establish greater legal certainty, trade, and
investment. Specifically, a refusal to enforce the concurso plan in the
United States would result in a series of cases, judgments, and collections that would conflict with the plan. This inconsistency created
would expose Vitro to differing obligations to its creditors “depending
on the legal regime they opt to rely on or are bound by,”188 and create
disincentives for “creditors to reach consensual resolutions in foreign
insolvency proceedings.”189
Therefore, the Vitro court expanded the public policy exception
to include the protection of third party claims in a bankruptcy case.
Like the Qimonda holding, this is again, ultimately to the detriment of
the general aims of comity expressed in both the Model Law and
Chapter 15.
VII.
ALTERNATE GROUND FOR CREDITOR PROTECTION: SECTION 1522
By expanding the public policy exception beyond fundamental U.S.
policy, courts in In re Qimonda and In re Vitro have used the provision
as a way to uphold the rights of creditors and interested entities.
185.
186.
187.
188.
189.
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In re Vitro, S.A.B. de C.V., 473 B.R. 117, 131 (Bankr. N.D. Tex. 2012).
In re Vitro, S.A.B. de C.V., 701 F.3d 1031, 1070 (5th Cir. 2012).
Id.
Brief of Appellant at *28, In re Vitro, 2012 WL 3560654 (N.D. Tex. Aug. 10, 2012).
Id. at 29.
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Certainly, the issues presented in both cases implicated the rights of
both U.S. patent licensees and creditors, and the U.S. courts are well
to want to protect the rights of those entities. Using the public policy
exception, however, is entirely inconsistent with comity as provided
for in the purpose of both the Model Law and Chapter 15. The fact that
courts in other enacting states have not litigated the public policy
exception further illustrates the narrowness of the exception, and
courts should not be remiss in relying on the provision for nonrecognition of foreign judgments. Therefore, these rights of these
creditors and interested entities should instead be analyzed under
another fundamental section of Chapter 15: Section 1522.
A.
Overview of Section 1522
Section 1521 of the U.S. Bankruptcy Code provides that “[u]pon recognition . . . the court may . . . grant any appropriate relief, including
. . . granting any additional relief that may be available to a trustee . . . .”
However, Section 1522 places limitations on the relief that may be
granted. Under Section 1522, “the protection of U.S. creditor’s interests is a mandatory condition of turning over assets to a foreign
representative,”190 specifying that the court “may grant relief in the
form of recognition of a foreign proceeding, or may modify or terminate relief . . . only if the interests of creditors and other interested
entities, including the debtor, are sufficiently protected.”191 Additionally, the court may impose conditions on either the relief or the
operation of the debtor’s business.192 Therefore, the court must “tailor
relief and conditions as to balance the relief granted to the foreign
representative and the interests of those affected by such relief, without
unduly favoring one group of creditors over another.”193
While the use of the phrase “sufficiently protected,” however, departs
from the Model Law’s insistence that the interest of the creditors and
interested entities be “adequately protected,”194 the terms have identical implications.195 In In re Atlas Shipping A/S196 the court explained
that “sufficient protection” incorporated “three basic principles:” (i) “the
190. Proskurchenko, supra note 86, at *6.
191. 11 U.S.C. § 1522 (2012) (emphasis added).
192. 11 U.S.C. § 1522(b) (2012).
193. In re Tri-Continental Exchange Ltd., 349 B.R. 627, 637 (Bankr. E.D. Cal. 2006).
194. Model Law on Cross-Border Insolvency, supra note 47, art. 22(2).
195. “Section 1522 changed this concept from adequately protected to sufficiently protected
to avoid confusion with other notions of adequate protection found in the Bankruptcy Code.” In re
AJW Offshore, Ltd., 2013 WL 1147203, n.22 (Bankr. E.D.N.Y March 19, 2013), citing LEIF M.
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just treatment of all holders of claims against the bankruptcy estate,”
(ii) “the protection of U.S. creditors against prejudice and inconvenience in the processing of claims in the [foreign] proceeding,” and
(iii) “the distribution of proceeds of the [foreign] estate substantially in
accordance with the order prescribed by U.S. law.”197 When a court
engages in the balancing test, it must clearly delineate the interests of
the debtors and creditors, and articulate why the interests of these
parties are sufficiently protected.
Section 1522(c) allows the court to modify or terminate the relief
upon its own motion or at the request of either a foreign representative or an entity affected by the relief.198 The section, therefore, gives
standing to parties affected by the relief a court may grant under
section 1519 or 1521.199 However, section 1522 does not give the court
discretion to modify or terminate relief that is an automatic effect of
recognition under 1520, “specifically the application of the section 362
automatic stay and those aspects of section 363 other than operation of
the debtor’s business.”200 However, the cited sections both have provisions permitting relief from the stay by “terminating, annulling, modifying or conditioning the stay.”201 Therefore, section 1522 gives the court
full say whether or to modify any automatic or discretionary relief.
B.
Section 1522 Allows the Courts to Uphold Concept of Comity
Both the In re Qimonda and In re Vitro courts hold, in part, that under
the balancing test of section 1522, U.S. creditors and interested entities
would not be sufficiently protected if the foreign proceedings were
recognized and enforced. Therefore, the courts would have reached
the same result even if the foreign proceedings were not deemed to be
manifestly contrary to U.S. public policy under section 1506. Typically,
however, the public policy exception should only be employed if
another more specific provision of Chapter 15 does not dictate the
CLARK, ANCILLARY AND OTHER CROSS-BORDER INSOLVENCY CASES UNDER CHAPTER 15 OF THE BANKRUPTCY CODE, § 7[2], n.41 (2008).
196. In re Atlas Shipping A/S, 404 B.R. 726 (Bankr. S.D.N.Y. 2009) (holding that the
creditor’s interests are sufficiently protected when creditors have the right to assert their rights in
the foreign bankruptcy proceeding).
197. Id. at 740 (quoting In re Artimm, 335 B.R. 149, 160 (Bankr. C.D. Cal. 2005)).
198. 11 U.S.C. § 1522(c) (2012).
199. COLLIER ON BANKRUPTCY § 1522.03, Modification or Termination of Relief (16th ed.).
200. Id.
201. Id.
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dispute,202 “consistent with the principle that more specific statutory
provisions usually prevail over general provisions.”203 In these cases,
section 1522 appears to be adequate to resolve the disputes arising
from a conflict between U.S. and foreign law, and, therefore, the public
policy exception would not have to be invoked.204
This reliance on section 1522, however, is not foolproof and the
same issues of comity may arise. For example, courts may insist that
preference be given to U.S. creditors and interested entities over those
in foreign states. However, the section requires a stringent balancing
test that requires the court to balance debtor and creditor interests.205
The latitude the court has to completely deny recognition or relief,
therefore, is much more limited and requires courts to look not just at
the interests of U.S. policy and U.S. creditors and interested parties, but
also to foreign policy and foreign interests. Additionally, remember
that the court has broad discretion to tailor relief and conditions in
order to achieve this balance, and a court would be well to try to tailor
the relief in a way that would allow it to grant comity to the foreign
proceeding. Comity, here, has a stronger influence.
In enacting Chapter 15, the United States recognized that there will
undoubtedly “be conflicts between various insolvency codes as each
nation enacts its own insolvency code which it feels is best suited to its
circumstances.”206 The plain meaning and stated purposes of Chapter
15, however, require the Court to grant comity to every foreign
insolvency proceeding where procedural due process requirements
have been met and no narrowly defined fundamental rights are infringed. To uphold the purpose of Chapter 15 and the Model Law,
then, both courts should have relied primarily on section 1522.
VIII.
CONCLUSION
The UNCITRAL Model Law on Cross-Border Insolvency was developed to encourage international cooperation in cross-border insolvency proceedings. Drawing on the principles of comity to provide an
202. In re Toft, 453 B.R. 186, 195-96 (Bankr. S.D.N.Y. 2011).
203. HO, supra note 3, at 178. The Fifth Circuit, on appeal, agreed with this general
proposition. In dicta it highlighted that it did not decide “whether the Concurso plan would be
manifestly contrary to a fundamental public policy of the United States” “because [it] conclude[d]
that relief is not warranted under [section] 1507, however, and would also not be available under
[section] 1521.” In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1070 (5th Cir. 2012).
204. See id.
205. In re Tri-Continental Exchange, Ltd., 349 B.R. 627, 637 (Bankr. E.D. Cal. 2006).
206. In re Qimonda AG, 2009 WL 4060083, at *1 (Bankr. E.D. Va. Nov. 19, 2009).
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interface that assists countries in administering cross-border insolvency
proceedings, it aims to foster cooperation between foreign States,
provide legal certainty for trade and investment, protect and maximize
the value of a debtor’s assets, and to fairly administer the interests of
creditors and other interested parties, including the debtor. The
United States integrated the substantial majority of the Model Law
into the U.S. Bankruptcy Code, including a public policy exception
that allows enacting courts to deny recognition or relief to a foreign
proceeding if the proceeding is “manifestly contrary” to the public
policy of the enacting country.
While most courts have interpreted the exception narrowly and
note that it should only be reserved for “exceptional circumstances,”207
the recent cases In re Qimonda and In re Vitro have unjustifiably
“stretched” the exception to include cases where the interests of U.S.
creditors and interested parties are impaired by the foreign proceeding. This directly contravenes the stated premises of both the Model
Law and Chapter 15, and threatens to undermine the promotion of
international cooperation and legal consistency in cross-border insolvency proceedings by increasing the inconsistency and unpredictability
of U.S. recognition. Therefore, when looking to secure the interests of
U.S. creditors and interested parties, courts should rather look to
section 1522 of the Bankruptcy Code, and engage in a stringent
balancing test that looks at, and allows the court to tailor relief to, the
interests of both U.S. creditors and foreign debtors.
207. See supra note 95.
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