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Home > Journals > Michigan Law Review > MLR > Volume 104 > Issue 8 (2006)

 

Abstract

The collapses of Yukos, Parmalat, and other international juggernauts have focused scholarly attention on the failure of multinational enterprises. Even what one might consider "American" companies, such as Chicagobased United Airlines, have made clear in their restructuring plans that their operations have profound effects on the dozens of nations around the globe where they transact business. Government and quasi-government reform efforts to regulate these cross-border insolvencies have abounded, including among others, the UNCITRAL Model Law on Cross-Border Insolvency. UNCITRAL is also building on World Bank and INSOL efforts at promulgating a Legislative Guide for "best practices" bankruptcy codes.

Scholars vary in their enthusiasm toward these reform efforts, but most will agree that these initiatives should be grounded in a coherent theory of cross-border financial distress.5 Debate to date in international bankruptcy theory has centered on two competing paradigms, universalism and territorialism. This rich scholarly discussion is replete with complex overlays, such as the proper role of private ordering by parties within either proposaI. One of the principal sticking points of this debate, however, has been how best to protect what are often called "local interests." While scholars and courts are not as precise in their use of this term as they might be, they express serious concern over the perils local creditors and small-country sovereigns face in trying to design a viable international bankruptcy system.

The purpose of this Article is twofold. First, it explores what exactly we mean in cross-border insolvency law when we talk about "local" creditors and protecting "local interests." Because these local interests are crucial to the debate between universalists and territorialists (with the latter claiming that the former cannot protect these interests sufficiently), rigorous analysis is imperative to permit meaningful critique. Second, this Article advances policy recommendations to address the problems of local interests (as properly understood) and suggests the next stage in designing a theoretically sound but pragmatically functional international bankruptcy system.

The Article proceeds as follows: Part I summarizes briefly the universalist- territorialist debate in international bankruptcy theory. Part II first looks at the concern of protecting "local creditors" and unpacks that concept into its constitutive parts. It argues that this construct is actually an amalgam of what is called the local asset-claims ratio (a legally neutral, unpredictable-before- bankruptcy happenstance) and the content of the local state's substantive bankruptcy laws (an arguably predictable factor ex ante to any given debtor's default). These components both affect the overriding motivation of the local creditor in a cross-border insolvency, which I characterize as "greed." Part II further explores the idea of protecting "local states" and argues that these are distinct concerns from the problems of local creditors. These state-specific interests present separate obstacles for international bankruptcy that operate on a parallel but distinct track from greed. The related vice of these local sovereign policymakers that matches their local constituents' greed is what I loosely call "pride."

Armed with a more accurate and honest understanding of the challenges local greed and local pride present in cross-border insolvencies, Part III turns to policy recommendations, focusing on the more intractable but at least more predictable problem of pride. It offers a first-best resolution from a theoretical standpoint, contending that recharacterization of the conflicts of laws presented by cross-border disputes- by focusing on diffuse reciprocity and the identification of bankruptcy meta-norms-provides the clearest path to taming the problem of sovereign pride. It suggests that the project of substantive harmonization, especially the reduction of priority payout provisions within domestic bankruptcy laws, begins this task. Be. cause international bankruptcy is an inchoate and fluctuating field, however, Part III also offers some second-best, pragmatically oriented policy alternatives. It first critiques two of the dominant proposals, liens and circumscription. It then proposes a new and arguably better idea: a substantive carve-out in favor of the local territorial state within an overarching universalist framework. The carve-out proposal, while directed at pride, may have spillover potential that will help with greed; it thus takes aim at two birds with one stone.

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