Restructuring

Welcome to the first in the Weil Bankruptcy Blog’s Breaking the Code series! You’ll be forgiven if you’re reading this blog entry on the misapprehension that it has something to do with Hugh Whitemore’s 1986 play “Breaking the Code,” which sketches British mathematician Alan Turing’s involvement in the breaking of the German Enigma code at Bletchley Park during World War II.  No such luck!  Our Breaking the Code series, however, promises to be just as interesting.  Hopefully.  Our highly trained attorney-cryptologists will delve deep in to the annals of the Bankruptcy Code to bring you randomly selected sections of the Bankruptcy Code, dusting off and bringing to light sections that may not ordinarily see the light of day.
To kick it off, we have selected section 1503 of the Bankruptcy Code as the first section for us to peruse.  And should you not be familiar with it, here it is:

1503. International Obligations of the United States.  To the extent that this chapter conflicts with an obligation of the United States arising out of any treaty or other form of agreement to which it is a party with one or more other countries, the requirements of the treaty or agreement prevail.

So to start, a bit of history.  Section 1503 was added to the Bankruptcy Code (along with the rest of chapter 15) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, implementing into federal law the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on Cross-Border Insolvency in 1997, replacing section 304 of the Bankruptcy Code, and interestingly, was adopted almost verbatim from the Model Law, with only minor conforming changes.  In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, 374 B.R. 122, 126 (Bankr. S.D.N.Y. 2007) (citing H.R.Rep. No. 109-31 at 105-07 (2005), U.S.Code Cong. & Admin. News (2005 p. 88)); In re Tri-Continental Exchange Ltd., 349 B.R. 627, 631-32 (Bankr. E.D. Cal. 2006).  And if you’re not overly familiar with UNCITRAL, it is a United Nations commission with members that are elected by the UN’s General Assembly for six year terms, the terms of half the members expiring every three years.  UNCITRAL’s membership is intended to represent the various legal systems and traditions in use today, to be representative of the world’s various geographic regions and includes members at different levels in their cycle of economic development.
The main thrust of section 1503 is that a bankruptcy court may not recognize a foreign proceeding if such recognition violates international agreements to which the United States is a party.  Given the UNCITRAL provenance of this section of the Bankruptcy Code, bankruptcy courts must interpret it in light of the various interpretations given to it by countries that have adopted the Model Law, to ensure a uniform and coordinated approach to cross-border insolvency cases.
To put the section in context, chapter 15 cases are typically ancillary to a debtor’s principal proceedings that would ordinarily be commenced in their home jurisdiction, and chapter 15 is intended to provide a clear and uniform procedure by which a foreign entity charged with management of a bankruptcy within its jurisdiction may reach out to American courts for assistance in achieving an efficient result.
So how does section 1503 work in practice?  Unsurprisingly, and as noted in Paul Andrus, case authority in this sphere is fairly sparse, perhaps because the law is relatively new and straightforward.  Let’s take for instance a government that the United States doesn’t currently recognize, that of the Nagorno-Karabakh Republic (yes, there is such a place).  Azerbaijan claims Nagorno-Karabakh as part of its sovereign territory.  Should the United States enter into a treaty with Azerbaijan, to the effect that only agents recognizing the legitimacy of the Azerbaijani government in its territory will have access to U.S. courts, section 1503 may prevent entities subject to the jurisdiction of the unrecognized government of Nagorno-Karabakh from obtaining relief under this chapter of the Bankruptcy Code.
So there you have it.  Section 1503 in a nutshell.  We’ll be bringing you more sections of the Bankruptcy Code in the coming months as part of our Breaking the Code series.  A word of caution though, in the words of the brilliant Alan Turing: “It’s not breaking the code that matters – it’s where you go from there.”