Academic journal article Texas International Law Journal

Universal Priorities

Academic journal article Texas International Law Journal

Universal Priorities

Article excerpt



Today even the leaders of the People's Republic of China' agree with the Founders of the American Republic2 that a bankruptcy system is central to fundamental economic reform. Yet only recently has this understanding risen to an international level, focusing attention on the problem of multinational (cross-border) insolvency. Just as automotive enthusiasts rarely rave about radiators, bankruptcy is not often a major topic in the discussion of economic development and globablization-until the engine boils over. Recent developments, in particular the adoption of a Model Law on Cross-Border Insolvency by the United Nations Commission on International Trade Law (UNCITRAL),3 demonstrate a dramatically increased awareness of this problem and provide a stimulus to look ahead to the next evolution.

Traditionally, scholars have identified two fundamental views about the administration of a multinational insolvency. One is universalism, which means that a single bankruptcy proceeding affects the debtor's assets wherever located in the world such that the orders entered and dispositions made in the main proceeding are given effect by courts everywhere.4 The second view, territorialism, has meant seizure of local assets by each local court to be distributed under local law for the benefit of locally filing creditors. In recent years, adherents to both systems have urged cooperation among courts, especially in reorganizations.

We in the United States face some difficult decisions related to this distinction. Universalism, in a modified form, is the fundamental concept underlying U.S. approaches to cross-border insolvency, while a modified territorialism dominates thinking in most other countries. U.S. courts are conditioned to think of seeking deference to a court in a debtor's home country, or, if the United States is the home country, of seeking deference from other courts. In many other countries, courts think in terms of local or secondary bankruptcies in cases where a local jurisdiction has a significant interest in a particular debtor. In these countries, deference to a main proceeding is limited for the most part to instances where the local jurisdiction has some assets but not enough to justify a local proceeding. Section 304 of the U.S. Bankruptcy Code and the leading case law thereunder exemplify "modified universalism,"6 while "modified territorialism" has its most advanced example in the European Union Bankruptcy Convention.7

This distinction is not to suggest for a moment that U.S. courts have always been internationally minded and other courts have always been parochial. That is certainly not true; but it is true that the underlying idea behind section 304 is centralization and deference while the fundamental concept behind the EU Convention is cooperation among decentralized proceedings.9

The question that faces U.S. policymakers is whether and to what extent to adapt U.S. doctrine to the realities of a world of modified territorialism despite the U.S. conviction that modified universalism is a superior long-term solution. This paper addresses a central point in the structure of cross-border insolvency, the problem of priorities, in the context of that question.


In a previous paper,10 I addressed the potentialities of universal cross-filing (UCF), which is a system that permits a liquidator in Country A to file claims in an insolvency proceeding in Country B on behalf of all the creditors who have filed claims in the insolvency proceeding in Country A. In that paper my concern was to show how UCF might produce distributions in a system of modified territorialism similar to that produced by a universalist system.11

In the process it was necessary to discuss the interesting question of "cross-priority," by which I mean nondiscriminatory, national treatment for foreign12 claims that fall within a category of claims given priority in a local insolvency system. …

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