Are SEC Equity Receiverships 'Foreign Proceedings' Within The Meaning Of UNCITRAL's Model Law On Cross-Border Insolvencies?

A federal district court in Texas has recently concluded that an SEC equity receivership is collective in nature as that term is used in the definition of a "foreign proceeding" in section 101(23) of the Bankruptcy Code, which is based on the Model Law on Cross-Border Insolvency (the "Model Law") developed by the United Nations Commission on International Trade Law ("UNCITRAL"). This decision may assist equity receivers appointed in the United States in their efforts to marshal assets and obtain information in foreign jurisdictions around the world.

The case, In re Stanford International Bank, Ltd., 3:09-CV-0721-N (N. D. Tex.), arose out of the notorious international Ponzi scheme masterminded by Allen Stanford, who was recently sentenced to 110 years in prison for securities fraud. The Stanford cases present a striking example of court-appointed representatives competing around the world for control of the assets of a multinational enterprise. The central issue before the Texas court was whether to recognize a liquidation proceeding filed in an Antiguan court as a "foreign proceeding" under Chapter 15 of the United States Bankruptcy Code, 11 U.S.C. §§ 1501 et seq.

Foreign Proceedings Under the Model Law

Chapter 15 is derived from the UNCITRAL Model Law. The United States enacted Chapter 15 in 2005 to assist representatives of debtors in foreign insolvency proceedings to obtain relief in United States courts, and to foster coordination and cooperation between the insolvency courts of different jurisdictions with concurrent jurisdiction over a debtor's assets.

The term "foreign proceeding" is defined in the Model Law and in section 101(23) of the U.S. Bankruptcy Code as "a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation."

A U.S. court may recognize an insolvency proceeding commenced in a foreign country as either a foreign "main" or a "non-main" proceeding, depending on the location of the debtor's center of main interests (often referred to as its "COMI"). The center of main interests term was derived from the European Union Convention on Insolvency Proceedings that was in the process of being adopted when UNCITRAL drafted the Model Law. In the European Union, the COMI location determines the choice of law for most issues. Under the Model Law, however, it determines only whether a proceeding is a foreign main or non-main proceeding. COMI is not a defined term in the European Insolvency Regulation or the Model Law, but the preamble to the European Insolvency Regulation provides that "The 'centre of main interests' should correspond to the place where the debtor conducts the administration of his interest on a regular basis and is therefore ascertainable by third parties." Although there is a presumption that the debtor's COMI is located in its place of registration, that presumption may be rebutted by objective factors ascertainable to third parties.

A "main proceeding" is one that was filed where the debtor has its COMI, and a "non-main" proceeding arises where the debtor has another non-transitory establishment. The principal difference between a main proceeding and a non-main proceeding is the relief available following recognition. For example, a representative of a main foreign proceeding is automatically entitled to a stay of all proceedings pending against the debtor in the territorial United States, identical to the stay that automatically arises upon any domestic bankruptcy filing. The foreign representative may recover post-petition transfers of estate property, may sell estate property with all of the protections of section 363 of the Bankruptcy Code, and may, unless the court orders otherwise, operate the business of the debtor. While some of this relief, and other forms of relief, may also be available in non-main proceedings upon specific application and where necessary to effectuate the purposes of Chapter 15 and to protect the assets of the debtor and the interests of the creditors, any such relief granted to a representative of a foreign non-main proceeding must be predicated upon a determination that the relief relates to assets that, under the law of the United States, should be administered in the foreign main proceeding. Litigation about COMI has often been contentious in a number of jurisdictions around the world.

The International Competition For Recognition In The Stanford Cases

Stanford International Bank, Ltd. ("SIB") was registered in Antigua. It was a member of a group of companies (the "Stanford Entities") owned directly or...