Recognition of U.S. Bankruptcy Proceedings by Canadian Courts

Presented at the 4th International Symposium on

Bankruptcy, June 2004.

[C]ourts must have regard to the need to do justice to the particular litigants who come before them as well as to the public interest in the efficient administration of bankrupt estates. It would be inappropriate to elevate any one consideration to a controlling position in the exercise of a bankruptcy court's discretion to stay proceedings under Part XIII of the Act Discretion should not be thus predetermined. The desirability of international coordination is an important consideration. In some cases, it may be the controlling consideration. The courts nevertheless have to exercise their discretion to stay or not to stay domestic proceedings according to all the relevant facts of a particular case.

The Honourable Mr. Justice Binnie in Holt Cargo Systems Inc. v. ABC Containerline N.V. (Trustees of) at para. 87.

With the reduction of trade barriers and the introduction of open borders pursuant to bilateral and international agreements such as the North American Free Trade Agreement, there has been a steady increase in the cross-border commerce between Canada and the United States. The statistics show the extent to which U.S. capital plays a major role in the Canadian market place. For instance, in 2002, investment from sources in the United States represented $224,330,000,000 of the total foreign direct investment in Canada of $349,388,000,000. At the end of 2003, United States investors had invested $229,684,000,000 in Canadian bonds, $71,325,000,000 in Canadian stocks and $12,754,000,000 in Canadian money market instruments.1

As cross-border commerce has expanded, a greater number of multi-national companies are establishing "branch" locations or local subsidiaries in jurisdictions outside of their home territory. This is particularly true with respect to American companies setting up operations within Canada and Canadian companies setting up operations within the United States. Despite the multi-national presence of corporations, it must be remembered that corporations still operate within the territorial jurisdiction of the countries in which their assets and operations are located. In the case of an insolvency involving a multi-national corporation, the limits of territorial jurisdiction are often put to the test.

Despite a number of procedural and substantive differences between the bankruptcy laws of Canada and the United States, Canadian courts have shown a willingness to extend recognition to bankruptcy proceedings commenced in the United States and to enforce orders issued in U.S. bankruptcy proceedings within the territorial jurisdiction of Canada. The recognition of such proceedings was originally carried out under the doctrine of "international comity" and more recently pursuant to the statutory authority to recognize a "foreign proceeding" under each of the Bankruptcy and Insolvency Act (Canada)2 and the Companies' Creditors Arrangement Act (Canada)3. For the reference of non-Canadian readers, key insolvency legislation in Canada is found in two separate federal statutes. The BIA deals with liquidations and winding up of a bankrupt entity (similar to Chapter 7 of the U.S. Bankruptcy Code4) and contains provisions for a short-term restructuring of an insolvent entity in the context of a stay of proceedings (similar to Chapter 11 of the U.S. Bankruptcy Code5), whereas the CCAA is a statute which allows companies to restructure their debts and/or share capital under judicial supervision in the context of a court imposed stay of proceedings (similar to Chapter 11 of the U.S. Bankruptcy Code).

In order to understand the extent to which U.S. bankruptcy orders will be recognized in Canada, it is helpful to look at the historical recognition of foreign insolvency orders under the common law doctrine of "international comity" and also in the context of the more recent statutory amendments to the BIA and the CCAA.

International Comity

The leading definition of "comity" in Canada is as follows:

" 'Comity' in the legal sense, is neither a matter of absolute obligation, on the one hand, nor of mere courtesy and good will, upon the other. But it is the recognition which 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 the other persons who are under the protection of its laws "6

Comity is the basis upon which a court may recognize and enforce an order or decree from a foreign court within its own territorial jurisdiction. As with most common law countries, Canadian courts do not automatically recognize an order issued from a foreign court as it applies to persons or assets located within Canada, even where such order purports to have extraterritorial effect (such as a stay under Chapter 11 of the U.S. Bankruptcy Code). However, under the doctrine of comity, the Canadian court may, in the appropriate circumstances, enforce a foreign order in Canada.

The leading case on the recognition of foreign judgments is the Supreme Court of Canada (the "SCC") decision in Morguard Investments Ltd. v. De Savoy. In this case, which involved the recognition of an order of one Canadian province in another Canadian province, the SCC rejected earlier principles of English case law which restricted the enforcement of a foreign judgment to a number of limited circumstances. The SCC held that the principles behind the previously imposed restrictions on the enforcement of foreign judgments which were the historic basis for such limitations, notably the difficulty in travelling far distances to defend an action at the turn of the century and less sophisticated foreign legal processes, were no longer valid considerations in many cases. In this context, La Forest J. stated "[m]odern states cannot live in splendid isolation and do give effect to judgments given in other countries in certain circumstances [t]his was in conformity with the requirements of comity, the informing principle of private international law".7 The SCC held that for the reasons of justice, necessity and convenience, comity should be applied in situations where the judgment was given by a jurisdiction that had a "real and substantial connection" with the action. While the Morguard decision specifically involved the enforcement of an order of a provincial court in another province of Canada, it has often been cited as applying to the enforcement of a foreign order within Canada.

In 1993, the SCC was faced with similar issues, but this time in an international context. In Amchem Products Inc. et al. v. Workers' Compensation Board (B.C.)8, the SCC was asked whether an anti-suit injunction issued by a British Columbia court to prevent the continuation of actions commenced in Texas should be upheld. In that case, 194 people had brought a suit for damages against asbestos companies in Texas. The majority of the claimants were British Columbia residents, but none of the asbestos companies were resident in British Columbia. Most of the asbestos companies carried on business in Texas in the form of asbestos manufacturing plants and some had their corporate offices located in Texas. Most of the companies were incorporated in the United States, but not in the state of Texas.

The Texas court found jurisdiction and venue. The asbestos companies challenged this finding on the grounds of forum non conveniens, a doctrine that is not recognized in Texas, arguing that virtually all of the alleged exposure occurred while the claimants were resident and working in British Columbia. The asbestos companies successfully applied in the Supreme Court of British Columbia for anti-suit injunctions against the claimants, in order to prevent the continuation of the Texas actions. The Texas court in turn issued an "anti-anti-suit" injunction, with a limited period of currency, prohibiting the seeking of such injunctions in British Columbia.

At the trial level, Esson C.J.S.C. of the British Columbia court held "that if the local court decides that its jurisdiction is the natural forum for the adjudication of the dispute, and that the plaintiff is acting oppressively through the foreign proceedings, the local court can enjoin the plaintiffs from proceeding with the foreign action, if doing so would be in the interests of justice."9 Esson C.J.S.C. felt that British Columbia was a natural forum and that the proceeding in Texas was oppressive because the doctrine of forum non conveniens was not recognized in that jurisdiction.

The injunctions were upheld on appeal. The British Columbia Court of Appeal also found the absence of the doctrine of forum non conveniens oppressive and the court believed "that comity was of little importance because the injunction [was] not directed to the foreign court but only to the appellants who were British Columbia residents."10 The case was then appealed to the SCC, which overturned the lower court decisions and dismissed the application for an injunction. Sopinka J. stated:

"when a foreign court assumes jurisdiction on a basis that generally conforms to the our rule of private international law relating to the forum non conveniens, that decision will be respected and a Canadian court will not purport to make the decision for the foreign court. The policy of our courts with respect to comity demands no less. If, however, a foreign court assumes jurisdiction on a basis that is inconsistent with our rules of private international law and an injustice results to a litigant or "would-be" litigant in our courts, then the assumption of jurisdiction is inequitable and the party invoking the foreign jurisdiction can be restrained. The foreign court, not having, itself, observed the rules of comity, cannot expect its decision to be respected on the basis of comity."11

One of the key limitations to a Canadian court's...