The Revenue Rule And The Recognition Of Tax Claims In Cross-Border Cases

Stephen M. Packman, Esq.a1

Douglas G. Leney, Esq.a2

1. Introduction

   In the nearly seven years since the United States Bankruptcy Code1 was amended to include a new Chapter 15 to address cross-border insolvencies,2 a number of previously unsettled insolvency issues has been put to the test, with some measure of clarity coming from the courts while still other guidance is provided by Chapter 15 itself. To be sure, Chapter 15, like its predecessor transnational legal texts,3 seeks to provide a general framework for recognition of foreign proceedings, relief which may be granted to a foreign representative, and cooperation among foreign courts in which concurrent proceedings are pending. However, Chapter 15 does not explicitly provide instruction with respect to claims procedures, either within or outside the United States. Courts have thus been left to fashion their own means of ensuring fair adjudication of claims while simultaneously seeking to protect the interests of local constituencies. The issue is further compounded when the claims at issue are foreign tax claims, which are generally not recognized outside the country in which they arise. This paper begins by examining the various approaches to administering cross-border insolvencies, which provides some context for the various ways in which claims may be treated. It then outlines the historical reasons for non-recognition of foreign tax claims, and provides potential solutions which are consistent with the goals of Chapter 15 and international insolvency jurisprudence.

2. The Theoretical Spectrum: From Universalism to Territorialism

   "Universalism" refers to a concept in which a single court – that of the debtor's "home country" – would maintain exclusive jurisdiction over a debtor's assets, wherever located, and distribute them in accordance with the law of that country.4 Under a "pure universalist" approach, courts in other, "non-home" countries would be expected to recognize and enforce the laws and priorities of the home country's court.5 This end of the philosophical spectrum is championed by those such as Jay Lawrence Westbrook, a leading advocate of the universalist convention. Professor Westbrook submits that in order for universalism in international bankruptcies to succeed, a single law and a single forum must govern each case.6 Proponents of universalism espouse among its theoretical benefits the reduced administration costs to the bankruptcy estate, as a result of one centralized proceeding rather than multiple international fragments; increased predictability on an ex ante basis, as a result of knowing the debtor's home country, and therefore, the applicable insolvency law;7 and, in large part due to this increased predictability, encouragement of foreign investment and extension of credit. While these perceived benefits may still be far more theory than practice, even critics of the universalism view concede that "the globalization of business eventually will harmonize the now-divergent debt collection and insolvency systems of the countries of the world, making conditions ripe for universalism."8

   In response to the relatively stricter rigidity imposed by a pure universalism approach, the notion of "modified universalism" instead combines the core elements of pure universalism – one main proceeding and one main body of law – with the flexibility for countries other than the home country to "evaluate the fairness of the home-country procedures and to protect the interests of local creditors."9 This is accomplished by the establishment of a main proceeding in the home country and the appointment of a foreign representative charged with the administration of the debtor's assets. However, rather than a single venue and mandatory application of a single body of law, modified universalism allows for, on a case by case basis, the initiation of ancillary proceedings in other countries, and some degree of discretion in applying foreign law. In other words, where application of the home country's law would offend justice or public policy in the country where an ancillary proceeding may be pending, the ancillary court – against a backdrop of deference and cooperation with the home country – would nevertheless have some discretion in choosing to apply the foreign law. If this sounds familiar, it is because the Model Law and Chapter 15 have embraced a modified universalism approach in the administration of transnational insolvency proceedings.

   At the other end of the philosophical spectrum on administration of international insolvency is the "territorialism" approach. In stark contrast to universalism, territorialism attempts to provide a more flexible and organic process for bankruptcies which may require more than one central proceeding. Lynn LoPucki, a supporter of cooperative territorialism, frames the basic approach of pure territoriality as follows: "[i]n a territorial system, the necessary international cooperation takes place in each case. That is, 'parallel' bankruptcy proceedings are initiated in each country in which the corporate group has substantial assets. Each court appoints a "representative" for the estate of each entity filing in its jurisdiction. Those representatives then negotiate a solution to the debtor's financial problems. If the estates are worth more in combination than they are separately, it will be in the interests of the representatives to combine them."10 The perceived benefits of territorialism include safeguards against potentially biased foreign courts or laws; keeping a closer eye on local assets and thus a affording a greater level of protection to local creditors; and furthering national sovereignty while eliminating blind deference to foreign laws.11

   With the goal of preserving some measure of cooperation among countries and courts, a modified form of territorialism known as "cooperative territorialism" has emerged. This approach, like the pure territorialism from which it is derived, would still favor separate insolvency proceedings in each country in which a debtor maintains interests. However, a key element of cooperative territorialism would be cooperation among various representatives appointed in their respective country's proceedings, and this discretionary cooperation and joint decision-making would somewhat temper the blanket application of "local country" laws in each proceeding, where it is determined that the debtor's overall bankruptcy estate is better served through such cooperation.12

   While none of the above theories can provide a perfect solution to the problems facing the many players involved in international insolvency proceedings, it seems evident that pure universalism, and its mandate for one singular proceeding, is likely an unrealistic option. This is not to suggest that pure territorialism, and its "race to assets" approach spread among numerous countries and courts, provides a more palatable answer to the problem. Whether the Model Law and Chapter 15, and the principles of modified universalism they encompass, have aimed in the right direction or not, it seems that multiple proceedings in multiple countries are an inevitability, and therefore some level of international cooperation is required. Accordingly, we now shift our focus to the manner in which claims are adjudicated in these cases, and the unique problems associated with foreign tax claims.

3. Claims Procedures and Treatment in Cross-Border Cases

   Prior to the enactment of Chapter 15, U.S. bankruptcy courts' willingness to recognize or enforce the laws of foreign jurisdictions found its roots in general principles of international comity.13 Notions of comity were codified in Chapter 15's predecessor statute – Section 30414 of the Bankruptcy Code – but the mechanics of where, when, and how to apply comity have long been amorphous concepts in U.S. courts. Unlike judgments entered in other states, foreign judgments are not governed by the Full Faith and Credit Clause.15 Moreover, the United States is not a party to any international agreement regarding the recognition of foreign judgments.16 Nevertheless, more than a century ago, in the landmark case of Hilton v. Guyot,17 the Supreme Court of the United States decided in favor of a presumptive recognition of foreign judgments, subject to certain requirements, including a reciprocity requirement with the country seeking to enforce said judgment.18

   While Section 304 employed some degree of judicial analysis of weighing policy interests and examining various factors,19 including comity, in recognizing a foreign insolvency proceeding, Chapter 15 streamlined the...