A Bankruptcy Practice Enters The Global Arena

Sunday, January 1, 2006 - 00:00

Editor: Would you tell us how you came to Arent Fox?

 

Grossman: In the late 1980s I had formed a small, specialized bankruptcy firm. Real estate bankruptcies and restructuring work for some of the oil companies were at the center of my practice. As the practice grew, however, the requirements of the clients became increasingly complicated and entailed an ability to litigate and handle corporate finance and corporate tax work as well. A larger platform became a necessity. To that end I took my group and joined a mid-sized New York firm seven or eight years ago. This was a firm with corporate, real estate and tax expertise, and the arrangement worked well for a few years. Our practice continued to grow in complexity, however, and if I was going to sustain that growth an even larger platform was necessary. I knew of Arent Fox from my years at the Securities and Exchange Commission in Washington, DC. I was attracted to the firm primarily because of the quality of its lawyers and the services they provide, together with the great variety of its practice groups. In addition, I considered the firm's significant Washington presence to be extremely important at a time when the government is involved in virtually everything we do. I have been with the firm for three years now, and the arrangement has been an enormous success.

 

Editor: Would you give us an overview of your practice?

 

Grossman: I am the chairman of Arent Fox's national bankruptcy practice. Between our New York and Washington offices, we have approximately 20 people who are focused on bankruptcy and restructuring matters.

I have been engaged in this type of work since the early 1970s, when I was with the Securities and Exchange Commission, and it has changed significantly over time. When I began my career, bankruptcy and restructuring was a fairly narrow specialty, and no major firm was involved in this work. Over the past ten years or so an increasing number of large corporations have used the bankruptcy laws and courts to accomplish economic goals that could not otherwise be achieved, certainly not through the mainstream judicial system. I am thinking, in particular, of the modification of collective bargaining agreements - which we have seen in the airline industry and we are going to see in the automobile industry - through a bankruptcy process that was not designed for such purposes but which has been utilized to achieve economic benefits for an entire industry.

How does this connect to a cross-border bankruptcy and restructuring practice? Historically, bankruptcy laws reflect the cultural and economic dynamics of the societies they serve. In our case, the notion of bankruptcy that derives from the 1700s says that it is wrong to throw a person into debtors' prison for having made a mistake. That it is better for all concerned, debtor and creditor alike, that that person be discharged and given a new lease on life. Accordingly, our bankruptcy laws are designed to restructure and reorganize companies, not terminate them. This is quite different from the traditional European concept, which says that the debtor has done his creditors harm and does not deserve a second chance. With globalization in recent years, each of these traditions has been forced to recognize the other and to work within the other's system. If a European investor makes an acquisition in the U.S., or an American in Europe, and the transaction does not work, the questions - if not the answers - are the same: what are my rights as a creditor, what difference does it make if I am a secured creditor, how are creditors' liens enforced, who has priority, and so on.

The need for clarity and consistency here is such that UNCITRAL, the United Nations Commission on International Trade Law, has put together a working group to try to draft a model bankruptcy code. There is some urgency to this. The United Nations has a real stake in seeing capital move from money centers to destinations in need of development. That will only happen if the First World investor has a certain comfort level with the predictability and enforceability of bankruptcy laws in place in the Third World. A uniform body of law with global applicability would have a dramatic effect in easing the flow of capital around the world, and that would benefit everyone.

I hasten to add, the need for clarity and consistency in this area is not only necessary to enhance capital flows from the developed to the developing world. Within the developed world today, people are being forced to take a hard look at the cultural and historical dynamics that underlie their bankruptcy laws. If the overriding concern of such laws is to protect the individual workers - something that prevails in many European jurisdictions - it is going to be difficult for, say, French and Italian companies to attract capital. The Europeans are beginning to realize that. And in the United States, the ability to walk away from credit card debt through bankruptcy is an issue that has received enormous attention in recent years. All of these things contribute to a very interesting environment for the bankruptcy and restructuring lawyer.

Editor: The Bankruptcy Act was recently amended to provide a new Chapter 15 to govern cross-border insolvency cases. For starters, would you describe the regime that functioned pursuant to §304, Chapter 15's predecessor provision? Why was §304 unsatisfactory?

 

Grossman: Under the prior regime there was considerable discretion to determine whether a bankruptcy proceeding was an ancillary proceeding or a main proceeding, whether a U.S. bankruptcy court had jurisdiction over assets in, say, Europe, how a proceeding involving a U.S. affiliate here related to a proceeding instituted by its parent in a foreign jurisdiction, and so on. There were differences among the various districts as well, and the resulting confusion was very unsatisfactory.

Chapter 15 is meant to codify what most of the commentators believed to be appropriate under prior statutes and the case law and to lay out a procedural path for the treatment of the "main case." The statute also gives creditor status to foreign creditors who appear in U.S. bankruptcy court. When a bankruptcy case is filed today, all other cases which involve the alleged bankrupt party and such creditors are stayed pending resolution of the bankruptcy. What we have done is open our bankruptcy court system to European creditors in a very substantial way. While Chapter 15 was intended to simplify a number of procedural matters, the complexity of the substantive issues is on the increase. For example, if the main case has been filed in an EU jurisdiction, the U.S. judge is in a position to determine that it is indeed the main case for Chapter 15 purposes even if several other EU cases are pending. The decision as to which EU proceeding is the main case for EU purposes has been made before any appearance in the U.S. If, however, there is an EU proceeding and another proceeding in a non-EU jurisdiction, and both claim to be the main proceeding for purposes of Chapter 15, the U.S. judge is going to have to make a determination as to which is the main case. Comity may come into play here - the bankruptcy court will not enforce any foreign laws if those laws discriminate against a U.S. creditor - but the element of complexity in this process is very high.

Editor: How is the new statute going to affect your practice?

 

Grossman: In light of how new this statute is, all practitioners engaged in cross-border bankruptcy practice are on a high learning curve. At Arent Fox we have been handling this kind of matter for some time under the prior regime, so we are well positioned, I think, to meet the needs of our clients. I would say that, with globalization, no large law firm is going to be able to serve its clients effectively in the absence of a cross-border bankruptcy expertise. That consists of not only familiarity with the new rules but also with appropriate overseas connections. The clients are going to need the expertise of American lawyers - the proceedings are going to be conducted here, of course - and the lawyers handling those proceedings will do so with the assistance of European and other foreign lawyers. From the standpoint of marketing strategy, I am very conscious of being head of a practice which foreign attorneys look to for support in this area. Many American firms have offices in Europe and other jurisdictions today, and they are regarded as competitors by the domestic firms in those jurisdictions. There is a natural reluctance, of course, to refer work to a competitor. The fact that we are a "safe" referral for purposes of this kind of work represents a real marketing opportunity. With the opportunities afforded by globalization, as reflected in Chapter 15, I anticipate a very busy practice over the next few years.

Editor: Does globalization mean that, eventually, we will see a single, worldwide bankruptcy system emerge?

 

Grossman: I think that is a long way off, although the UNCITRAL project is indicative of where we are headed, at least in the long run. There are still a number of very important issues to be addressed, notwithstanding the accelerating pace of globalization and statutory initiatives such as Chapter 15. For example, if an American airline is proceeding with bankruptcy - main proceeding in Europe and ancillary proceeding in the U.S. - and the U.S. court issues its stay of proceedings under Chapter 15, it is likely that a French court will ignore the stay if seizure of one of the airline's aircraft at Charles de Gaulle is deemed necessary to protect the airline's French workers. This is but one of several major issues that have not been addressed by statutory initiatives such as Chapter 15. What has happened is that the gap between the extremes has been narrowed, a process for resolving the issues in an orderly way has been developed, and some degree of predictability and uniformity has been injected into that process. I do not see the French or the Italians permitting a creditor to take precedence over the workers any time soon, but I do see movement toward at least some harmonization and rationalization of the various bankruptcy regimes in place across the world.

Then again, I must express my surprise at how the Italians have modified their laws in response to the recent bankruptcy of the giant food company Parmalat and the enormous sums of fraudulent financial paper that emerged as a consequence. If people perceive that their economic survival is at stake - and certainly the Parmalat case sent shock waves all across Italy and the rest of the EU - change comes about much more rapidly than originally anticipated. If the result of that scandal is, ultimately, greater clarity and predictability, that is good for investors, for those who service them and for the global agenda.

Please email the interviewee at grossman.robert@arentfox.com with questions about this interview.