A New Role for Secondary Proceedings in International Bankruptcies

Secondary proceedings- the ugly stepsisters to main proceedings- get short shrift in international bankruptcy scholarship.1 This article seeks to remedy that deficiency. First, it describes what it argues are the traditional conceptions- both stated and implicit- of secondary proceedings in international bankruptcies. Second, it offers a revised way of thinking about secondary proceedings, proposing to restrict their scope through the use of "synthetic" hearings. Third, it addresses some problems with the proposed new role of secondary proceedings and sketches a possible solution involving the creation of an international priorities registry. I. THE SECONDARY PROCEEDING AS TRADITIONALLY UNDERSTOOD The Europeans get the principal credit with popularizing the secondary proceeding.2 True, "ancillary," "parallel," and other related proceedings existed all along, stitched together ad hoc in the haphazard comity-based precedent book of cross-border bankruptcy,3 but the concept of the "secondary proceeding" did not really take off until the EU Insolvency Regulation.4 The purpose of a secondary proceeding is to allow local creditors of a foreign debtor the opportunity to open a bankruptcy case in their native country, chiefly to enjoy the benefit of local bankruptcy law.5 They exist only in contrast to a main proceeding, which is a plenary bankruptcy case opened in the country housing the debtor's center of main interests (COMI).6 Thus, secondary proceedings serve as a form of definitional residuum: proceedings that are not main proceedings.7 (One preliminary point of lexical air must be cleared, however, at the outset of this discussion. Secondary proceedings are not, strictly speaking, a true residuum class, because there can be proceedings so remote to the debtor that they are neither COMI-based main proceedings nor the lesser class of secondary proceedings (which require, under the EU Insolvency Regulation and U.S. chapter 15 an "establishment").8 As such, there can be nonmain, non-secondary proceedings. These tangential affairs have yet to find a good name.9 Others have explored these oddities, but they are beyond the scope of this enquiry.) Why allow secondary proceedings? The traditional justification is to respect the sovereignty of local courts that have direct jurisdictional power over locally situated assets, as well as to accord local creditors their rights under domestic bankruptcy law." In other words, secondary proceedings are needed to counteract a perceived "over-relinquishment" of sovereignty in a cross-border insolvency to the main proceeding.12 The tension flows from the extra-territorial application of the main proceeding's substantive bankruptcy law under a universalist international insolvency regime. (On the off-chance anyone reading this article is unfamiliar with this debate, "universalism" refers to the theory that advocates resolving cross-border insolvencies to the maximal extent possible by one substantive bankruptcy law.13 Its doctrinally promulgated version is "pluralist," i.e., the substantive bankruptcy law is chosen from among various jurisdictions for export from the one housing the debtor's COMI.14 It is contrasted with "territorialism," which advocates strict territorial application of bankruptcy laws to those assets- and only those assetswithin a country's physical borders.15) Universalism challenges states that are sensitive about the rotating subjugation of sovereignty a universalist system inherently requires.16 This concern spawned the secondary proceeding as a compromise to these territorialists.17 While in a pure universalist system, the deferring state might open an "ancillary" or "auxiliary" proceeding to marshal assets, exercise jurisdiction, and otherwise compel performance of bankruptcy actors to assist the COMI state's proceedings,18 a true "secondary" proceeding accords the putative deferring state the opportunity to entertain a full-fledged parallel action. …