Source: https://www.scribd.com/document/39409102/20090527-Varig-Bankruptcy-Note-Gaunt
Timestamp: 2019-08-20 04:34:55
Document Index: 164274714

Matched Legal Cases: ['§ 1110', '§ 1110', '§ 304', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 304', '§ 304', '§ 304', '§ 304', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 304', '§ 304', '§ 304', '§ 1110', '§ 304', '§ 1110', '§ 1110', '§ 304', '§ 304', '§ 1110', '§ 304', '§ 304', '§ 304', '§ 1110', '§ 1110', '§ 1501', '§ 1110', '§ 304', '§ 00001', '§ 304', '§ 304', '§ 304', '§ 304', '§ 3', '§ 362', 'Art. 52', '§ 362', 'Art. 6', 'Art. 6', '§ 4', 'Art. 53', '§ 363', 'Art. 83', 'Art. 83', '§ 363', 'Art. 60', 'Art. 49', '§ 3', '§4', 'Art. 198', 'Art. 187', 'Art. 199', '§ 3', 'Art. 49', '§ 3', 'Art. 199', '§ 1110', '§ 3', 'Art. 49', '§ 1110', '§ 1110', '§ 40102', '§ 1110', '§ 116', '§ 116', '§ 1110', '§\n1110', '§ 81', '§ 1110', '§ 1110', '§ 105', '§ 362', '§ 7', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 105', '§ 362', '§ 1110', '§\n362', '§ 362', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1129', '§ 1129', '§ 304', '§ 304', '§ 304', '§ 101', '§\n802', '§ 1501', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§\n1110', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§ 1110', '§ 1110', '§ 304', 'Art. 199', '§ 304', '§ 1110', '§ 304', '§ 1110', '§ 1110', '§ 304', '§ 304', '§ 304', '§\n304', '§ 304', '§ 304', '§ 1110', '§\n304', '§ 304', '§ 304', '§ 304', '§ 1507', '§ 547', '§ 547', '§ 304', '§ 304', '§ 304', '§ 304', '§ 304', '§\n304', '§ 1110', '§ 1110', '§ 304', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 105', '§ 105', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 362', '§ 1110', '§ 1110', '§ 1110', '§ 744', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 304', '§ 304', '§ 304', '§ 1507', '§ 1507', '§ 304', '§ 1110', 'Art. 3', '§ 1110', '§ 1110', '§ 1110', '§ 1110', '§ 1110']

20090527 - Varig Bankruptcy Note (Gaunt) | Bankruptcy | Chapter 11
20090527 - Varig Bankruptcy Note (Gaunt)
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87 Things You Need to Know Before You File Before You File
Arthur Sherr and Richard Rubin v. Sierra Trading Corporation, a Nevada Corporation, Debtor-Appellee. L. W. Winkler, Jr., Trustee-Appellee. Peter Graf and Harry Rubin v. Sierra Trading Corporation, a Nevada Corporation, Debtor-Appellee, L. W. Winkler, Jr., Trustee-Appellee, 492 F.2d 971, 10th Cir. (1974)
10000016360
Bankr. L. Rep. P 76,063 in Re Thomas Edward Coggin, Debtor. Phyllis B. Coggin v. Thomas Edward Coggin, Defendant-Cross-Plaintiff-Appellant-Cross-Appellee, Thomas E. Reynolds, Trustee-Cross-Defendant-Appellee-Cross-Appellant, 30 F.3d 1443, 11th Cir. (1994)
10000021401
Hennepin County Steven F Meldahl Bankruptcy Objection.pdf
10000023473
U.S. Aircraft Financiers Beware: 11 U.S.C. § 1110
Expectations May Not Be Met in Cross‐Border
II. History of Varig and its Bankruptcy ................................................................................... 6
III. Prior History of Brazilian Bankruptcy Code ...................................................................... 9
IV. Enactment of the New Bankruptcy and Restructuring Law of Brazil .............................. 11
A. The NBRL’s Limited Automatic Stay ........................................................................... 12
B. Prioritization of Claims Under the NBRL...................................................................... 13
C. Air Carrier Reorganization Under the NBRL ................................................................ 14
V. Aircraft Equipment and Vessels Under 11 U.S.C. § 1110................................................ 17
VI. Background of Cross-Border Insolvencies Under the U.S. Code ..................................... 22
VII. Petition of Varig to Commence a Case under 11 U.S.C. § 304 ........................................ 25
VIII. Outcome Analysis ............................................................................................................. 29
A. Section 304 and Modified Universalism ........................................................................ 30
B. Cases Addressing Comity Considerations ..................................................................... 32
1. In re Maxwell Communication Corp. ......................................................................... 33
2. In re Treco .................................................................................................................. 35
C. Public Policy and § 1110 ................................................................................................ 37
1. The Public Value of Aircraft Creditor Priority ........................................................... 38
2. Collateral Value and Financing Predictability............................................................ 39
D. Chapter 15 and its Effect on the Case if Filed Today .................................................... 41
E. Harmonization with International Financing Principles ................................................ 42
IX. Conclusion ........................................................................................................................ 44
The Viação Aérea Rio Grandense (“Varig”) airline judicial recuperation in Brazil was the
first major test case under the New Bankruptcy and Restructuring Law of Brazil (“the NBRL”),
ratified in February of 2005 and going into effect on June 9, 2005.1 The experience was largely
negative for aircraft and engine lessors and creditors, most of whom were United States-based
and accustomed to special protections afforded them by 11 U.S.C. § 1110, which specifically
provides greater protection to aircraft owners in bankruptcy procedures than other secured
creditors enjoy.2 In the United States, an aircraft creditor may use § 1110 to circumvent the
automatic stay or any injunctive power of the court to enjoin taking of possession of certain
equipment unless the debtor’s obligations are performed in full and all prior defaults are cured
within 60 days after the order for relief. No such protections are available in a Brazilian
bankruptcy proceeding. When the main proceeding was initiated in Brazil, and an ancillary
proceeding was then simultaneously brought in New York under the U.S. Bankruptcy Code, the
U.S.-based assets that were subject to the ancillary proceeding were conserved and administered
in accordance with the NBRL.
See Thomas Benes Felsberg et al., Brazil: New Bankruptcy Law Ready for Signing, INTER-AM. TRADE REP., Dec.
2004, at 2 [hereinafter Felsberg, New Bankruptcy Law].
See 11 U.S.C. § 1110 (2006). Of particular relevance here is § 1110(a)(1):
Except as provided in paragraph (2) and subject to subsection (b), the right of a secured party with
a security interest in equipment described in paragraph (3), or of a lessor or conditional vendor of
such equipment, to take possession of such equipment in compliance with a security agreement,
lease, or conditional sale contract, and to enforce any of its other rights or remedies, under such
security agreement, lease, or conditional sale contract, to sell, lease, or otherwise retain or dispose
of such equipment, is not limited or otherwise affected by any other provision of this title or by
any power of the court.
See also Kenneth Basch, Why the Varig Experience Should Not Recur, GUIDE TO AVIATION LAWYERS, Jul. 2007, at
Varig’s creditors’ discontent stemmed from the Brazilian court’s handling of claims for
both pre- and post-petition debt claims arising out of the security and lease agreements (beyond
just missed rent payments, issues existed with failure to a) pay maintenance reserves, b) maintain
required liquidity to meet return conditions, and c) maintain critical maintenance and parts
logs).3
Varig filed an ancillary proceeding under the former § 304 of Title 11 (the Bankruptcy
Code) of the U.S. Code (“the Code”) in the Bankruptcy Court of the Southern District of New
York on June 17, 2005, the same day that its main petition was filed in Brazil (an ancillary
proceeding does not commence a full bankruptcy case, but instead authorizes the U.S. court to
administer limited proceedings in aid of a principal proceeding abroad; a foreign representative
must seek injunctive or other relief, as the automatic stay is not triggered).4 Because the NBRL
Basch, supra note 2, at 38.
Petition Pursuant to 11 U.S.C. § 304 To Commence a Case Ancillary to a Foreign Proceeding at 1, In re Petition of
Vicente Cervo, as Foreign Representative of Varig, S.A., et al., No. 05-14400 (Bankr. S.D.N.Y. 2005) [hereinafter
"Petition Pursuant to 11 U.S.C. § 304"]. Section 304 of the Code read as follows:
§ 304. Cases ancillary to foreign proceedings.
(a) A case ancillary to a foreign proceeding is commenced by the filing with the bankruptcy court
of a petition under this section by a foreign representative.
(b) Subject to the provisions of subsection (c) of this section, if a party in interest does not timely
controvert the petition, or after trial, the court may--
(1) enjoin the commencement or continuation of--
(A) any action against--
(B) the enforcement of any judgment against the debtor with respect to such property, or any
act or the commencement or continuation of any judicial proceeding to create or enforce a lien
against the property of such estate;
(2) order turnover of the property of such estate, or the proceeds of such property, to such
foreign representative; or
(c) In determining whether to grant relief under subsection (b) of this section, the court shall be
guided by what will best assure an economical and expeditious administration of such estate,
had no corollary to § 1110 at the time Varig filed,5 the specific class of aircraft creditors referred
to in § 1110 (secured parties, lessors, and conditional vendors, hereinafter referred to as the
“Financiers”) argued that the U.S. court should not recognize the judicial recovery in Brazil
because the NBRL did not afford these creditors the special position they hold under U.S. law.6
As a general matter, however, the foreign distribution scheme of the main proceeding is followed
in an ancillary proceeding unless it unfairly discriminates against U.S. creditors. The New York
court in the Varig case extended comity to the foreign main proceeding because it determined
that the U.S. policy interests behind § 1110 did not override the considerations that favored
abiding by the NBRL’s provisions.
The protections provided by § 1110 were originally intended by Congress to encourage
Financiers to offer favorable credit terms to airline operators and thus promote industry growth
and consumer travel and ensure that airlines were able to secure financing for replacing obsolete
equipment with modern aircraft.7 The industry has come to expect those protections when
(2) protection of claim holders in the United States against prejudice and inconvenience in the
processing of claims in such foreign proceeding;
(4) distribution of proceeds of such estate substantially in accordance with the order prescribed
(6) if appropriate, the provision of an opportunity for a fresh start for the individual that such
11 U.S.C. § 304 (2004), repealed by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11 U.S.C.
ch. 15, 119 Stat. 146 (Chapter 15 incorporated most of the principles of § 304 and still allows for ancillary
proceedings to foreign bankruptcy actions).
Section 304(c) outlined six factors for the court to consider when determining whether to grant relief, one
of which is comity. Id. A court may decline to afford comity to a foreign proceeding so long as that court is of
competent jurisdiction and as long as laws and public policy of the forum are not violated. See, e.g., In re Culmer,
25 B.R. 621 (Bankr. S.D.N.Y. 1982); see also Interpool, Ltd. v. Certain Freights of M/VS Venture Star, 878 F.2d
111 (3d Cir. 1989).
See, e.g., Otto Eduardo Fonseca Lobo et al., Varig Airlines: Flying the Friendly Skies of Brazil’s New Bankruptcy
Law with Help from Old § 304, AM. BANKR. INST. J., July-Aug. 2007, at 42, 43.Id.
See Jason J. Kilborn, Thou Canst Not Fly High with Borrowed Wings: Airline Finance and Bankruptcy Code
Section 1110, 8 GEO. MASON L. REV. 41, 51 (1999).
financing aircrafts and engines; indeed, Congress indicated in retaining the provisions that the
industry claimed it would simply cease financing relevant equipment if the protections were not
preserved.8
By comparing NBRL and § 1110 protections to one another, this paper will examine why
the U.S. court extended comity to the Brazilian main proceeding and review the reasons why the
aircraft Financiers’ petitions for relief from the injunctive stay were denied in the ancillary
proceeding. This paper will argue that a filing for bankruptcy by another Brazilian airline today
would—in spite of (or perhaps because of) changes made to laws in both the United States and in
Brazil after the Varig decision—still result in an outcome unfavorable to Financiers. As is
demonstrated in detail below, with respect to the Varig case, the Court in the ancillary
proceeding in New York had the opportunity to decline to extend comity to the foreign main
proceedings had it concurred with the arguments advanced by the Financiers that the public
policy exception “escape clause” in § 304 should provide § 1110 protections to aircraft
Financiers; in extending comity to the foreign proceeding instead, a precedent was set that will
likely weaken the Financiers’ reliance on § 1110 in future deals with Brazilian and other foreign
Though § 304 was repealed under the Bankruptcy Abuse Prevention and Consumer
Protection Act (the “BAPCPA”) in 2005 (after the filing of the Varig case under § 304) and
replaced by Chapter 15 of the Code, Financiers today would likely have an even more difficult
time attempting to convince the courts to uphold the § 1110 protections. The pre-change cases
interpreting § 304 still matter inasmuch as the tests applied by courts prior to the BAPCPA
inform the Chapter 15 comity analysis of current cases. Chapter 15 implemented the Model Law
on Cross Border Insolvency drafted by the United Nations Commission on International Trade
and Law.9 The ‘modified universalism’ approach of the Model Law and its enactment in
Chapter 15 expands upon the principles of comity enumerated in § 304 to make the Bankruptcy
Code even more broad in its acceptance of foreign courts of law and their decisions in insolvency
proceedings. However, the expansiveness and spirit of international cooperation of the new
Chapter 15 on its face is tempered by several specific provisions that allow territorialism to
sneak back into the frame and possibly allow Financiers to succeed in their arguments.
This note will examine two cases decided under § 304 and the tests that the courts in
those cases used in extending or denying comity. The analysis will address the somewhat unique
status of § 1110 against the other provisions within the Code; ‘modified universalism’ and its
application to the Varig case at hand, specifically when looking at the relative merits of deferring
to the Brazilian court versus protecting the Financiers. Finally, using the foregoing, the note will
speculate as to how the case might differ, if at all, under Chapter 15 of the code, and look at what
the UNIDROIT Convention on International Interests in Mobile Equipment and its
corresponding Protocol on Matters Specific to Aircraft Equipment (“Convention/Aircraft
Protocol”) indicates about the international economic community’s approach to handling aircraft
priority in secured transactions and insolvency proceedings.
The Varig ancillary proceeding is presented here as an example of how aircraft
Financiers might be thwarted in their efforts to take advantage of § 1110 protection for their
assets. The analysis is not limited solely to Brazilian carriers, however; this analysis may be
11 U.S.C. § 1501(a) (2005) (“The purpose of this chapter is to incorporate the Model Law on Cross-Border
Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency . . . .”); U.N.
Comm. on Int'l Trade Law [UNCITRAL], MODEL LAW ON CROSS-BORDER INSOLVENCY WITH GUIDE TO
ENACTMENT, 36 I.L.M. 1386 (1997).
useful for any U.S. based creditor that is faced with the challenge of confronting a foreign main
proceeding that does not have analogous provisions to § 1110.
II. History of Varig and its Bankruptcy
At the time of the bankruptcy filing in 2005, Varig was the largest air carrier in Brazil
and Latin America.10 Having operated continuously since 1927, its 80-year history secures it
among the world’s oldest airlines.11 Up to the conclusion of the bankruptcy proceedings in
Brazil in 2006, Varig was majority-owned by the Ruben Berta Foundation ("RBF"), a non-profit
foundation constituted in 1945 “to provide health, financial, social, and recreational benefits” to
company employees; RBF controls Varig through a holding company, FRB-Par Investments.12
Varig has been managed and operated as a private business enterprise since inception, though the
Brazilian State of Rio Grande du Sol holds a minority interest of less than 1%.13
Varig’s principle business was and is passenger travel on domestic routes within Brazil
and international routes between Brazil and North and South America, Europe, and Asia.14 As of
May 31, 2005, the airline had a fleet of 87 aircraft, carried approximately 13 million passengers a
year, and employed approximately 11,456 full-time employees.15 Varig has no significant fixed
Petition Pursuant to 11 U.S.C. § 304, supra note 6, at 2.
Archive of Varig’s website as of June 2005, http://web.archive.org/web/200506-200507re_/ http://portal.
varig.com.br/us/varig/index_html, (last visited Nov. 13, 2007) (showing international and domestic flight routes in
existence at the time of filing in June 2005).
Background and Description of Varig, Varig Bankr. News, June 18, 2005, at § 00001,
http://bankrupt.com/varig.txt (last visited Nov. 13, 2007).
assets,16 and each of the aircraft is operated under lease – 83 under operating leases and 4 under
finance leases.17
Varig has long been a marquee brand in Brazil.18 For years, it was protected by the
Brazilian government, which limited competition and regulated prices.19 In return, Varig
compensated government officials with courtesy tickets and flew unprofitable routes to
destinations the government hoped to tie into the national economy.20 Regulation of air carriers
in Brazil across the board requires government approval of the acquisition of additional aircraft,
opening of new routes, and changes in flight frequency; the government also monitors fares that
air carriers are permitted to charge on each domestic route.21
Flights to the United States began in 1955, with Varig providing approximately 18 flights
each week into Miami, New York, and Los Angeles.22 In 2004, tickets sold in the U.S.
accounted for roughly 5.20% (approximately US $163.9 million) of Varig flight revenues.23
Varig estimated that 133 employees were employed in the United States, with 51 of those
working in New York State at John F. Kennedy International Airport or one of two Manhattan
locations.24
In the mid-1990s, Brazil began to loosen its hold on regulation of the airline industry by
allowing low-price competitors into the market. TAM Linhas Aéreas and Gol Linhas Aéreas
Inteligentes increased their offerings to business travelers within and coming to Latin America,
Petition Pursuant to 11 U.S.C. § 304, supra note 6, at 6.
Id. at 4. See discussion infra Part IV.C and notes 69-73 for commentary on why the distinction was at the time
Geraldo Samor, Brazil's Not-So-Favored Airline: Once a Government Darling, Varig Faces Vagaries of
Competition, WALL ST. J., Sept. 14, 2005, at A18.
and slowly Varig’s market share began to evaporate.25 Other low-cost carriers such as WebJet
Linhas Aéreas have entered the region as well.26 Finally, while Brazil maintained a high degree
of control over Varig, Varig was still a private operation, whereas many of its foreign
competitors were wholly or majority owned by their respective governments and thus able to
access greater resources and subsidies than could Varig.27
Additionally, in 1994, and again in 1999, Varig restructured its debt by deferring it,
alleviating immediate pressure by causing its debt burden and cash flow requirement to grow.28
In 2001, Varig laid off approximately 10% of its workers and reduced its fleet, and the Brazilian
government briefly considered nationalizing the carrier.29 In February 2003, International Lease
Finance Corporation, a U.S.-based corporation, seized one of its leased Boeing 777 aircraft from
Varig at Paris’ Charles De Gaulle airport due to missed lease payments.30 That March, GE
Capital Aviation Services, another U.S. corporation, impounded—for non-payment of past due
leasing fees—a Varig Boeing 767 bound for Rio de Janeiro while it was on the runway at Miami
International Airport.31
At the time of the filing on June 17, 2005, of the main and ancillary proceedings in Brazil
and United States respectively, Varig’s negative net worth was approximately US $2.5 billion,
with balance sheet debt of approximately US $2.0 billion and off-balance sheet debt at
Samor, supra note 18.
Webjet Linhas Aéreas, http://www.webjet.com.br/empresa/novosite/index.asp (last visited November 1, 2007).
Petition Pursuant to 11 U.S.C. § 304, supra note 6, at 7.
Megan Christoph, Comment, Airline Reorganization Under the New Bankruptcy and Restructuring Law of Brazil,
13 L. & BUS. REV. AM. 451, 457 (2007).
Creditors Release Varig’s Boeing 777 Aircraft, ALLBUSINESS.COM, Feb. 3, 2003,
http://www.allbusiness.com/operations/shipping-air-freight/448097-1.html
Varig 767-200 Impounded in Miami by Gecas, AVIATION DAILY, Mar. 10, 2003, at 5 (pointing out also that Varig
attorneys had been in negotiations with Gecas to return several on-lease aircraft out of the 30 that it had at one time).
approximately US $2.0 billion.32 Varig’s largest single creditor was Brazil itself, which had
claims on the larger part of US $3.3 billion for back taxes and Brazilian social security
payments.33
Given the high degree of operating leverage inherent to the airline industry and the high
costs of fuel (and subsequent inability to pass rising fuel costs onto customer fares due to
Brazilian fare regulation), minor shifts in passenger revenues based on seasonality or
competition have a disproportionately large effect in decreasing profits.34 Additionally, because
Varig dedicated a large percentage of its cash flow to service its accumulated debt, and because
of the devaluation of the Brazilian Real against the dollar over the years prior to filing, Varig was
intensely sensitive to any decline in revenue.35 On June 17, 2005—a mere eight days after the
NBRL became effective36—Varig filed for bankruptcy under the NBRL’s new reorganization
procedures.37
III. Prior History of Brazilian Bankruptcy Code
Prior to the enactment of the NBRL in June 2005, the landscape of insolvency in Brazil
was a scary place for debtors and creditors alike. Corporations considering filing for bankruptcy
faced potentially “harsh consequences” going through “ineffective and fragmented bankruptcy
law that had been in place since 1945.”38 Under the old law, only merchants were eligible for
Samor, supra note 18, at 2.
Petition Pursuant to 11 U.S.C. § 304, supra note 6, at 8.
Id. at 7, 8.
Felsberg, New Bankruptcy Law, supra note 1, at 2.
Petition Pursuant to 11 U.S.C. § 304, supra note 6, at 9.
See Christoph, supra note 29, at 452. See also Christopher Andrew Jarvinen, A Primer on Judicial
Reorganizations and Out-of-Court Reorganizations Under Brazil’s New Bankruptcy and Restructuring Law, 2005
ANN. SURV. OF BANKR. LAW PART II § 3, at 10 n.4 [hereinafter Jarvinen, Primer on Reorganizations] (“Prior to the
effective date of the NBRL, the system of corporate reorganization in Brazil was governed by Decree-Law No. 7661
bankruptcy protection.39 Two of the most common types of proceedings available to debtors
declaring bankruptcy were bankruptcy liquidation (falencia) and debt rehabilitation (preventive
concordata).40 The majority of all bankruptcy proceedings initiated in Brazil prior to enactment
of the NBRL were bankruptcy liquidations, or falencia.41
While the concordata was a proceeding similar in some regards to a reorganization
proceeding, it was conducted under strict scrutiny from the Brazilian courts.42 The oversight was
provided by a court-appointed receiver (comissário), and a debtor was severely limited regarding
the options for reorganization strategies that it could pursue.43 Unlike a Chapter 11
reorganization in the U.S. courts or a Judicial Reorganization under the NBRL, a statutorily-
prescribed percentage of unsecured claims were discharged with a concordata, while secured
claimholders were not affected by any stay and were free to attempt to collect their claims.44
Ultimately, the concordata was not a flexible tool for reorganizing a going concern; it largely
failed for rehabilitating businesses because of the limited discharge of unsecured debts and the
inability of the debtor and its creditors to negotiate directly.45
One of the most significant impediments to secured creditor recovery in Brazil was the
priority scheme for claims. Unlike the varied protective measures built into the U.S. Bankruptcy
of June 21, 1945 (the “Prior Bankruptcy Law ”) . . . . [T]he Prior Bankruptcy Law was the target of heavy criticism
in Brazil because it effectively prevented companies from reorganizing, failed to provide a meaningful role for
creditors in the reorganization process and provided minimal protections for secured creditors.”). This article
provides an excellent and exhaustive overview in English of most of the changes made to the Brazilian bankruptcy
code with enactment of the NBRL. For purposes of this article, I will highlight only those passages that apply most
directly to the crux of my argument, rather than duplicating Jarvinen’s work of providing a synopsis of the entire
NBRL.
See Christoph, supra note 29, at 452.
Christopher Andrew Jarvinen et al., Bankruptcy Reform Coming to Brazil, AM. BANKR. INST. J., Dec. 2004–Jan.
2005, at 32 [hereinafter Jarvinen et al., Bankruptcy Reform].
See Jarvinen, Primer on Reorganizations, supra note 38, at 11 n.9.
See Jarvinen et al., Bankruptcy Reform, supra note 40, at 68.
Code, the prior bankruptcy law of Brazil placed secured claims lower in priority than two classes
of claims that are conceivably almost unlimited: labor claims in first priority, and tax claims in
second priority; “because those claims are frequently enormous in Brazil, there are generally few
assets remaining in a debtor's estate to satisfy secured claims.”46 Even compared to other Latin
American countries, Brazilian creditors have very minimal protection, making credit “scarce and
expensive.”47 Because the risk of failing to recover in bankruptcy proceedings from a Brazilian
corporation (and because of the losses that some lenders have suffered in the past due to loan
defaults), lenders and Brazilian banks protected (and still protect) themselves with some of the
highest lending rates in the world.48
IV. Enactment of the New Bankruptcy and Restructuring Law of Brazil
The enactment of the NBRL on February 9, 2005, was the first significant remodeling of
Brazilian insolvency law in over 60 years.49 Chief among the new provisions of the NBRL is the
creation of two new proceedings, a Judicial Reorganization (Recuperaçáo Judicial) and an Out-
of-Court Reorganization (Recuperaçáo Extrajudicial).50 The Judicial Reorganization is similar
to a Chapter 11 reorganization proceeding under the U.S. Bankruptcy Code, with the goal in
mind of preserving the operation and assets of a reorganizing corporation as a going concern
Jarvinen et al., Bankruptcy Reform, supra note 40, at 32.
Aloisio Araujo & Bruno Funchal, Past and Future of the Bankruptcy Law in Brazil and Latin America, 50
ESCOLA DE PÓS GRADUAÇÃO EM ECONOMIA DA FUNDAÇÃO GETULIO VARGAS [GRADUATE SCH. OF ECON., GETULIO
VARGAS FOUND., ECON. WORKING PAPERS], Paper No. 599, at 48 (2005) (Braz.), available at
http://epge.fgv.br/portal/arquivo/1922.pdf.
See Jarvinen et al., Bankruptcy Reform, supra note 40, at 32. See generally Araujo & Funchal, supra note 47, at
47 (arguing that “creditors’ rights are only weakly protected and financial markets are characterized by a relatively
low credit volume and high interest rate.” The ratio of Private Credit to Gross Domestic Product in Brazil is at only
35%, compared to a ratio in Organisation for Economic Co-operation and Development [OECD] countries of 102%
during the period from 1997-2002.).
See Jarvinen, Primer on Reorganizations, supra note 38, at 1.
with a greater social value (in terms of employing workers, participating in the economy, paying
taxes, etc.) than would be true in a liquidation proceeding.51
A. The NBRL’s Limited Automatic Stay
One of the key aspects of the NBRL reorganization proceedings is the institution of a
limited automatic stay.52 Conceptually, the stay provides similar protections to that afforded
under § 362 of the Code.53 The stay provides ‘breathing room’ for the debtor to focus on
restructuring and developing a reorganization plan to be negotiated with its creditors.54 Some
restrictions apply, however: the stay in the context of the Judicial Reorganization is limited in
duration to a single period of 180 days that is not extendable; when the stay expires, creditors
may immediately resume collection efforts against the debtor.55
The debtor has 60 days from the approval of the petition for judicial reorganization to
submit its reorganization plan.56 The plan must be approved by creditors; if any creditor objects
to the proposal, a formal vote will be held and dissident creditors bound provided that at least the
statutorily stipulated percentages of creditors in each credit class ratify it.57
See id. See also Araujo & Funchal, supra note 47, at 50 (noting that creditors now have a much more active role
in the proceedings than under the old concordata; creditors now directly negotiate with the creditor and vote for the
reorganization plan).
Lei. No. 11.101, 9 de fevereiro de 2005, D.O.U. de 09.02.2005, Art. 52(III) (Brazil), translated in Affidavit of
Sergio Bermudes, In re Petition of Vicente Cervo, as Foreign Representative of Varig, S.A., et al., No. 05-14400
(Bankr. S.D.N.Y. June 17, 2005); see also Jarvinen, Primer on Reorganizations, supra note 38, at 3.
11 U.S.C. § 362 (2006).
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 6; see also Jarvinen, Primer on Reorganizations, supra note 38, at 3.
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 6, § 4; see also Jarvinen, Primer on Reorganizations, supra note 38,
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 53. Given that Brazilian debtors have never before had this
opportunity to reorganize rather than liquidate, an argument could be made that 60 days may prove to be an
insufficient amount of time to meet with creditors and negotiate a plan, particularly in complex reorganizations such
as the Varig proceeding. Certainly this would be true of most U.S. Chapter 11 reorganizations of any size (even with
sufficient precedent existing to guide the debtor and creditors through the process).
Felsberg, New Bankruptcy Law, supra note 1, at 2. See also Jarvinen, Primer on Reorganizations, supra note 38,
at 7. A thorough discussion of the steps necessary to obtain approval from creditors and the court is laid out in
“Procedure to Obtain Court Confirmation of a Reorganization Plan” of the Jarvinen article. Id.
B. Prioritization of Claims Under the NBRL
Compared to the prior bankruptcy law, the NBRL significantly enhances the protections
available to secured creditors in terms of prioritization of claims.58 The claims of secured
creditors now occupy second position in priority (after labor claims), supplanting tax claims in
the order of priority.59 Secured creditors’ positions are further strengthened by the NBRL
capping the amount of first priority labor claims that will be awarded.60 The NBRL also protects
creditors who choose to continue to deal with the debtor post-petition, primarily by granting an
administrative post-commencement priority claim to post-petition lenders over other secured,
pre-petition claims. In the event that the reorganization is converted to a liquidation proceeding
and the estate’s funds are insufficient to satisfy all creditor claims, the post-commencement
claims will enjoy a higher priority.61
The prior bankruptcy law failed to protect potential purchasers of debtor assets from
successor liability for claims against the debtor.62 No analogue to § 363 under the Bankruptcy
Code existed to authorize sales “free and clear” of liens and interests on the asset, and investors
thus were understandably leery of purchasing assets in bankruptcy proceedings that were likely
encumbered by labor and tax claims against them.63 Now, certain categories of claims under the
NBRL are not subject to successor liability; certain types of debtor assets (such as separate
See discussion supra at Part III; Brazil’s prior bankruptcy code prioritized labor and tax claims above secured
claims, frequently leaving secured creditors empty-handed at the close of liquidation or concordata proceedings.
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 83(II).
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 83(I). See Jarvinen, Primer on Reorganizations, supra note 38, at 6.
The cap is equal to Brazil’s monthly minimum wage for 150 months. At current exchange rates, the amount of the
cap is approximately US $31,666 per employee (=150 x 380 reals (monthly minimum wage) / 1.80 reals/dollar
(current exchange rate as of October 2007)).
Jarvinen, Primer on Reorganizations, supra note 38, at 6.
Jarvinen et al., Bankruptcy Reform Coming to Brazil, supra note 40, at 32.
11 U.S.C. § 363 (2005); Jarvinen, Primer on Reorganizations, supra note 38, at 6; Jarvinen et al., Bankruptcy
Reform Coming to Brazil, supra note 40, at 32 (“Because the actual amounts of such claims are not generally known
or capable of accurate estimation at the time of a sale, investors avoid purchasing assets from debtors. Consequently,
the existing bankruptcy laws preclude the development of an efficient market in Brazil for the sale of assets in
bankruptcy.”).
production units or branches of the debtor’s operations) in judicial reorganization will no longer
be burdened by the debtor’s obligations for tax claims, labor or work-related injury claims, or
social security claims.64 The hope is that under the NBRL creditors will have an incentive (and
feel well-enough protected) to provide financing to debtors-in-possession “since they will have a
prior claim against the assets in the debtor's bankruptcy estate in relation to pre-petition debt and
a greater likelihood of recoveries on their debt in the event of a liquidation.”65
C. Air Carrier Reorganization Under the NBRL
The NBRL holds several wrinkles for air carriers undergoing reorganization. Aircraft
leases are subject to Section 3 of Article 49 of NBRL, which provides that leased assets cannot
be repossessed if essential to the economic activity of a company in recovery.66 Additionally,
Article 198 of the NBRL disallows reorganization proceedings by companies not allowed to file
under the concordata of the old law.67 But, under Article 199, corporations identified in Article
187 of the Brazilian Aeronautical Code of December 19, 1986, are not subject to Article 198 and
thus may initiate a Judicial Reorganization; Article 187 identifies companies who have as their
primary purpose air services of any nature and indicates that air carriers can apply for judicial
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 60 (“The object of disposal shall be free of any encumbrances and
the bidder shall not be encumbered with the debtor’s obligations, including those related to tax . . . .”); see also
New Brazil Bankruptcy Law Likely to Improve Recovery Prospects for Creditors, but Challenges Remain,
STANDARD & POOR’S RATINGS DIRECT, Jul. 5, 2005, at 2, available at http://www.securitization.net/
pdf/sp/BrazilianLaw_5Jul05.pdf.
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 49, § 3 (“In the event of the creditor who is a fiduciary owner of
chattels and real estate properties, or mercantile lessor, owner or prominent seller of property whose respective
contracts contain irrevocable or irretrievability clauses, including estate institutions or owner in a sale contract with
domain reserve, its credit shall not be submitted to the effects of judicial recovery, prevailing the rights to property
over the things or contractual conditions, observing the respective legislation, not allowing, however, during the
suspension period referred to in §4 of Section 6 of this Law, the sale or removal of the establishment of the debtor of
goods essential for its corporate activity.” (emphasis added).
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 198 (“The debtors prohibited to request reorganization in bankruptcy
under the terms of the specific legislation in effect on the day of publication of this Law are prohibited to request a
judicial or extrajudicial recovery under the terms of this Law.”); see also Lobo et al., supra note 5, at 42.
reorganization.68 The analysis does not end there, however: the airlines may file, but the NBRL
requires an analysis the debtor’s contracts to determine which are subject to proceedings, as well
as an analysis of what equipment may be preserved by the estate as necessary to preservation of
the going concern.
There’s more. One notable loophole in the Brazilian code at the time of Varig’s petition
applied Article 199—addressing aviation finance contracts—only to finance leases (as opposed
to finance and operating leases).69 Article 199 of the NBRL identified finance leases of aircraft
as being outside of the judicial recovery proceedings, so that the non-debtor party to the lease
could pursue collection on its collateral notwithstanding the stay provisions of the NBRL.70 The
provision completely prohibits Brazilian airlines from rescheduling any obligations arising from
aircraft and equipment leases; in other words, there is no stay period at all.71 At the time of the
Varig case, however, the Article only applied to finance leases, which comprised only 4 of the 87
total aircraft in the Varig fleet, and so the majority of the aviation assets in the Varig case were
Lei. No. 7.565, 19 de decembero de 1986, Art. 187, D.O.U. de 20.12.1986. (Brazil), (“Those companies who have
as their constituent acts the purpose of pursuing air services of any nature or aeronautical infrastructure cannot
petition for concordata.”). Prior to the NBRL’s enactment, Brazil seemed disinclined to allow recovery proceedings
for a commercial air carrier under the rationale that the safety of the general public was at stake; that is, aircraft
maintenance and safety was too great of a public concern to allow to be affected by the financial instability of a
company in reorganization. See Lobo et al., supra note 5, at 42. Presumably, it was preferable for an airline to be
liquidated and sold off rather than allowed to continue on with possibly suspect safety and maintenance oversight.
See also New Brazil Bankruptcy Law Likely to Improve Recovery Prospects for Creditors, but Challenges Remain,
supra note 65, at 6 (“Under the old bankruptcy regime, airline insolvencies were governed by the federal
Aeronautical Code and were supervised by a trustee appointed by a federal regulator. The airlines sought to have
their insolvencies governed by the New Bankruptcy Code . . . .”).
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 199 (“In the judicial recovery and the bankruptcy of corporations
mentioned in the heading of this section, the exercise of the rights resulting from the finance leasing contracts of
aircrafts or their parts will not be suspended in any hypothesis.”).
See id. Immediately after Varig’s filing, Brazil amended this section to provide that lease agreements (including
aircraft lease agreements) are not subject to the judicial recovery, according to the first part of § 3 of Art. 49 of the
NBRL. However, air carriers’ leases would presumably still be protected under the second portion of § 3,
prohibiting the repossession of goods “essential for . . . corporate activity.” See Lobo et al., supra note 5, at 72.
Lei. No. 11.101, 9 de fevereiro de 2005, Art. 199.
subject to the stay as it applied to the general category of creditors.72 In November of 2005,
Brazil’s Congress closed the loophole to apply Article 199 to both finance and operating leases.73
Be that as it may, there is a tension between Articles 199 and 49 of the NBRL: Article
199 indicates that there is no stay at all for aircraft and aircraft engine leases, while Article 49
indicates that equipment necessary to maintain a going concern is not to be repossessed.74 As it
stands now, then, airlines may file for judicial reorganization under the NBRL (an improvement
from the prior bankruptcy law, which prevented them from proceeding under a concordata) but
both finance and operating leases are outside the scope of the stay unless Article 49 is
determined to apply and the leases are necessary for the corporation to continue as a going
concern; it is difficult to imagine that this would not be determined to be the case.75 For cases in
the U.S. courts, then, no relief akin to § 1110 is apparent for aircraft creditors if comity is granted
to Brazilian law.
The enactment of the NBRL undoubtedly expanded the flexibility of debtors and
creditors seeking to pursue reorganization and created more options for the judiciary to use to
facilitate the maximization of value of insolvent companies.76 Given the relative newness of the
statute (and its literal newness at the time of the Varig filing), much remains to be seen as to its
Basch, supra note 2, at 39.
See id. (“Article 199 completely prohibits Brazilian airlines from rescheduling any obligations arising from
aircraft and aircraft engine leases. In other words, the stay provided by Article 199 is zero days. A Brazilian airline
in judicial reorganization is allowed to reschedule its non-lease debt only. The original language of Article 199,
which remains applicable in the Varig case, contained language that the judiciary intended to limit the scope of the
Article to finance leases only. Future judicial recuperation would be processed under the new language, however,
which closes that loophole. Now all aircraft and aircraft engine leases, regardless of whether they are finance or
operating leases, are protected by Article 199 and should be excluded from judicial recuperation restructuring.”). But
cf. Lobo et al., supra note 5, at 72 (“Nevertheless, as with any other type of lease, the aircraft lease agreements are
still subject to the rule of the first part of § 3 of Art. 49 of the NBRL, providing that any assets that are leased cannot
be repossessed from the debtor if it is essential to the economic activity of the company in judicial recovery.”).
See Lobo et al., supra note 5, at 72.
See Araujo & Funchal, supra note 47, for an in-depth discussion of the anticipated favorable effects of the NBRL
on Brazil’s credit market and overall economic efficiency.
shortcomings. One noted deficiency of the NBRL is its lack of reference to cross-border
insolvency proceedings—a deficiency especially germane to this discussion and a growing
concern in light of the ongoing globalization of commerce.77
V. Aircraft Equipment and Vessels Under 11 U.S.C. § 1110
In the United States, special protection has long been afforded by Congress to certain
equipment financiers of aircraft, aircraft engines, propellers, appliances and spare parts.78 Due in
part to the great capital expense of operating a large fleet of high-maintenance aircraft, and due
to the extremely high price of purchasing even one modern airliner,79 most air carriers—even
large ones—are incapable of owning their fleets outright.80 As a result, air carriers are forced to
enter into complex financial arrangements with both financial institutions and aircraft
manufacturers themselves.81 As far back as 1957, Congress was concerned with the fact that
airlines were facing “serious financing problems resulting from the need to replace obsolete
Jarvinen, Primer on Reorganizations, supra note 38, at 9. See also Thomas Benes Felsberg et al., Brazil
Overhauls Restructuring Regime, INT’L FIN. L. REV., Jan. 2006, at 40, 44 (“In 1997 UNCITRAL promulgated a
Model Law on Cross-Border Insolvency and several countries, including most recently the U.S. in 2005 with the
new Chapter 15, have incorporated the Model Law in their domestic insolvency laws. But the new Brazilian law
does not do so, and this failure to incorporate the Model Law will maintain the uncertainty and unpredictability that
existed under the old law with respect to multi-jurisdictional insolvencies that include a Brazilian component,
including the process by which Brazilian courts will determine whether to grant recognition to, or otherwise
cooperate with, foreign insolvency proceedings.”).
See, e.g., In re Ionosphere Clubs, Inc., 123 B.R. 166 (S.D.N.Y. 1991) (holding that a creditor with a purchase
money security interest could take possession of property such as aircraft pursuant to § 1110 despite the automatic
bankruptcy stay). The Federal Aviation Act of 1958, 49 U.S.C.A. § 40102, defines the types of equipment that are
subject to protection.
A Boeing 767-200 of the type repossessed by Gecas from Varig in 2003, for example, currently costs between US
$124.5 million and US $135.5 million. See Boeing Commercial Airplane Prices,
http://www.boeing.com/commercial/prices (last visited Oct. 14, 2007).
See Gregory P. Ripple, Note, Special Protection in the Air[line Industry]: The Historical Development of Section
1110 of the Bankruptcy Code, 78 NOTRE DAME L. REV. 281, at 281-82, n.6 (“The difficulty these costs impose on
start-up airlines is evidenced in the circumstances surrounding the beginnings of JetBlue Airways. In 1999 the
airline launched with $ 130 million in capital investment, the largest capital buildup in the history of the American
airline industry. This amount would have been sufficient to buy outright only one of the airline's twenty-three Airbus
A320s.”).
equipment with modern aircraft.”82 They were, perhaps, predisposed to acquiesce to demands
from Financiers for more substantial protections for their investments when considering the
codification of such protections.83 Today, Financiers continue to argue that they are unwilling—
or at least unlikely—to provide financing for new or unproven airlines absent the protections
offered their investments under § 1110 (or at least that the terms they would offer would border
on the usurious).84
Prior to the enactment of what is the modern form of the law, the old U.S. § 116(5) of the
Bankruptcy Act ("Bankruptcy Act") made reorganization proceedings completely inapplicable
insofar as they affected title and the right of aircraft creditors to repossess.85 Because debtors
were required to obtain aircraft financiers’ agreement to retain equipment whose financing was
in default during insolvency proceedings, § 116(5) essentially gave financiers “the absolute veto
power over a reorganization.”86 Additionally, the Bankruptcy Act did not give debtors any grace
period within which to determine if it would cure defaults and continue under a pre-petition
agreement or if it would surrender its equipment to the creditor.87 When the modern § 1110 was
enacted in 1977, Congress, rather than perpetuating the aircraft creditors’ veto power, crafted §
1110 such that a debtor may remain in possession of aircrafts and aircraft equipment so long as it
H.R. REP. NO. 85-944 (1957), reprinted in 1957 U.S.C.C.A.N. (71 Stat. 716) 1926, 1926. See also Ripple, supra
note 80, at 290 (“Most commentators agree that Congress hoped to strengthen the borrowing power of airlines
engaged in fleet modernization by offering equipment financiers more security on their investment by limiting the
equitable powers of the bankruptcy court to modify their rights to take possession of collateral after a default.”).
Eric A. Posner, The Political Economy of the Bankruptcy Reform Act of 1978, 96 MICH. L. REV. 47, 48 (“It has, of
course, long been assumed that certain narrow provisions of the 1978 Act reflect the influence of interest groups—
for example, the section that gives special protection to security and lease interests in aircraft.”).
See, e.g., Ripple, supra note 79, at 282.
See H.R. REP. NO. 85-944 (1957), reprinted in 1957 U.S.C.C.A.N. (71 Stat. 716) 1926, 1927.
See S. REP. NO. 95-989, at 116-17 (1978), reprinted in 1978 U.S.C.C.A.N. (92 Stat. 2549) 5787, 5903.
WILLIAM L. NORTON, JR., ET AL., 4 NORTON BANKRUPTCY LAW AND PRACTICE § 81:1 (2d ed. 2007).
cures its defaults and reaffirms its obligations under any pre-petition security agreements or
financing arrangements.88
Section 1110 sets out three prerequisites to be met before a creditor may receive the
protection of its provisions. Because the provision only applies to: (1) a specific type of
equipment; (2) a specific type of transaction; and (3) a licensed debtor, the protections afforded
are available to only a very narrow class of creditors.89 Creditors who pass the test for the
protections of § 1110 must make a written demand for possession before the trustee must
surrender the collateral.90 The rights of a § 1110 Financier are not “limited or otherwise affected
by any other provision of this title or by any power of the court.”91 The title referred to is Title 11
of the United States Code (the Bankruptcy Code); “power of the court” is defined in § 105 of the
Code as the court’s ability to “issue any order, process, or judgment that is necessary or
appropriate to carry out the provisions of this title.”92
Section 1110 provides qualifying Financiers with the right—§ 362 and other provisions
of the Code notwithstanding—to repossess qualifying aircraft and equipment under the terms of
their pre-petition agreements unless, within 60 days of the commencement of the relief
proceedings, the debtor either a) “agrees to perform all obligations of the debtor under [the]
See Margaret Sheneman & Cecily A. Dumas, Equipment Leasing and the Bankruptcy Code, in 1 EQUIPMENT
LEASING – LEVERAGED LEASING § 7-1, 7-98 (Ian Shrank & Arnold G. Gough eds., 4th ed. 2002). It is important to
note, however, that § 1110 “merely provide[s] an exception to the automatic stay and collateral use provisions of
sections 362 and 363; [it] does not insulate the transportation equipment financier from the other provisions of the
Bankruptcy Code.” Id.
11 U.S.C. § 1110(a).
11 U.S.C. § 1110(c)(1).
11 U.S.C. § 1110(a)(1).
11 U.S.C. § 105(a). See also United Airlines, Inc. v. U.S. Bank N.A., 406 F.3d 918 (7th Cir. 2005) (“This takes
aircraft out of the automatic stay, see 11 U.S.C. § 362, and entitles secured lenders and financing lessors to repossess
their collateral. There are only two exceptions. Section 1110(b), which we have mentioned, says that the creditor or
lessor may agree to allow the debtor to continue using the equipment. This is how [the debtor] has retained the
aircraft so far. Section 1110(a)(2), the other exception, gives the debtor 60 days after the bankruptcy begins to come
current on its payments and provides that, if the debtor thereafter makes all payments called for by the contracts, it
may retain the airplanes. [The debtor] is not paying the full amount required by these leases, so § 1110(a)(2) does
not assist it.”).
security agreement” and cure all pre- and post-petition defaults; or b) agrees, with the secured
party or lessor whose right to possess is protected, to extend the 60-day period specified.93 If the
debtor or trustee fails to agree to perform or to negotiate an extension, the automatic stay of §
362 does not apply and the Financier may recover its collateral to the extent governed by the pre-
petition financing arrangement.94 Section 1110 is somewhat unusual in the scheme of the Code
in that it takes the ‘adequate protection’ concept of §§ 362 and 363 further than usual. Whereas
the Code ordinarily provides for payments or other compensation that are minimally sufficient to
maintain the value of the creditor’s claim relative to its collateral, § 1110 “basically rewrites the
concept of ‘adequate protection’ in the context of qualifying aircraft equipment . . . to provide
the secured creditor [or] lessor with precisely what it bargained for: compliance with the terms of
any relevant . . . agreement . . . , or return of the property.”95 The legislative history for the
enactment of § 1110 explicitly clarifies that:
[t]he major differences for transportation equipment security interests is that the
proposed section defines more precisely what constitutes adequate protection. It is
the payments and duties of the debtor called for under the security agreement. In
the case of a lease, the protection is the same afforded other lessors, but the
trustee is required to make a decision within 60 days of the order of relief.96
Additionally, any post-petition default must be cured within 30 days.97 The transaction
must be an equipment security interest, a conditional sale, or a lease to qualify for the
11 U.S.C. §§ 1110(a)-(b) (2006). See also Sheneman & Dumas, supra note 88, at, 7-97 (“As a practical matter,
the value of the financier’s or lessor’s right to repossess the equipment depends on the market for resale or re-lease
of the equipment at the time the debtor’s sixty-day period has expired. For example, the financier may prefer to
have the debtor operate the aircraft during a Chapter 11 case under a month-to-month rent stipulation, rather than
have the aircraft sit idle at the end of the runway after repossession.”).
7-1110 COLLIER ON BANKRUPTCY, Relationship between § 1110 and Other Provisions of the Code, 1110.05 (15th
ed. 2007).
H.R. REP. NO. 95-595, at 239-240 (1977).
11 U.S.C. § 1110(a)(2)(B)(ii)(I).
protections, and the pre-petition security or lease agreement must give the financier the right to
repossess.98
Section 1110, while limited in scope and applicability, is a potent clause within the
Code.99 “Congress obviously knew what it was doing when it gave special protection to aircraft
financiers. In each of the amendments in 1978, 1994, and 2000, respectively, Congress
broadened the scope and applicability of § 1110.”100 Any lease or security interest in aircraft
falls under the aegis of § 1110 – the 1994 amendments specifically clarified that question in
response to debtor challenges of the previous § 1110 language in the Pan Am and Continental
insolvency proceedings of the early 1990s.101 The 1994 amendments also clarified that the rights
of a § 1110 creditor are not intended to be limited by the effects of a § 1129 ‘cramdown’ in the
reorganization process.102 Also, after the initial 60-day period of protection under 1110 expires,
any subsequent default of lease or loan terms gives the secured party an immediate and
unqualified right to retake possession and control.103
Kilborn, supra note 7, at 46 (“Given the significant value of transportation equipment to a carrier's estate—either
in operating the carrier's business or in producing proceeds from assignment of the carrier's rights under an
unexpired lease—debtors have a powerful incentive to fulfill these conditions.”).
Vanguard Airlines, Inc. v. Int'l Aero Components, Inc. (In re Vanguard Airlines, Inc.), 295 B.R. 908, 919 (Bankr.
W.D. Mo. 2003)
In re Pan Am Corp., 929 F.2d 109 (2d Cir. 1991); In re Continental Airlines, Inc., 932 F.2d 282 (3d Cir. 1991).
See 11 U.S.C. § 1129 (2006). See also Ripple, supra note 80, at 296.
See Ripple, supra note 80, at 296.
VI. Background of Cross­Border Insolvencies Under the U.S. Code
Varig commenced its bankruptcy proceedings in the United States under former § 304 of
the Code.104 This section authorized cases ancillary to foreign proceedings commenced by filing
of a petition by a foreign representative of the debtor.105 The proceeding was meant to prevent a
duplicative effort by the U.S. Bankruptcy Court in cases where “main proceedings” have already
been filed in another country, and it aimed to be a “more efficient and less costly alternative” to
initiating a full bankruptcy case.106 Ancillary proceedings do not automatically trigger stay
protections, grant the petitioner powers of avoidance, or create an estate.107 The section was,
however, intended to protect a foreign debtor’s assets in the United States by preventing “the
piecemeal distribution of assets in the United States by means of legal proceedings initiated in
domestic courts by local creditors.”108
Stay requests are analyzed on a discretionary basis by the bankruptcy judge using the
guidance provided by § 304. The foreign representative must affirmatively seek a protective stay
or any other form of relief.109 The court may, at its discretion, enjoin the commencement or
continuation of any action or the enforcement of a judgment against the debtor concerning
Petition Pursuant to 11 U.S.C. § 304, supra note 6, at 1. Act of Nov. 6, 1978, P.L. 95-598, Title 1, § 101, 92 Stat.
2560, repealed by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, P.L. 109-8, Title VIII, §
802(d)(3), 119 Stat 146. Section 304 was good law at the time of the filing of the ancillary proceeding in the
Bankruptcy Court of the Southern District of New York. Chapter 15 (Ancillary and Cross-Border Proceedings) of 11
U.S.C. § 1501 et seq. did not go into effect until October of 2005 with the enactment of the BAPCPA, so the Varig
case was conducted under the provisions of § 304.
11 U.S.C. § 304(a).
Cunard S.S. Co. v. Salen Reefer Servs. A.B., 773 F. 2d 452, 456 (2d Cir. 1985). See generally Joseph Samet,
Multinational Insolvencies, in EMERGING ISSUES IN WORKOUTS & BANKRUPTCIES 2005, at 337, 337 (2005)
(program to Practicing Law Institute’s 2005 workshop on workouts and bankruptcies; provides a background on
proceedings initiated under § 304).
See Samet, supra note 106, at 337.
In re Koreag, Controle et Revision S.A., 961 F. 2d 341, 348 (2d Cir. 1991).
See Interpool, Ltd. v. Certain Freights of the M/VS Venture Star, 878 F. 2d 111 (3rd Cir. 1989) (noting also that
“a foreign representative has the alternative of filing a full-scale involuntary bankruptcy case under section
303(b)(4), thereby triggering the automatic stay.”).
property involved in the proceeding, order turnover of such property to the foreign
representative, or order other appropriate relief.110
Section 304 outlines six factors for the court to consider when deciding whether to grant
a foreign representative’s petition for relief:
(2) protection of claim holders in the United States against prejudice and
inconvenience in the processing of claims in such foreign proceeding;
(4) distribution of proceeds of such estate substantially in accordance with the
order prescribed by this title;
(6) if appropriate, the provision of an opportunity for a fresh start for the
individual that such foreign proceeding concerns.111
Conflicts arise between debtors and creditors—as they did in the Varig ancillary proceeding—
when a foreign debtor requests injunctive relief under § 304 and the creditor protests, arguing
that it should not have to sacrifice remedies available to it under the U.S. Code simply because a
foreign proceeding is underway elsewhere.112 The U.S. Bankruptcy Court must then decide what
§ 304(c) factors are applicable and what force to give each of them when determining whether to
defer to the jurisprudence of the foreign proceedings and grant the relief requested by the foreign
representative.113 Great deference is given to comity114 in the consideration by the U.S. court,
11 U.S.C. § 304(b) (repealed 2005).
11 U.S.C. § 304(c) (repealed 2005).
See Samet, supra note 106, at 345; see In re Parmalat Secs. Litig., 472 F. Supp. 2d 582 (S.D.N.Y. 2007) and In re
Petition of Davis, 191 B.R. 577 (Bankr. S.D.N.Y. 1996) for examples of courts applying the § 304 factors to the
facts of the cases at hand.
See, e.g., In re Rubin, 160 B.R. 269, 283 (Bankr. S.D.N.Y. 1993) (court enjoined all actions by creditors against
the debtor’s property in the United States, holding that as long as “as the laws of the foreign jurisdiction are not
repugnant to our own, there is a distinct judicial preference for deferring to the foreign tribunal litigation respecting
the validity or the amount of the claims against the foreign debtor.”); but cf. In re Hourani, 180 B.R. 58 (Bankr.
S.D.N.Y. 1995) (in which the court denied a foreign representative’s § 304 petition on grounds that the foreign
liquidation proceedings lacked minimum safeguards for creditors when it did not distinguish between secured and
unsecured creditors in prioritization of claims); Treco v. Bank of New York, 240 F. 3d 148 (2d Cir. 2001) (court
declined to extend comity to Bahamian courts, reasoning that comity did not hold greater weight than the other
factors of § 304(c) and that the Bahamian bankruptcy laws did not substantially accord with the priority given
secured claims in the United States).
and comity will be accorded so long as the foreign court is of competent jurisdiction and the laws
and public policy of the home forum are not violated.115 It is not, however, to take automatic
precedence over the other factors of § 304(c), but rather should be considered in light of all of
the factors that Congress provided.116
Numerous commentators have examined the circumstances under which courts either
should defer to foreign proceedings or should decline to grant comity by use of public policy
arguments.117 Section 304(c)(2) is most commonly cited as the source of the ‘escape clause’
reasoning that courts use to abjure foreign law and apply local law instead. The escape clause
comes in the form of a public policy exception that “provides that if application of the law
chosen by the relevant conflicts rule would violate the public policy of the forum state, the court
can choose to apply forum law instead.”118
Courts have not been consistent in their determinations of what constitutes a public
policy violation significant enough to warrant not extending comity.119 While no fixed rule
exists for determining what public interests warrant an increased level of protection when
BALLENTINE’S LAW DICTIONARY (3d ed. 1969) (“Literally, courtesy or civility, to which the law adds some
refinements in defining the term for the purposes of conflicts of laws and international law: Neither a matter of
absolute obligation on the one hand nor a mere courtesy and good will on the other, but the recognition which one
nation or state allows within its territory to the legislative, executive, or judicial acts of another nation or state,
having due regard both to international duty and convenience and to the rights of its own citizens or of other persons
who are under the protection of its laws.”).
See In re Culmer, 25 B.R 621, 628 (Bankr. S.D.N.Y. 1982) (granting petition of foreign representative on
grounds that no prejudice to creditors was shown by foreign proceedings; court reasoned that their primary
consideration was “whether the relief petitioners seek will afford equality of distribution of the available assets.”)
See, e.g., In re Caldas, 274 B.R. 583 (Bankr. S.D.N.Y. 2002) (reasoning that comity, considered in conjunction
with the other § 304(c) factors, was not at odds with granting deference to the foreign proceedings); In re
Application of Papeleras Reunidas, S.A., 92 B.R. 584 (Bankr. E.D.N.Y. 1988) (holding that comity should not be
accorded when Spanish law prejudiced American creditors under the other factors of § 304).
See, e.g., Hannah L. Buxbaum, Rethinking International Insolvency: The Neglected Role of Choice-of-Law Rules
and Theory, 36 STAN. J. INT’L L. 23 (2000); Sandeep Gopalan, Article, Transnational Commercial Law: The Way
Forward, 18 AM. U. INT’L REV. 803 (2003).
See Buxbaum, supra note 117, at 40.
See, e.g., In re Toga Mfg., 28 B.R. 165, 168 (Bankr. E.D. Mich. 1983) (refusing to defer to a foreign proceeding
in which a local creditor was recognized as holding a secured claim under U.S. law but would be an "ordinary"
(unsecured) creditor under foreign law); Overseas Inns v. United States, 911 F.2d 1146 (5th Cir. 1990) (stating that
foreign law would have implicated public policy, unrelated to bankruptcy, favoring payment of income taxes).
considering foreign proceedings, predictability in the courts’ approaches to each case will result
in a greater likelihood of uniform results and thus allow more stability for cross-border
financing.120 Also significant to the concept of comity analysis is the extent to which a foreign
proceeding might discriminate against a U.S. creditor. For instance, because the granting of a
petition to initiate an ancillary proceeding under § 304 triggers an automatic stay under the
Code—which would ordinarily be circumvented by a Financier under the protections of §
1110—the Financiers are arguably discriminated against in the sense that they are left in a
significantly worse position than they would be under a U.S. main proceeding. However, New
York courts in particular are inclined to defer to the foreign proceeding, so convincing them of
discrimination will likely entail showing proof of a “transaction which is inherently vicious,
wicked or immoral, and shocking to the prevailing moral sense.”121
VII. Petition of Varig to Commence a Case under 11 U.S.C. § 304
On June 17, 2005 (the “Filing Date”), Vicente Cervo, the foreign representative of Varig,
filed a petition in the Bankruptcy Court of the Southern District of New York (the “U.S. Court”)
to commence a case ancillary to a foreign main proceeding in Brazil under the auspices of § 304
of the Code, Case No. 05-14400 (RDD).122 The petition coincided with the filing of applications
by Varig for the commencement of judicial reorganization proceedings (the “Foreign
Proceeding”) in the Commercial Bankruptcy and Reorganization Court in Rio de Janeiro (the
Buxbaum, supra note 117, at 55.
Intercontinental Hotels Corp. v. Golden, 203 N.E.2d 210, 212 (N.Y. 1924) (“[F]oreign-based rights should be
enforced unless the judicial enforcement of such a [right] would be the approval of a transaction which is inherently
vicious, wicked or immoral, and shocking to the prevailing moral sense.”).
Petition Pursuant to 11 U.S.C. § 304, supra note 6, at 1.
“Brazilian Court”) pursuant to the NBRL.123 The petition sought to “obtain the assistance of
[the] Court in protecting the property of Varig for the benefit of all its creditors.”124 It further
asserted that as part of the judicial reorganization under the NBRL, the debtor is permitted to
remain in control of its business and properties and is protected by a stay from the attempts of
most creditors to enforce claims against the debtor.125 Through its foreign representative, Varig
outlined the shell of a reorganization plan and claimed that the stay of proceedings, if granted,
would provide the “breathing space” needed for it to complete its restructuring and rework its
balance sheet.126
Varig argued that its anticipated reorganization plan would provide for the fair treatment
of creditors, result in a creditor-approved restructuring of the debtor capital structure, and create
a financially stable reorganized airline.127 A stated goal of the petition was to reduce the costs of
litigation by funneling all claims through the Brazilian bankruptcy court for adjudication, and
accordingly the foreign representative requested injunctive relief to enable Varig to devote its
resources to reorganizing rather than litigating in the United States.128 The petition specifically
references five of the factors set forth in § 304(c), and, without elaborating further, claims that
the grant of relief by the U.S. court would satisfy each of the factors by contributing “to an
economical and expeditious administration of the foreign estates.”129
Id. at 9. Judge Alexander dos Santos Macedo of the Commercial Bankruptcy and Reorganization Court issued an
interim order (a medida liminar) in compliance with the NBRL on the Filing Date. The interim order—similar to a
temporary restraining order in the United States—specifically restrains aircraft creditors from seizing or interfering
with Varig’s use of equipment essential to its operations. See Lobo et al., supra note 5, at 43.
Petition Pursuant to 11 U.S.C. § 304, supra note 6, at 12.
The debtor, Varig, sought the court’s protection principally to enjoin aircraft and engine
lessors and Financiers from repossessing their equipment; at the time of filing, pre-petition
claims by Varig’s creditors were in the tens of millions of dollars on past-due rent and
maintenance reserves.130 Varig intended to extend the protective orders of the Brazilian Court to
make them enforceable in the United States against property and creditors subject to U.S.
jurisdiction.131 On June 17, 2005, the Court entered a temporary restraining order granting the
relief requested pending further consideration of parties’ arguments and briefs.132
Varig’s creditors in the United States immediately countered with objections to the
temporary restraining order entered by Judge Robert Drain of the Bankruptcy Court.133
Financiers accustomed to the protections afforded to them by § 1110 of the Code petitioned for
relief from the stay and the right to have any faults cured or to repossess their aircraft or
equipment.134 The lack of an analogous provision to § 1110 in the NBRL (Article 199
notwithstanding) led the creditors to argue that the U.S. Court should not recognize the
See Lobo et al., supra note 5, at 42; Basch, supra note 2, at 38 (“Another significant portion of Varig’s pre-filing
debt with lessors arose from prior rescheduling plans that Varig had negotiated for repayment of unpaid rent over
time.”).
Lobo et al., supra note 5, at 72 (“This was particularly critical in Varig’s case, because nearly all of the aircraft
creditors were located in the United States and could have repossessed their equipment at any of the three U.S.
airports where Varig landed.”).
Temporary Restraining Order, In re Petition of Vicente Cervo, as Foreign Representative of Varig, S.A., et al.,
No. 05-14400 (Bankr. S.D.N.Y. 2005).
See, e.g., Objection of the Boeing Company to Temporary Restraining Order, In re Petition of Vicente Cervo, as
Foreign Representative of Varig, S.A., et al., No. 05-14400 (Bankr. S.D.N.Y. 2005) (arguing, among other things,
that the filing of the § 304 proceeding was premature and thus invalid, as Varig had not fulfilled all of the filing
requirements in Brazil, nor had it had its foreign representative approved by the Brazilian Court. It further argued
that Art. 199 of the NBRL does not suspend the rights resulting from mercantile leases of aircraft and so it should be
permitted to pursue its rights of repossession.); Objection of International Lease Finance Corporation to Further
Continuation of Temporary Restraining Order at 9, In re Petition of Vicente Cervo, as Foreign Representative of
Varig, S.A., et al., No. 05-14400 (Bankr. S.D.N.Y. 2005) (arguing that § 304(a) is inapplicable as no foreign
proceeding is pending due to filing failures; arguing also that the debtors wrongly characterize the aircraft leases as
not being “mercantile” leases and that the operating leases should not be subject to a stay under the foreign
See Lobo et al., supra note 5, at 43.
proceedings in Brazil because the NBRL did not protect claim holders in the same manner to
which they were accustomed under the Code.135
The aircraft Financiers made three basic arguments in their briefs to the U.S. Court. The
first, primarily procedural, was that Varig had not met the burden of properly filing the assorted
paperwork required by the NBRL for a proceeding to commence; if no foreign proceeding was
properly begun, then necessarily no ancillary proceeding could follow.136 The second centered
around § 1110 and the protections afforded therein.137 The third revolved around the way in
which both the Brazilian Court and the U.S. Court handled pre- and post-filing debt
obligations.138
The substantive argument of the Financiers centered on the perceived inequities of the
effect that applying Brazilian law would have on the rights available to the creditors regarding
their collateral. The Foreign Representative relied heavily on the argument that § 304 of the
Code authorized the Court to grant relief in the form of continuation of the initial preliminary
injunction. In particular, it pointed to the flexibility afforded the courts to “broadly mold
appropriate relief in near blank check fashion.”139 This conflict of opinion was the crux of the
case and the arguments between the parties as regarded the aircraft collateral.
Id. See, e.g., Objection of the Boeing Company to Temporary Restraining Order, supra note 133.
See, e.g., briefs cited supra note 133. While undoubtedly a matter of great importance to all parties involved at
the time, ultimately the issues regarding the proper filing of the suit were resolved in the Brazilian courts and the
case proceeded apace in both Brazil and New York; I will not focus on this procedural line of protest from the
See Lobo et al., supra note 5, at 43. See, e.g., Objection of U.S. Bank National Association, U.S. Bank Trust
National Association and Wells Fargo Bank, N.A., as Trustees, to the Temporary Restraining Order or Preliminary
Injunction at 7, In re Petition of Vicente Cervo, as Foreign Representative of Varig, S.A., et al., No. 05-14400
(Bankr. S.D.N.Y. 2005) (arguing that no power of the court may affect the rights of creditors protected under §
See Basch, supra note 2, at 38 (noting that when post-filing defaults on debt should give the creditor the right to
possess, Brazilian courts found ways to prevent them from doing so in order to protect Varig as a going concern).
Memorandum of Law in Support of Continuation of Preliminary Injunction, In re Petition of Vicente Cervo, as
Foreign Representative of Varig, S.A., et al., No. 05-14400 (Bankr. S.D.N.Y. 2005) (citing In re Culmer, 25 B.R.
621, 624 (Bankr. S.D.N.Y. 1992)).
As a workaround, and instead of extending the protections of § 1110 to the aircraft
Financiers, the U.S. Court crafted a “contingency return plan” that purported to approximate
some of the protections of § 1110.140 Varig was required to prepare a schedule showing the
location of each asset, trace, and granting a priority claim for any damages incurred as result of
missing parts or maintenance documents. The Court directed Varig to seek to have the
contingency return plan (including priority claim) approved by the Brazilian court (which it did).
But this plan did not provide the relief that the Financiers were seeking; namely, it did not
require the debtor to come current on arrearages and default terms incurred pre-petition, nor did
it grant creditors the option of repossessing after the prescribed cure period.141
VIII. Outcome Analysis
The Court, in extending comity to the debtor’s application, determined that the foreign
main proceeding sufficiently protected creditor interests that U.S. public policy considerations
were not infringed. Comity, while an important (indeed, perhaps the most important) factor of
the six § 304 factors, does not trump all others, and the court considered each of the factors,
especially “protection of claim holders in the United States against prejudice and inconvenience
in the processing of claims in such foreign proceeding.”142
Preliminary Injunction Order, In re Petition of Vicente Cervo, as Foreign Representative of Varig, S.A., et al.,
No. 05-14400 (Bankr. S.D.N.Y. 2005)
11 U.S.C. § 304(c)(2). In cases where U.S. courts ultimately did not defer to the law of the primary proceeding
state, this section was most commonly cited as the basis for the decision. See, e.g., Interpool, Ltd. v. Certain
Freights, 102 B.R. 373 (D. N.J. 1988), appeal dism’d, 878 F.2d 111 (3d Cir. 1989); In re Toga Manu., Ltd., 28 B.R.
165 (Bankr. E.D. Mich. 1983).
A. Section 304 and Modified Universalism
Section 304, propagated as an embracing of “modified universality” by Congress in the
1978 Bankruptcy Reform Act, purports to assist the foreign representative undertaking a foreign
proceeding while still preserving the discretion of the local court to protect the interests of local
creditors.143 Because of the broad flexibility given to the court (indeed, the very flexibility that
the Foreign Representative espoused in its motion to continue the preliminary injunction), the
actual application of the law in ancillary proceedings in the United States has been somewhat
unsystematic.144 This of course has the potential to lead to unpredictable outcomes; in the world
of finance—especially aircraft finance—unpredictability is a dangerous thing.145
Modified universalism is a philosophy of international insolvency jurisprudence that
tempers a purely universal approach (advocating using the law of only a single forum in
adjudicating insolvency proceedings) with an acknowledgement that in certain circumstances a
local proceeding and local forum rules may need to be applied.146 The U.S. system is a modified
universalist approach, recognizing the need to acknowledge foreign debtor proceedings in
foreign courts (per § 304 and now Chapter 15 of the Code) while maintaining a territorialist
option of protecting local creditors from unfairness or prejudice in those proceedings (per §
304(c)(2)).147 Section 304 does not provide a bright-line rule to judges on how to apply the
decision-making process when evaluating the protections afforded local creditors versus the
Buxbaum, supra note 117, at 29.
Id. (“Although the fair resolution of any individual case is of course desirable, unpredictability of outcome is not.
This is especially true in international bankruptcy, where uncertainty as to the possible consequences of a debtor's
bankruptcy renders creditor planning difficult and cross-border lending unduly risky.”).
See Buxbaum, supra note 117, at 27.
See id. See also Pottow, Procedural Incrementalism: A Model for International Bankruptcy, 45 VA. J. INT'L L.
935, 951 (2005) (“A critical problem that universalism faces . . . stems from the ongoing allure of territorialism to
sovereignty-conscious states. Many states will be happy to apply their own bankruptcy laws broadly to the
resolution of an international dispute, but few want to cede their sovereignty over the same dispute when they are
deemed to be in the ancillary position.”).
deference to grant to the foreign proceeding.148 Each case in a § 304 ancillary proceeding
involves the application of the law by the presiding judge on an ad-hoc basis.
While courts are overwhelmingly likely to defer to the foreign proceedings, courts in the
United States nonetheless will use public policy exceptions—often referred to as “escape
clauses”—to ensure fair results in the local forum when the foreign law would render an
injustice.149 As Hannah Buxbaum says:
In a sense, public policy is merely the flip side of comity: Where comity is viewed
as a reason to accept a choice leading to the application of the laws of another
nation, public policy is viewed as a reason to refuse that choice, preferring instead
to apply the laws of one's own.150
While Congress explicitly embodied the public policy escape clause into the Reform Act of 1994
with the language of § 304, the lack of system-wide predictability creates problems in the arenas
of international financing and transaction costs.151 In order to establish generally ex ante
predictability for parties, “only if the application of a particular foreign law contravenes a public
policy of the United States should a court refuse to effectuate the choice of law resulting from
In a purely universal or purely territorial insolvency system, the choice for a judge would be clear: in universal
proceedings, the law of the foreign forum prevails; in territorial systems, the local forum law governs. See Buxbaum,
supra note 117, at 31-32.
See Buxbaum, supra note 117, at 46; see also Pottow, supra note 138, at 952 (pointing out that the challenge to
pure universalism is getting courts to accept outcome differences, that is, “the commitment of rationally selfish
states - which generally prefer to see their own substantive bankruptcy laws govern - to cede sovereignty when
another state has been chosen to control an international bankruptcy dispute, even though such a concession may
produce a different substantive outcome to the bankruptcy for the deferring state's participants.”). This reluctance to
cede sovereignty manifests itself in multilateral or modified universal systems that allow public policy exceptions
when needed to protect local creditors.
See Buxbaum, supra note 117, at 46.
See Buxbaum, supra note 117, at 48 (“[A]ny court considering which law to apply to a particular case should
reach the same result, and that result should be predictable. These advantages are particularly relevant to the
resolution of international bankruptcy proceedings. If domestic creditors know that a local action (whether a local
bankruptcy proceeding or an action to attach a debtor's assets) will be subordinated to the bankruptcy proceeding
initiated in the debtor's home jurisdiction, they will be less likely to initiate such actions, thereby increasing the
likelihood that the estate will remain intact. In addition, if creditors are aware in advance of the jurisdiction to which
any future bankruptcy proceeding concerning the debtor will be assigned, they will be able to enter into their
financing arrangements with an appreciation of the likely results of debtor insolvency.”).
the selection of jurisdiction.”152 As discussed infra, the § 1110 provisions are ones that
Financiers argued should be preserved as public policy exceptions during cross-border
B. Cases Addressing Comity Considerations
Cases in which U.S. courts have declined to defer to foreign main proceedings under §
304 and principles of comity acknowledge the primacy of comity and international cooperation
as factors, but are careful to point out that the other tests of § 304(c) must be given due
consideration in order to prevent § 304(c) from being “effectively eliminated from the statute,
violating ‘[the court’s] duty to give effect, if possible, to every clause and word of a statute’.”153
The courts generally recognize that the priority, preference, or automatic stay rules of a foreign
main proceeding need not be identical to those of the Code, as demanding pure equivalence
would be akin to reverting to territorialism and would fly in the face of the spirit of international
cooperation. However, the factors of § 304(c) (or of the current § 1507) are not to be thrown
aside in a blind rush to confer comity on an ancillary proceeding. Courts must “consider
differences between American . . . rules and those applicable to the foreign proceeding in
determining whether affording comity will be repugnant to American public policies,” and then
“consider the effect of the difference in the law on the creditor in light of the particular facts
presented.”154
Buxbaum, supra note 117, at 58.
In re Treco, 230 F.3d 148, 157 (2d Cir. 2001) (quoting United States v. Gitten, 231 F.3d 77, 80 (2d Cir. 2000).
1. In re Maxwell Communication Corp.
In re Maxwell Communication Corp. is one of the most important modern cross-border
insolvency cases to address a wide range of dueling foreign law considerations using principles
of comity analysis.155 After the controversial death of Robert Maxwell, a prominent publisher
and businessman whose many business interests were headquartered in London but whose assets
were largely located in the U.S., a Chapter 11 proceeding was brought in the U.S. simultaneously
with an administration in the United Kingdom.156
The Maxwell court addressed the primary considerations of comity in determining that it
should defer to the courts and law of England on a question of avoidance of pre-petition
transactions.157 The court begins by establishing that “[w]hen construing a statute, the doctrine
of international comity is best understood as a guide where the issues to be resolved are
entangled in international relations.”158 It then argues that ‘international comity’ is a “canon of
construction [that] might shorten the reach of a statute.”159 In Maxwell, the court is concerned
that the U.S. system should not take precedence if it appeared clear that English law should apply
based on concern for the international system as a whole functioning properly. In other words,
the court reasons that unless Congress legislates specifically against it, the doctrine of comity
may properly be used to analyze any statute in proceedings with foreign ties. In particular, the
Comity is especially important in the context of the Bankruptcy Code for two
reasons. First, deference to foreign insolvency proceedings will, in many cases,
facilitate "equitable, orderly, and systematic" distribution of the debtor's assets . . .
In re Maxwell Commc’n Corp., 93 F.3d 1036 (2d Cir. 1996).
Id. See also Jay Lawrence Westbrook, The Lessons of Maxwell Communication, 64 FORDHAM L. REV. 2531,
2534 (1996).
In re Maxwell Commc’n Corp., 93 F.3d 1036.
. Second, Congress explicitly recognized the importance of the principles of
international comity in transnational insolvency situations when it revised the
bankruptcy laws.160
Having determined that a true conflict exists between U.S. and English law (in that English
avoidance law requires a pre-petition transfer to have been made with intent to benefit the
creditor, whereas § 547 of the Code has no such requirement), the court goes on to argue that
under the facts, English law has primacy to the dispute and thus should apply. Looking at the
location of the debt, overdraft facilities, and other credit transactions, as well as choice of forum
clauses in the agreements between the debtor and creditors, the court believed that the interests
of the U.S. forum were not compelling enough to warrant applying § 547 preference
avoidance.161 “The principal policies underlying the Code's avoidance provisions are equal
distribution to creditors and preserving the value of the estate through the discouragement of
aggressive pre-petition tactics causing dismemberment of the debtor,” the court reasons, and as
the English court effectuated those same policies with its laws, the court deferred to the English
primacy of interest.162
The court finally concludes by reasoning that in addition to the strong jurisdictional
interests of the English forum, the spirit of international cooperation “argues decidedly against
the risk of derailing that cooperation by the selfish application of our law to circumstances
touching more directly upon the interests of another forum.”163 In Maxwell, therefore, the test
for extension of comity was based less on the specific factors enumerated in § 304(c) and more
on the balance of interests involved for each party and each forum country.
Id. at 1052.
What is important to note, however, is the extent to which the court applied a balancing
test when choosing the applicable law to use. While in Maxwell the U.S. contacts were deemed
so insignificant as to preclude the application of U.S. law, the court analyzes the U.S. and U.K.
law and determines that a true conflict does exist between the competing insolvency procedures,
thus compelling the use of comity principles.164 In the instant case, the court determines that the
U.K. contacts to the case had primacy over U.S. interests.165 In fact, the court characterizes the
linkage to U.S. interests as “not particularly weighty” and that the “negative effects [of not
applying the Code] are insubstantial.”166 Westbrook speculates that had the U.S. interests been
greater, the choice of law analysis would have been more closely addressed:
If, for example, the record in Maxwell had shown that the banks had forced the company
to make payments by liquidating important United States operations, thereby putting
United States creditors, employees, and communities at risk, then interests to which the
preference laws are relevant would have been implicated.167
The implication for the Varig creditors, perhaps, is that had they been able to demonstrate a
greater connection to the U.S., the court may have been more inclined to apply U.S. law.
2. In re Treco
In In re Treco, by comparison, the court analyzed the § 304(c) factors in detail when
considering a turnover request in a Bahamian main proceeding and U.S. ancillary proceeding.168
At issue was the priority of the secured claim of a U.S. creditor: under Bahamian insolvency law,
Id. at 1051 (“England has a much closer connection to these disputes than does the United States. The debtor and
most of its creditors—not only the beneficiaries of the pre-petition transfers—are British. Maxwell was incorporated
under the laws of England, largely controlled by British nationals, governed by a British board of directors, and
managed in London by British executives . . . . These same factors, particularly the fact that most of Maxwell's debt
was incurred in England, show that England has the strongest connection to the present litigation.”).
Westbrook, supra note 156, at 2537. “[I]t must be conceded that the result is essentially a case-by-case choice-of-
law analysis. That approach pays the price of unpredictability to avoid the harmful consequences of a mechanical
territorial rule.” Id. at 2540.
In re Treco, 240 F.3d 148 (2d Cir. 2001).
the secured claim was subordinated to administrative expenses arising from the proceeding,
whereas under the Code, a secured creditor’s interest is not relegated to a lower priority than
most administrative claims, and thus can usually count on receiving the full value of its
collateral.169 While the debtor’s estate argued that comity was the primary factor to be
considered under § 304(c), the court reasoned that the Code calls for a fact-specific inquiry in
light of all of the circumstances.170 While “comity is the ultimate consideration in determining
whether to provide relief under § 304 . . . [t]he statute plainly provides that the other factors may
form the basis for denying relief, and thus denying comity, in some cases.”171 In addressing the
facts of the case, the court recognized that “[i]t is implicit in the concept that deference should be
withheld where appropriate to avoid the violation of the laws, public policies, or rights of the
citizens of the United States.”172
The court then dismisses the first three factors of § 304(c) as presenting no obstacle to the
granting of comity to the Bahamian proceedings: “[t]here being no reason to doubt that the
insolvency proceeding in the Bahamas will be fair, impartial, procedurally sound, and free from
fraud, there is no question that comity would be extended and the turnover order issued if our
scrutiny of Bahamian bankruptcy law were limited to these considerations.”173 However, §
304(c)(4) indicates a Congressional decision to require courts to look beyond mere
considerations of fairness and prejudice and to consider the specific effects of applying foreign
insolvency law to a U.S. creditor, specifically in assessing the distribution of proceeds of an
estate relative to how the Code would prescribe the distribution.
Because the court found from the facts that the administrative expenses of the estate were
so large as to deplete the estate completely and deprive the secured creditor of the value of its
claim, the distribution of proceeds “in the Bahamian proceedings would thus not be
“substantially in accordance with the order prescribed by” United States law.”174 The court’s
“observation that security interests enjoy constitutional protection supports [its] conclusion that
United States law affords strong protection to secured creditors and treats those protections very
seriously, a conclusion that, in turn, amplifies the significance of the difference in the way
secured claims are treated under Bahamian law.”175 In the end, comity was not granted to the
Bahamian court, as the U.S. court found the Bahamian procedures too prejudicial to U.S.
creditors’ interests.
C. Public Policy and § 1110
For a court to decline to grant comity, the decision more properly is evaluated in terms of
national interests than solely on the rights of any particular domestic creditor.176 To be consistent
with the goals of comity and modified universalism, the “trigger” for application of local law—
here, § 1110—should be the actual violation of public policy.
Secured creditors have protections built into the Code that are derived from the fifth
amendment of the U.S. Constitution. The theory that the fifth amendment places substantive
limits on the ability of the government to restrain secured creditors' rights in reorganization has
crystallized into the following proposition: any impairment of the liquidation value of a secured
creditor's collateral attributable to the exercise of powers conferred on the reorganization court
Id. at 159 (citing § 304(c)(4)).
Buxbaum, supra note 117, at 68
by bankruptcy legislation is, in the absence of just compensation, a violation of the takings
clause of the fifth amendment.177
1. The Public Value of Aircraft Creditor Priority
Going back to the prior discussion supra of Congress’ intention behind the enactment and
continuing refinement of the protections given by § 1110, courts might reasonably deduce that a
high public value is given to the super-priority of aircraft creditors in insolvency proceedings.
The plain language of § 1110 indicates how preemptive the clause is relative to the rest of the
[T]he right of a secured party with a security interest in equipment . . . to take
possession of such equipment, . . . and to enforce any of its rights and remedies . .
. is not limited or otherwise affected by any other provision of this title or by any
power of the court.178
The section trumps all comers in the code; it is evidence of the importance placed on aircraft
financiers rights’ by Congress that the protections of § 1110 are not to be abridged by any other
section of the Code. That in and of itself is an argument for handling its protections as
instruments of public policy. In United Airlines, Inc. v. U.S. Bank N.A., the court even went so
far as to say that the phrase “any power of the court” was not limited purely to the Bankruptcy
The final clause of § 1110(a)(1) prevents bankruptcy judges from using any
source of law, including antitrust, as the basis of an injunction against
repossession. United protests this understanding, observing that “power of the
court” is the caption of the Code's § 105 . . . and contending that the language
“any power of the court” thus must refer back to § 105. Yet that would drain all
meaning from the phrase “any power of the court” in § 1110(a)(1), for the
preceding language already blocks reliance on any other part of the Bankruptcy
Code. Unless it is to be empty, the phrase “any power of the court” must deal with
sources of law outside the Bankruptcy Code. It is not as if “power of the court”
James Steven Rogers, The Impairment of Secured Creditors’ Rights in Reorganization: A Study of the
Relationship between the Fifth Amendment and the Bankruptcy Clause, 96 HARV. L. REV. 973, 977 (1983).
11 U.S.C. § 1110(a)(1) (2006) (emphasis added).
were a phrase limited to bankruptcy practice. It is generic language, logically read
to mean exactly what it says: “any power of the court.”179
Thus, under the plain language of the statute, Varig’s creditors have the right to take
possession of the collateral pursuant to their agreements with Varig, and those rights are not
limited or otherwise affected by any other provision of the Code, or by any power of the court.
Under the 7th Circuit’s theory, then, no external legal theory usurps the ability of the Financiers
to repossess under § 1110. The court in In re Vanguard elaborated further on this clause:
The legislative history of § 1110 provides further support demonstrating
that the statute means what it says. Prior to the 2000 amendments, § 1110(a)(1)
provided that the underlying agreement was "not affected by section 362, 363, or
1129, or by any power of the court to enjoin the taking of possession …." In 2000,
Congress changed the wording of the statute, expressly deleting the limiting
references to §§ 362, 363, and 1129 in favor of the all-inclusive language, "any
other provision of this title." Thus, any argument for expressio unius est exclusio
alterius that existed prior to 2000 -- i.e., that [a section] was not limited by § 1110
because [that section] was not specifically mentioned -- certainly cannot prevail
after the amendments. Indeed, under the rules of statutory construction, the more
specific provisions in § 1110 -- which concerns the relationship between a
specific chapter, a specific class of creditors, and specific collateral -- should take
precedence over the more general provisions in [any other section].180
2. Collateral Value and Financing Predictability
How, then, do the provisions of § 1110 further a legitimate public policy? Legal
protection for collateralized securities has a direct effect on the availability of external financing
options for airlines in developing and established financial markets.181 As discussed, the airline
industry depends heavily on outside investments to raise capital. Any legal reforms that
encourage lending or secured financing increase liquidity, which adds value—the gains from
406 F.3d 918, 924 (7th Cir. 2005).
In re Vanguard, 295 B.R. at 916-17 (citing Pub. L. 106-181, Title VII § 744(b)).
Anthony Saunders et al., The Economic Implications of International Secured Transactions Law Reform: A Case
Study, 20 U. PA. J. INT'L ECON. L. 309, 313. See also Kilborn, supra note 7, at 65-66 (“A reduction in section 1110
protections may advance general bankruptcy principles, but the gain to a relatively limited number of transportation
debtors pales in comparison to the cost of sacrificing the substantial advantages of strong section 1110 protections
for developing airlines.”).
which will in some part be passed back to the borrower.182 Within the airline industry,
practically all lenders require some sort of security backing to a loan or lease contract, usually in
the form of taking collateral in the underlying aviation asset.183 Technologically-advanced,
expensive, rapidly-depreciating, and highly-mobile assets such as aircraft and aircraft engines
have value as collateral largely to the degree that a financier can repossess quickly and with a
minimum of legal uncertainty upon debtor default and then sell or re-lease the collateral.184 The
financing principles underlying the lender’s ability to extend asset-backed financing are that a
(1) should be able to determine and assure itself that its proprietary interest in a
financed or leased asset is superior to all potential competing claims against that
asset; (2) upon default, will be able to promptly realize the value of the asset
and/or redeploy that asset for purposes of generating proceeds/revenues to be
applied against amounts owed; and (3) will not have their rights described in (1)
and (2) above qualified or modified in the context of bankruptcy or insolvency.185
In the United States, § 1110 guarantees to financiers that those financing principles will be met
in the event that default occurs. Saunders et al. argue that the § 1110 protections are significant
in regards to the cost of external asset-backed financing “because the major international credit
rating agencies will give a rating enhancement of up to two notches to debt issues so
protected.”186 The lower credit and liquidity risks provided by § 1110 protection result in
lowered spreads over the risk-free interest rate offered by lenders.187 Arguably, then, § 1110 has
Saunders et al., supra note 182, at 313.
See id. at 315.
See id. at 317.
See id. at 316.
See id. at 323.
See id. at 331-33 for a discussion of the effects on Standard & Poor’s index of airline stocks when the U.S.
Bankruptcy Reform Act of October 22, 1994 was enacted. “[T]he Standard & Poor's index of airline stocks rose
3.43% in the week before the Reform Act's passage and 6.3% in the week following, resulting in a two-week return
of 9.73% in the period immediately surrounding the Act's passage. By comparison, the Standard & Poor's 500 index
a tangible effect on asset-backed financing within the airline industry that extends beyond the
immediate benefits to the secured creditor in an insolvency proceeding; the external markets
themselves reflect the security and predictability provided to lenders.188 This predictability
manifests itself favorably for the debtor as well, as premiums demanded by investors are lowered
and capital is thus more readily available. The legal system, by enforcing § 1110, plays a
substantial role in helping predictability remain constant when default occurs and a lender seeks
to speedily repossess and enforce contractual rights.
D. Chapter 15 and its Effect on the Case if Filed Today
Looking at the Varig case from the perspective of the new Chapter 15 requirements for
cross-border proceedings requires an analysis of the new test for extending or declining to extend
comity to a foreign main proceeding. Debtors, creditors, and courts must determine whether the
new language of the code will lead to different outcomes for § 1110 creditors than what occurred
under § 304 of the old code.
Section 1506 specifically provides that “nothing in this chapter prevents the court from
refusing to take an action governed by this chapter if the action would be manifestly contrary to
the public policy of the United States.” However, the committee report for the new Act
specifically states that “the word ‘manifestly’ in international usage restricts the public policy
fell 0.9% in the week prior to the Act's passage and rose only 1.95% in the week following, resulting in a two-week
return of 1.05%.”
See Kilborn, supra note 7, at 43 (“In light of recent experience, the balance of burdens appears to favor
encouraging financing of the entire airline industry rather than avoiding the disruption of individual bankruptcy
proceedings.”). See also United Airlines, 406 F.3d at 924 (“Section 1110(a)(1) gives the trustees a right to the return
of aircraft unless United pays the full rental or the lessors agree to accept a lower price. Those conditions are not
satisfied, so the bankruptcy judge must dissolve the injunction and allow the lessors to repossess their collateral . . .
.The statute gives them that entitlement, treating aircraft different from other assets. A credible threat to repossess
the aircraft changes the terms on which post-bankruptcy bargains can be struck; it is exactly this prospect that makes
credit available on better terms when air carriers shop for financing in the first place. United obtained the sort of
terms that were available from creditors secure in their ability to repossess the collateral; it must live with those
terms now, just as it must pay the current market price for jet fuel.”).
exception to the most fundamental policies of the United States,” so the bar is set high for
convincing the Court to sidestep a request for comity.189 Traditional parochial interests in
sovereign power in the face of foreign main proceedings are preserved by removing the language
of Chapter 15 comity considerations from the realm of “shall” to “may.”190 That being said, the
primary effect of Chapter 15’s enactment was to move ‘comity’ from the list of six § 304(c)
factors and to make it instead an overarching, primary consideration when considering the
remaining five factors.191 That is to say, Congress has made it explicitly clear that comity is in
fact a more influential factor for courts to consider when approaching foreign main proceedings
and requests for ancillary help.192 The case law that has accrued under § 304 is still valid to the
extent that courts use it to assess comity in the face of the other factors to be considered.
E. Harmonization with International Financing Principles
The United States is not alone in creating protections for financiers in the aviation arena.
The International Institute for the Unification of Private Law ("UNIDROIT") Convention on
International Interests in Mobile Equipment as modified by the Aircraft Equipment Protocol
H. Rpt 109-31.
11 U.S.C. § 1507(a) (2005) (“[T]he court, if recognition is granted, may provide additional assistance to a foreign
representative under this title.”) (emphasis added).
11 U.S.C. § 1507(b) (2005) states:
In determining whether to provide additional assistance under this title or under other laws of the
United States, the court shall consider whether such additional assistance, consistent with the
principles of comity, will reasonably assure--
(2) protection of claim holders in the United States against prejudice and inconvenience
in the processing of claims in such foreign proceeding;
(4) distribution of proceeds of the debtor's property substantially in accordance with the
order prescribed by this title; and
(5) if appropriate, the provision of an opportunity for a fresh start for the individual that
such foreign proceeding concerns.
See H.R. Rep. No. 109-31, pt.1 (2005) (“Although the case law construing section 304 makes it clear that comity
is the central consideration, its physical placement as one of six factors in subsection (c) of section 304 is
misleading, since those factors are essentially elements of the grounds for granting comity. Therefore, in subsection
(2) of this section, comity is raised to the introductory language to make it clear that it is the central concept to be
addressed.”).
thereto ("Convention/Aircraft Protocol") was formulated and adopted in November, 2001, at a
diplomatic conference in Cape Town, South Africa. Fifty-three of the sixty-eight attending
countries at the convention signed the final act; forty-one have signed the Convention and its
Protocol.193 The United States ratified the Convention and Protocol on October 28, 2004.194
Brazil, however, was not a party to the Convention and has not ratified the measures. The
Convention applies “when, at the time of the conclusion of the agreement creating or providing
for the international interest, the debtor is situated in a Contracting State.”195 The Convention
thus does not apply on its face, but the weight of the international movement toward
harmonization of aircraft financing protection swings the pendulum toward the application of
those protections by use of the public policy exception escape clause in § 304.
The Convention addressed many of the same concerns of international aircraft financiers
that § 1110 of the Code addressed for U.S. lenders regarding assert-backed financing: the ability
to determine superior priority to all potential competing claims; the ability to realize the value of
the collateral promptly upon default; and the knowledge that the first two rights will not be
qualified or modified in a bankruptcy or insolvency proceeding.196 Countries that adopt the
international insolvency rule of the Convention/Aircraft Protocol choose to embrace asset-
backed financing principles; “in particular, the international insolvency rule will assist in
International Institute for the Unification of Private Law [UNIDROIT], Convention on International Interests in
Mobile Equipment, Nov. 16, 2001, http://www.unidroit.org/english/conventions/mobile-equipment/mobile-
equipment.pdf; see also UNIDROIT, Protocol to the Convention on International Interests in Mobile Equipment on
Matters Specific to Aircraft Equipment, Nov. 16, 2001, http://www.unidroit.org/english/conventions/mobile-
equipment/aircraftprotocol.pdf.
See UNIDROIT, Status of the Convention on International Interests in Mobile Equipment,
http://www.unidroit.org/english/implement/i-2001-convention.pdf (last visited Nov. 13, 2007); see also UNIDROIT,
Status of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to
Aircraft Equipment, Nov. 16, 2001, http://www.unidroit.org/english/implement/i-2001-aircraftprotocol.pdf (last
visited Nov. 13, 2007).
UNIDROIT, Convention on International Interests in Mobile Equipment, supra note 153, at Art. 3(1).
Saunders et al., supra note 173, at 324.
internationalizing the types of financing benefits and alternatives available to U.S. airlines under
Section 1110.”197 The advantages of stabilizing financing for aviation assets and the
predictability provided within those markets by a consistent application of the protections
described in the Convention/Aircraft Protocol would contribute to micro- and macroeconomic
benefits in capital and transaction costs for all parties involved. “International commerce
demands international law,”198 and as more cross-border transactions are conducted, more
standardized cross-border legal remedies are being sought.
The unique protections of § 1110 present a compelling marginal case to be upheld even
in the face of foreign main insolvency proceedings that do not provide them. U.S. courts might
use the public policy ‘escape clauses’ permitted by modified universalism to enforce the
provisions of § 1110 that protect creditors. Financiers approaching a Chapter 15 ancillary
proceeding need to emphasize the extent to which their interests would be impaired relative to
the Code if a foreign insolvency law is applied and also need to present a strong case that the
center of main interests for the specific transactions leading to the § 1110 protections are
centered in the United States. It is not a foregone conclusion that a § 1110 financier will not
receive the protections it seeks, but those creditors must emphasize the particular equities that
would allow a court to apply the comity tests and decline to extend comity.
The international economic community’s progress in standardizing the collateral
protections of mobile aircraft equipment and the tangible financial market benefits that accrue
when the collateral is specially protected all point to the choice that courts may be inclined to
Gopalan, supra at 117, at 849.
make in future cross-border insolvency proceedings: modify the foreign proceedings as
necessary to make available the § 1110 protections and therefore comfort the aviation financing
community that is seeking predictability in lending and speedy enforcement of rights in debtor
default situations.
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