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U.S. Recognition of International Financial Restructurings

By Louis M. Solomon

There has been a significant increase in litigation in the U.S. under Section 304 of the U.S. Bankruptcy Code. It is through that statutory mechanism that foreign issuers, having sold debt in the U.S., restructure the debt under foreign restructuring regimes and then return to the U.S. for “recognition.” Recognition under ' 304 has been read to cut off claims and litigation by U.S. creditors in U.S. courts, avoid U.S. judgments for collection, and hence can pave the way for the foreign company to access the U.S. capital markets in the future.

The influential U.S. Bankruptcy Court for the Southern District of New York has recently rendered a significant post-trial decision under ' 304. In re Multicanal, Dkt No. 04-10280. The decision extends a line of Bankruptcy Court decisions approving foreign restructurings notwithstanding their ever-increasing deviations from the U.S. creditor protections that bondholders might be said to have bargained for when they loaned money to the foreign issuer. The decision also, however, shows how a prejudiced minority creditor might get a U.S. court to draw the line between permissible and impermissible foreign restructuring regimes, for the decision withholds recognition in the face of clear and unexplained discrimination against a subset of U.S. creditors (retail investors). The decision also signals a warning to foreign issuers against utilizing threats and intimidation tactics against U.S. creditors to secure their majorities.

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