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NTFC Capital Corp. wasn’t too enamored with PSINet Inc. in September when the bankrupt telecommunications company wanted to sell its Canadian business to Toronto-based Telus Corp. for $77 million, but going to court over it wouldn’t be easy. After all, PSINet had filed for protection against its creditors in both the U.S. Bankruptcy Court for the Southern District in Manhattan and the Ontario Superior Court of Justice in Toronto, and NTFC’s beef was that the telecommunications equipment involved in the sale belonged to Ashburn, Va.-based PSINet’s Canadian business, not its U.S. operations. Which court should decide the matter? It was a crucial issue for NTFC, a PSINet creditor and an arm of Stamford, Conn.-based GE Capital Corp. that does the financing work for Brampton, Ontario-based Nortel Networks Inc. If the courts ruled in NTFC’s favor, then it would have had a greater chance of attaching liens to the equipment transferred to Telus. But PSINet contended that the equipment belonged to the U.S. business because it paid for it, insured it and simply allowed its Canadian subsidiary to use it. The first issue was one of jurisdiction. After several hearings, the parties involved agreed that under a protocol established in the cross-border case, the U.S. court would resolve the NTFC objection regarding the ownership issue. The protocol also dictated that when it came to the sale itself, both courts would conduct a hearing — via videoconferencing. (In the end, the Manhattan court overruled NFTC and after a videoconferenced hearing, both courts approved the sale itself.) What could have dissolved into contentious bickering was settled in about a month. “If we hadn’t had that provision in there, we would have spent a considerable time fighting [over jurisdiction],” says PSINet’s counsel, Andrew Goldman at Wilmer, Cutler & Pickering. “It would have been a mess. The protocol provided a useful roadmap.” DUAL-NATION BANKRUPTCY Goldman was one of the chief architects of the protocols being used in PSINet’s dual-nation bankruptcy. The protocols are contained in a document, but they allow the U.S. and Canadian court to jointly — or individually, depending on the circumstance — deal with asset sales, contract claims, leases, real estate issues, intercompany claims, third-party financing agreements and other issues. “Most protocols are just procedures. But this is the first protocol where we’ve gone the next step and actually put in substantive guidelines,” Goldman says. “We took the opportunity to extend the protocol. Otherwise, we would have had to be concerned with what the protocol didn’t say and what it implied.” Other recent U.S.-Canadian bankruptcies, such as 360Networks Inc., Livent Inc. and Laidlaw Inc., also have protocols in place to guide each nation’s court. But their protocols are pretty standard. PSINet has gone to another level by clearly outlining what issues the U.S. and Canadian court will resolve separately, as well as jointly, cross-border insolvency experts say. Protocols generally make cross-border insolvencies run smoother by setting ground rules on how assets in different countries will be handled. While they are increasingly being employed by multinational companies to help them navigate the murky waters of a cross-border bankruptcy, some multi-jurisdictional cases are devoid of them. Protocols thus far are not being used in the U.S.-Belgium bankruptcy of Lernout & Hauspie NV, or in the U.S.-U.K. insolvency of Federal-Mogul Corp. “In international cases, no one’s in charge without negotiation,” said Bruce Leonard, an attorney with the Cassels Brock & Blackwell law firm in Toronto who is involved with the PSINet, 360networks and Laidlaw cases. “It just makes commercial sense to have protocols, so judges and parties can think about maximizing value versus who should run what part of the case.” PLAIN VANILLA PROTOCOLS Problem is, most protocols tend to be plain vanilla. They merely address procedural matters between a U.S. and foreign court. For instance, protocols require that all parties in a case be informed. They ensure the reciprocal recognition of stays and injunctions issued by each court. They cover the retention and compensation of professionals. And they provide a blanket agreement that the U.S. court will have sole and exclusive jurisdiction over the U.S. case and the company’s U.S. assets while empowering the foreign court with primary responsibilities over the non-U.S. case and the bankrupt’s non-U.S. assets. “Protocols tend to deal with things that aren’t important because those are the things parties can easily agree to,” said Matthew Feldman, a partner at Willkie Farr & Gallagher in New York, which represents Livent and 360Networks. That standardization may only get more sweeping, for protocols could soon become cross-border bankruptcy staples. If Congress approves the Model Law on Cross-border Insolvency, the international provision aimed at setting universal procedures for global bankruptcies, protocols will be a mandatory element of such proceedings. The Model Law would become Chapter 15 of the U.S. Bankruptcy Code if President Bush signs it into law. That’s not likely soon. The proposed Chapter 15 is imbedded in bankruptcy reform legislation that has been mired in delays ever since both houses of Congress passed it in March. A conference committee to reconcile the House and Senate versions of the bill was indefinitely postponed in September. Congressional interest in the bill — which would apply tougher bankruptcy rules to corporations and individuals — is also beginning to wane because of the sickly state of the economy and other priorities. This is the second time that bankruptcy reform legislation has hit a formidable roadblock. Last year, Congress forwarded bankruptcy reform legislation to former President Clinton, who never signed it. So far, Japan, Mexico and Eritrea in East Africa have adopted the Model Law. South Africa has adopted a modified form, and the U.K., Australia and New Zealand have introduced enabling legislation to permit its adoption. Experts say the balance of countries are waiting for the U.S. to adopt the Model Law before they support it. ON THE CUTTING EDGE Cross-border bankruptcies have little tradition. For example, PSINet’s protocols are Wilmer Cutler’s Goldman’s first. His only other experience with them came while he was a clerk for former Chief Judge Tina Brozman of the U.S. Bankruptcy Court for the Southern District of New York. Brozman has since left the bench to join the New York office of Boston-based Bingham Dana. But Goldman certainly was at the cutting edge of the cross-border movement, for Brozman served as a special adviser to the U.S. delegation to the United Nations commission that developed the Model Law. Brozman is also considered a trailblazer when it comes to cross-border bankruptcies because of her handling of the Maxwell Communications Corp. case in the early 1990s. In fact, Maxwell Communications, the U.K.-based publishing empire of the late Robert Maxwell, was the first case to use cross-border protocols. The company had core publishing businesses, such as the New York Daily News, in the U.S. At the time of its bankruptcy filing in the U.S. and in the U.K., amid evidence of massive fraud, Maxwell Communications had total assets of $6.3 billion and liabilities of $4.1 billion. “I spent a lot of time working with the judge” on the Maxwell case, Goldman says. “It was pretty thorny.” Goldman’s career has come full-circle, now that he’s spent at least the past six months immersed in protocol issues with PSINet. And the case is only halfway done. In Canada, the company’s sale proceeds have to be distributed and claims resolved. In the U.S., the company is still considering sale alternatives, as well as the option to remain a stand-alone business. While PSINet’s efforts are unique — if not groundbreaking — some attorneys are still wary of protocols. Willkie Farr’s Feldman, for one, says it may be better to figure out along the way which matter should be heard by which court instead of carving it in stone. CROSS-BORDER CONCERNS “What concerns me is, how can you bind creditors in one country to a ruling in another country’s courts?” he wonders. “Furthermore, would a judge in Canada be willing to issue an order supporting a U.S. judge’s decision without hearing the evidence? I have some concerns about that.” Cassels Brock’s Leonard agrees. “I tend to favor more detail rather than less,” he says. “It eliminates an entire level of controversy and let the courts and the professionals get on with the job.” Laidlaw’s protocols, for example, are extremely barebones and deal mainly with administrative issues such as making sure there is proper notice of any motion, application or pleading. (Laidlaw filed for dual protection in Toronto and in the U.S. Bankruptcy Court in Buffalo, N.Y., in June.) Sources close to the filing say that, although the transportation giant is based in Ontario, about 95 percent of its business is in the U.S. and the bankruptcy court in Buffalo is handling the bulk of the case with little input from the court in Toronto. Furthermore, Laidlaw’s filing has been fairly free of disputes, the sources add. 360Networks’ protocols are a little meatier. They go beyond procedure and deal with the filing and resolving of proofs of claim, distributing assets and preparing, filing and implementing plans of reorganizations. But Leonard says they haven’t been put to the test yet. (The company filed for bankruptcy in the Southern District of New York and Vancouver, British Columbia, in June.) “There also hasn’t been much sale activity, which is where protocols really show their value,” he notes. COMPLICATED ASSETS Protocols could play a role later in 360Networks’ case, given some complex issues it will deal with on the horizon. For example, 360Network’s fiber-optic cable stretches across the U.S. and Canadian border at some points, further complicating the treatment of its assets. There have been about two dozen bankruptcy cases in the past decade involving U.S. courts and protocols, but the bulk of them have been instituted in the past three or so years, experts said. Prior to the use of protocols in the Maxwell Communications case, debtors had to separately reorganize each piece of their business in each country, and it almost never worked without coordination, lawyers say. But that’s changing. Even without the Model Law, the use of protocols has become logical. “We’re now getting to point where there are almost always protocols established at the outset, and many of them come down as part of first-day orders,” Leonard said. “They are no longer regarded as strange and unusual, and are becoming more routine.” And it appears protocols can be custom-made to suit each case. As the counsel for Livent, a Toronto company that owned and operated theaters across the U.S. and Canada, Willkie Farr’s Feldman has gone yet another route with that company’s protocols. JOINT RULINGS The protocols outlined that every substantive issue — such as the sale of the company, the distribution of proceeds and plan confirmation — would be heard by the U.S. and Canadian courts simultaneously. Canadian witnesses would be cross-examined by U.S. attorneys via videoconferencing and vice versa. The two judges would then consult and craft joint rulings. “Every case demands a unique protocol,” Feldman says. “Whether PSINet’s protocols represent a future trend or a one-time aberration, only time will tell.” Copyright (c)2001 TDD, LLC. All rights reserved.

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