International insolvency and environmental obligations: A prelude to resolving the conflicting policies of a clean slate versus a clean site in transnational bankruptcies

Fordham Journal of Corporate & Financial Law, 2003 by Neiman, David

I. introduction

An axiomatic feature of all modern States is the need for bankruptcy laws.1 This recognition traces back to the earliest of civilized times, when it was first realized that the existence of commerce is inherently entwined with the inevitable failing of some enterprises.2 Over the last two decades, with the expansion of worldwide trade resulting from improvements to modern technology and the opening of the former Soviet bloc, businesses have become multinational entities and their bankruptcies have consequently increased in both size and scope.3 Additionally, the proliferation of regional trade agreements has expanded the stream of commerce across borders, allowing for the establishment of continental corporations.4 Given that these new businesses are subject to the jurisdiction of all the countries in which they are incorporated, it is essential that an effective and efficient apparatus be instituted for handling the complexities of cross-border insolvency cases.5 Harmonization of insolvency laws, or at a minimum, increased cooperation among trading partners must be established to maintain the current trend towards globalization. Otherwise, fearing potential losses if a foreign business associate files for insolvency relief, entrepreneurs may stop investing internationally.6 Recently, there has been an effort to establish international insolvency agreements. For example, the United Nations Commission on International Trade Law7 as well as regional endeavors by the European Union8 and the North American countries,9 have made attempts to create such agreements.

Another issue related to the growth of international commerce, is the fear of potential increases in environmental contamination caused by multinational corporations.10 This disquietude has been addressed by international agreements pertaining to environmental protection and by environmental activists utilizing political tactics to prevent pollutant activities.11 Yet the mechanisms currently in place do not address the issues that may arise if a transnational entity files for insolvency relief with multiple States pursuing environmental claims against it.

The dilemma of environmental claims interacting with bankruptcy laws is not limited to the international realm, U.S. domestic law has, since the inception of environmental legislation, addressed the interplay between the two.12 On the national level, a primary goal of insolvency laws is to allow a debtor to reenter society free from debt-to provide the debtor with a fresh start.13 Underlying this goal is the belief that a rehabilitated debtor is more beneficial to society than having the entity remain debt ridden.14 To accomplish this objective, a debtor is granted a stay or moratorium from all ongoing proceedings or from the commencement of new actions, and subsequently allowed to discharge pre-petition debts.15 However, environmental laws may be inconsistent with bankruptcy's policy of attempting to clean a debtor's slate.16 Environmental legislation as a whole, seeks to protect the environment and preserve public health and safety through imposing full liability for hazardous waste clean up on potentially responsible parties ("PRP").17 The imposition of liability in the environmental context is based upon the belief that commercial entities should bear the burden of protecting the external costs to society associated with their activities.18 Thus, where environmental claims are asserted against a debtor in bankruptcy, which of the inconsistent policies underlying bankruptcy and environmental law should take precedence? Should the goal of granting the debtor a fresh start trump the policy that a polluter should pay for its actions or vice versa?

This Note will explore the issues raised when environmental claims arise during the course of international insolvencies. More specifically, it will provide an analysis of the treatment afforded to environmental claims of two nations being adjudicated in a single bankruptcy proceeding pursuant to the Model Law on International Insolvency that was adopted by the United Nations Commission on International Trade Law ("UNCITRAL")19 and the Transnational Insolvency Project forwarded by the American Law Institute ("ALI").20 The Note will conclude by arguing that currently proposed protocols, which are limited to procedural aspects of international insolvencies, must endeavor to include provisions addressing the intersection of non-bankruptcy law which will inevitably arise in transnational bankruptcies. Without a complete integration of all potential issues that can be encountered in a bankruptcy case, the inherent difficulties associated with multinational proceedings will nullify the utility of the protocols.

Part II of the Note will begin by discussing how the American judiciary has reconciled its Bankruptcy Code's fresh start objective and substantive provisions vis-a-vis the U.S. policy of strict environmental liability. Part III of the Note suggests a detailed hypothetical, which seeks to assess whether a Canadian environmental claim would be afforded treatment comparable to an American environmental claim if they were both brought in a single United States bankruptcy proceeding. The part will also provide an overview of the policies underlying international insolvency. Part IV applies the provisions of the UNCITRAL Model Rule on International Insolvency21 to the hypothetical as well as providing an outline of the Model Law's structure. In a similar vein, Part V puts the principles articulated in the ALI Transnational Insolvency Project22 into practice by applying them to the hypothetical, and summarizes the structure and goals of the project.