The Problem of Corporate Groups, a Comment on Professor Ziegel

Professor Ziegel's article provides a helpful guide to some of the issues that may arise in the insolvency of a corporate group that spans the United States and Canada.1 There is much to learn from the piece. Professor Ziegel provides an insightful analysis of two types of problems that arise when an enterprise that has substantial operations in both the United States and Canada seeks relief under each nation's respective bankruptcy laws.2 The legal organization can be arranged so that it will be many affiliated entities in each jurisdiction. Few, if any, enterprises that have substantial operations in two countries will have all of its assets housed in a single legal entity. This is true regardless of how tightly integrated the firm's operations are. In short, transnational firms are corporate groups. The first, and somewhat easier, set of problems that Professor Ziegel examines revolves around whether all members of the corporate group can file for bankruptcy in the appropriate national forum.3 If one assumes that the corporate group as a whole needs to be reorganized, Canada's somewhat more stringent requirement to file for reorganization raises the possibility that some members of the group could be left outside of the reorganization effort.4 The fear is that failure to administer all of the assets of the enterprise IMAGE FORMULA5 could impede, and perhaps doom, the reorganization effort. The second, and more difficult, set of issues that Professor Ziegel focuses on arise once at least part of the corporate group has come within the jurisdiction of both countries' bankruptcy courts.5 Inevitably, not all creditors will find themselves similarly situated. To be sure, there will be the commonplace difference between secured creditors and unsecured creditors. But corporate groups raise an additional problem. Even creditors whose claims have the same ostensible priority position may be facing the prospect of receiving radically different payouts.6 For example, creditors of one member of the corporate group may have claims that in total roughly equal that member's assets. Such creditors face the happy fate of being paid in full. Creditors of another related entity, however, may have claims that vastly exceed the assets of that member. These creditors see the possibility of a return of pennies on the dollar. The latter group of creditors understandably would prefer to see all claims and assets of the corporate group lumped together, whereas the former group of creditors would insist on maintaining the legal separation among the affiliated entities. The question, in a nutshell, is to what extent should the courts respect the divisions made by the parties? This problem arises even in the context of a wholly domestic firm.7 The problem only becomes compounded when competing legal systems struggle with the issue. These problems are nettlesome. Professor Ziegel does an admirable job in setting forth the issues that a court, guided only by the common law, will face. In this comment, I want to make two brief points to help put these issues into context. Both points stem IMAGE FORMULA7 from the fact that in modern financial practice, a firm's organizational structure, and by this I mean the number of distinct legal entities that comprise the corporate ground and the assets and obligations of each entity result from a conscious decision of the firm's managers. Moreover, sophisticated creditors are well aware of these decisions when they extend credit. The first point, which is noted in passing by Professor Ziegel, is that not all related entities of a group file for insolvency.8 Bankruptcy of an enterprise does not imply that all of the assets will come before the bankruptcy court. This ability of the firm's managers and creditors to ensure that some assets remain beyond the reach of any bankruptcy court suggests hesitancy on imposing substantive consolidation on unwilling parties. …

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