Author: Raúl Zeyi Huang*
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[The opinions expressed herein are the author’s alone, and do not represent those of any institution. The author would like to thank Prof. Shuai Guo (China Uni. Poli.-Sci. & L.) and Mr. Brendan Low (Peking) for their invaluable comments.]
Under mainstream financial reporting standards such as International Accounting Standard (IAS) 37, a pending investment claim is classified as a contingent asset, which is not recognized in an entity’s financial statements due to its high uncertainty as future income (IAS 37, paras. 31-33; a separate but equally interesting question, an earlier post on this Blog by Sumit Kulkarni discussed the accounting status of liabilities arising from foreign (and commercial) arbitral awards in India). Usually, an adverse arbitral award would be sufficient to permanently exclude the claim from the asset side of an entity’s balance sheet, though it remains possible that the arbitral award might still be annulled.
However, it took three proceedings and two awards spanning six years to sentence the financial death of an over CAD$470 million (approximately US$343 million) NAFTA/USMCA claim recently. The Westmoreland Arbitrations arose out of Canadian measures to phase out coal-fired electricity absent satisfactory compensation to the influenced local business of the Westmoreland Coal Company (“WCC”), a US Delaware corporation. To adopt UNCTAD’s naming, they comprise Westmoreland v. Canada (I), (II), and (III), the first discontinued in 2019 and the latter two rendering awards in 2022 and 2024.
Indispensably, they together resulted in the invalidity and financial worthlessness of the investment claim, which disrupted WCC’s reorganization arrangement under US bankruptcy and tax laws. WCC’s secured creditors, that hold first-priority liens on its assets, had purchased the claim with part of their US$700 million bankruptcy claim against WCC. They became the ultimate bearers of the arbitral bitterness.
WCC’s and Its Secured Creditors’ Type G Reorganization and Tax Planning
Against the backdrop of declining coal sector in North America amid areal and global energy transition, WCC’s influenced Canadian businesses became another straw to its worsening financial condition. On 9 October, 2018, it filed for reorganization under Chapter 11 of the US Bankruptcy Code. On the same date, a restructuring support agreement was concluded between WCC and its secured creditors and submitted to the bankruptcy court for approval. A common practice to exercise first-priority liens in bankruptcy, the agreement applied the “credit bid” mode, where the secured investors are entitled to purchase WCC’s assets with their bankruptcy claim over WCC under Bankruptcy Code Section 363(k). They established Westmoreland Mining Holdings LLC (“WMH”), a Delaware corporation, for this purpose.
In addition to such incentives as time- and expense-saving, the choice of reorganization over a Chapter 7 insolvency and credit bid over debt-for-equity swap or debt settlement was principally driven by tax considerations. Under US law, the primary tax attributes of a distressed corporation like WCC are its accumulated Net Operating Losses (“NOL”), which it could use in the future to deduct earnings and profits for tax purposes. The subject-specific nature of NOL and other tax attributes means that they are generally not transferable, and extinguish along with the corporation’s legal personality, which insolvency would eliminate but reorganization could preserve.
Similarly, credit bid is tax-advantaged over debt-for-equity swap and debt settlement. Both latter arrangements constitute a cancellation of debt, the happening of which may reduce WCC’s NOL as well as future depreciation deductions of, and therefore the value of, its assets in general. Meanwhile, if a credit bid is carefully designed to qualify as a Type G reorganization under the US Tax Code, like in WCC’s and WMH’s case, the transaction becomes tax-free as opposed to a normal merger and acquisition deal. Lastly, Type-G reorganization avoids successor liability and thus creates such legal flexibility as negotiable labor agreement.
WCC’s Institution of Westmoreland (I) and Canada’s Resistance
A common business and legal practice for the maximum benefit of WCC and its secured creditors, the Type G reorganization had an initial confrontation with international investment law when Canada as Respondent refused the change of Claimant from WCC to WMH. Paralleling with US bankruptcy proceedings, WCC initiated NAFTA arbitration against Canada. Consistent with NAFTA Article 1119, WCC filed a notice of intent to Canada on 20 August, 2018. Upon passage of the 90-day gap required by Article 1119, on 19 November, 2018, WCC’s filing of a notice of arbitration and statement of claim marked the beginning of Westmoreland (I).
On 15 March, 2019, the transfer of WCC’s Canadian business and the investment claim to WMH was executed after court approval, which brought a dilemma for the secured creditors. On one hand, continuing the arbitration in the name of WCC and not WMH incurred apparent domestic legal risks. The US court and tax authorities might doubt whether the Type G reorganization had been effectively implemented, which involved immediate court compliance issues and tax benefits in the future. On the other hand, it was virtually certain that a unilateral change of Claimant would be challenged by Respondent, arguing for procedural flaws in notification, which was lethal to the lawfulness of an arbitration.
On 13 May, WCC and WMH filed an amended notice of arbitration where WMH replaces WCC as Claimant. On 2 July, Canada expressed its refusal to the amendment, arguing that WMH could not become Claimant of the arbitration instituted by WCC and must submit its own claim. While it remained doubtful whether a mere change of Claimant but not the substance of the dispute would impact Canada’s knowledge of an upcoming arbitration against it, which Article 1119 purposefully protects, it has insisted on a formalistic understanding of the provision.
Canada’s hard measures were coupled with calibrated incentives. It proposed that WCC withdraw Westmoreland (I) and submits a notice of intent in its own name, commencing a new arbitration. In exchange, Canada would be willing to view the amended notice of arbitration in May as the new arbitration’s notice of intent for the purpose of counting the 90-day period under Article 1119, namely that the new arbitration could lawfully commence on 12 August instead of no earlier than October.
WCC’s Withdrawal of Westmoreland (I) and WMH’s failure in Westmoreland (II)
WCC and WMH implemented Canada’s proposal on 23 July, thereby discontinuing Westmoreland (I) and instituting Westmoreland (II) in WMH’s name. It seems like Canada had made a small victory by winning itself additional time and increasing Claimant’s financial and temporal costs through prolonged proceedings. And for WCC and WMH then, accepting Canada’s proposal seemed optimal. Had the Parties failed to reach an agreement, the procedural dispute could only be settled by forming a tribunal to issue a final award, or at least a partial one on jurisdiction if bifurcation were granted. The process would likely hang the secured creditors for months or even years, distracting them from operating WCC’s restructured business.
Consistent with the accepted proposal, on 12 August, 2019, Westmoreland (II) was commenced with WMH’s submission of the claim. On 31 January 2022, a final award was dispatched to the Parties, which found a lack of jurisdiction ratione temporis for WMH to bring the claim initially entitled to WCC, and denied WMH any independent standing. It rendered meaningless the secured creditor’s arbitral efforts since the amended notice of arbitration on 13 May, 2019.
The tribunal started by identifying the “fundamental question” to be whether WMH must have owned or controlled the investment at the time of Canada’s alleged NAFTA breach (para. 194). By treaty interpretation, it found that such a general requirement was established under relevant NAFTA provisions (paras. 195-214), which WMH failed to satisfy since it was a different entity from WCC and not its legal successor (paras. 215-30). For completeness instead of judicial economy, the tribunal also rebutted WMH’s argument that it suffered separate losses from the challenged measures and thus had an independent standing (paras. 231-36).
Westmoreland (II) was a radical sanction from international investment law on WCC’s insolvency arrangement. In denying any succession relationship between WCC and WMH, the tribunal made three observations on the relevance of the Type G reorganization. First, as WMH itself admitted, its insertion into the bankruptcy assets’ ownership chain under the Type G reorganization was “intermediate” (para. 223). Secondly, through Type G reorganization, WMH did not take on WCC’s any successor liability; nor did it obtain all WCC’s assets; both continued to exist after the reorganization; and WMH was not a spin-off from WCC or a result of WCC’s mere change of corporate form (para. 226).
The third observation was rather odd by the award’s text, where the tribunal rebutted WMH’s emphasis of tax benefit from WCC with the fact that “no evidence was adduced that Westmoreland did, in fact, take on prior year losses of WCC and apply them against future year profits (para. 226).” Contrary to the tribunal’s implication, it is common knowledge that a right not being exercised does not per se deny its existence. And in the present case, a recently created special vehicle corporation like WMH is unlikely to generate any immediate income to be deducted by the tax benefits it obtained from its debtor.
Other factors for the tribunal to rebut WMH’s legal succession of WCC include their divergent interests (para. 222), the non-bindingness and ultimate irrelevance of the US bankruptcy court’s holding on the tribunal (para. 228), and that WCC’s and WMH’s shareholders did not overlap, and the double identity of the secured creditors as WCC’s lenders and WMH’s shareholders did not meet the successionary threshold (para. 229).
Secured Creditors’ Continued Struggle and the Last Nail by Westmoreland (III)
Westmoreland (II)’s denial impliedly suggested that the claim be sought by WCC in another arbitration, namely Westmoreland (III), before which the secured creditors requested domestic compliance before the US bankruptcy court. Upon the agreed motion of WCC and the bankruptcy administrator, on June 23, 2022, the Court ordered that the NAFTA claim had not been transferred from WCC to WMH; the former was entitled to pursue the claim; and WMH enjoyed all economic benefits and proceeds of the claim.
Although the order guaranteed that WCC’s institution of Westmoreland (III) was compliant with US bankruptcy law, it resulted in the abstract legal fiction between WCC’s ownership and WMH’s benefit of the investment claim. For WCC, its prolonged corporate personality meant extra operational costs and continued strict employer obligation. For WMH, a common Type-G reorganization was changed into some degree of novelty, generating additional legal fees and placing relevant tax benefits at risk. And for the court, the order inevitably occupied its ever-scarce judicial capacity that could have been invested in other pending bankruptcies.
Those efforts were declared all again meaningless by Westmoreland (III) based on two principal grounds. First, the claim was time-barred since it was made after the three-year statute of limitations under NAFTA Articles 1116(2) and 1117 (2). According to Westmoreland (III)’s notice of arbitration, the Parties agreed that the “knowledge date” as the calculation’s starting point was 24 November 2016 (para. 104). The tribunal found that WCC’s limitation period could not be tolled by Westmoreland (II) and thus had passed when it submitted the notice of arbitration on 14 October 2022, almost six years after the knowledge date.
Part of Westmoreland (III)’s claim, namely Expropriation (NAFTA art. 1102), was not raised in Westmoreland (II), and was thus beyond the coverage of any tolling effect the latter could have (paras. 106-112). For claims that were included in both, namely Minimum Standard of Treatment (NAFTA arts. 1102, 1105) and Discrimination (NAFTA art. 1110), since WCC and WMH were separate entities instead of the same NAFTA investor, Westmoreland (II) in the name of WMH had no tolling effect on WCC’s claims (paras. 113-129). Lastly, Claimant’s recourses to the regime’s purpose and general international law were also rebutted (paras. 130-133).
Secondly, jurisdiction was also precluded by USMCA’s “legacy investment” requirement. The withdrawal of Westmoreland (I) and the time spent on Westmoreland (II) influenced Westmoreland (III) in such another way that, by the time the latter commenced, NAFTA had been substituted by USMCA, after which a NAFTA claim against Canada can only be arbitrated if requirements under USMCA Annex 14-C are satisfied (USMCA, art. 14.2.3-4). Among others, the investment shall constitute a “legacy investment”, which must be “in existence” when USMCA entered into force (USMCA Annex 14-C, para. 6a).
The tribunal found that “in existence” requires Claimant’s ownership or control, except that the loss of ownership or control was caused by Respondent, which was not the case here; thus, the credit bid sale of WCC’s Canadian business to WMH in 2019 disqualified the business as an Annex 14-C legacy investment (paras. 154-175). The NAFTA claim also did not constitute a legacy investment for two reasons: that no claims were made “with respect” to it as required under Annex 14-C para.1, and that it concerned the Canadian business, which itself was not a legacy investment. Before concluding that it had no jurisdiction, the tribunal rebutted estoppel, abuse of rights, and preclusion objections raised by Claimant (paras. 178-96).
Conclusion
A first case of its kind, the Westmoreland Arbitrations may have implications beyond the jurisdictional reach of NAFTA, USMCA, and US law. The tribunals’ interpretation of ‘investor’ and ‘investment’ under the North American investment regime may well be transposed to other international investment agreements and their applicable jurisdictions. For credit bid, while its existence as a statutory right has a strong US characteristic, its comparative law counterparts widespread among other jurisdictions in the form of common law principles or judicial discretion in civil law systems. Consequently, the tribunal’s conclusions are worth global attention.
From a lex lata perspective, insolvency lawyers are reminded to pay special attention to the debtor’s investment claim assets. To free the bankrupt initial investor, often a giant, into liquidation, its investment claims are better transferred to a smaller entity with sufficient equity affiliation, either an existing subsidiary or one freshly incorporated for the special purpose of pursuing the claim. For the creditors, instead of purchasing the debtor’s investment claim for ownership, they may otherwise secure benefits from the claim through such channels as third-party funding; meanwhile, some tax benefit loss may be unavoidable.
And for investment dispute lawyers, a bilateral flexible deal with the opposing Party, like the one in Westmoreland (I), may have unpredictable future impacts, yet some certainty could still be sought by bargaining. Had an agreement been concluded guaranteeing WCC’s claim regardless of the NAFTA-USMCA transition, the claim’s fate could be entirely different. The opinion somehow finds an endorsement from the Westmoreland (III) tribunal itself, which emphasized that the publication of the final version of USMCA Chapter 14 and Annex 14-C predated Westmoreland (I) (para. 167), implying an available period for Claimant to take actions for the protection of their procedural interests.
From a lex ferenda perspective, the awards collide with legislative best practices and raise political legitimacy problems. UNCITRAL in 2013 had observed that municipal foreign investment law may restrict the sale of certain businesses or assets to foreign investors (p. 10). The UNIDROIT Legislative Guide on Bank Liquidation adopted last May further emphasizes that “[j]urisdictions need to assess in advance whether their legal provisions create obstacles to the transfer… of specific assets or rights… Authorisation procedures may relate to specific assets…” (para. 277) It is perhaps beyond UN experts’ prediction that an international investment agreement is interpreted into a more restrictive position than what have been taken by any domestic law or regulation to prohibit the transfer of investment claims from a bankrupt debtor to its creditors, and radically sanction the transfer by denying the latter’s standing before an investment tribunal, which eliminates the claim’s market liquidity. It is further questioned whether such legal and business impacts were intended by the three NAFTA/USMCA State Parties, and to what extent their national congresses, tax authorities, and bankruptcy courts have been questionably substituted by the Westmoreland tribunals.
Reference
Daniel Quintero Botero, Westmoreland v Canada: A Precedent Against the Transferability of Treaty Claims, 8 Eur. Inv. L. & Arb. Rev. Online 229 (2023).
Diego Mejía-Lemos, Westmoreland Mining Holdings LLC v. Government of Canada, Case No. UNCT/20/3, 119 Am. J. Int’l L. 298 (2025);
Hosna Sheikhattar & Mansour Vesali Mahmoud, Domestic Insolvency Proceedings Before Investment Treaty Arbitration, 41 Arb. Int’l 349 (2025).
IBA Report on Insolvency and Investment Arbitration (Hamid Abdulkareem, Simon Batifort & Manuel Penades eds., Sept. 2024);
* Raúl Zeyi Huang is a M.Phil. in International Law candidate at Peking University Law School. After receiving his LL.B. (dean’s scholarship, summa cum laude equivalent) from China University of Political Science and Law, he has been working as a Research Analyst at the International Finance Corporation, World Bank Group. He is principally interested in the doctrinal and critical studies of the relationship between international law and domestic law.