Debate Intensifies as to Whether the Bankruptcy Code’s Avoidance Provisions Apply Extraterritorially

by Charles M. Oellermann and Mark G. Douglas (Jones Day).

The ability to avoid fraudulent or preferential transfers is a fundamental part of U.S. bankruptcy law. However, when a transfer by a U.S. entity takes place outside the U.S. to a non-U.S. transferee—as is increasingly common in the global economy—courts disagree as to whether the Bankruptcy Code’s avoidance provisions apply extraterritorially to avoid the transfer and recover the transferred assets. Several bankruptcy courts have addressed this issue in recent years, with inconsistent results.

In a recent example, in In re CIL Limited, 582 B.R. 46 (Bankr. S.D.N.Y. 2018), the U.S. Bankruptcy Court for the Southern District of New York, disagreeing with other courts both within and outside its own district, ruled that the “transfer of an equity interest in a U.K. entity to a Marshall Islands entity was a foreign transfer” and that the Bankruptcy Code’s avoidance provisions do not apply extraterritorially because “[n]othing in the language of sections 544, 548 and 550 of the Bankruptcy Code suggests that Congress intended those provisions to apply to foreign transfers.”

The decision further muddies the waters on an issue that has become increasingly prominent as the volume of cross-border bankruptcy cases continues to grow and cross-border transactions become ubiquitous. The split on this issue exists not merely between courts in different jurisdictions, but also among courts in the Southern District of New York, where the majority of cross-border bankruptcy cases have traditionally been filed.

The full article is available here.

The Year in Bankruptcy: 2017

by Charles M. Oellermann and Mark G. Douglas (Jones Day).

In their annual chronicle of business bankruptcy, financial, economic, and related developments in the U.S., Charles M. Oellermann and Mark G. Douglas of Jones Day review the most significant events of 2017, including business bankruptcy filing statistics and industry trends; newsworthy developments regarding sovereign and commonwealth debt; the top 10 public-company bankruptcies of the year; notable private and cross-border bankruptcy cases; significant business bankruptcy and U.S. Supreme Court bankruptcy rulings; bankruptcy-related legislative and regulatory developments; noteworthy chapter 11 plan confirmations and exits from bankruptcy; and more.

The article is available here.

Fraudulent Transfer Avoidance Recovery Not Limited to Total Amount of Creditor Claims

posted in: Avoidance, fraudulent transfer | 0

By Jane Rue Wittstein and Mark G. Douglas (Jones Day)

Courts disagree as to whether the amount that a bankruptcy trustee or chapter 11 debtor-in-possession can recover in fraudulent transfer avoidance litigation should be capped at the total amount of unsecured claims against the estate. The U.S. Bankruptcy Court for the District of Delaware recently weighed in on this issue in PAH Litigation Trust v. Water Street Healthcare Partners, L.P. (In re Physiotherapy Holdings, Inc.), 2017 WL 5054308 (Bankr. D. Del. Nov. 1, 2017). Noting the absence of any guidance on the question from the U.S. Court of Appeals for the Third Circuit, the bankruptcy court ruled that, unlike most state fraudulent transfer laws, which limit a creditor’s recovery to the amount of its unpaid claim against the transferor, section 550 of the Bankruptcy Code imposes no such limitation on the estate’s recovery. The ruling reinforces the idea that federal and state fraudulent transfer avoidance laws are intended to be remedial rather than punitive. Under state law, this understandably means that an avoidance recovery is limited to the amount necessary to make an injured creditor whole. Under federal bankruptcy law, recoveries must benefit the bankruptcy estate, which includes the interests of creditors and other stakeholders.

The article is available here.

Bankruptcy Court Rules That It Has Constitutional Authority to Grant Nonconsensual Releases in Chapter 11 Plan

By Charles M. Oellermann and Mark G. Douglas (Jones Day)

Many chapter 11 plans include nonconsensual third-party releases that preclude certain non-debtors from pursuing claims against other non-debtors as part of a restructuring deal in which such releases are a quid pro quo for financial contributions made by prepetition lenders or old equity holders. However, bankruptcy and appellate courts disagree as to whether such non-consensual plan releases should be permitted due, among other things, to concerns regarding the scope of a bankruptcy court’s subject matter jurisdiction and constitutional authority. Several court rulings handed down in 2017 addressed these concerns.

For example, In In re Midway Gold US, Inc., 575 B.R. 475 (Bankr. D. Colo. 2017), the court held that, although Tenth Circuit law does not categorically forbid third-party releases in chapter 11 plans, it lacked jurisdiction to “adjudicate” plan releases of claims against non-debtors because the underlying claims should not be considered as part of the proceedings to confirm the plan and were not within either its “core” or “related to” jurisdiction. In addition, in In re SunEdison, Inc., 2017 BL 401968 (Bankr. S.D.N.Y. Nov. 8, 2017), the court ruled that, as a matter of contract law, merely implied consent for plan releases is insufficient, and it lacked subject matter jurisdiction to approve releases that were overly broad.

By contrast, in In re Millennium Lab Holdings II, LLC,  2017 WL 4417562 (Bankr. D. Del. Oct. 3, 2017), the court held that it had the constitutional jurisdiction to authorize nonconsensual releases, despite the existence of litigation in another forum to adjudicate one of the claims to be released. A discussion of the court’s ruling in Millennium is available here.

Recent Rulings Deepen the Divide on Whether the Bankruptcy Code’s Avoidance Provisions Apply Extraterritorially

By Charles M. Oellermann and Mark G. Douglas (Jones Day)

The ability to avoid fraudulent or preferential transfers is a fundamental part of U.S. bankruptcy law. However, when a transfer by a U.S. entity takes place outside the U.S. to a non-U.S. transferee—as is increasingly common in the global economy—courts disagree as to whether the Bankruptcy Code’s avoidance provisions apply extraterritorially to avoid the transfer and recover the transferred assets.

Several bankruptcy courts have addressed this issue in recent years, with inconsistent results. For example, in In re Ampal-Am. Israel Corp., the Bankruptcy Court for the Southern District of New York ruled that the avoidance provisions of the Bankruptcy Code do not apply outside the U.S, disagreeing with other courts both within and outside its own district. The Bankruptcy Court for the District of Delaware, however, held to the contrary in In re FAH Liquidating Corp., where it held that the presumption against territoriality did not prevent a trustee from avoiding an overseas transfer.

More recently, in a pair of adversary proceedings commenced in the chapter 11 case of Arcapita Bank, the Bankruptcy Court for the Southern District of New York held that the “presumption against extraterritoriality” did not defeat claims against foreign banks under sections 362 and 542 (while also ruling it need not decide whether sections 547 and 550 apply extraterritorially because it concluded that the challenged transfers occurred within the U.S.).

Taken together, these recent decisions further muddy the waters on an issue that has become increasingly prominent as the volume of cross-border bankruptcy cases continues to grow.

The article is available here.

Eighth Circuit Expands Subsequent New Value Preference Defense in Cases Involving Three-Party Relationships

posted in: Avoidance | 0

Authors:  Charles M. Oellermann and Mark G. Douglas

A bankruptcy trustee or chapter 11 debtor-in-possession has the power under section 547 of the Bankruptcy Code to avoid a transfer made immediately prior to bankruptcy if the transfer unfairly prefers one or more creditors over the rest of the creditor body. However, not every payment made by a debtor on the eve of bankruptcy can be avoided merely because it appears to be preferential. Indeed, section 547 provides several statutory defenses to preference liability. The Eighth Circuit Court of Appeals recently addressed one such defense to preference avoidance—the “subsequent new value” exception. In Stoebner v. San Diego Gas & Electric Co. (In re LGI Energy Solutions, Inc.), 746 F.3d 350 ( (8th Cir. 2014), the court, in a matter of first impression, ruled that “new value” (either contemporaneous or subsequent) for purposes of section 547(c) can be provided by an entity other than the transferee.

LGI Energy is a positive development for those doing business with financially troubled entities because it expands the scope of the subsequent new value defense to encompass payment relationships involving multiple parties. In one sense, the ruling can be viewed as an instance of judicial activism directed at harmonizing the Bankruptcy Code with the realities of complex financial transactions. However, it could be argued that the Eighth Circuit’s decision was motivated more by equitable and policy considerations than by a careful examination of the plain meaning of section 547(c)(4).

The full-length article can be found here.