November 30, 2021

Volume XI, Number 334

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November 29, 2021

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A New World of Avoidance Options

The section 544(b) avoiding powers are based on non-bankruptcy legal principles, with the section looking to the state law powers (usually under state fraudulent transfer law) of existing unsecured creditors.  But which State’s law should a Bankruptcy Court look to?  This question usually arises when there are different statute of limitations periods under the different state laws and the trustee wants the longer reach-back period.

 Few cases address this, but those that do tend to apply the law of the forum state in which the bankruptcy was filed on the theory that section 544 incorporates state law so state choice of law rules should be used.  An interesting Louisiana case took the opposite approach.  See In re Gulf Fleet Holdings, Inc., 491 B.R. 747 (Bankr. W.D. La. 2013).  Bankruptcy Judge Robert Summerhays drew the subtle distinction that the rule of decision under section 544(b) is not state law but rather federal law – which just happens to borrow its content from state law.  Thus section 544(b) claims implicate federal policy and federal choice of law principles should govern.  A subsequent Georgia case disagreed, although it viewed the issue as one calling for the Bankruptcy Judge to exercise discretion in choosing between the federal and state choice of law rules.  See In re International Management Assoc., LLC, 495 B.R. 96 (Bankr. N.D. Ga. 2013).

 If federal choice of law rules apply, they point to the state with the most significant relationship – a multi-factored test that provides little precision.  In Gulf Fleet that happened to be the forum state, but only because that was both the debtor’s principal place of business and the place where the allegedly fraudulent transaction was centered.  The Gulf Fleet approach is interesting because it expands the options for attacking pre-petition transactions and may provide a variety of state laws as arguable choices.  More interesting, globalization has added cross-border aspects and foreign creditors to most of our business bankruptcy cases.  Application of a “most significant relationship” test for determining the avoiding powers the estate inherits from existing unsecured creditors may add to the estate’s arsenal some very strange foreign avoidance principles that might be available in a foreign jurisdiction if the transaction was centered there.

 Anyone know a good expert on the avoiding laws of The Republic of Nauru?

©2021 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume III, Number 339
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Businesses faced with changes in the competitive global economy and within their own industries increasingly turn to financial restructuring as an option to reorganize and de-leverage core businesses, shed excess assets for underperforming divisions, and reformulate long-term objectives. Greenberg Traurig's internationally recognized Restructuring & Bankruptcy Practice has broad advisory and litigation experience with the often-complex issues that arise in reorganizations, restructurings, workouts, liquidations, and distressed acquisitions and sales, in both domestic...

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