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| vol 18, num 2 | August 2019 |
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| The Reach of Avoidance: 2d Cir. Holds in Madoff that Bankruptcy Code Can Be Used to Recover Subsequent Extraterritorial Transfers |
| On Feb. 25, 2019, the U.S. Court of Appeals for the Second Circuit issued a decision holding that a trustee is not barred by either the presumption against extraterritoriality or by international comity principles from recovering property from a foreign subsequent transferee that received the property from a foreign initial transferee. In reversing the district court’s Decision, the court of appeals concluded that, because § 550(a) of the Bankruptcy Code[1] is designed to remedy a debtor’s fraudulent (or preferential) transfer of property, the proper focus for determining the impact of the statute should be on the location of the initial
transfer, not on the location of the recipient of the transfer or of any subsequent transferee. The court of appeals found that because the initial fraudulent transfer from Madoff took place in the U.S., the general presumption against the extraterritorial reach of a statute did not apply. The court of appeals further held that comity considerations did not limit the reach of the Bankruptcy Code avoidance provisions in these actions, noting that the U.S. has a compelling interest in allowing domestic estates to recover fraudulently transferred property.
Background
Certain foreign investment funds (so-called “feeder funds”) that had pooled their customers’ assets for the purpose of investing with Madoff withdrew funds from their Madoff accounts prior to the unraveling of Madoff’s Ponzi scheme. Those feeder funds (most of which landed in liquidation proceedings in their home countries) then transferred those funds — which, as withdrawals from a Ponzi scheme, were subject to avoidance as fraudulent conveyances — to their own investors, many of whom were foreign entities. The Madoff trustee sued both the feeder funds and the subsequent transferees under § 550 of the Bankruptcy Code in an attempt to recover the transferred assets. Although § 550 authorizes trustees to recover a debtor’s fraudulent transfers not only from the direct recipients of the transfers, but also, in some instances, from subsequent transferees, the
subsequent transferees moved to dismiss the complaint on the grounds that § 550 does not apply extraterritorially and thus does not enable the trustee to set aside transfers from a foreign transferor to a foreign transferee.
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| Get Rich or Die Trying: Recent Developments of Make-Whole Provisions in Bankruptcy |
| Parties enter into contracts to get the benefit of their bargain. Loan agreements are no different. If a credit facility has a term of five years, the borrower should expect to pay interest for five years. Unless negotiated, borrowers generally do not have an unfettered right to repay their debts early because this would deprive the lender of its bargained-for consideration. This concept, known as the “perfect tender in time” rule, precludes prepayment of a loan (or bond issue, or any other extension of credit) so that lenders can collect the interest contracted to earn through the maturity date of the loan. Further, many loan agreements
contain prepayment penalties, exit fees and other provisions that allow lenders to recoup future consideration if a loan is repaid early. Such clauses are typically referred to as “make-whole” or “yield maintenance” provisions. Bankruptcy law can change the rules for many financial arrangements, including loans containing make-whole provisions. |
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| When Hopes and Prayers Are Not Enough: Lessons Learned from FirstEnergy Solutions Corp.’s Ill-Fated Third-Party Releases |
| In a “code-driven” discipline such as bankruptcy, third-party releases are a rare breed. As a form of equitable relief available to certain nondebtors in certain court-decreed circumstances in certain circuits, they are shrouded in a level of uncertainty seldom seen elsewhere. A recent holding from In re FirstEnergy Solutions Corp. that denied the approval of the debtors’ disclosure statement because it contained fatally flawed releases highlights this confusion and offers much-needed guidance to future plan proponents. |
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| The Delaware Bankruptcy Court Once Again Adopts the Narrow View of Stern v. Marshall |
| Does a bankruptcy court have the power to enter a final order in a fraudulent-transfer action where the defendant has not filed a proof of claim, or is the bankruptcy court limited to submitting proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment? On March 11, 2019, in Paragon Litigation Trust v. Nobel Corp., et al. (In re Paragon Offshore PLC, et al.), Delaware Chief Bankruptcy Judge Christopher S. Sontchi answered this question in the affirmative, putting the Delaware bankruptcy court in contrast with other courts across the country more broadly interpreting
Stern v. Marshall. The Paragon decision is in line with existing Delaware cases. |
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| Business Reorganization Committee Leadership for 2019 |
| The Business Reorganization Committee is proud to announce our new leaders for 2019!
You can also visit the committee's homepage for more newsletter articles, relevant recordings and other committee information.
The committee is always eager to welcome new volunteers. Please contact any member of our leadership team to find out how you can get involved.
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Clayton George Gring, III
Membership Relations Director
AlixPartners LLP
Houston |
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Patrick R. Mohan
Newsletter Editor
Reorg
Columbia, S.C. |
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