Does Section 546(e) Bar Foreign Law Avoidance Actions in Chapter 15?
Turns out, it depends on who you ask. Judge Bernstein said no. Recently, Judge Glenn said yes, but only for causes of action that resemble actual fraudulent transfers. It is unusual for the bankruptcy judges in Manhattan to disagree with each other, so let’s take a look at the issue.
The source of the disagreement involves a detailed analysis of few sections of the bankruptcy code. To simplify the issue, we summarize the relevant provisions. One begins with Section 1521(a)(7) of the bankruptcy code which provides that bankruptcy courts may grant a foreign representative additional assistance “except for relief available under sections 544, 545, 547, 548 and 550.” The Court of Appeals for the Fifth Circuit, the first and the only Court of Appeals to address the issue, held that section 1521(a)(7) does not prohibit a foreign representative from prosecuting, in the chapter 15 case, causes of action that are available to it under the laws of the country governing the main proceeding, i.e., foreign laws avoidance actions. Condor, 601 F.3d 319.
But, how does this provision interplay with the safe harbor provisions of section 546 prohibiting the assertion of avoidance actions with respect to safe harbor agreements – securities and commodities contracts, repurchase and forward agreements and swaps - except for actions for actual fraudulent transfer? Section 561(d) provides that the various safe harbor provisions limit the avoidance powers in chapter 15 cases to the same extent they do in chapter 7 and 11 cases. The question is, why is there even a need for section 561(d) to limit avoidance powers when section 1521(a)(7) eliminates a foreign representative’s ability to bring any avoidance actions to begin with?
In Fairfield Sentry, Judge Bernstein held that that a foreign representative cannot bring an actual fraudulent transfer claim under BVI law. Judge Bernstein reasoned that the BVI claim was not an actual fraudulent transfer claim under section 548(a) of the bankruptcy code, and therefore does not benefit from the carve-out of such claims from the scope of section 546(e). At best, Judge Bernstein viewed the BVI claim as analogous to state law actual fraudulent transfer claims, applicable in bankruptcy via section 544, and barred by section 546(e).
In a recent decision in the case of Norske ASA, a Norwegian entity, Judge Glenn disagreed with Fairfield Sentry. Judge Glenn posited two possible interpretations of sections 561(d) and 1521(a)(7). One reads section 1521(a)(7) as overriding section 561(d). The other reads section 561(d) as creating an exception to section 1521(a)(7). Judge Glenn chose the latter.
Judge Glenn explained that state law fraudulent transfer actions are preempted by the bankruptcy code, but neither the wording, nor the intent of Congress appears to preempt foreign law causes of action. He found no good reason to equate foreign law claims with state law fraudulent transfer claims and pointed to the irony that prohibiting claims for actual fraudulent transfers in chapter 15 cases would make the safe harbors broader in chapter 15 cases than in domestic bankruptcy cases. That result, he found, would contradict section 561(d) which applies the safe harbors in chapter 15 cases to the same extent, but not to a broader extent, as they apply in chapter 7 and 11 cases.
Finding that the asserted foreign law claim was sufficiently analogous to an actual fraudulent transfer claim, the motion to dismiss was denied.
Chapter 15 cases are being filed with increasing frequency. And an ever-increasing number of structured and synthetic transactions involve foreign assets, foreign entities and foreign laws. Yet, the ambiguity caused by the seemingly incompatible language of sections 561(d) and 1527(a)(7), leaves the markets and the parties with uncertainty as to the protections offered by the safe harbors in chapter 15 cases. It would appear that a legislative solution is in order. In the meantime, one must await Circuit courts’ rulings on the issue.