Avoidance of Pre-Bankruptcy Transactions in Multinational Bankruptcy Cases

Abstract

From perspective of planning commercial transactions, application of avoiding powers may be single most important aspect of multinational insolvency/bankruptcy cases.1 Yet there have been remarkably few reported cases dealing with those issues. The present author was guilty of an article on subject some fifteen years ago.2 Very few cases have been reported since that time, until three conveyance cases I discuss in this article. The French case is a Court of Appeals case that applies United States law to avoid a pre-bankruptcy transfer of real estate in Bermuda.3 In Midland Euro Exchange case, Los Angeles bankruptcy court comes to opposite conclusion about a transnational payment in context of a Ponzi scheme.4 In third case, Al Sabah, Privy Council applied Cayman Islands law to permit a Bahamian trustee in bankruptcy to undo two Cayman Islands trusts.5 Relatively speaking, our cup runneth over. I. BACKGROUND As I have noted in a prior paper for Academy, many issues in a multinational bankruptcy case require two distinct choice-of-law analyses: one to determine proper nonbankruptcy law and other to choose applicable bankruptcy law.6 Thus, for example, nonbankruptcy law might determine if a party has a valid contract claim against debtor in bankruptcy, while bankruptcy law would determine priority, if any, that claim would receive in a bankruptcy distribution. The contract law would be chosen by the proper law of contract7 in most cases, while choice of applicable bankruptcy law would depend on whether jurisdiction followed a more territorial or a more universalist approach in multinational bankruptcy cases.8 II. FRAMING THE PROBLEM A. Choice of Bankruptcy Law The ancient law review article I mentioned above was devoted exclusively to second determination, choice of bankruptcy law. In that article, I surveyed few existing cases concerning choice of law for avoidance actions and performed a detailed analysis as to choice of proper avoidance law in multinational cases. I refer reader to that article for a more elaborate discussion. Because all three of recent cases have involved what Americans would call a fraudulent conveyance, I will focus on that aspect of problem. We start with fact that a court following a traditional territorial approach to multinational bankruptcies will have difficulty fashioning a defensible choice-of-law rule for avoidance of multinational transactions. Territorialists grab what local assets are available and apply local law to them.9 They then distribute any proceeds of an avoiding action under local priority system.10 They would normally not seek to recover assets located in foreign jurisdictions, but they may control assets that have arguably been transferred in fraud of creditors. The literature does not reveal any coherent approach to application of foreign avoidance law under a territorialist system. However, courts in United States and a number of other countries are moving in direction of a modified universalism in multinational bankruptcies, seeking to cooperate with other courts in achieving a pragmatic result as close as possible to ideal of a single worldwide proceeding.11 Those courts are forced to consider which country's bankruptcy laws should be applied to a particular issue in a multinational bankruptcy system. For example, if a creditor subject to personal jurisdiction in two countries, such as a multinational bank, engages in behavior that violates moratorium (stay) of country where a bankruptcy proceeding is pending, yet behavior takes place entirely in second country where there is no proceeding, which law should apply to creditor's conduct?12 The most difficult choice-of-law issue is determining which avoidance law to apply to a given pre-bankruptcy transaction. …