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Key Creditors' Rights Decision
The Second Circuit handed down a key creditors' rights decision on April 1 in Sharp Int'l Corp. v. State Street Bank & Trust Co. (In re Sharp Int'l Corp. & Sharp Sales Corp.), 2005 U.S. App. LEXIS 5241(2d Cir. Apr. 1, 2005). The court affirmed the lower courts' finding that a secured lender was not liable for aiding and abetting management's breach of fiduciary duty, and not liable for receiving a $12.25 million loan repayment from a closely held borrower it correctly suspected of engaging in massive fraud. The decision limits the scope of a lender's duties to its borrower and other creditors. Absent the lender's participation in its borrower's fraud, the lender should have no liability on a fraudulent transfer theory or on any other basis, at least in New York, where Sharp arose.
The Role of State Fraudulent Transfer Law in Federal Bankruptcy Cases
A trustee or Chapter 11 debtor-in-possession may attack a fraudulent transfer either under Bankruptcy Code (Code) ' 548 or under state law, made available to the trustee by Code ' 544(b) (trustee may avoid any pre-bankruptcy transfer voidable by unsecured creditors). See, e.g., In re Image Worldwide, Ltd., 139 F.3d 574, 577 (7th Cir. 1998) (bankruptcy case construing UFTA and applying state law); In re Leonard, 125 F. 3d 543, 544 (7th Cir. 1997) (“if any unsecured creditor could reach an asset of the debtor outside bankruptcy, the Trustee can use ' 544(b) to obtain that asset for the estate[,] … Trustee need not name a specific creditor.”). Because of generally longer reach-back recovery periods, state fraudulent transfer law is more frequently relied on in this kind of bankruptcy litigation. When, for example, a debtor fraudulently transfers assets in New York 3 years prior to bankruptcy, the trustee cannot rely on Code ' 548, but must rely on state fraudulent transfer law to challenge the transfer. New York's statute of limitations for fraud suits — 6 years — will govern. See, e.g., Buncher Co. v. Official Comm. Of Unsecured Creditors of Genfarm LP IV, 229 F.3d 245, 250-51 (3d Cir. 2000) (“When recovery is sought under section 544(b) … [t]he remedy … adopts the longer 'reach-back' provisions of state law.”); Seligson v. N.Y. Prod. Exch., 378 F. Supp 1076 1106-1107(S.D.N.Y. 1974) (pre-code case; if fraudulent transfer claim is brought under state law, that state's statute of limitations applies.).
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