The so-called safe harbor under Section 546(g) of the Bankruptcy Code does not bar an assignee for the benefit of creditors from suing under state law to recover actual and constructive fraudulent transfers from a swap participant, according to Second Circuit precedent interpreted by District Judge Analisa Torres of New York.
The debtor was a coffee importer. Allegedly without receiving consideration in exchange, the debtor issued guarantees to a swap counterparty covering losses that might be incurred by a third party as a result of trades in swaps. According to the May 9 opinion by Judge Torres, the debtor paid $77 million more than was required by the guarantees.
The debtor became insolvent and voluntarily executed an assignment for the benefit of creditors in Florida. Judge Torres reports that creditors filed more than $220 million in claims with the assignee. We will refer to the assignment for the benefit of creditors as an ABC.
As plaintiff, the assignee filed suit in New York under a forum-selection clause to avoid the guarantees and to recover $91.5 million in actual and constructive fraudulent transfers under Florida or New York law. The defendant responded with a motion to dismiss, contending that it was a swap participant and that the assignee’s claims under state law were preempted by the Section 546(g) safe harbor. Two industry groups filed amicus briefs in support of the defendant’s motion to dismiss.
Section 546(g) provides that:
the trustee may not avoid a transfer, made by or to (or for the benefit of) a swap participant . . . under or in connection with any swap agreement and that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.
The assignee conceded that the safe harbor would bar the claims if the debtor were in bankruptcy. However, the assignee said that the debtor was not in bankruptcy and never had been. No matter; the defendant claimed that the ABC was the “functional equivalent” of bankruptcy.
Judge Torres examined the circumstances to decide whether state fraudulent transfer laws were subject to implied or field preemption by Section 546(g).
Under Supreme Court precedent, implied preemption applies when compliance with both state and federal law is impossible. Mere “tension” between state and federal law isn’t enough. Judge Torres cited the Second Circuit for saying there is no implied preemption absent a clear and manifest purpose of Congress.
Field preemption applies when Congress has decided to foreclose any state regulation in the area.
Judge Torres said that the “plain text of § 546(g) makes clear that the provision only applies to a federal bankruptcy trustee,” because the statute says that the “trustee may not avoid . . . .”
In Second Circuit precedent, Judge Torres found support for the idea “that implied preemption occurs at the initiation of Chapter 11 bankruptcy proceedings.” She held:
The Second Circuit has made clear that the filing of a federal bankruptcy case — not a state insolvency proceeding — triggers the preemption analysis. Because the ABC Proceeding is not a bankruptcy case, federal bankruptcy law, including § 546(g), does not apply.
Judge Torres denied the motion to dismiss to the extent based on federal preemption but did strike some of the assignee’s older claims under Florida’s statute of repose.
The so-called safe harbor under Section 546(g) of the Bankruptcy Code does not bar an assignee for the benefit of creditors from suing under state law to recover actual and constructive fraudulent transfers from a swap participant, according to Second Circuit precedent interpreted by District Judge Analisa Torres of New York.
The debtor was a coffee importer. Allegedly without receiving consideration in exchange, the debtor issued guarantees to a swap counterparty covering losses that might be incurred by a third party as a result of trades in swaps. According to the May 9 opinion by Judge Torres, the debtor paid $77 million more than was required by the guarantees.