Restructuring

Contributed by Laura Napoli
In MC Asset Recovery LLC v. Commerzbank A.G. (In re Mirant Corporation), No. 11-10070, 2012 WL 919620 (5th Cir. Mar. 20, 2012), the Fifth Circuit faced a number of interesting issues, including questions of standing, applicable law, and conflicts of law rules.  It all began when Mirant Asset Development and Procurement B.V. (MADP), a subsidiary of Mirant Corporation (Mirant) sought to acquire nine power islands from General Electric.  Commerzbank provided financing for the acquisition, and Mirant issued a guaranty for the amounts MADP owed to Commerzbank.  After Mirant filed for bankruptcy, it sued Commerzbank to avoid the guaranty, and its special litigation entity, MC Asset Recovery, LLC (MCAR), took Mirant’s place in the litigation after confirmation of Mirant’s plan of reorganization.
Commerzbank asserted three main arguments in support of its motion to dismiss Mirant’s complaint.  First, Commerzbank argued that MCAR lacked standing to bring an avoidance claim because, it claimed, all of Mirant’s creditors had been paid in full.  Second, Commerzbank alleged that the Federal Debt Collection Procedures Act (the FDCPA), which Mirant had tried to use to avoid the guaranty, was not “applicable law” under which Mirant could avoid a transfer under section 544(b) of the Bankruptcy Code.  Finally, Commerzbank asserted that because the FDCPA was out of the picture, MCAR could not avoid the guaranty under any other “applicable law.
Standing
To address Commerzbank’s first argument, the Fifth Circuit first concluded that a split existed in the federal courts as to whether a debtor’s trustee could pursue an avoidance action if its unsecured creditors had already been paid in full.  The Eighth and Ninth Circuits had found that the trustee could avoid a transfer in that case, but the United States District Court for the Southern District of New York, affirmed by the Second Circuit, held that the debtor did not have standing to assert an avoidance claim because its creditors would receive no benefit from avoiding the transfer.  The Fifth Circuit sided with the Eighth and Ninth Circuits, concluding that a trustee’s right to avoid a transfer is measured at the petition date.  The court reasoned that if, on the petition date, an unsecured creditor can reach property that the debtor has transferred to a third party, the trustee can use section 544(b) to avoid that transfer until the point when avoidance would no longer benefit the estate.  Thus, to the extent that MCAR’s avoidance of a fraudulent transfer would benefit Mirant’s estate, MCAR had standing to avoid any transfers that injured the estate.  The court stressed, however, that a bankruptcy trustee may avoid a transfer only to the extent that doing so would benefit the debtor’s estate and that, accordingly, MCAR would have standing only to the extent that its avoidance of the transfer would, in fact, benefit the Mirant estate.
The FDCPA
After establishing that MCAR had standing, the court next addressed whether it could use the FDCPA to avoid the guaranty under section 544(b).  The court easily found that the FDCPA was not “applicable law” by looking at the text of the FDCPA itself, which states, in relevant part, that “[t]his chapter shall not be construed to supersede or modify the operation of . . . title 11.”  The court interpreted this phrase to mean that the Bankruptcy Code should be read as if the FDCPA did not exist.  Thus, the FDCPA could not be used as “applicable law” under section 544(b) of the Bankruptcy Code.
Choice of Law
Finally, the court looked to whether MCAR could avoid the guaranty under any other “applicable law.”  To answer this question, the court first needed to decide which state’s fraudulent transfer law applied.  The parties disagreed as to whether New York’s or Georgia’s fraudulent transfer law applied, with Commerzbank arguing that Georgia law applied and MCAR asserting that New York law was the proper “applicable law.”
Noting that avoidance actions resemble tort actions, the court found that the “most significant relationship” test was the proper test to use in determining the applicable state law.
The court examined section 145 of the Restatement (Second) of Conflict of Laws, which articulates the “most significant relationship” test and describes four factors for consideration: (a) the place where the injury occurred, (b) the place where the conduct causing the injury occurred, (c) the domicile, residence, nationality, place of incorporation, and place of business of the parties, and (d) the place where the relationship, if any, between the parties is centered.  The court had difficulty in applying these factors to the case at hand because the “injury” alleged was intangible and, therefore, difficult to assign a “location.”  Similarly, the court found that it could not assign a locality to the conduct causing the injury or the place where the conduct occurred and that the parties’ relationship was not centered in any one location.  Ultimately, the court was unable to apply the section 145 factors to the avoidance action.
With section 145 providing limited assistance, the court next turned to section 6 of the Restatement.  Section 6 lists other factors that are relevant to a choice of law analysis, including consideration of the basic policies underlying the particular field of law involved in the case.  In this case, the court determined that the basic bankruptcy policy at issue was the protection of creditors from fraudulent transfers.  New York’s fraudulent transfer law treats certain guarantees as transfers, but the law in place in Georgia at the time of the transfer, which was later repealed, did not.  Because the differences in the laws of the two states were otherwise minor, the court concluded that New York’s law more strongly promoted the Bankruptcy Code’s underlying policy of protecting creditors from fraudulent transfers.  In reaching this conclusion, the Fifth Circuit also noted that none of the parties involved in the case were Georgia citizens and that Georgia would, therefore, have little interest in applying its now-repealed statute to a case that would not benefit its citizens in the slightest.  Concluding that the district court below had erred in applying Georgia law, the Fifth Circuit remanded the case for further proceedings.
This decision indicates that, in certain instances, conflicts of laws may play a key role in the outcome of an avoidance action.