Law Times

PAGE 10 FOCUS March 19, 2012 • Law TiMes BY JULIUS MELNITZER For Law Times C anadian companies doing business in the United States should be aware that fraudu- lent transfers are a hot topic in American bankruptcy law these days. The most recent development came in Re Pitt Penn Holding Co. Inc., a case in which a bankruptcy judge in Delaware ruled that the look-back period under Article 548 of the U.S. Bankruptcy Code cannot be equitably tolled. "Look-back refers to the fact that a trustee in bankruptcy can treat certain transfers of a debtor's property as fraudulent so long as they occurred no more than two years before the date of bankrupt- cy filing," says Alison Bauer of Torys LLP's New York office. The issue arose in Pitt Penn when the insolvent debtor com- pany, Industrial Enterprises of America Inc., sought to set aside certain transfers that occurred several months beyond the two- year period. The company argued that as the defendants had con- cealed certain facts and partici- pated in a scheme to deplete its assets, the court should extend the two-year period under the doctrine of equitable tolling. The doctrine allows for filing a claim outside a limitation period where the defendant's conduct contrib- utes to the plaintiff 's ignorance of the right of action. The court concluded, however, that Article 548 wasn't akin to a statute of limitations. The company's "argument fails . . . because it assumes without discussion" that Article 548's two- year look-back period is a statute of limitations, the court noted. "It is not; the look-back period is a substantive element" of an Article 548 claim there "to cabin the broad power given to the trustee to pursue fraudulent transfers." There was a significant differ- ence, the court noted, between a substantive restriction on the trust- ee's powers and a limitation period. The U.S. code has 'safe-harbour provisions structured to protect good-faith public shareholders from fraudulent conveyance actions,' says Alison Bauer. "Statutes of limitation are rules of procedure," the court wrote. "They bear on the judicial process for enforcing the rights and duties recognized by the substantive law. In other words, they 'regulate sec- ondary conduct, i.e., the filing of a suit, not primary conduct, i.e. the actions that gave rise to the suit.'" Put another way, the look- back provision didn't cap how far into the future the trustee could bring a claim but looked back from the petition date when the cause of action accrued to deter- mine if the claim fell within the cause of action. "By contrast, a statute of lim- itations begins running when a cause of action accrues and requires a litigant to file its claim within a certain time in the future or perhaps lose it forever," the court wrote. Unlike a limitation period, the look-back provision didn't refer to any act within the trust- ee's control. By contrast, Article 546, which prohibited the trustee from com- mencing a claim under Article 548 after a period of time, was "a true statute of limitations" because it "dictates procedure and does not have anything to say about the substance" of an Article 548 claim. The effect of the court's judgment is to create a bright- line test for ascertaining which transfers fall within the statutory period. But that doesn't create as much certainty as it might because of the existence of state law look-backs that can extend for as long as six years. "Pitt Penn creates more cer- tainty in the federal arena but doesn't create massive certainty overall," says James Sprayregen of Kirkland & Ellis LLP's Chicago office. Indeed, the interaction of state and federal law in the fraudulent transfer context is currently the subject of two high-profile pro- ceedings, one involving Lyondell Chemical Co. and the other involving Tribune Co., owner of the Chicago Tribune and Los Angeles Times. Lyondell embraces two state- one federal- law-based and law-based clawback lawsuits in which various creditors are seeking to recover amounts paid to former shareholders in con- nection with the failed lever- aged buyout of Lyondell by Basell AF S.C.A. in 2007. The plaintiffs allege that certain pay- ments to the shareholders are fraudulent transfers and should be returned for distribution to unsecured creditors. "The Bankruptcy Code has certain safe-harbour provisions structured to protect good-faith public shareholders from fraudu- lent conveyance actions," Bauer explains. "By proceeding under state bankruptcy legislation, the trustee is trying to get around that provision." The defendants argue that the end-run avoiding the federal legislation is improper. "The same argument is being made in the Tribune cases, but there's no decision in either pro- ceeding yet," Bauer says. "But the issue has opened up a can of worms by creating uncer- tainty as to just whom Congress was trying to protect by enacting the safe-harbour provision." LT UNCOVER THE DETAILS OF A CASE FROM EVERY ANGLE Litigator Powerful Insight for Compelling Arguments Litigator from Westlaw® Canada combines litigation-focused research with practice tools to support your strategic decisions and automate your most laborious tasks. Litigator contains Canada's largest collection of online court documents – more than 100,000 skillfully drafted pleadings, motions and facta from leading Canadian cases. Get Better Results Faster with Westlaw® Canada Call 1-866-609-5811 or visit www.westlawcanada.com www.lawtimesnews.com Court considers look-back period for transfers

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