July 09, 2012
Fraudulent transfers are a hot topic in American bankruptcy law these days, and therefore of considerable interest to Canadian companies with cross-border dealings. But Canadian companies unfamiliar with US law may find that the issue is somewhat more complicated than it seems.
The reason is that American law makes a distinction between the way that "look-back" periods and limitation periods are treated in relation to fraudulent transfers. That in turns affects the applicability of equitable tolling doctrines used to extend limitation periods.
"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 bankruptcy filing," says Alison Bauer.
Failing to distinguish between the two can be fatal when a Canadian company is assessing whether a suit that aims to set aside what it believes to be a fraudulent transfer will be successful. This becomes apparent on a reading of Re Pitt Pen Holding Inc., where a bankruptcy judge in Delaware ruled that the "look-back" period under ss. 548 of the US Bankruptcy Code, cannot be equitably tolled.
"The Bankruptcy Code has certain safe harbour provisions structured to protect good-faith public shareholders from fraudulent conveyance actions," Alison 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 issue has opened up a can of worms, however, by creating uncertainty as to just whom Congress was trying to protect by enacting the safe harbour provision," Alison says.
To read the full article, visit Lexpert's website.