For Fraudulent Transfer Claims, Courts Should Apply Law of Jurisdiction in Which Debtor Is Located, Was Injured and Made the Transfer

For purposes of fraudulent transfer claims, courts should apply law of jurisdiction in which the debtor is located and was injured and from which the debtor made the transfer, notwithstanding any choice of law provision in a contract between the debtor and the transferee.

A receiver bringing state law fraudulent transfer claims on behalf of a receivership estate, as a creditor of the receivership entity utilized to perpetrate a fraud, must select a particular state’s fraudulent transfer law under which to assert such claims. When the receivership entity and the party that received the transfers at issue were previously parties to a contract containing a choice of law provision, the transferee sometimes raises the defense that such contract’s choice of law governs the dispute rather than the state law upon which the receiver’s fraudulent transfer claims are based. Such a defense, however, is unlikely to prevail in most jurisdictions, including New York.

Indeed, the District Court for the Southern District of New York, in Geron v. Robinson & Cole, 476 B.R. 732, 737-38 (S.D.N.Y. 2012), held that contractual choice of law provisions do not apply to fraudulent transfer claims because fraudulent transfer claims sound in tort. Id. Under New York choice of law rules, the law governing a tort claim is based on the state having the greatest interest in adjudicating the pending claim.  Id. at 738.  The Southern District of New York reasoned that a fraudulent transfer claim is a claim to regulate conduct, and thus the state in which the tortious conduct occurred is normally the state with the greatest interest in regulating that conduct. Id. In Geron, the tort (transfer of property interest) occurred in New York thus the Southern District of New York applied New York law to the fraudulent transfer claim rather than the law of the debtor’s state of incorporation or the choice of law stated in the partnership agreement. Id.

Similarly, in Drenis v. Haligiannis, 452 F. Supp. 2d 418 (S.D.N.Y. 2006), the District Court for the Southern District of New York reasoned:

Typically where there is a conflict of law in cases involving tort claims, New York applies an ‘interest analysis’ to identify the jurisdiction that has the greatest interest in the litigation based on the occurrences within each jurisdiction, or contacts of the parties with each jurisdiction, that relate to the purpose of the particular law in conflict.

Id. at 427 (citations and quotations omitted).

Based on the “interest analysis”, the Southern District of New York held that New York’s version of the Uniform Fraudulent Transfer Act applied to fraudulent transfer claims where the victimized debtor is domiciled (not incorporated) in New York and where the majority of the fraud occurred in New York.  See id.  That District Court reasoned that “A tort occurs in ‘the place where the injury was inflicted,’ which is generally where the plaintiffs are located.”  See id. (citations and quotations omitted). Under those circumstances, the Court concluded that New York has the greatest interest in seeing its fraudulent transfer laws applied.  See id.

 

2016 Update

The choice of law provision set forth in Section 10 of the Uniform Voidable Transactions Act (UVTA), which has been introduced by the New York Senate as SB 7687 (see Article 10, Section 279) but not yet enacted by the Legislature, clearly provides that the law of the debtor’s principal location will apply to all fraudulent transfer claims brought by its creditors.