Bankruptcy trustees and chapter 11 debtors-in-possession ("DIPs") frequently seek to avoid fraudulent transfers and obligations under section 544(b) of the Bankruptcy Code and state fraudulent transfer or other applicable nonbankruptcy laws because the statutory "look-back" period for avoidance under many nonbankruptcy laws exceeds the two-year period governing avoidance actions under section 548. Governmental units (defined below) sometimes argue that avoidance actions against them are precluded by the doctrine of sovereign immunity under the applicable nonbankruptcy law, even though section 106(a) of the Bankruptcy Code explicitly provides that sovereign immunity is abrogated "with respect to … [section] 544."The federal circuit courts of appeals (and many lower courts) are split regarding whether the abrogation of sovereign immunity by governmental units with respect to avoidance actions commenced under section 544(b) also extends to the causes of action arising under applicable nonbankruptcy law that a "triggering" or "predicate" creditor would be precluded from asserting outside of bankruptcy due to sovereign immunity. The U.S. Court of Appeals for

Derivative Avoidance Powers Under Section 544(b) of the Bankruptcy CodeSection 544(b)(1) of the Bankruptcy Code provides in relevant part as follows:[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.11 U.S.C. § 544(b)(1). Thus, a trustee (or DIP pursuant to section 1107(a)) may seek to avoid transfers or obligations that are "voidable under applicable law," which is generally interpreted to mean state law.

W.D.N.C. Nov. 3, 2020), the court, adopting the majority approach, held that a chapter 7 trustee could effectively circumvent North Carolina's four-year statute of limitations for fraudulent transfer actions by stepping into the shoes of the IRS, which is bound not by North Carolina law but by the 10-year statute of limitations for collecting taxes specified in the Internal Revenue Code ("IRC").Derivative Avoidance Powers Under Section 544(b) of the Bankruptcy CodeSection 544(b)(1) of the Bankruptcy Code provides in relevant part as follows:[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.11 U.S.C. § 544(b). Thus, a trustee (or DIP pursuant to section 1107(a)) may seek to avoid transfers or obligations that are "voidable under applicable law," which is generally interpreted to mean state law.

Section 544(b)(1) of the Bankruptcy Code enables a trustee to step into the shoes of a creditor and avoid a transfer “of an interest of the debtor in property” that an unsecured creditor could avoid under applicable state law. See 11 U.S.C. § 544(b)(1). Thus, for example, if outside of bankruptcy a creditor could avoid a transaction entered by a debtor as a fraudulent transfer, in bankruptcy, the trustee acquires the power to avoid such a transaction. This principle raises special questions in the context of government entities. Outside of bankruptcy, sovereign immunity bars many suits against the government, including suits seeking to avoid a fraudulent transfer. It might thus seem that the federal government is also immune from an action under section 544(b)(1), because an unsecured creditor could not avoid a transfer to the government under applicable state law. But there is another wrinkle: section 106(a)(1) of the Code abrogates sovereign immunity for any “governmental unit” as to an extensive list of Code sections

We have previouslyblogged about the section 546(e) defense to a trustee’s avoidance powers under the Bankruptcy Code. A trustee has broad powers to set aside certain transfers made by debtors before bankruptcy. See 11 U.S.C. §§ 544, 547, 548. Section 546(e), however, bars avoiding certain transfers, including a “settlement payment . . . made by or to (or for the benefit of) . . . a financial institution [or] a transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract.” 11 U.S.C. § 546(e). The applicability of section 546(e) often hinges on what qualifies as a “financial institution,” which the Bankruptcy Code defines in a way that includes many entities not ordinary considered financial institutions. See 11 U.S.C. § 101(22)(A). But section 546(e) sometimes also raises the question of whether a transfer is made “in connection with a securities contract.” That is the question the Seventh Circuit recently addressed in Petr v. BMO Harris Bank, No. 23-1931 (7th Cir. Mar. 15, 2024).BWGS, LLC (“BWGS”) was a wholesale distributor of garden products. In December 2016, it was acquired by Sun Capital Partners VI, L.P. (“Sun Capital”), pursuant to a st

Section 546(e) of the Bankruptcy Code's "safe harbor" preventing avoidance in bankruptcy of certain securities, commodity, or forward-contract payments has long been a magnet for controversy. Several noteworthy court rulings have been issued in bankruptcy cases addressing the application of the provision, including application to financial institutions, its preemptive scope, and its application to non-publicly traded securities.One of the latest chapters in the ongoing debate was written by the U.S. District Court for the Southern District of Indiana in Petr v. BMO Harris Bank N.A., 2023 WL 3203113 (S.D. Ind. May 2, 2023), appeal filed, No. 23-1931 (7th Cir. May 17, 2023). The district court broadly construed the section 546(e) safe harbor to bar a chapter 7 trustee from suing under state law and section 544(b) of the Bankruptcy Code to avoid an alleged constructive fraudulent transfer made by the debtor shortly after it had been acquired in a leveraged buy-out ("LBO"). According to the district court: (i) all of the agreements related to the LBO acquisition "were securities contracts" for purposes of the section 546(e) safe harbor, which insulated from avoidance a transfer made by the debtor one month after the LBO to refinance a loan incurred as part of the transaction; (ii) the safe harbor is not limited to transfers involving publicly traded securities; and (iii) section 546(e) preempted the trustee's state law constructive fraudulent transfer claims.The Section 546(e) Safe HarborSection 546 of the Bankruptcy Code imposes a number of limitations on a bankruptcy trustee's avoidance powers, which include the power to avoid certain preferential and fraudulent transfers. Section 546(e) provides that the trustee may not avoid, among other things, a pre-bankruptcy transfer that is a settlement payment "made by or to

Section 544 of the Bankruptcy Code enables trustees to avoid a transfer of “property of the debtor” where a creditor of the debtor would have such a right under state law. 11 U.S.C. § 544(a). The statutory requirement that the transfer be “of an interest of the debtor” or “property of the debtor” (emphasis added) has important implications for claims brought under sections 544 and 548 in the aftermath of a merger or acquisition.

tract as, among other things, “[(1)] a contract for the purchase, sale, or loan of a security[, (2)]…any extension of credit for the clearance or settlement of securities transactions[, (3)]…any…credit enhancement related to any agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement obligation by or to a…financial institution…in connection with any agreement or transaction referred to in this subparagraph[, (4)]…any other agreement or transaction that is similar to an agreement or transaction referred to in this subparagraph [or (5)]…any combination of the agreements or transactions referred to in this subparagraph.”John J. Petr, as chapter 7 trustee for BWGS, LLC, sued Sun Capital and BMO on April 23, 2021, claiming that BWGS’s repayment benefitted Sun Capital by relieving them of their “credit enhancement commitments,” constituting avoidable fraudulent transfers under section 17(a) of the Indiana Uniform Voidable Transactions Act (IUVTA). Section 544 of the Bankruptcy Code allows the trustee to step into the shoes of a creditor and seek remedies for a transfer that is avoidable under the IUVTA. Section 18(b)(1) of the IUVTA and section 550(a) of the Bankruptcy Code further enable the trustee to recover the value of a transferred asset if such transfer is avoidable. Sun Capital and BMO moved to dismiss the claims on grounds that the transfer falls within the 546(e) safe harbor because it was made by or to a financial institution in connection with a securities contract.The bankruptcy court denied the motions, concluding that the 546(e) safe harbor does not apply to transfers made in connection with securities contracts concerning privately held securities and the transfer was not made in connection with a securities contract. The court further opined that a claim brought pursuant to state law by way of section 544 was not subject to the 546(e) safe harbor. On appeal, the District Court for the Southern District of Indiana reversed, concluding that the la

tion involved, the relationships between the parties, whether the transferor continued to use the property even after the transfer, and the transferor's financial condition at the time of and after the transfer. See, e.g., In re TransCare Corp., 81 F.4th 37 (2d Cir. 2023); see generally Collier at ¶ 548.04[1][b][i] (citing cases); see also Section 4(b) of the Uniform Fraudulent Transfer Act (the "UFTA") and its successor, the Uniform Voidable Transfer Act (the "UVTA") (listing 11 separate badges of fraud to be applied in determining whether an actual fraudulent transfer should be avoided under state law) (discussed below).A transfer is constructively fraudulent if the debtor received "less than a reasonably equivalent value in exchange for such transfer or obligation" and was, among other things, insolvent, undercapitalized, or unable to pay its debts as such debts matured. Collier at ¶ 548.05; 11 U.S.C. § 548(a)(1)(B).Fraudulent transfers may also be avoided by a trustee or DIP under section 544(b) of the Bankruptcy Code, which provides that, with certain exceptions, "the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor by a creditor holding an unsecured claim that is allowable under section 502 of [the Bankruptcy Code] or that is not allowable only under section 502(e) of [the Bankruptcy Code]." 11 U.S.C. § 544(b)(1). This provision permits a trustee to step into the shoes of a "triggering" unsecured creditor that could have sought avoidance of a transfer under applicable non-bankruptcy law (e.g., the UFTA or its successor, the UVTA). See generally Collier at ¶ 544.06. Section 544(b) is an important tool, principally because the reach-back period for avoidance of fraudulent transfers under state fraudulent conveyance laws (or even non-bankruptcy federal laws, such as the Internal Revenue Code) is typically longer than the two-year period for avoidance under section 548. Id.If a transfer is avoided under either section 548 or 544(b), sect

etition ….11 U.S.C. §548(a)(1) (emphasis added). Fraudulent transfers that can be avoided include both: (i) actual fraudulent transfers, which are transfers made with "actual intent to hinder, delay, or defraud" creditors (see 11 U.S.C. § 548(a)(1)(A)); and (ii) constructive fraudulent transfers, which are "transactions that may be free of actual fraud, but which are deemed to diminish unfairly a debtor's assets in derogation of creditors." Collier at ¶ 548.05; see 11 U.S.C. § 548(a)(1)(B). Under section 548(A)(1)(B), a transfer is constructively fraudulent if the debtor received "less than a reasonably equivalent value in exchange for such transfer or obligation" and was, among other things, insolvent, undercapitalized, or unable to pay its debts as such debts matured. Id.Section 548(c) provides a defense to avoidance of a fraudulent transfer for a "good faith" transferee who gives value in exchange for the transfer involved.Fraudulent transfers may also be avoided by a trustee under section 544(b) of the Bankruptcy Code, which provides that, with certain exceptions, "the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of [the Bankruptcy Code] or that is not allowable only under section 502(e) of [the Bankruptcy Code]." 11 U.S.C. § 544(b)(1) (emphasis added). This provision permits a trustee to step into the shoes of a "triggering" unsecured creditor that could have sought avoidance of a transfer under applicable bankruptcy law (e.g., the Uniform Voidable Transfer Act enacted in many states). See generally Collier at ¶ 544.06.What Is an Interest of the Debtor in Property?Notably, the plain language of sections 544(b), 547(b), and 548(a)(1) contains a fundamental limitation on their application: Only a transfer "of an interest of the debtor in property" is avoidable. The Bankruptcy Code does not define the phrase "an interest