In Hosking v. TPG Capital Management LP (In re Hellas Telecommunications (Luxemburg) II SCA), 2015 BL 21823 (Bankr. S.D.N.Y. Jan. 29, 2015), the U.S. bankruptcy court presiding over the chapter 15 case of London-based Hellas Telecommunications (Luxemburg) II SCA ("Hellas II"), which formerly owned one of the largest mobile phone operators in Greece, dismissed fraudulent transfer claims asserted by Hellas II's U.K. liquidators against private equity giants TPG Capital Management LP and Apax Partners LLP as well as various affiliates (collectively, the "defendants"). In the avoidance litigation, the liquidators were seeking, among other things, avoidance of €973.7 million in transfers made by Hellas II to the defendants in connection with a 2006 "debt refinancing." The cross-border transactions involved entities in Luxembourg, the U.K., and the U.S. (principally New York) as well as agreements and securities governed by the different laws of these jurisdictions. 

The court ruled that a cause of action stated in the complaint under the New York Debtor and Creditor Law (the "NYDCL") alleging constructive fraudulent transfers must be dismissed under choice-of-law principles. According to the court, an actual conflict exists between the NYDCL and the laws of the U.K. and Luxembourg, which do not recognize a constructive fraudulent conveyance cause of action, and the U.K. and Luxembourg have a more significant interest in applying their laws to the dispute. The court also concluded that it need not decide whether the NYDCL may be given extraterritorial effect or whether the liquidators could assert the avoidance claims in light of section 1521(a)(7) of the Bankruptcy Code, which expressly precludes a U.S. bankruptcy court from granting relief that would allow a foreign representative to seek avoidance of transfers under section 544(b) of the Bankruptcy Code (among other Code sections) in a chapter 15 case.

Hellas

In 2005, the defendants acquired the equity of TIM Hellas Telecommunications S.A., a Greek telecommunications service provider, in a leveraged buyout transaction that involved the formation under Luxembourg law of Hellas Telecommunications, S.à.r.l. ("Hellas"); Hellas Telecommunications I, S.à.r.l. ("Hellas I"); Hellas II; and other related acquisition entities. Hellas, the ultimate parent of the newly formed entities, was wholly owned by the defendants.

As part of the LBO transaction, Hellas issued convertible preferred equity certificates (the "certificates") to the defendants. An equivalent number of certificates were issued to Hellas by Hellas I—the direct subsidiary of Hellas and direct parent of Hellas II—and by Hellas II to Hellas I. 

Unable to sell Hellas II at an acceptable price, the defendants instead orchestrated a multistep "debt refinancing" transaction in December 2006 that involved the issuance of new debt as well as a series of certificate redemption payments and transfers. Among other things, the transaction involved: (i) the issuance by Hellas II of euro-denominated subordinated notes with a face value of €960 million, as well as dollar-denominated subordinated notes with a face value of $275 million; (ii) the transfer by Hellas II of approximately €1.57 billion to its parent, Hellas I, of which approximately €973.7 million was paid to redeem certificates issued by Hellas II; (iii) a €973.7 million payment by Hellas I to Hellas to redeem certificates issued by Hellas I; and (iv) a corresponding €973.7 million payment by Hellas to the defendants to redeem certificates issued by it.

In 2009, Hellas II began considering a potential restructuring of its capital structure. To effectuate a restructuring, Hellas II migrated its center of main interests ("COMI") from Luxembourg to the U.K. in August 2009, moving its headquarters and operating offices to London. On November 26, 2009, the English High Court of Justice approved a petition to place Hellas II into administration in England and appointed joint administrators. However, on December 1, 2011, the High Court discharged the administrators and ruled that Hellas II should instead be wound up through a compulsory liquidation to maximize recoveries for unsecured creditors, who were dissatisfied with the administrators' efforts to restructure the company.

Hellas II's liquidators filed a chapter 15 petition with the U.S. Bankruptcy Court for the Southern District of New York on February 16, 2012, seeking recognition of the company's U.K. liquidation proceeding. The liquidators also requested an injunction preventing the continuation of certain lawsuits pending against Hellas II in New York state court. The bankruptcy court entered an order granting recognition of the U.K. liquidation as a foreign main proceeding under chapter 15 on March 14, 2012.

Hellas II's liquidators commenced an adversary proceeding against the defendants in the bankruptcy court on March 13, 2014. In the complaint, the liquidators sought, among other things, to avoid the December 2006 transfer of €1.57 billion from Hellas II to Hellas I, as well as the subsequent transfer to the defendants as actual or constructive fraudulent transfers.

The defendants moved to dismiss the complaint on several grounds. Among other things, they argued that the count of the complaint stating a cause of action for constructive fraud under the NYDCL should be dismissed because: (i) under choice-of-law principles, (a) the laws of Luxembourg and the U.K., where the challenged transfers occurred, conflict with the NYDCL because the former do not permit avoidance of transfers that are constructively fraudulent (i.e., transfers made by an insolvent entity in exchange for less than reasonably equivalent value), as distinguished from transfers made with the intent to defraud creditors, and (b) Luxembourg, the U.K., or both have a greater interest than New York in applying their laws to the liquidators' constructive fraud claim; (ii) the liquidators lack standing to seek avoidance of the transfers on behalf of creditors; and (iii) the NYDCL cannot be applied extraterritorially to avoid a foreign transaction lacking a close nexus to New York.

The Bankruptcy Court's Ruling

The bankruptcy court ruled that the liquidator's constructive fraud claim must be dismissed under choice-of-law principles because the laws of Luxembourg and the U.K. conflict with the NYDCL, and either Luxembourg or the U.K. has a greater interest than New York in having its law applied to the claim. Initially, the court examined the applicable laws.

Under sections 273, 274, 275, and 277 of the NYDCL, the court explained, "a transfer made without fair consideration constitutes a fraudulent conveyance, regardless of the intent of the transferor" (citing Sharp Int'l Corp. v. State St. Bank & Trust Co. (In re Sharp Int'l Corp.), 403 F.3d 43, 53 (2d Cir. 2005)). By contrast, the U.K. and Luxembourg equivalents to the NYDCL require proof of some degree of purpose or intent. Section 423(3) of the U.K. Insolvency Act requires a creditor to prove that the "actual subjective purpose" of the transferor in entering into the transaction was to: "(a) put[] assets beyond the reach of a person who is making, or may at some time make, a claim against him, or (b) . . . otherwise prejudic[e] the interests of such a person in relation to the claim which he is making or may make." Similarly, article 1167 of the Luxembourg Civil Code requires a plaintiff-creditor to prove the transferor's "actual intent to defraud."

According to the Hellas court, "[s]ince other causes of action under the NYDCL require a showing of 'an intent to defraud,' these foreign laws are clearly different from the constructive fraudulent transfer claim asserted in Count II of the Complaint."

Because the court had identified an "actual conflict" among the fraudulent conveyance laws concerned, it then applied the "interest analysis" under New York choice-of-law rules. This analysis, the court explained, requires that "the law of the jurisdiction having the greatest interest in the litigation will be applied and . . . the [only] facts or contacts which obtain significance in defining State interests are those which relate to the purpose of the particular law in conflict" (citing Geron v. Seyfarth Shaw LLP (In re Thelen LLP), 736 F.3d 213, 219 (2d Cir. 2013)). It further noted that "given that fraudulent conveyance laws are 'conduct regulating,' the law of the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in regulating behavior within its borders" (citing Lyman Commerce Solutions, Inc. v. Lung, 2014 BL 32304, at *3 (S.D.N.Y. Feb. 6, 2014)).

The liquidators argued that New York had the greatest interest in seeing its law applied to their constructive fraud claim because: (i) more notes issued as part of the certificate redemptions were held by U.S. custodians than Luxembourg custodians; (ii) the documentation governing the dollar-denominated notes was governed by New York law; (iii) the notes were aggressively marketed and sold to investors in New York and elsewhere in the U.S.; and (iv) a greater portion of the redemption proceeds was ultimately distributed in New York than in Luxembourg.

The defendants countered that Luxembourg had a superior interest in seeing its laws applied to the constructive fraud claim because: (i) the "conveyances" at issue were the redemptions, rather than the subsequent sale of notes; (ii) the "principal steps" of the redemptions were carried out in Luxembourg by Hellas entities formed under Luxembourg law and located in Luxembourg; (iii) Hellas II's principal place of business at the time of the redemptions was located in Luxembourg; (iv) the certificates were redeemed by Luxembourg-based Hellas entities, and each of the redemption agreements documenting those transactions was governed by Luxembourg law; and (v) the corporate resolutions authorizing the redemptions were adopted by Hellas, a Luxembourg entity, in its capacity as the "sole manager and general partner" of Hellas II.

On balance, the court concluded that Luxembourg appeared to have a greater interest than New York. The court explained that the "allegedly wrongful conduct ccurred more substantially in Luxembourg, whereas the alleged injury occurred more substantially in New York."

However, the court emphasized, the U.K. might have a countervailing interest pursuant to the European Union's Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings (the "EU Insolvency Regulation"). Article 4 of the EU Insolvency Regulation provides that the law of a debtor's COMI "continues to govern aspects of that entity's bankruptcy throughout the [European Union], including the choice of which avoidance law will control." This provision, the court wrote, "thus establishes a default rule that the law of the debtor's COMI governs the avoidance of antecedent transactions."

Acknowledging that there is conflicting authority on the point, the court declined to decide whether Luxembourg or the U.K.—the situs of Hellas II's COMI when it was placed into liquidation—had a greater interest in applying its laws to the liquidators' constructive fraud claim. It ruled that eitherLuxembourg or U.K. law applies to the claim, but not New York law. Because the liquidators pleaded this claim only under New York law, the court held that it must be dismissed.

The court also ruled that the constructive fraud claim must be dismissed because the liquidators lacked standing to assert the claims under either U.K. law or the NYDCL on behalf of creditors. It declined, however, to decide whether the liquidators had "standing to assert avoidance claims under applicable state or foreign law pursuant to section 1521(a)(7) without invoking section 544 to provide such standing."

Section 1521(a)(7) of the Bankruptcy Code authorizes a U.S. bankruptcy court, "where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors," to grant "any appropriate relief, including . . . relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a)" (emphasis added).

Section 544(b) authorizes a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") to avoid transfers made, or obligations incurred, by a debtor that are voidable by unsecured creditors under applicable nonbankruptcy law (such as the NYDCL). 

Relatedly, section 1523 of the Bankruptcy Code provides that, upon recognition of a foreign proceeding, a foreign representative has "standing in a case concerning the debtor under another chapter of this title to initiate actions under sections 522, 544, 545, 547, 548, 550, 553, and 724(a)."

Taken together, these provisions mean that a foreign representative in a chapter 15 case is precluded from seeking to avoid a transfer that could be avoided under the sections enumerated above without first commencing a case with respect to the debtor under another chapter of the Bankruptcy Code (e.g., chapter 7, 11, or perhaps 13). See 8 Collier on Bankruptcy ¶ 1521.02 (16th ed. 2015). However, some courts have held that section 1521(a)(7)'s restrictions on a foreign representative's use of certain provisions of the Bankruptcy Code, such as section 544, do not necessarily bar a foreign representative from asserting an avoidance claim under applicable foreign law. See, e.g., Fogerty v. Petroquest Resources, Inc. (In re Condor Ins. Ltd.), 601 F.3d 319, 322–29 (5th Cir. 2010).

The bankruptcy court in Hellas skirted the issue. According to the court, it was not necessary to decide whether the liquidators had standing to assert such claims without relying on section 544 because "the Court finds that the Plaintiffs fail to establish that they have standing under the applicable New York and U.K. laws." Moreover, because it dismissed the fraudulent transfer counts of the complaint on standing and/or choice-of-law grounds, the court declined to resolve whether the NYDCL could be afforded extraterritorial effect.

Outlook

Hellas is not a positive development for the representatives of foreign debtors attempting by means of a chapter 15 filing to use U.S. bankruptcy avoidance powers to avoid pre-bankruptcy transfers or obligations. U.S. federal and state fraudulent transfer laws are much more favorable to parties seeking avoidance than the laws of other countries because, among other reasons, U.S. laws provide a mechanism for avoiding constructively fraudulent transfers in addition to transfers made with the intent to defraud, which is far more difficult to prove.

Even if the facts in Hellas had been different and the court had not concluded that the constructive fraud claim must be dismissed under choice-of-law principles, its ruling that the liquidators lacked standing to prosecute claims belonging to creditors under the NYDCL (for both actual and constructive fraud) was a fatal blow to the liquidators' litigation strategy. However, the court did suggest a possible alternative. Although it dismissed the fraudulent transfer counts of the liquidators' complaint with prejudice, the court did not decide "whether, on a motion for leave to amend the Complaint to assert fraudulent conveyance claims under U.K. or other foreign law, the Plaintiffs would have the requisite standing to assert such foreign law claims or the merits of such claims." Given the foreign laws involved, however, this would revive only the actual fraudulent transfer claim. In fact, the liquidators filed a motion on March 20, 2015, to amend their complaint to add fraudulent conveyance claims under U.K. and Luxembourg law.

Provided Hellas II has U.S. assets, the liquidators could also file a chapter 7 or chapter 11 case for the company in the U.S., thereby conferring the bankruptcy trustee or DIP with the power to assert actual and constructive fraudulent transfer claims under both sections 544 and 548 and eliminating the standing problem. However, choice-of-law principles would presumably preclude any constructive fraud claims against the defendants under these provisions as well. Moreover, even if they did not, the court would have to grapple with the thorny (and unsettled) issue of whether sections 544 and 548 can be enforced extraterritorially. Finally, on these facts, any cause of action under section 548 would be time-barred.