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Trustee May Pursue Overseas Fraudulent Transfers as Unjust Enrichment

Delaware, July 27, 2017 – The U.S. Bankruptcy Court for the District of Delaware recently granted in part and denied in part dismissal in favor of a defendant car manufacturer in a fraudulent transfer adversary proceeding brought by the Chapter 11 trustee in Emerald Capital Advisors Corp. ex rel. FAH Liquidating Trust v. Bayerische Motoren Werke Aktiengesellschaft (“BMW”) (In re FAH Liquidating Corp.).

Emerald Capital Advisors Corp., in its capacity as trustee for FAH Liquidating Trust, filed a complaint in which it sought to avoid, recover, and have turned over alleged constructively fraudulent transfers in the total amount of $32,579,798.87 under the Bankruptcy Code Sections 542, 544, 548, and 550. The Trustee also sought recovery under common law principles of unjust enrichment. BMW moved to dismiss the complaint for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6) made applicable by Federal Rule of Bankruptcy Procedure 7012(b). Further, BMW argued that the avoidance powers of Section 548 do not apply to the transfers because they were extraterritorial transactions, they occurred in Germany. The Trustee contended that the transfers were not extraterritorial because the transfers originated from the United States, by a Delaware corporation headquartered in California, using funds provided by U.S. taxpayers.

The Court found that the alleged transfers were extraterritorial because the centre of gravity for the transfers was Germany. The Court added that the most compelling facts showing domestic activity—that the transfers originated in the United States from a Delaware corporation—are insufficient to overcome the primarily foreign nature of the agreements. The Court next adopted the reasoning of Judge Gerber in his decision in Weisfelner v. Blavatnik (In re Lyondell), 543 B.R. 127 (Bankr. S.D.N.Y. 2016), where he held that “Congress’ intent was to extend the scope of section 548 to cover extraterritorial conduct.” Lyondell, 543 B.R. at 148. The Court concluded that transactions occurring predominately outside the United States may nonetheless be subject to the trustee’s power to avoid fraudulent transfers under the United States Bankruptcy Code. In doing so, the Court sided with a growing number of courts reaching a similar conclusion and allowed the trustee to proceed with its fraudulent transfer claim against BMW. The court, however, reduced the amount at issue from approximately $32.5 million to $793,761.87 because the majority of the transfers at issue occurred outside the two-year fraudulent transfer period under 11 U.S.C. § 548. However, the Court allowed the liquidating trust’s alternative unjust enrichment claim to proceed in the full amount of nearly $32.5 million.


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