Opinion ID: 625820
Heading Depth: 1
Heading Rank: 4

Heading: Whether New York or Georgia Fraudulent Transfer Law Applies

Text: The parties disagree over what constructive fraudulent transfer law applies to this case. MCAR argues that New York law applies, but Lenders assert that Georgia law applies. The district court found that Georgia law applies. For the reasons stated below, the Court reverses and remands the case to the district court for the application of New York law. This circuit has not determined whether the independent judgment test or the forum state's choice-of-law rules should be applied in bankruptcy. Woods-Tucker Leasing Corp. of Ga. v. Hutcheson-Ingram Dev. Co., 642 F.2d 744, 748 (1981). Avoidance actions pursuant to 11 U.S.C. § 544(b) sound in tort. Tow v. Rafizadeh (In re Cyrus II P'ship), 413 B.R. 609, 619 (Bankr.S.D.Tex.2008). In tort cases, Texas courts apply the `most significant relationship' test as enunciated in Sections 6 and 145 of the Restatement (Second) of Conflicts. Gutierrez v. Collins, 583 S.W.2d 312, 318 (1979). Because the independent judgment test is `essentially synonymous with the most significant relationship approach adopted by' the Restatement (Second) Conflict of Laws Tow, 413 B.R. at 615 (quoting Kaiser Steel Corp. v. Jacobs (In re Kaiser Steel Corp. ), 87 B.R. 154, 158 (Bankr.D.Colo. 1988)), the Court need not resolve which choice-of-law test applies here. In either case, Sections 6 and 145 [2] of the Restatement (Second) of Conflict of Laws (the Restatement) provide the appropriate analytical framework. The Court will thus employ those sections of the Restatement to determine whether New York or Georgia law applies here. The Court emphasizes that both New York and Georgia have sufficient contacts with this issue for their constructive fraudulent transfer laws to be properly considered for application in this case. The Court will begin by evaluating the § 145 contacts because those contacts provide the backdrop for the § 6 analysis. As explained below, the specific facts of this case minimize the relevance of the § 145 contacts in the choice-of-law analysis. Significantly, the injury in this case is intangible. Not only does this make it very difficult to assign a meaningful location to the injury, the commentary to the Restatement suggests that when the injury is intangible the importance of this factor is severely diminished. Cf. Restatement (Second) of Conflict of Laws § 145 cmt. e (1971). Similarly, the facts of this case make it nearly impossible to define what conduct caused the injury and the place where that conduct occurred. Here, it is not necessary to definitively identify or locate the relevant conduct because constructive fraudulent transfer laws are more concerned with helping injured parties than deterring conduct. Cf. Restatement (Second) of Conflict of Laws § 145 cmt. c (1971). Because the record indicates that there are relevant parties in both New York and Georgia, this factor does not favor either state. Finally, there is no one location where the relationship of the parties is clearly centered, and this factor is not particularly relevant on these facts. Ultimately, even if the Court were to determine that the § 145 contacts slightly favor the application of Georgia law, these contacts are of limited importance in this case. Now the Court turns to the § 6 analysis which strongly favors the application of New York law. The Court conducts this analysis mindful of the basic policies underlying the fraudulent transfer laws, which, as noted in the commentary to the Restatement, [are] of particular importance in situations where the policies of the interested states are largely the same but where there are nevertheless minor differences between their relevant local law rules. In such instances, there is good reason for the court to apply the local law of that state which will best achieve the basic policy, or policies, underlying the particular field of law involved. Restatement (Second) of Conflict of Laws § 6 cmt. h (1971). Here, the basic policy at issue is the protection of creditors from fraudulent transfers. As it pertains to guarantees, New York's law follows the majority approach [3] which treats certain guarantees as transfers under its fraudulent transfer law. On the other hand, Georgia's now-repealed statute does not treat guarantees as transfers. When the entire corpus of fraudulent transfer law is considered, the differences between these two laws are minor. This factor favors the application of the law that best achieves the basic policy underlying this particular field of law. In this instance, the choice is clear. New York's law promotes the underlying policy of protecting creditors from fraudulent transfers regardless of the specific form of those transfers. On the other hand, Georgia's now-repealed statute exempts transactions that most states identify as fraudulent transfers merely because they were structured as guarantees. Thus, the basic creditor protection policy underlying fraudulent transfer law will be better served by the application of New York law in this case. Turning to the needs of the interstate system, [c]hoice-of-law rules, among other things, should seek to further harmonious relations between states and to facilitate commercial intercourse between them. Restatement (Second) of Conflict of Laws § 6 cmt. d (1971). Here, the needs of the interstate system are best met by the application of New York's law which reflects the approach taken by an overwhelming majority of the states. Similarly, an application of New York law will promote the Restatement's goal of uniformity of result. While the application of Georgia's now-repealed statute would benefit Lenders, none of them are citizens of Georgia. The fact that in this case Georgia's citizens would not benefit from the application of Georgia law diminishes Georgia's interest. Also, Georgia has replaced its repealed statute with one that treats guarantees as transfers for the purposes of fraudulent transfer law. Thus, Georgia has little interest in applying its now-repealed statute to this case where its citizens have nothing to gain from the application of that statute. Even assuming that the § 145 contacts slightly favor the application of Georgia law, Georgia has little interest in applying its now-repealed, minority approach statute when its citizens would not benefit from its application. While none of the § 6 factors support the application of Georgia law, several favor the application of New York law. Even when the § 6 analysis is conducted against a backdrop that assumes that § 145 weakly favors Georgia law, § 6 completely favors the application of New York law in this case. We find that the district court erred in applying the now-repealed Georgia law rather than New York law to the avoidance claim. Accordingly, the judgment dismissing MCAR's claim is vacated and remanded for further proceedings consistent with this opinion.