Should the Scope of the Safe Harbor for a Constructive Trust Claim Differ Depending on Whether the Claim Is Based on State Law or Foreign Law?

In connection with the Fairfield Sentry Chapter 15 case, the U.S. Bankruptcy Court for the Southern District of New York recently denied motions to dismiss constructive trust claims asserted under the laws of the British Virgin Islands even though the “Safe Harbor” under Sections 546(e) and 561(d) of the U.S. Bankruptcy Code would have barred the claims if the plaintiffs had asserted the claims under U.S. state law. The Bankruptcy Court determined untested issues regarding the scope of the Supremacy Clause of the U.S. Constitution and held that congressional intent to apply the Safe Harbor to preempt non-avoidance foreign law claims must be explicit (which it is not, under Section 561(d)), whereas for U.S. state law claims, such intent may be implied. The result is anomalous in that the Safe Harbor would bar certain claims (such as constructive trust claims) if asserted under U.S. state law but would not bar similar claims asserted under foreign law. This anomaly will lead to a proliferation of litigation as enterprising practitioners seek to extend the logic of the Bankruptcy Court’s ruling to other claims (such as unjust enrichment) and/or dress up avoidance claims as foreign law non-avoidance claims in order to benefit from the Bankruptcy Court’s ruling.

This piece was published in the New York Law Journal on April 7, 2021.  Click here to view.