In re Morse Tool, Inc.
| Citation | 108 BR 384 |
| Decision Date | 22 December 1989 |
| Docket Number | Adv. No. 87-1303-CJK.,Bankruptcy No. 87-10588-CJK |
| Parties | In re MORSE TOOL, INC., Debtor. David FERRARI, Trustee of Morse Tool, Inc., Plaintiff, v. BARCLAYS BUSINESS CREDIT, INC., Defendant. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts |
Gene Landy, Mark Berman, Boston, Mass., for trustee.
Charles Bennett, Boston, Mass., for Barclays Business Credit, Inc.
Memorandum of Law on Plaintiff's Motion for Partial Summary Judgment Regarding Choice-of-Law
The Trustee and Barclays have filed cross-motions for summary judgment as to which state's law should govern the Trustee's fraudulent conveyance claim. The Trustee brings that claim pursuant to his power under 11 U.S.C. § 544(b) to avoid transfers and obligations that are voidable under "applicable law," which the Trustee claims is Massachusetts law and Barclays claims is Connecticut law. In order to settle this dispute, a bankruptcy court would normally first determine whose choice-of-law rules to apply: its own (the "federal common law") or those of the state in which it sits. But the matter is not settled1 and need not be settled to resolve this dispute. Whether the Court applies the federal common law or the law of Massachusetts, the result will be the same: it will apply the "multiple-factor, `interest analysis' or `most significant relationship' analysis exemplified by the Restatement (Second) of Conflict of Laws (1971)." Bi-Rite Enterprises, Inc. v. Bruce Miner Co., Inc., 757 F.2d 440, at 442-443 (1st Cir.1985) ().2
Under the approach of the second Restatement, the Court must apply the law of the state that has the most significant relationship to the parties, the transfer, and the issue. Courts are to determine which state has the most significant relationship to an issue3 by evaluating the significance of various contacts according to certain choice-influencing considerations:
(a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied.
Restatement (Second) of Conflict of Laws (1971) at § 6(2). See Bushkin Associates, Inc. v. Raytheon Co., 393 Mass. 622, 631-634, 473 N.E.2d 662 (1985).
This case has significant contacts with four states — Massachusetts, Michigan, New York, and Connecticut. The first three have adopted the Uniform Fraudulent Conveyance Act (UFCA)4; Connecticut has not, but instead provides a remedy for fraudulent conveyances in the form of Connecticut General Statutes, § 52-552.
Connecticut has two contacts with this case. The first is its contact with Barclays: Barclays is incorporated and conducts its business in Connecticut. The second is its contact with the allegedly fraudulent security agreement: Barclays and Morse Tool, Inc. agreed in their General Loan and Security Agreement of August 24, 1984, that Connecticut law would govern "this agreement and all transactions, assignments and transfers hereunder, and all the rights of all the parties" with respect to "validity, construction, enforcement and in all other respect." General Loan and Security Agreement, par. 23. It is on this latter contact — the contractual choice-of-law clause — that Barclays bases its argument that Connecticut law should govern.
The choice-of-law clause carries little weight in the context of this adversary proceeding. The parties to a contract can specify which forum's law will govern their contract, and courts often follow their choice because both parties to the contract, and therefore to the suit on the contract, have agreed upon the choice. But this is a fraudulent conveyance action, not a contract action. And one of the parties to this suit — the Trustee, who stands in the shoes of the creditors — was not a party to the contract. The parties to a contractual conveyance cannot in their contract make a choice-of-law that binds creditors who allege that they were defrauded by the conveyance. The choice-of-law binds only parties to the contract, not the Trustee or the creditors.
Neither the Restatement (Second) of Conflict of Laws (1971) nor Desmond v. Moffie, 375 F.2d 742 (1st Cir.1967) requires a different result. Section 187 of the Restatement states that, under certain circumstances, "the law of the state chosen by the parties to govern their contractual rights and duties will be applied." Restatement (Second), § 187(1) and (2) (emphasis added). This section, on which Barclays relies, plainly applies only to suits between parties to a contract regarding their rights and duties under the contract. And it applies only where the parties to the suit have chosen which state's law will govern. Neither of these circumstances applies here.
Nonetheless, citing Desmond v. Moffie, supra, Barclays contends that a fraudulent conveyance action sounds in contract. Desmond does not stand for that proposition. It holds that for purposes of deciding which statute of limitations the Massachusetts courts would apply to a fraudulent conveyance action, the fraudulent conveyance action should be treated as a contract action, not as a tort action, because its essential basis is an indebtedness. Desmond v. Moffie, 375 F.2d at 743-744. This holding does not require that the courts treat fraudulent conveyance actions as sounding in contract for choice-of-law purposes. For statute of limitations purposes, the fraudulent conveyance had to be categorized as either a tort or a contract; there was no middle ground because the Commonwealth had no statute of limitations applying specifically to fraudulent conveyances. The choice-of-law rules, on the other hand, permit more flexibility. In fact, they require the court to consider, among other things, "the basic policies underlying the particular field of law." Restatement (Second), § 6(2)(f) (emphasis added).
A fraudulent conveyance action is not easily categorized. It usually, if not always, arises as an ancillary action to a suit on a debt. The debt can be and often is contractual, but it can also derive from any number of other sources, such as from a tort or property judgment or from a tax statute.5 Therefore, the underlying basis of a fraudulent conveyance suit varies and is not necessarily contractual.
Accordingly, the focus here should be not so much on the debt to which the fraudulent conveyance action is ancillary as on the fraudulent conveyance action itself. A fraudulent conveyance action is one in which creditors seek to avoid a conveyance of assets from the debtor to a transferee. The crucial parties in the suit, the creditors and the transferee, usually have not dealt directly with each other. The only things that they have in common are dealings with the same debtor and claims of entitlement to certain asset of that debtor. From these observations follow two conclusions.
First, a fraudulent conveyance suit is not a suit on a contract. The conveyance sometimes occurs pursuant to a contract, as did the alleged fraudulent conveyance in this case, but it need not. And even when it does, the contract is not between the parties to the suit, but between two parties whom the plaintiff (a creditor or a bankruptcy trustee) alleges executed the contract for the very purpose of defrauding creditors. In view of this, it makes no sense to follow the choice-of-law clause in the agreement between Barclays and the Debtor. That would be tantamount to giving the defendant unilateral control over the choice-of-law, which clearly would violate the requirements of due process.
Second, because the creditors and the transferee have had no direct dealings with each other, but have both dealt with the debtor and the debtor's assets,6 it would be reasonable to look to the site of the (allegedly) fraudulently conveyed assets to supply the applicable law. This would promote certainty, predictability, and the protection of justified expectations. The creditors of Morse Tool would have had little cause to suspect that the collectability of their claims would be subject to the law of Connecticut because Morse Tool had no assets or operations there. Likewise, Barclays would have had little cause to suspect that its security interest would be subject to the fraudulent conveyance law of any one of the various jurisdictions in which Morse Tool's creditors are located. Both would have been justified in looking to the law of the state in which the Debtor and its assets were located, simply because the Debtor and especially the transferred assets are the known common foci in a fraudulent conveyance action.
Although the site of the conveyed property will not always and necessarily be the state with the most significant relationship to a fraudulent conveyance action, it often will be, just by the nature of the cause of action. The authorities accordingly have shown a preference for applying the law of the site of the conveyed property. See 4 Collier on Bankruptcy par. 544.02, at 544-13 to 544-14 and fn. 17 (15th ed. 1989) and cases cited therein; In re Kaiser Steel Corporation, 87 B.R. 154 (Bankr.D.Colo.1988) . See also Uniform Commercial Code § 9-103(1)(b) (...
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