Article courtesy of Jeff Dutson (King & Spalding)
Friedman v. Wellspring Capital Management, 651 B.R. 509 (Bankr. D.S.C. 2023).
A Trustee for creditors’ liquidation trust in a Chapter 11 case brought an adversary proceeding asserting fraudulent conveyance claims against equity holders of the debtor. The proceeding sought to avoid transfer of funds in the form of dividends. The funds were originally sourced by the debtor from loan agreements entered into seven years before the debtor filed Chapter 11 bankruptcy cases in South Carolina.
In this dispute, the U.S. Bankruptcy Court grappled with the issue of whether a fraudulent conveyance claim should be characterized as a tort claim. Whether a fraudulent conveyance claim should be characterized as a tort action is disputed among American jurisdictions. Under South Carolina’s conflict-of-law rules, the parties are given some latitude in selecting the law that governs their dealings. If a contractual choice of law provision is not applicable, South Carolina follows the doctrines of lex loci delicti and lex loci contractu in interpreting and giving effect to contracts. Under these doctrines, the characterization of a claim is determined by reference to the law of the forum. South Carolina law states that the law governing a tort claim is the location where the injury occurred, not the domicile of the plaintiff. For cases in which the injury occurred in multiple states, South Carolina law provides that the injury occurred where the defendant resides.
The court found there was no compelling evidence that the claims were governed by choice-of-law provisions. While the original loan agreements contained choice-of-law provisions, the court found the equity holders at issue had not met the burden to be considered third-party beneficiaries of these agreements. The court proceeded with a conflict-of-law analysis. The court ruled that the injury in this case is the creditors remaining unpaid. Since the unpaid creditors reside in multiple states, the court reasoned that the place of injury is where the debtor resided, which was South Carolina. Accordingly, the court ruled that South Carolina is the applicable law under the Trustee’s claims against the equity holders.