Lack of Specific Personal Jurisdiction over Candian Creditor

On May 16, 2007, the court issued its decision in the case of In re Thermoview Industries, Inc., ___ B.R. ___, 2007 WL 1447855 (Bkrtcy.W.D.Ky.)(Lloyd, J.), in which the Chapter 11 Trustee brought a preference action against a Canadian corporation. The court held that it lacked specific personal jurisdiction over the the Canadian creditor and dismissed the adversary proceeding.

The Canadian corporation had it principal place of business in Canada. It did not do business in the U.S. and it was not registered to do business in the U.S. The Debtors purchased items from the Creditor FOB the plant in Canada. The Trustee attempted to serve the Canadian Creditor by mail and further measures in compliance with the Hague Convention’s requirements. The Trustee contended that the fact that the Debtor’s purchased products FOB the creditor’s Canadian plant was sufficient to confer specific personal jurisdiction. The Trustee did not contend that there was “continuous and systemmatic” contacts with the forum as is required for general personal jurisdiction.

The court noted that in order to establish the existence of specific jurisdiction, a three part test must be met: 1. the defendant must purposely avail himself of the privilege of acting in the forum state or cause a consequence in the forum state, 2. the cause of action must arise from the defendant’s activities there, and 3. the acts of the defendant or consequences must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable. Southern Machines Co., Inc. v. Mohasco Industries, Inc., 401 F.2d 374, 381 (6th Cir. 1968). All three elements must be met to invoke personal jurisdiction. LAK, Inc. v. Deercreek Enterprices, 885 F.2d, 1293, 1303 (6th Cir.1989).

As to meeting element number one, the court noted the Sixth Circuit Court of Appeal’s preference for the “stream of commerce plus” approach in analyzing whether a defendant purposely avails itself of the privilege of acting in the forum state. Under this theory, the placement of a product into the stream of commerce, without more, is not an act of the defendant purposely directed toward the forum State.

The creditor sought dismissal of the complain based on lack of personal jurisdiction and insufficient service of process. The court noted that the record before the court showed that creditor was not registered to do business in the U.S. and that it in fact did not do business in the U.S. The court found merit in the creditor’s arguments and dismissed the preference adversary proceeding

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Avoided Preference Repaid Prepetition– Trustee Can’t Recover

Judge Hyman’s recent decision in In re Sawran, __ B.R. ___, 2007 WL 101841 (Bkrtcy. S.D. Fla.) presents an analysis of the common fact pattern. If a debtor made a prepetition preferential payment to an initial transferee, but the initial transferee or immediate transferee repays the involved amount to the debtor prepetition, may the trustee in bankruptcy still recover the preference?

The Sawran case presented a situation where the trustee obtained a judgment to avoid a preferential transfer under section 547. The trustee then filed an action under section 550 to recover the amount of the avoided transfer from an immediate transferee of the initial transferee.

The Court began its analysis with a review of section 550(d) which provides that a trustee is only entitled to a single recovery under 550(a)–the single satisfaction rule. That is, the trustee cannot recover from the various transferees more than the actual amount avoided. The Court further pointed out that the avoidance of a voidable transfer and the recovery from the transferee are distinct from one another.

The Court held that a trustee is prohibited under section 550(d) from recovering the amount avoided from a transferee who has already returned to the estate that which was avoided. To allow the trustee to collect the amount would result in a windfall to the trustee that violates the single satisfaction rule of section 550(d).

The Court found an alternative basis for its holding pursuant to the use of the Court’s equitable powers under section 105(a) by finding that it had the power to grant the initial transferees an “equitable credit” even if there was no defense available under the provisions of the Code. The initial transferees were innocent of wrongdoing and deserved protection to the extent that they repaid the involved amount. The equitable credit prevented the estate from receiving a windfall.
The Court noted that the Court’s equitable powers under section 105(a) are also used in other contexts to prevent a trustee from being able to recover from a party who is innocent of wrongdoing and deserves protection, such as when the initial recipient is a “mere conduit” of funds and therefore not an “initial transferee” under section 550(a)(1).

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983