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Key Creditors' Rights Decision

By Michael L. Cook and Alix S. Pustilnik

The Second Circuit handed down a key creditors' rights decision on April 1 in Sharp Int'l Corp. v. State Street Bank & Trust Co. (In re Sharp Int'l Corp. & Sharp Sales Corp.), 2005 U.S. App. LEXIS 5241(2d Cir. Apr. 1, 2005). The court affirmed the lower courts' finding that a secured lender was not liable for aiding and abetting management's breach of fiduciary duty, and not liable for receiving a $12.25 million loan repayment from a closely held borrower it correctly suspected of engaging in massive fraud. The decision limits the scope of a lender's duties to its borrower and other creditors. Absent the lender's participation in its borrower's fraud, the lender should have no liability on a fraudulent transfer theory or on any other basis, at least in New York, where Sharp arose.

The Role of State Fraudulent Transfer Law in Federal Bankruptcy Cases

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