A recent bankruptcy case provides some good news to foreign banks that are active corporate lenders in the United States.

The federal appeals court in New York has made it tougher for bankruptcy trustees to recover funds used to repay loans to foreign banks. The court found that the "avoidance" provisions of the U.S. Bankruptcy Code do not always apply to foreign banks.

Avoidance allows a court-appointed receiver to recoup funds paid out during a dying company's final 90 days. The only exception is for payments made in the normal course of business.

The intent of the law is to prevent debtors who are nearing bankruptcy from using their last resources to pay friends and others who are not secured creditors.

But the U.S. Court of Appeals for the Second Circuit ruled Aug. 21 that this law may not apply once the funds leave the United States. Rather, Circuit Judge Richard J. Cardamone said, the federal courts should defer to the avoidance law in the country where the foreign bank is headquartered.

"Deference to foreign insolvency proceedings will, in many cases, facilitate equitable, orderly, and systematic distribution of the debtor's assets," Judge Cardamone wrote.

The decision, in the case In Re: Maxwell Communication Corp., means that the London operations of National Westminster Bank, Barclays Bank, and Societe Generale do not have to return more than $100 million to the estate of the late Robert Maxwell.

Banking lawyers hailed the ruling. "This is a very important decision," said Lewis Goodman, a partner at the Washington law firm of Shaw, Pittman, Potts & Trowbridge. "The court was deciding which law should apply and it decided that English law should apply, even though it was a U.S. bankruptcy."

"This should provide comfort to foreign lenders," said Thomas C. Rice, a partner at the New York law firm of Simpson, Thacher & Bartlett, which represented Barclays. The court has provided these institutions with some protection from receivers, he said.

Both lawyers cautioned that the ruling does not apply to all foreign banks. Rather, the ruling gives judges discretion to exempt foreign banks if their home country's laws conflict with the U.S. bankruptcy code.

The case stems from the death of Mr. Maxwell, the colorful book publisher, owner of several reference periodicals and one-time owner of the New York Daily News.

Mr. Maxwell's company was based in London, but 80% of its assets were in the United States. The company made a series of cash transfers in fall 1991 to repay some debt. This included $30 million to Barclays, $60 million to Natwest, and $10 million to Societe Generale.

The company deposited cash from the sale of several U.S. businesses in the New York branches of Natwest and Citicorp, then transferred it to their London branches. Maxwell Communications then used the proceeds to pay off the three bank loans.

But Maxwell Communications failed in December 1991, and bankruptcy proceedings began in the United States and London. The courts worked together to create a global plan to liquidate the company and pay creditors.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.