Restructuring and Insolvency Bulletin Issue 2 - 2017: Offshore and off limits: SDNY Bankruptcy Court finds foreign transfer unavoidable amid shaping split

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Can foreign transfers of a U.S. debtor be avoided under the Bankruptcy Code’s avoidance provisions? While the Bankruptcy Court for the Southern District of New York recently found that the answer is no, that court, as well as other bankruptcy courts, remain split on the answer. 

In In re Ampal-Am. Israel Corp., 562 B.R. 601 (Bankr. S.D.N.Y. 2017), a chapter 7 trustee (the “Trustee”) filed an avoidance action, seeking to avoid and recover a single prepetition transfer made by the debtor to an Israeli law firm (the “Firm”). The transfer in question was the payment of legal fees to the Firm within 90 days of the debtor’s bankruptcy filing. The services at issue were rendered entirely in Israel and the debtor, although incorporated under New York law, had its operations, offices, and books located in Israel.

Since there was no dispute that the Trustee proved a prima facie case for avoidance under section 547 of the Bankruptcy Code, the only question before the court was whether the presumption against extraterritoriality bars the Trustee from avoiding the transfer. This presumption provides that absent a clear intent to the contrary, legislation of Congress is meant to apply only within the territorial jurisdiction of the U.S.

As other courts before it, the court employed a two-step test to examine whether the presumption against extraterritoriality foreclosed the claim: first, does the statute give a clear, affirmative indication that it applies extraterritorially; and second, if it does not, whether the conduct “relevant to the statute’s focus” occurred in the U.S. If the court’s answer to the second question is in the affirmative, then the application of the statute would be viewed as domestic, “even if other conduct occurred abroad.”

Ampal answered both steps in the negative. First, the court found that section 547 of the Bankruptcy Code does not apply extraterritorially. Second, the court found that, based on the facts before it, the transfer in question was not “domestic.” In this last finding, the court relied on evidence showing that the transfer occurred in Israel between two Israeli-based entities. The court further found that the legal services rendered by the Firm did not have sufficient connections to the U.S. to be considered “domestic.” Considering these factors, the court concluded that “[t]he Transfer was not domestic, and hence, cannot be avoided.”

While Ampals holding builds on a long line of authorities, courts remain split on the extraterritoriality of avoidance provisions, both within and outside the Southern District.  Recently, the Delaware Bankruptcy Court found persuasive the contrary holding of In re Lyondell Chem. Co., 543 B.R. 127 (Bankr. S.D.N.Y. 2016), where the court found that Congress intended to extend the scope of section 548 to cover extraterritorial conduct. In re Fah Liquidating Corp., No. 13-13087(KG), 2017 WL 2559892, at *4 (Bankr. D. Del. June 13, 2017). The Ampal court has explained that for purposes of the presumption against extraterritoriality, there is no distinction between sections 547(b) and 548 because “[b]oth permit a trustee to ‘avoid any transfer of an interest of the debtor in property,’” and section 541(a) defines property of the estate to include various categories of property “wherever located.” Unlike in Ampal, the Lyondell court answered the first step of the above test in the affirmative, finding that section 548 applies extraterritorially. It was therefore not required to turn to the second step.

The recent adoption of In re Lyondell by the Delaware Bankruptcy Court in Fah Liquidating may signal a future shift in the way courts analyze the Bankruptcy Code’s avoidance provisions in connection with extraterritorial transfers. Until then, whether foreign transfers are unavoidable in the Southern District of New York and elsewhere, is uncertain.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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