Can § 547 of the Bankruptcy Code Be Used To Avoid Foreign Transaction? by Thomas R. Slome and Jessica G. Berman

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The Extraterritorial Application of Preference Laws

March 21, 2011

Publication Source: ABI Journal

Written By: Thomas R. Slome and Jessica G. Berman

There have been a number of multinational bankruptcy filings in recent years, including the mega cases In re Lehman Brothers Holdings Inc.,1 In re Quebecor World (USA) Inc.2 and In re Lyondell Chemical Company,3 where large corporations and dozens of their domestic and foreign affiliates have sought economic relief from the courts. As a consequence, there have been thousands of preference actions filed, and many more are sure to come. Many of these recent adversary proceedings involve foreign entities and ostensibly foreign transactions.

These preference actions raise the following issues: Does § 547 of the Bankruptcy Code apply extraterritorially, and if not, when is a potentially avoidable transaction extraterritorial? For example, can a payment by a foreign entity to another foreign entity occurring outside of the United States be avoided pursuant to § 547 simply because of a tangential connection to the United States?

This article examines this increasingly pertinent issue, which has arisen several times over the years, most importantly in Maxwell Communication Corp. v. Barclays Bank (In re Maxwell Communication Corp.) (Maxwell I), a case of first impression, which held that United States preference laws are not extraterritorial in their reach and where (1) a foreign debtor makes a preferential transfer to (2) a foreign transferee and (3) the transfer’s “center of gravity” is abroad, § 547 may not be used to avoid the transfer.4 The implications of this decision are significant for any transnational debtor groups who anticipate utilizing U.S. laws to avoid preferential transfers or foreign creditors with potential U.S. preference liability. Each side should review its tactical position in relation to Maxwell I and subsequent case law in order to best obtain or escape the application of U.S. preference laws.

Maxwell I

The Maxwell bankruptcy case arose as a consequence of the dramatic and untimely drowning death of Ian Robert Maxwell, the controlling owner of Maxwell Communications Corp. Plc (MCC), an English holding company with vast assets in the United States. Following Maxwell’s death, speculation arose as to the cause of his drowning. Even more shocking than Maxwell’s sudden death was the news that emerged in the succeeding weeks of the financial irregularities involving Maxwell and MCC.

Maxwell’s empire ultimately collapsed, leading MCC to file for chapter 11 protection with the Bankruptcy Court for the Southern District of New York. Following MCC’s filing, the company also filed for protection in England under the English Insolvency Act 1986. The U.S. and English proceedings were coordinated by a court-appointed examiner. The court approved a reorganization plan, which provided that all of MCC’s assets, both domestic and abroad, would be pooled together. In addition, MCC’s disclosure statement informed creditors of potential recoveries from MCC’s asset sales and causes of action, including adversary proceedings under U.S. preference laws.

The bankruptcy court’s Maxwell I decision involved three foreign-preference defendants, each of which provided credit facilities to MCC at their English bank branches. The source of the transferred funds at issue, in regard to two of the defendants, was a sale, which occurred in the U.S. in dollars, of MCC’s U.S. assets. However, in both of these cases, MCC concluded its transactions at its accounts in London. The last preference defendant’s 90-day transfers took place in London. However, unlike the first two preference defendants, MCC did not allege that the 90-day transfers to this defendant were made from funds originating from the sale of a U.S. asset.

Main Holding

The court’s analysis in Maxwell I was based on the Supreme Court’s holding in Equal Employment Opportunity Comm. v. Arabian American Oil Co. (Aramco),5 where the Court articulated what is referred to as a “clear statement” rule.6 In other words, the Court held that “legislation of Congress, unless a contrary intent appears [in the statutory text], is meant to apply only within the territorial jurisdiction of the United States.”7 This extraterritoriality rule of statutory construction is based on a question of “substantive law turning on whether, in enacting [§ 547], Congress asserted regulatory power over the” transactions at issue.8 In the Aramco decisions, the Court did not consider two other modes of statutory construction, whether (1) legislative history speaks to congressional intent for the statute at issue to have extraterritorial application, and (2) administrative agency decisions interpreting the relevant statute shed light on congressional intent.9 However, the Court did not overrule prior case law utilizing these forms of statutory construction.10 (see pdf for rest of article)

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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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