Facebook Twitter LinkedIn Email Share

Courts’ Decisions Vary on Extraterritoriality of U.S. Bankruptcy Law in Avoidance Actions

“It is a longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’”1


A number of cases involving avoidance actions have been brought against overseas defendants in recent years. Several legal doctrines apply in such circumstances, including the doctrines of international comity and extraterritoriality. This article focuses on extraterritoriality.2 Although the U.S. Supreme Court has articulated a seemingly simple test for extraterritoriality, implementation of that test in the bankruptcy context has not been straightforward. This article summarizes several recent decisions, which at times are difficult to reconcile.

Perhaps the Supreme Court anticipated this difficulty when it noted that “[i]t is a rare case … that lacks all contact with the territory of the United States. But the presumption of extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.”3

Weisfelner v. Blavatnick (In re Lyondell Chemical Co.). In Lyondell, the trustee of a litigation trust sought to avoid a prepetition shareholder distribution4 under Section 548 of the U.S. Bankruptcy Code.5 The defendant moved to dismiss, arguing the transfer was extraterritorial.6 Bankruptcy Judge Robert E. Gerber of the Southern District of New York recognized the presumption against the extraterritorial reach of U.S. law, which “serves to protect against unintended clashes between our laws and those of other nations which could result in international discord.”7 Gerber observed:

Courts perform a two-step inquiry determining whether to apply the presumption against extraterritorial reach of a statute in a specific factual setting. First, a court must determine if the presumption applies at all—by ‘identifying the conduct proscribed or regulated by the particular legislation in question,’ and considering whether that conduct ‘occurred outside of the borders of the U.S.’ ‘Second, if the presumption is implicated, an inquiry into Congressional intent must be undertaken to determine if Congress intended to extend the coverage of the relevant statute to such extraterritorial conduct.’8

In considering the first step, Gerber used a “flexible” approach in which courts apply a “center of gravity” test to “‘look at the facts of a case to determine whether they have a center of gravity outside the United States.’”9 This allows courts to consider “‘all component events of the transfer[],’ such as ‘whether the participants, acts, targets, and effects involved in the transaction at issue are primarily foreign or primarily domestic.’”10

The trustee argued the center of gravity of the transfer was domestic because some of the decisions to make it were made in the United States and because it was initiated at the direction of the individual who controlled the debtors from New York.11 Gerber disagreed. He found the contacts to the United States to be “insufficient to overcome the substantially foreign nature” of the transfer.12 He concluded the transfer was made by a foreign entity to a foreign entity,13 without the funds passing through the United States.14

Gerber then considered the second step of the analysis, which is Congressional intent: “‘unless there is the affirmative intention of the Congress clearly expressed to give a statute extraterritorial effect,’ courts ‘must presume it is primarily concerned with domestic conditions.’ ‘When a statute gives no clear indication of an extraterritorial application, it has none.’”15 Gerber observed that Section 548 “does not contain any express language or indication that Congress intended the statute to apply extraterritorially.”16 He noted, however, that courts may consider “context,” including other provisions of the Bankruptcy Code, to determine whether Congress intended that Section 548 apply extraterritorially.17

The judge acknowledged a Bankruptcy Court’s in rem jurisdiction over all of a debtor’s property under 28 U.S.C. Section 1334 and Section 541 of the Bankruptcy Code. He examined the definition of “property of the estate” in Section 541(a) and the trustee’s authority to recover property for the benefit of the estate under Sections 544 and 548, noting the U.S. 4th Circuit Court of Appeals’ conclusion in French18 that Congress intended Section 548 to apply extraterritorially. He also discussed a scholarly examination of the subject. Gerber then held that Congress intended for Section 548 to have extraterritorial reach.19

Sherwood Inv. Overseas Ltd., Inc. v. Royal Bank of Scotland N.V. (In re Sherwood Inv. Overseas Ltd., Inc.).20 Later in 2016, the U.S. District Court for the Middle District of Florida addressed this issue. In Sherwood Inv., the court reviewed a Bankruptcy Court’s proposed order granting summary judgment in favor of the transferee of prepetition transfers from the debtor.21 The transferee argued, and the Bankruptcy Court agreed, that the presumption against extraterritoriality protected the defendant because the transfers occurred overseas.22

After noting the disagreement among the courts that have addressed the issue, the District Court observed that neither the language nor the legislative history of Sections 548 and 550 indicated a Congressional intent that they should apply to conduct occurring outside the United States.23 The court also noted the debtor’s failure to introduce evidence sufficient to overcome the presumption against extraterritoriality and rejected the debtor’s argument based on Section 541’s definition of “property of the estate,” which formed the basis for Gerber’s Lyondell decision, noting that the debtor failed to recognize the limitation imposed by Section 541(a)(3)’s reference to property recovered as a fraudulent transfer.24

Spizz v. Goldfarb Seligman & Co. (In re Ampal-American Israel Corp.).25 Bankruptcy Judge Stuart M. Bernstein of the Southern District of New York considered this issue in Ampal-American. Entering judgment in favor of a foreign defendant, he concluded that “Congress did not intend the avoidance provisions of the Bankruptcy Code to apply extraterritorially” and that the transfer occurred in Israel.26


 
As this discussion makes clear, the application of the extraterritoriality doctrine in the bankruptcy context is both fact-specific and difficult to predict.

 


Bernstein began by discussing the two-step approach outlined in Morrison.27 With respect to the first step—whether the presumption against extraterritoriality has been rebutted—he examined what he considered to be the two “most influential” pre-Morrison decisions on the extraterritorial reach of the Bankruptcy Code, Maxwell and French; he also considered the Madoff and Lyondell decisions. Bernstein followed Maxwell and U.S. District Judge Jed Rakoff’s Madoff decision, and concluded Section 547(b) does not apply extraterritorially.28

He agreed that “[p]roperty transferred to a third party prior to bankruptcy in payment of an antecedent debt is neither property of the estate nor property of the debtor at the time the bankruptcy case is commenced, the only two categories of property mentioned in” Section 541(a)(1).29 He also found that although certain sections of the Bankruptcy Code and the jurisdictional statutes “contain clear statements that they apply extraterritorially,” Section 547 does not.30

Bernstein then turned to the second step of the analysis—whether the focus of the statute requires its extraterritorial application.31 Agreeing with Lifland, he concluded that the focus of the Bankruptcy Code’s avoidance and recovery provisions “is the initial transfer that depletes the property that would have become property of the estate.”32 Because both parties to the initial transfer were located overseas and the transfer was effectuated using an overseas bank, Bernstein concluded that the transfer was not subject to avoidance under Section 547(b).33

Emerald Capital Advisors Corp. v. Bayerische Moteren Werke Aktiengesellschaft (In re FAH Liquidating Corp.).34 Five months later, Bankruptcy Judge Kevin Gross of the District of Delaware considered this issue. In FAH Liquidating, a post-confirmation trustee sought to avoid payments by an American debtor to a German company. The defendant moved to dismiss the trustee’s complaint for failure to state a claim, contending the payments were extraterritorial.35

Gross undertook the two-step Maxwell analysis, examining first the question of whether the transfers occurred within the United States. Using the center of gravity test, he held the complaint’s allegations showed the transfers and the agreements pursuant to which they were made were “primarily foreign” in nature, even though the transfers originated in the United States and the debtor was a domestic corporation.36 Having held that the transfers were extraterritorial, Gross turned to the issue of whether Section 548 was intended to apply extraterritorially. He recognized the split of authority on the issue but followed Gerber’s reasoning in Lyondell and held that Section 548 applied.37

LaMonica v. CEVA Group PLC (In re CIL Ltd.).38 Finally, Bankruptcy Judge James L. Garrity Jr. of the Southern District of New York issued a decision in which he considered whether the Bankruptcy Code’s avoidance and recovery provisions have extraterritorial reach. In CIL, Garrity reviewed the now familiar two-step approach and the cases applying it,39 and held that because “[n]othing in the language of sections 544, 548 and 550 of the Bankruptcy Code suggests that Congress intended those provisions to apply to foreign transfers,” it was necessary to “examine the ‘context, including surrounding provisions of the Bankruptcy Code, to determine whether Congress nevertheless intended that [those] section[s] apply extraterritorially.’”40 Garrity held that “property that is the subject of an avoidance action is not considered property of the estate until it is recovered”41 and that Congress did not clearly express an intention that avoidance actions apply extraterritorially.42

Garrity then considered whether Sections 548 and 550 should be applied extraterritorially under the facts before him. Because the transfer was between foreign entities and was accomplished outside of the United States by parties operating under U.K. law and because the relationship of the transfer to the United States was tenuous, Garrity concluded Sections 548 and 550 could not be used.43

Room for Argument

As this discussion makes clear, the application of the extraterritoriality doctrine in the bankruptcy context is both fact-specific and difficult to predict. Put simply, different courts have applied the doctrine differently. Presumably, greater predictability will emerge as cases progress to the courts of appeals. In the meantime, the extraterritoriality doctrine provides litigants with ample room for argument and, perhaps, for creative resolutions of the shared risk that comes from uncertainty.


  1. EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991) (quoting Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949)) (Aramco).
  2. For a helpful discussion on international comity, see Official Committee of Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(c)), 575 B.R. 229, 237-239 (Bankr. S.D.N.Y. 2017).
  3. Morrison v. National Australia Bank Ltd., 561 U.S. 247, 266 (2010) (italics in original).
  4. 543 B.R. 127, 133-134 (Bankr. S.D.N.Y. 2016).
  5. Unless otherwise noted, all section references are to sections of the Bankruptcy Code.
  6. Id. at 134.
  7. Aramco, 499 U.S. at 248 (citation omitted).
  8. Lyondell, 543 B.R. at 148 (footnotes omitted) (quoting Societe General plc v. Maxwell Commc’n Corp. plc (In re Maxwell Commc’n Corp. plc), 186 B.R. 807, 816 (S.D.N.Y. 1995), aff’d on other grounds, 93 F.3d 1036 (2d Cir. 1996)).
  9. Id. at 149 (quoting French v. Liebmann (In re French), 440 F.3d 145, 149 (4th Cir.), cert. denied, 549 U.S. 815 (2006); In re Florsheim Grp., Inc., 336 B.R. 126, 130 (Bankr. N.D. Ill. 2005)).
  10. Id. (quoting French, 440 F.3d at 150 (citations omitted); Maxwell, 186 B.R. at 816).
  11. Id. (footnotes omitted).
  12. Id. at 150 (footnotes omitted).
  13. Id. at 148.
  14. Id. at 149 n.86.
  15. Id. at 151 (quoting Morrison, 561 U.S. at 255 (quoting Aramco, 499 U.S. at 248)) (internal quotation marks omitted).
  16. Id. (footnote omitted).
  17. Id. (footnotes omitted).
  18. See supra at note 8.
  19. Id. at 151-154 (footnotes omitted).
  20. No. 6:15-cv-1469, 2016 WL 5719450 (M.D. Fla. Sept. 30, 2016).
  21. Sherwood Inv., 2016 WL 5719450, at *1. See Stern v. Marshall, 564 U.S. 462 (2011).
  22. Id. at *10-*11.
  23. Id. at *11 (citing Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222, 228 (S.D.N.Y. 2014) (Rakoff, J.); In re Bank. Estate of Midland Euro Exch. Inc., 347 B.R. 708, 717 (C.D. Cal. 2006)). See also Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, No. 08-01789, 2016 WL 6900689, at *2-*6 (Bankr. S.D.N.Y. Nov. 22, 2016) (Bernstein, J.) (discussing rejection of effort to rebut presumption against extraterritoriality and assert fraudulent transfer causes of action against foreign subsequent transferees); but see id. at *4 (noting extraterritorial application of avoidance and recovery sections in Picard v. Bureau of Labor Ins. (In re Bernard L. Madoff Inv. Sec. LLC), 480 B.R. 501, 524-526 (Bankr. S.D.N.Y. 2012) (Lifland, J.), based on same reasoning in Lyondell and on finding of “clear intention” by Congress that Sections 548 and 550 apply extraterritorially); id. at *25 (focusing on locations of transfers to determine whether presumption against extraterritoriality was rebutted, and finding “a transfer by a U.S. resident from a U.S. account even to a foreign transferee rebuts the presumption against extraterritoriality.”).
  24. Id. (stating “argument could only hold if the allegedly fraudulent transfers had already been avoided and the funds already recovered.”).
  25. 562 B.R. 601 (Bankr. S.D.N.Y. 2017).
  26. Id. at 603.
  27. Id. at 605-606 (quoting Morrison, 561 U.S. at 255, 266-267).
  28. Id. at 612.
  29. Id. (emphasis in original).
  30. Id.
  31. Id. at 613.
  32. Id. (citing Madoff, 480 B.R. at 524).
  33. Id. at 613-614. Less than one month later, Bernstein had another opportunity to consider the issue, but in a decision issued jointly with Judge Martin Glenn concluded it was not necessary to reach it. See Nat’l Bank of Anguilla v. Caribbean Commercial Bank (Anguilla) Ltd. (In re Nat’l Bank of Anguilla), No. 16-01279 (MG), 2018 WL 583113 (Bankr. S.D.N.Y. Jan. 29, 2018).
  34. 572 B.R. 117 (Bankr. D. Del. 2017).
  35. Id. at 123.
  36. Id. at 124-125 (citing Sherwood Inv. Overseas Ltd., Inc. v. Royal Bank of Scotland N.V. (In re Sherwood Inv. Overseas Ltd., Inc.), No. 6:15-cv-1469, 2015 WL 4486470 (M.D. Fla. Jul. 22, 2015)).
  37. Id. at 125 (footnote omitted).
  38. No. 14-02242 (JLG), 2018 WL 329893 (Bankr. S.D.N.Y. Jan. 5, 2018).
  39. Id. at *23-*26 (citations omitted).
  40. Id. at *24 (quoting Madoff, 513 B.R. at 228 (internal citation omitted)).
  41. Id. at *26.
  42. Id. at *29.
  43. Id. at *30-*31. Garrity also rejected the plaintiff’s effort to use Section 544(b), concluding it too does not have extraterritorial application. Id. at *31. Less than two weeks later, Judge Sean H. Lane, also of the U.S. Bankruptcy Court for the Southern District of New York, denied a motion seeking reconsideration of an October 2017 decision discussing, but not deciding, the extraterritoriality issue. In Arcapita Bank, Lane examined the prior decisions addressing the extraterritorial application of Chapter 5, as well as a decision of the U.S. District Court for the Southern District of New York denying the defendants’ challenge to the assertion of personal jurisdiction, and found the transfers sought to be avoided “touched and concerned the United States in a manner sufficient to displace the presumption against extraterritoriality.” 575 B.R. at 245. Central to Lane’s ruling was the fact that the parties used correspondent bank accounts in New York to facilitate the initial transfers. Id. (citations omitted). Given that fact, and notwithstanding the split of authority, Lane found it unnecessary to take a position with respect to the extraterritorial reach of Chapter 5. Id. at 248 n.12. A few months later, after Garrity decided CIL, Lane issued a decision memorializing a bench ruling denying the defendants’ motion for reconsideration. See Official Committee of Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(c)), No. 13-01434 (SHL), 2018 WL 718399, at *1 n.1 (Bankr. S.D.N.Y. Feb. 5, 2018).
Adam H. Isenberg

Adam H. Isenberg

Saul Ewing Arnstein & Lehr LLP

Adam H. Isenberg is a partner in Saul Ewing Arnstein & Lehr’s Bankruptcy and Restructuring Practice. He concentrates his practice in commercial bankruptcy matters and out-of-court workouts and has represented debtors in possession, creditors’ committees, trustees, secured creditors, and other parties in cases throughout the country. He was one of the core group of attorneys that represented the debtors in the Chapter 11 cases of Owens Corning et al., Lower Bucks Hospital, Hussey Copper et al., and Associated Wholesalers Inc. et al.

Steven Reingold

Steven C. Reingold

Saul Ewing Arnstein & Lehr LLP

Steven Reingold is a partner with Saul Ewing Arnstein & Lehr LLP and handles a broad array of litigation matters for clients throughout the country. His experience includes complex commercial and bankruptcy-related disputes resolved through negotiation, mediation, arbitration, and litigation. In his bankruptcy practice, Reingold represents debtors, creditors’ committees, trustees, creditors, and other parties in insolvency proceedings involving companies of varying sizes and industries. He also counsels clients on issues relating to the restructuring of debt and alternatives to bankruptcy.

Topics: 
Bankruptcy
TMA Print Logo