In today’s global economy, transfers and payments by U.S. companies occurring outside the United States are commonplace. At the same time the avoidance provisions of the Bankruptcy Code are an important remedy for recovery of transfers made without adequate consideration or fraudulently, or that preferred certain creditors. Do the avoidance provisions apply to a U.S. debtor’s foreign transactions? This question was once again taken up by the Southern District of New York Bankruptcy Court in In re Ampal–American Israel Corp. Judge Bernstein answers, in short—they don’t. Ampal–American is the most recent event in a developing saga in this Bankruptcy Court’s treatment of foreign transfers.
Debtor Ampal–American Israel Corporation was a New York holding corporation with its subsidiaries, management, offices, and books and records located in Israel. Creditor Goldfarb Seligman & Co. is an Israeli law firm with its sole office in Israel, and that provided services to the debtor in Israel. Within 90 days of the bankruptcy filing, Ampal–American directed a transfer from its account at an Israeli bank to Goldfarb’s account at the same bank. After the case was converted to chapter 7 the Trustee filed an avoidance action against Goldfarb to recover the payment. Goldfarb argued that the avoidance powers under the Bankruptcy Code do not apply to foreign transactions.
The prevailing view in the Southern District had been that the avoidance provisions do not apply to foreign transfers. A year ago, however, this blog covered In re Lyondell, a decision that seemed to go against that grain by holding that section 548 of the Bankruptcy Code could apply to foreign transfers. Now, with Judge Bernstein weighing in on the issue, the pendulum swings back in favor of presuming that foreign transactions are not subject to avoidance.
To resolve this issue, courts apply the “presumption against extraterritoriality”—a complicated name for the simple idea that a federal law is assumed not to apply outside of the United States unless Congress gives some clear reason that it should. Courts apply a two-step process: First, for a particular statute the court asks whether Congress has given a clear indication that it should apply outside the U.S. If so, the court applies the law regardless of how “extraterritorial” the conduct is. The second step asks whether the conduct at issue, despite its foreign aspects, is essentially domestic such that the statute may be applied anyway. Thus, courts engage in two inquiries: 1) a legal question about Congress’s intent as to a particular statute, and 2) a factual question as to where the conduct occurred. Accordingly, the key question in an avoidance action is determining whether the transfer is foreign or domestic.
Ampal–American disagreed with the approach in Lyondell as to the first question, and clarified it as to the second. As this blog noted last year, Lyondell found that Congress intended to have avoidance actions apply abroad because of the comprehensive nature of the Bankruptcy Code. This argument also holds sway in the Fourth Circuit under In re French but one that Judge Bernstein did not find persuasive here. The Court therefore held that avoidance provisions of the Bankruptcy Code do not apply extraterritorially.
As to the second inquiry, Ampal–American solidified the framework for determining whether the conduct was essentially foreign or domestic. The key fact is where the “initial transfer” occurred. Here, because the transfer of payment for Israeli services occurred entirely in Israel, the transfer was not domestic and therefore immune from avoidance actions. Ampal–American suggests several relevant factors: the locations of the parties directing and receiving the transfer, where the services or goods were provided, and the location of the banks making the transfer. Here, all were in Israel, making the non-domestic determination an easy one. It remains to be seen, however, whether one of these factors carries disproportionate or even dispositive weight.
Under Ampal–American, it becomes slightly clearer how the Southern District of New York deals with avoidance of foreign transactions going forward. Further, if Lyondell was an outlier at the time it was decided, it appears to be even more of one now. The upshot is that parties can have greater confidence that purely foreign transactions would likely escape avoidance actions in this district. But because a split between the Judges still exists, case assignment remains a major consideration on this issue. It remains to be seen whether companies with predominant or even significant foreign operations find the uncertainty or the law in this venue to be too unfavorable, and instead tilt towards filing elsewhere—in the Fourth Circuit, for example, where the French reasoning remains persuasive.
The presumption against extraterritoriality has been a topic of increasing interest, and one to keep an eye on. This blog as well as others have explored the issue in the past year. The issue of foreign transactions and the avoidance provisions are sure to get more attention as companies become increasingly globalized. We’ll keep readers posted.