STUART M. BERNSTEIN, United States Bankruptcy Judge:
Alex Spizz, the chapter 7 trustee (the "Trustee") for Ampal-American Israel Corp. ("Ampal"), filed this adversary proceeding to avoid and recover a single prepetition transfer made by Ampal in Israel to the Israeli law firm Goldfarb Seligman & Co. ("Goldfarb") as a preference pursuant to sections 547 and 550 of the Bankruptcy Code. The Court conducted a trial on April 13, 2016. The sole issue is whether the presumption against extraterritoriality prevents the Trustee from avoiding the transfer.
The Court concludes that Congress did not intend the avoidance provisions of the Bankruptcy Code to apply extraterritorially, and the transfer at issue occurred in Israel. Accordingly, the Court awards judgment to Goldfarb dismissing the action.
Ampal is a corporation organized under New York law that served as a holding company owning direct and indirect interests in subsidiaries primarily located in Israel. (Joint Pre-Trial Order, entered Feb. 2, 2016 ("JPTO") at 3, ¶ 3 & 4, ¶ 6 (ECF Doc. # 17)
Prior to and for some time after August 29, 2012 (the "Petition Date"), Ampal's Class A Stock was publicly traded on the NASDAQ Capital Market Exchange in the United States and was also listed on the Tel Aviv Stock Exchange (the "TASE"). (Id. at 4, ¶ 4.) In addition, Ampal had issued three series of debentures, all of which were publicly traded solely on the TASE. Consequently, Ampal was subject to on-going reporting obligations under the Israeli Securities Law — 1968 and the regulations promulgated thereunder. (Id. at 4, ¶ 5.) Ampal's senior management in Israel retained Goldfarb to provide legal services to Ampal in connection with various corporate and securities matters in Israel and compliance with Israeli securities laws from prior to 2010 through the Petition Date. (Id. at 5, ¶ 19.) Erez Altit, a partner in Goldfarb, (Transcript of Apr. 13, 2016 Trial ("Tr.") at 8:20-22)), served as the relationship partner for Ampal during the relevant period. (Tr. at 19:19-21.)
In the course of the work for Ampal, Goldfarb issued a series of invoices. (See Defendant's Exhibits ("DX") A-E.) On or about June 11, 2012, Ampal instructed Bank Hapoalim located in Tel Aviv, Israel
Ampal commenced a chapter 11 case in this Court within ninety days of the Transfer. (Id. at 3, ¶ 2.) By order dated May 2, 2013, the Court converted the chapter 11 case to a case under chapter 7 of the Bankruptcy Code, (id. at 4, ¶ 9), and on May 20, 2013, the Trustee was elected chapter 7 trustee. (Id. at 4, ¶ 10.) The Trustee filed his complaint against Goldfarb on Aug. 27, 2014
Goldfarb answered the complaint on Oct. 15, 2014.
A trial was held on Apr. 13, 2016, and the parties submitted post trial briefs.
Section 547(b) of the Bankruptcy Code provides that the trustee may avoid any transfer of an interest of the debtor in property —
11 U.S.C. § 547(b). If the trustee avoids the transfer, he may recover the transfer or its value from, inter alia, the initial transferee. 11 U.S.C. § 550(a)(1). Goldfarb does not dispute that the Trustee proved a prima facie case for avoidance. (Tr. at 66:25-67:8.) As noted, the only issue is whether the presumption against extraterritoriality bars the Trustee from avoiding the Transfer.
The "presumption against extraterritoriality" 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." EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248, 111 S.Ct. 1227, 113 L.Ed.2d 274 (1991) ("Aramco") (internal quotation marks and citation omitted); accord RJR Nabisco, Inc. v. European Cmty., ___ U.S. ___, 136 S.Ct. 2090, 2100, 195 L.Ed.2d 476 (2016) ("Nabisco"); Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 248, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) ("Morrison"). The presumption "serves to protect against unintended clashes between our laws and those of other nations which could result in international discord." Aramco, 499 U.S. at 248, 111 S.Ct. 1227.
In Morrison, the Supreme Court outlined a two-step approach to determine whether the presumption forecloses the claim. "At the first step, we ask whether the presumption against extraterritoriality has been rebutted — that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially." Nabisco, 136 S.Ct. at 2101; accord Morrison, 561 U.S. at 255, 130 S.Ct. 2869 ("When a statute gives no clear indication of an extraterritorial application, it has none."). The first step does not impose a "clear statement rule," because even absent a "clear statement," the context of the statute can be consulted to give the most faithful reading. Morrison, 561 U.S. at 265, 130 S.Ct. 2869. If the first step yields the conclusion that the statute applies extraterritorially, the inquiry ends.
If it does not, the court must turn to the second step to determine if the litigation involves an extraterritorial application of the statute:
Nabisco, 136 S.Ct. at 2101; accord Morrison, 561 U.S. at 266-67, 130 S.Ct. 2869 (court must look to the "`focus' of congressional concern," i.e., the "objects of the statute's solicitude"). Courts however, must be wary in concluding too quickly that some minimal domestic conduct means the statute is being applied domestically:
Morrison, 561 U.S. at 266, 130 S.Ct. 2869 (emphasis in original).
The Supreme Court expressly rejected the "conduct and effects" tests that the Second Circuit had applied in determining whether the presumption had been rebutted. The "effects" test asked "whether the wrongful conduct had a substantial effect in the United States or upon United States citizens," and the "conduct" test asked "whether the wrongful conduct occurred in the United States." Id. at 257, 130 S.Ct. 2869 (quoting SEC v. Berger, 322 F.3d 187, 192-93 (2d Cir. 2003)). Justice Scalia described these standards as "complex in formulation and unpredictable in application." Id. at 255, 130 S.Ct. 2869.
Several pre-Morrison decisions considered the extraterritoriality of the Bankruptcy Code's avoidance provisions but two have proved most influential.
In Maxwell I, the debtor ("MCC") operated as a holding company for an international media conglomerate based out of England. While MCC was headquartered in England and incurred most of its debts there, most of its assets were in the United States. Maxwell II, 93 F.3d at 1040. On December 16, 1991, MCC filed a chapter 11 petition in the Southern District of New York, and on next day, petitioned the High Court of Justice in London for an administration under the Insolvency Act 1986. Maxwell I, 186 B.R. at 813. Prior to the bankruptcy proceedings, it had sold significant portions of its U.S. assets, and within ninety days of the U.S. petition date, had transferred a portion of the sale proceeds to Barclays Bank plc, National Westminster Bank plc and Societe General, all in satisfaction of pre-petition credit facilities incurred abroad. Id. After its chapter 11 filing, MCC sought to avoid those transfers as preferences under section 547 of the Bankruptcy Code. Id. at 814. One issue before the Maxwell I Court was whether the presumption against extraterritoriality barred avoidance of MCC's pre-petition transfers to the foreign banks.
After applying a "component events" analysis and concluding that the transfers occurred abroad, id. at 816-18, the District Court turned to whether Congress nevertheless intended section 547 to apply extraterritorially. The District Court noted at the outset that "nothing in the language or legislative history of § 547 expresse[d] Congress' intent to apply the statute to foreign transfers." Id. at 819; accord Barclay v. Swiss Fin. Corp. Ltd. (In re Midland Euro Exch. Inc.), 347 B.R. 708, 717-18 (Bankr. C.D. Cal. 2006). The District Court also rejected MCC's argument that the comprehensive nature of the Bankruptcy Code indicated Congress' intent to apply U.S. avoidance laws internationally. MCC had argued that property of the estate under Bankruptcy Code § 541(a) included property wherever located and by whomever held that the trustee recovered under Bankruptcy Code § 550, see 11 U.S.C. § 541(a)(3), and any interest in property that the estate acquired after the commencement of the case. See 11 U.S.C.
Lastly, the District Court concluded that a finding that the presumption against extraterritoriality had not been rebutted would not undermine the Bankruptcy Code's policies of equality of distribution among similarly-situated creditors and discouraging the dismemberment of financially distressed debtors. First, not all pre-bankruptcy transfers are avoidable as § 547(c) contains a number of defenses. Second, the English and U.S. creditors were not similarly situated. Third, the transfers might still be recoverable under English law. Maxwell I, 186 B.R. at 820.
The Second Circuit affirmed, but on the ground that international comity required deference to the courts and laws of England and precluded the application of the avoidance and recovery provisions to the transfers at issue. Maxwell II, 93 F.3d at 1054-55.
The United States Court of Appeals for the Fourth Circuit reached the opposite conclusion in French. There, the debtor gifted her Bahamian house to her two children, both U.S. residents. The children did not immediately record the transfer, and shortly after they finally did, an involuntary chapter 7 petition was filed against the debtor by her creditors. French, 440 F.3d at 148. After the bankruptcy court ordered relief, the chapter 7 trustee filed an adversary proceeding against the children to avoid the transfer of the property as a constructive fraudulent transfer under 11 U.S.C. § 548(a)(1)(B). Id. The parties agreed that the trustee had established a prima facie case to avoid the transfer, but the children nevertheless moved to dismiss arguing, inter alia, that U.S. fraudulent transfer laws should not apply to the Bahamian transfer. Id. at 149.
The French Court determined that it was unnecessary to resolve whether the transfer was extraterritorial because Congress intended international application of U.S. fraudulent transfer law, adopting the argument rejected by the Maxwell I Court. The Fourth Circuit observed that pursuant to section 541 of the Bankruptcy Code, "all of a debtor's property, whether domestic or foreign, [was] `property of the estate' subject to the bankruptcy court's in rem jurisdiction." Id. at 151. In turn, section 548 "allow[ed] the avoidance of certain transfers of such `interest[s] of the debtor in property.'" Id. (quoting 11 U.S.C. § 548(a)(1)). Accordingly, the Fourth Circuit explained:
Id. at 151-52 (emphases in original; footnote omitted). Accord Weisfelner v. Blavatnik (In re Lyondell Chem. Co.), 543 B.R. 127, 151-52 (Bankr. S.D.N.Y. 2016) ("Lyondell") (agreeing with French that Congress intended extraterritorial application of section 548 of the Bankruptcy Code); Jay Lawrence Westbrook, Avoidance of Pre-Bankruptcy Transactions in Multinational Bankruptcy Cases, 42 TEX. INT'L L.J. 899, 907 (2007) ("Westbrook") (same); contra Midland, 347 B.R. at 718 ("In re French totally ignores § 541(a)(3) and uses an unclear and convoluted method to reach its conclusion."). The Fourth Circuit also noted the split in the law on the question of whether "property of the estate" included fraudulently transferred property, but did not have to take a side given its conclusion that § 548 extended to the Bahamian property. French, 440 F.3d at 151-52 n. 2.
The French Court cited Begier v. IRS in support of its conclusion that Congress intended Bankruptcy Code § 548 to apply extraterritorially. Begier did not deal with the issue of extraterritoriality. There, the chapter 7 trustee sued to avoid and recover a preferential transfer made by the debtor within ninety days of the petition date to satisfy a debt owing for trust fund taxes. The issue before the Supreme Court was whether the transferred property was property of the debtor within the meaning of Bankruptcy Code § 541 at the time of the transfer.
The Supreme Court began by reminding that "[e]quality of distribution among creditors is a central policy of the Bankruptcy Code," and 547(b) furthered that policy by allowing the trustee to avoid and recover certain preferential payments that favored transferee creditors over other creditors. Begier, 496 U.S. at 58, 110 S.Ct. 2258. The Supreme Court then added an important qualification: "if the debtor transfers property that would not have been available for distribution to his creditors in a bankruptcy proceeding, the policy behind the avoidance power is not implicated. The reach of § 547(b)'s avoidance power is therefore limited to transfers of `property of the debtor.'" Id.
This led the Supreme Court to consider the relationship between Bankruptcy Code § 541(a), which defines "property of the estate," and Bankruptcy Code § 547(b) which allows the avoidance of pre-petition transfers of "property of the debtor." Harmonizing the two provisions, the Supreme Court stated:
Id. at 58-59 (emphasis added); accord Cullen Ctr. Bank & Trust v. Hensley (In re Criswell), 102 F.3d 1411, 1416 (5th Cir. 1997)("[W]e agree with the district court
Begier, 496 U.S. at 59 n. 3, 110 S.Ct. 2258.
The Supreme Court concluded that the trustee could not avoid the transfers "[b]ecause the debtor does not own an equitable interest in property he holds in trust for another, that interest is not `property of the estate.' Nor is such an equitable interest `property of the debtor' for purposes of § 547(b)." Begier, 496 U.S. at 59, 110 S.Ct. 2258.
After Morrison, the issue of whether the Bankruptcy Code's avoidance and recovery provisions reached foreign transfers was first addressed in Picard v. Bureau of Labor Ins. (In re BLMIS), 480 B.R. 501 (Bankr. S.D.N.Y. 2012) ("BLI"). BLI, a Taiwanese entity, invested in Fairfield Sentry, a large feeder fund organized in the British Virgin Islands that invested substantially all of its assets in BLMIS,
Denying the motion, the Bankruptcy Court engaged in the two-step analysis required by Morrison. Beginning with the second step, Judge Lifland held that the "focus" of "the avoidance and recovery sections [of the Bankruptcy Code] is on the initial transfers that deplete the bankruptcy estate and not on the recipient of the transfers or the subsequent transfers." Id. at 524; accord Begier, 496 U.S. at 58, 110 S.Ct. 2258 (stating that "the purpose of the [preference] avoidance provision is to preserve the property includable within the bankruptcy estate — the property available for distribution to creditors"); French, 440 F.3d at 154 ("[T]he Code's avoidance provisions protect creditors by preserving the bankruptcy estate against illegitimate depletions.").
While this conclusion was dispositive, Judge Lifland also addressed the first Morrison step, and concluded that "Congress demonstrated its clear intent for the extraterritorial application of Section 550 through interweaving terminology and cross-references to relevant Code provisions." Id. at 527. Specifically, the term "property of the estate" includes property "wherever located, and by whomever held" that was property of the debtor at the commencement of the case. 11 U.S.C. § 541(a)(1). Thus, "property of the estate" extends to property located worldwide. Id.; accord 28 U.S.C. § 1334(e)(1) (granting the District Court exclusive jurisdiction "of all the property, wherever located, of the debtor as of the commencement of [the bankruptcy] case, and of property of the estate").
The avoidance provisions of the Bankruptcy Code grant a trustee the power to avoid certain prepetition transfers "of an interest of the debtor in property," e.g., 11 U.S.C. § 548(a)(1), the same term used in Bankruptcy Code § 541 to define the scope of "property of the estate." BLI, 480 B.R. at 527. For this reason, the concepts of "property of the estate" and "property of the debtor" are the same, separated only by time. As the Supreme Court explained in Begier, § 541 "delineates the scope of `property of the estate' and serves as the postpetition analog to § 547(b)'s `property of the debtor.'" Id. (quoting Begier, 496 U.S. at 58-59, 110 S.Ct. 2258) (internal quotation marks omitted); accord French, 440 F.3d at 151; contra Maxwell I, 186 B.R. at 820-21 (concluding that Congress did not clearly express its desire that Bankruptcy Code § 547 applies to foreign transfers of the debtor's property); Midland, 347 B.R. at 718 (concluding that Congress did not intend for § 548 to apply extraterritorially).
Section 550, in turn, allows the trustee to recover the avoided transfer from the initial transferee, the person for whose benefit the transfer was made or the subsequent transferee:
BLI, 480 B.R. at 528.
Less than two years after the issuance of the BLI decision, District Judge Rakoff reached the opposite conclusion in the Sec. Investor Prot. Corp. v. BLMIS (In re BLMIS), 513 B.R. 222 (S.D.N.Y. 2014)
The District Court then turned to the question of whether Congress intended the extraterritorial application of section 550(a). Here too, the ET Decision disagreed with BLI. First, "[n]othing in [the language of section 550(a)] suggests that Congress intended for this section to apply to foreign transfers...." Id. at 228. Judge Rakoff next looked to context and surrounding Bankruptcy Code provisions. Id. The trustee had argued that § 541's definition of "property of the estate," which included property held worldwide, indicated Congress' intent to allow the trustee to avoid transfers of "property of the debtor" that, but for the fraudulent transfer, would have been "property of the estate" as of the commencement of the bankruptcy case. Id. at 228-29. Judge Rakoff rejected the trustee's argument for the same reason the District Court rejected a similar argument in Maxwell I; fraudulently transferred "property of the debtor" only becomes "property of the estate" after recovery, ET Decision, 513 B.R. at 229 (citing Colonial, 980 F.2d at 131), "so section 541 cannot supply any extraterritorial authority that the avoidance and recovery provisions lack on their own." Id.; accord Sherwood Inv. Overseas Ltd. v. Royal Bank of Scotland N.V. (In re Sherwood Inv. Overseas Ltd.), No. 6:15-cv-1469-Orl-40, 2016 WL 5719450, at *11 (M.D. Fla. Sept. 30, 2016), appeal docketed, No. 16-16824 (11th Cir. Oct. 31, 2016); Maxwell I, 186 B.R. at 820; Midland, 347 B.R. at 718.
In Lyondell, Bankruptcy Judge Gerber reached the same conclusion as Bankruptcy Judge Lifland, and ruled that Bankruptcy Code § 548 applied extraterritorially. The case involved a liquidating trustee's action to avoid and recover pre-petition shareholder distributions as fraudulent transfers. The Court found that the transfers were extraterritorial, id. at 148-50, but were not beyond the reach of the Bankruptcy Code's fraudulent transfer provisions. After surveying the split in the case law, the Court concluded that the reasoning of French was more persuasive. Id. at 153-54. In addition to the French Court's analysis, Judge Gerber was influenced by Professor Jay Westbrook's endorsement of French's reasoning and his
The Court agrees with the ET Decision and Maxwell I that the avoidance provisions of the Bankruptcy Code, in this case 11 U.S.C. § 547(b), do not apply extraterritorially.
Finally, some provisions of the Bankruptcy Code and corresponding jurisdictional sections do contain clear statements that they apply extraterritorially. As discussed, § 541(a)(1) states that "property of the estate" includes, inter alia, all of the debtor's legal and equitable interests in property as of the commencement of the case, "wherever located," and 28 U.S.C. § 1334(e)(1) grants the district court exclusive jurisdiction "of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate."
Having concluded that Bankruptcy Code § 547 does not apply extraterritorially, the Court turns to the second prong of the Morrison test. Judge Lifland explained that the focus of the avoidance and recovery provisions is the initial transfer that depletes the property that would have become property of the estate. BLI, 480 B.R. at 524; accord Edward R. Morrison, Extraterritorial Avoidance Actions: Lessons From Madoff, 9 BROOK. J. CORP. FIN. & COM. L. 268, 271 (Fall 2014) ("Morrison"); but cf. ET Decision, 513 B.R. at 227 (concluding that the focus of Bankruptcy Code § 550(a)(2) is the subsequent transfer rather than the initial transfer). I agree.
The initial transfer is the transfer the trustee must avoid. If he does, section 550(a) imposes liability on the initial transferee, a subsequent transferee of the initial transfer or the entity for whose benefit the initial transfer was made. In the case of the initial and subsequent transferees, the trustee is essentially tracing property into the hands of the recipient — no different than a trustee under non-bankruptcy law. See Morrison, 9 BROOK. J. CORP. FIN. & COM. L. at 272 ("Although the trustee is suing the feeder fund's foreign investors, the trustee is tracing the funds from their domestic source to their final resting place."). If he is pursuing his remedy against the "entity for whose benefit" the initial transfer has been made, the initial transfer may be the only transfer.
Here, the undisputed evidence showed that the Transfer was not domestic. The Transfer occurred in Israel between a U.S. transferor headquartered in Israel and an Israeli transferee accomplished entirely between accounts at the same Tel Aviv bank. Although the Trustee argues that Goldfarb's legal services had some U.S. connections — Ampal's Class A shares traded on the NASDAQ, and Goldfarb's services included legal work related to Ampal's SEC and NASDAQ filings, (Tr. 21:7-16; 27:7-10), and rendering opinions on Israeli law for inclusion in the annual report (Tr. 29:24-30:18) — most of these services were performed in Israel.
The focus of Bankruptcy Code § 547 is the initial transfer, and that transfer occurred in Israel. The Transfer was not domestic, and hence, cannot be avoided. Furthermore, because the Transfer cannot be avoided, Goldfarb's claim is not subject to disallowance under 11 U.S.C. § 502(d). Maxwell II, 93 F.3d at 1054.
The Clerk of the Court is respectfully directed to enter judgment in favor of the defendant dismissing the action.
