Southern District Of New York Bankruptcy Court Rules That Avoidance Powers Apply Extraterritorially

Over the past 21 years, two U.S. district court judges in the Southern District of New York have held that the avoidance powers conferred on a bankruptcy trustee or chapter 11 debtor-in-possession under the Bankruptcy Code do not apply to pre-bankruptcy transfers made by a debtor outside the United States. However, a U.S. bankruptcy court judge in the same district recently reached the opposite conclusion in Weisfelner v. Blavatnik (In re Lyondell), 543 B.R. 127 (Bankr. S.D.N.Y. 2016). In Lyondell, bankruptcy judge Robert E. Gerber refused to dismiss a claim seeking avoidance of a fraudulent transfer under section 548 of the Bankruptcy Code on the ground that the challenged transfer occurred outside the U.S. According to Judge Gerber, Congress could not have intended to exclude extraterritorial transfers from avoidance under section 548 while explicitly defining property of the bankruptcy estate under section 541 of the Bankruptcy Code to include all of the debtor's property "wherever located and by whomever held."

The Presumption Against Extraterritoriality

"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.' " EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991) (quoting Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949)). This "presumption against extraterritoriality" is a judicially developed rule of statutory construction whereby federal law is presumed not to apply to conduct or property outside the United States "unless a contrary intent appears." Morrison v. National Australia Bank Ltd., 561 U.S. 247, 255 (2010). In Smith v. United States, 507 U.S. 197, 204 n.5 (1993), the U.S. Supreme Court explained that this presumption is at least partially "the commonsense notion that Congress generally legislates with domestic concerns in mind." The presumption also "serves to protect against unintended clashes between our laws and those of other nations which could result in international discord." Arabian American, 499 U.S. at 248 (citing McCulloch v. Sociedad Nacional de Marineros de Honduras, 372 U.S. 10, 20-22 (1963))

Contrary intent is shown through "clear evidence," either in the statutory text or the "legislative purpose underlying it." Id. at 204. However, a law need not explicitly state that "this law applies abroad" to have extraterritorial effect, and context is relevant to infer the statute's meaning. Morrison, 561 U.S. at 255.

Courts generally perform a two-step inquiry in determining whether to apply the presumption against extraterritoriality. First, the court must determine whether the presumption applies by "identifying the conduct proscribed or regulated by the particular legislation in question" and by considering whether that conduct "occurred outside of the borders of the U.S." See Societe Generale 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). Second, if the presumption is implicated, the court must examine lawmakers' intent to determine whether Congress "intended to extend the coverage of the relevant statute to such extraterritorial conduct." Id.

Most courts have adopted a flexible approach in determining whether a transaction is extraterritorial. Many apply a "center of gravity" test, whereby the court...