Courts have held that the Bankruptcy Code's avoidance powers do not apply extraterritorially, SIPC v. Bernard L Madoff Inv. Sec. LLC ("Madoff"),480 B.R. 501 (Bankr. S.D. N.Y. 2012); Barclay v. Swiss Fin. Corp Ltd., 347 B.R. 708 (Bankr. C.D. Cal. 2006); Societe Generale plc v. Maxwell Commc'n Corp plc "Maxwell I"),186 B.R. 807 (S.D.N.Y. 1995) and others have found to the contrary, Weisfelner v. Blavatnik (In re Lyondell),543 B.R. 127 (Bankr. S.D.N.Y. 2016); Sec. Investor Prot. Corp. v. BLMIS (In re BLMIS) , 513 B.R. (S.D.N.Y. 2014) ("BLI"); French v. Liebmann, 440 F.3d 145 (4th Cir., 2006).
In a ruling recently decided by the U.S. Bankruptcy Court for the Southern District of New York, Spizz v. Goldfarb Seligman & Co. (In re Ampal-Am Israel Corp.), 562 B.R. 601 (Bankr. S.D.N.Y. 2017), that court disagreed with other courts both within and outside its own district to rule that the avoidance provisions of the Bankruptcy Code do not apply outside the U.S. because, based on the language in the provisions, Congress did not intend for them to apply extraterritorially.
Ampal-American Israel Corp ("Ampal"), a New York holding company with subsidiaries in Israel, initially filed for relief under chapter 11, but the case was converted to a chapter 7.
The trustee sued under sections 547 (b) and 550 to avoid and recover funds transferred from Ampal's Tel Aviv bank account to the Tel Aviv bank account of an Israel law firm in payment for legal services provided to Ampal in Israel. The bankruptcy court agreed with Madoff and Maxwell I that the avoidance provisions of the Bankruptcy Code, particularly 547 (b), do not apply extraterritorially. "Property 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 Bankruptcy Code section 541 (a) (1)." Id. 611. The court said that the U.S. Supreme Court's conclusion in Begier v. IRS, 496 U.S. 53 (1990), that "property of the debtor" is best understood as property that would have become "property of the estate" but for the transfer does not support the French and BLI courts' interpretation of section 548. The court explained that Begier limited the avoidance powers under section 541 (a).
The court further reasoned that it is the initial transfer that the trustee must avoid.
The sole question then is personal jurisdiction over the initial transferee. Here, the transfer was not domestic, but rather occurred in Israel between a US transferor headquartered in Israel and an Israeli transferee accomplished entirely between accounts at the same Tel Aviv bank. This transfer was not domestic and therefore cannot be avoided. "Even where the claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application." Id. at 613-614.
Ampal further confuses the issue of extraterritorial enforcement, especially with the increased number of cross-border bankruptcies.
In view of the Ampal decision, the trustee's alternative is to litigate abroad the avoidance and recovery of transferred property. But, that litigation is subject to the application of foreign law and relatively few countries have enacted similar avoidance laws. This means that non-US transferees may be outside the reach of US trustees.