The Bottom Line
In In re FAH Liquidating Corp., Case No. 13‐13087 (Bankr. Del. June 13, 2017), the Bankruptcy Court for the District of Delaware recently followed the Fourth Circuit and Bankruptcy Court for the Southern District of New York in holding that avoidance claims under section 548 of the Bankruptcy Code apply to fraudulent transfers made outside the U.S. In reaching this decision, the Delaware Bankruptcy Court relied on the decision in Weisfelner v. Blavatnik (In re Lyondell), 543 B.R. 127 (Bankr. S.D.N.Y. 2016), where Judge Gerber held that “Congress’ intent was to extend the scope of section 548 to cover extraterritorial conduct.” Judge Gerber reached this decision, in turn, by relying on the Fourth Circuit’s decision in French v. Liebmann (In re French), 440 F.3d 145, 149 (4th Cir. 2006), where the Fourth Circuit concluded that since section 541 of the Bankruptcy Code defines property of the estate as all interests of the debtor in property, then section 548 allows a trustee to avoid any transfer of property that would have been property of the estate prior to the transfer in question, including an extraterritorial transfer.
In In re FAH Liquidating Corp., Fisker Automotive Holdings, Inc. and Fisker Automotive, Inc. (“Debtors”), seeking to develop their second premium plug-in hybrid electric vehicle, entered into two agreements with Bayerische Moteren Werke Aktiengesellschaft (“BMW”) in 2011 for engines. Between June 2011 and April 2012, the Debtors made several payments to BMW totaling $32.6 million in exchange for BMW designing and supplying engines for the Debtors’ second electric vehicle. However, the Debtors faced several difficulties while developing the vehicle and ultimately sought bankruptcy relief in November of 2013. In 2014, the bankruptcy court approved the Debtors’ liquidation plan to sell their assets and appoint a trustee as their successor-in-interest. Pursuant to the Debtors’ liquidation plan, the FAH Liquidating Corp. was formed with Emerald Capital Advisors Corp. (“Emerald”) as trustee. Emerald, as trustee for the FAH Liquidating Corp., was assigned all the Debtors’ possible causes of action, including any against BMW.
Emerald subsequently filed a complaint against BMW stemming from the payments the Debtors made to BMW between 2011 and 2012. Emerald alleged that BMW neither delivered the engines nor returned the $32.6 million. In the complaint, Emerald sought the avoidance of the transfers totaling $32.6 million as constructively fraudulent under Bankruptcy Code sections 542, 544, 548, and 550. Emerald also sought recovery of the $32.6 million under the common law principle of unjust enrichment. BMW moved to dismiss Emerald’s complaint for failure to state a claim upon which relief can be granted.
Of relevance to the decision, BMW argued that since the payments were sent to BMW in Germany, they were extraterritorial and thus not subject to an avoidance claim under section 548. The Court acknowledged that there is a presumption against applying federal laws extraterritorially and that courts generally employ a two-step inquiry for determining whether to apply this presumption. In this two-step inquiry, a court first determines if the conduct in question occurred outside the U.S. If it did, the court then examines whether Congress intended to extend the federal law in question to the extraterritorial conduct.
Here, the bankruptcy court first applied the “center of gravity” test to assess whether the payments were extraterritorial. This is a test that allows courts to consider all aspects of a transfer in determining whether the center of gravity of the transfer is outside the U.S. After reviewing the facts, the bankruptcy court concluded that the transfers had a center of gravity outside the U.S. since the underlying agreements between the Debtors and BMW included provisions that created milestones to be achieved by BMW’s German facilities, established Munich as the forum for dispute, identified German law as the applicable law, and required payment in Euros. The bankruptcy court, therefore, found that the transfers were extraterritorial.
The bankruptcy court next examined whether Congress intended section 548 to apply to extraterritorial transfers. The bankruptcy court recognized that there is a split of authority on this issue, but ultimately relied on the Lyondell and French decisions in holding that section 548 applies extraterritorially. In Lyondell, the court acknowledged that the text of section 548 does not contain any language expressly indicating Congress’ intent for the statute to apply extraterritorially, but concluded that courts could look at surrounding provisions of the Bankruptcy Code to determine Congress’ intent. The Lyondell court relied on the Fourth Circuit’s reasoning in French where the court found that section 541 of the Code revealed Congress’ intent for section 548 to apply extraterritorially. The French court highlighted that section 541 defines “property of the estate” as all “interests of the debtor in property.” The French court thus reasoned that when using the language of 541 to define what property a trustee can recover under a section 548 avoidance claim, it is clear that section 548 allows a trustee to avoid any transfer of property that would have been property of the estate before the transfer in question, including property that is no longer property of the estate because it has been transferred outside the U.S.
In reliance on the French decision, the Lyondell court found that section 541 supports a finding that Congress intended section 548 to apply to extraterritorial transfers. According to the Lyondell court, section 541(a)(3) allows any interest in property a trustee recovers under section 550 to become property of the estate. Moreover, section 550 allows trustees to recover transferred property where the transfer has been avoided under either section 544 or 548. The Lyondell court believed it would have been inconsistent to conclude that property located outside the U.S. could be property of the estate once recovered under section 550 while also concluding that trustees cannot avoid fraudulent transfers and recover property transferred outside the U.S. Consequently, the Lyondell court held that avoidance claims under section 548 applied to transfers outside the U.S. Here, the Delaware Bankruptcy Court agreed with the holding in Lyondell and held that section 548 apply extraterritorially to the payments made by the Debtors to BMW in Germany. The Delaware Bankruptcy Court also addressed other aspects of the dispute:
·In applying the facts of the matter to the dispute at hand, the bankruptcy court limited the amount Emerald could recover under its constructive fraud claims to approximately $0.8 million. (Since approximately $31.8 million of the $32.6 million payments occurred more than two years before the petition date, only approximately $0.8 million in payments were eligible to be recovered by Emerald under its sections 542, 548, and 550 claims alleging constructive fraud.)
·Emerald also sought avoidance of the transfers as constructively fraudulent under section 544(b)(1). But as a threshold matter, the bankruptcy court assessed whether California, Delaware, or German law applied. The bankruptcy court concluded that German law applied since the relevant agreements between the Debtors and BMW expressly provided that they are governed by German law with Munich as the exclusive place of jurisdiction. Consequently, the Delaware Bankruptcy Court granted BMW’s motion to dismiss this claim.
·Finally, Emerald claimed that BMW was unjustly enriched by the $32.6 million payments. The bankruptcy court concluded that Emerald sufficiently alleged the following five elements required for an unjust enrichment claim: (i) an enrichment, (ii) an impoverishment, (iii) a relationship between the enrichment and impoverishment, (iv) the lack of justification, and (v) the lack of a remedy provided by law. Therefore, the Delaware Bankruptcy Court denied BMW’s motion to dismiss Emerald’s unjust enrichment claim, sustaining the possibility for Emerald to recover the entire $32.6 million.
Why the Case is Interesting
While there is generally a longstanding presumption against applying federal laws extraterritorially, the decision recognizes that bankruptcy law has worldwide reach, which is a reflection of the fact that companies in bankruptcy have international business transactions or assets located outside of the United States. For example, section 541 of the Bankruptcy Code defines property of the estate to be “property, wherever located and by whomever held[.]” This has been used to extend the benefit of the automatic stay under section 362 to property of the estate located outside of the United States, with the prime issue being the ability to enforce the injunction against an entity that is outside of the United States. (Typically, the answer is to look to stay offenders with a presence or property (including accounts receivables) located in the United States.) With respect to the reach of avoidance actions, there has been a split of authority. Some courts have held that avoidance provisions apply extraterritorially. These courts view section 541’s expansive definition of property of the estate as evidence that Congress intended avoidance provisions like section 548 to apply extraterritorially. Other courts have held that avoidance provisions do not apply extraterritorially because Congress did not clearly express an intent in the avoidance related Bankruptcy Code sections for these provisions to do so. Furthermore, some courts that oppose applying avoidance claims extraterritorially view section 541 as merely defining the scope of property recoverable but not expanding the trustee’s avoidance powers which should be addressed by other applicable Code sections. The Bankruptcy Court for the District of Delaware’s decision in In re FAH Liquidating Corp. has now deepened the divide by relying on Lyondell and concluding that section 548 can be applied extraterritorially.