The Bankruptcy Court for the Southern District of New York is among the world's leading forums for court-supervised restructuring. As such, it routinely confronts complex flows of funds among affiliates and counter parties across the globe. Among other legal challenges, the extraterritorial application of avoidance provisions of the Bankruptcy Code takes on increased prominence in the district. This question is of particular importance in financial firm wind-downs, shipping restructurings, and other global insolvencies where fiduciaries review such essential functions as payments to vendors, pay-downs of credit facilities, distributions to shareholders, investments redemptions, and professional fees.

While the import of this issue is clear, consensus is not. Jurists have reached alternating conclusions on the issue of whether Congress intended the avoidance provisions to apply to foreign transactions. See Picard v. Bureau of Labor Ins. (In re BLMIS) (BLI), 480 B.R. 501 (Bankr. S.D.N.Y. 2012) (ruling for extraterritoriality). But see Sec. Investor Prot. Corp. v. BLMIS (BLMIS), 513 B.R. 222 (S.D.N.Y. 2014) (ruling against extraterritoriality). Contra Weisfelner v. Blavatnik, (Lyondell), 543 B.R. 127 (Bankr. S.D.N.Y. 2016) (ruling for extraterritoriality). Now, a recent decision by the bankruptcy court for the Southern District of New York in Spizz v. Goldfarb Seligman &. Co. (In re Ampal-American), 562 B.R. 601 (Bankr. S.D.N.Y. 2017) has moved the pendulum away from extraterritoriality back toward a nearer reach of avoidance powers.

'Morrison' and Differing Determinations Of Extraterritorial Intent

The “presumption against extraterritoriality” is a long-standing principal of statutory construction by which courts presume that federal law does not to apply to conduct or property outside the United States unless a contrary congressional intent is evident. The primary reason for this rule is to avoid unintended clashes between domestic laws and those of other nations. The U.S. Supreme Court analyzed this presumption in Morrison v. National Australia Bank, where it articulated a two-step approach to determine whether or not the presumption applies in individual cases. 561 U.S. 247 (2010). First, a court must determine if the presumption has been rebutted by a clear affirmative indication either in the statutory text or the underlying legislative purpose of a law that it is meant to apply extraterritorially, in which case the inquiry ends. Id. at 255. Second, in the absence of a clear affirmative indication, the court must apply the facts of the case and decide if the conduct relevant to the statute's focus occurred within the country (territorial) or outside of the country (extraterritorial). Id. at 266-67. If the presumption is rebutted by clear evidence or the conduct relevant to the statute's focus occurred within the United States, then the presumption is overcome and extraterritorial application may proceed; otherwise the court must dismiss the claim.

Although bankruptcy courts in the Southern District of New York have uniformly followed the standard set out in Morrison, they have reached different conclusions on whether the Bankruptcy Code's avoidance provisions contain a clear indication of extraterritoriality. The first post-Morrison case to address this issue was BLI, where the bankruptcy court examined whether a trustee could apply avoidance powers granted by §550 extraterritorially to recover transfers that were made to the foreign accounts of a foreign subsequent transferee. The court concluded that “Congress demonstrated its clear intent for the extraterritorial application of §550 through interweaving terminology and cross-references to relevant Code provisions.” BLI, 480 B.R. at 527. The court reasoned that the incorporation of the broad definition of property of the estate contained in §541 (“interests of the debtor in property as of the commencement of the case wherever located and by whomever held”) into the preference provisions contained in §547 demonstrated Congress' intent for the avoidance provisions to apply to all property that, absent a pre-petition transfer, would have been property of the estate, which, the court held, included the property in the foreign transfer at issue.