Pursuing Avoidance Power Claims Against Foreign Entities
A recent decision by the Delaware Bankruptcy Court, in In re FAH Liquidating Corp., addressed the issue of whether a transfer of a debtor’s assets that occurred outside of the United States can be avoided and recovered under the Bankruptcy Code. The Bankruptcy Court held that a trustee or debtor-in-possession can avoid and recover fraudulent conveyances (and, by extension, preferential transfers) that occurred outside of the U.S., following decisions by the Bankruptcy Court for the Southern District of New York and the U.S. Fourth Circuit Court of Appeals.
The liquidating trustee appointed under the confirmed Chapter 11 plan in the Fisker Automotive bankruptcy sued BMW seeking to recover fraudulent conveyances under Sections 544 and 548 of the Bankruptcy Code. BMW moved to dismiss the lawsuit, arguing transfers could not be avoided as fraudulent conveyances because Bankruptcy Code Section 548 does not apply to extraterritorial transactions. Under U.S. law, there exists a presumption that federal laws do not apply extraterritorially unless Congress intended them to.
The court first determined the transfers by Fisker, whose corporate headquarters were in California, to BMW, located in Germany, were extraterritorial. The court applied the “center of gravity” test, assessing the transfers were foreign transactions and extraterritorial because the work was to be undertaken by a German company pursuant to German contracts, which stated that they were governed by German law, that any dispute was to be adjudicated in Germany, and that the payment was required to be paid in euros.
The court next considered whether the presumption against extraterritoriality was implicated. The court, noting a split in the case law, held Congress intended for Section 548 to apply extraterritorially because it allows a trustee or debtor to recover an interest in the debtor’s property, thereby incorporating Section 541 of the Bankruptcy Code, which broadly defines property of the estate as all “interests of the debtor in property” without a geographical limitation. The court acknowledged the inconsistency of concluding that property located anywhere in the world could be property of the estate once recovered under Section 550, and then concluded that a trustee could not avoid the fraudulent transfer and recover that property if the property was transferred outside of the U.S. The court reasoned a fraudulent conveyance under Section 548 could be recovered even if the underlying transaction was extraterritorial since Congress did not impose a territorial limitation in defining property of the estate. Therefore, the court permitted the fraudulent conveyance claim to proceed to discovery and ultimately to trial if no resolution is reached.
The Fisker decision is part of a growing trend by bankruptcy courts to apply the Bankruptcy Code’s avoidance powers outside of the U.S. to recover property for the benefit of the estate and its creditors. Foreign creditors can no longer rely upon the presumption that the avoidance power actions under the Bankruptcy Code do not apply extraterritorially to insulate themselves from fraudulent conveyance and preference potential liability.
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