The trustee of an Israeli company in bankruptcy in the U.S. cannot recover a preference where the payment emanated from Israel to a supplier also in Israel, because Section 547 does not have extraterritorial effect and the transfer itself did not originate in the U.S., according to Bankruptcy Judge Stuart M. Bernstein of New York.
Judge Bernstein’s Jan. 9 opinion is a handy survey of decisions on extraterritorial application of the Bankruptcy Code where courts around the country disagree.
The chapter 7 debtor was a New York corporation with officers, senior management, books and records in Israel. The company’s stock was traded on exchanges both in the U.S. and Israel.
Within the preference period, the company paid a supplier on account of an antecedent debt. The supplier conceded that the elements of a preference existed but contended that Section 547 could not be applied extraterritorially. Judge Bernstein agreed.
Arguably, Judge Bernstein declined to follow the Fourth Circuit’s In re French opinion from 2006. There, the appeals court concluded that Congress intended for fraudulent transfer law to have extraterritorial effect. The circuit said that Section 548 “plainly allows a trustee to avoid any transfer of property that would have been ‘property of the estate.’” [Emphasis in original.]
Judge Bernstein noted how the Fourth Circuit cited the split on the question of whether fraudulently transferred property is “property of the estate.”
For Judge Bernstein, “property of the estate” was the pivotal issue. He said that property transferred before 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 commended, the only two categories of property mentioned in Bankruptcy Code Section 541(a).” [Emphasis in original.]
He agreed with a 2014 Madoff decision where New York District Judge Jed Rakoff held that Section 550(a)(2) did not have extraterritorial application allowing for recovery from a subsequent transferee who was abroad when the initial transferee was also abroad. Judge Bernstein therefore held that Section 547(b) does not apply extraterritorially.
Having decided that preference law is not extraterritorial, Judge Bernstein turned to the second test under the Supreme Court’s Morrison test from 2010: Does the litigation involve an extraterritorial application of the statute?
Siding with a 2012 Madoff decision by the late Bankruptcy Judge Burton R. Lifland, Judge Bernstein said that the extraterritorial application depends on whether the initial transfer came from the U.S. Since the initial transfer was not domestic, he dismissed the preference suit, saying that the transfer “cannot be avoided.”