« Secured Transactions in the Funny Pages | Main | Thoughts and Frustrations – Jevic »

Global Preferences

posted by Jay Lawrence Westbrook

An important opinion by one of our most knowledgeable bankruptcy judges, Judge Bernstein in Manhattan, may have reached the right result by the wrong path in deciding if a foreign debtor’s Chapter 7 trustee can avoid a foreign transfer to a foreign creditor. In re Ampal-American Israel Corp., 562 B.R. 601 (2017) (Ampal). Because the opinion’s reasoning may seriously weaken section 547 of the Bankruptcy Code, it is worth imposing on the reader’s time for a brief analysis.

Ampal, a corporation organized in the United States but operated in Israel, filed a Chapter 11 case that was converted to Chapter 7. The trustee sought to recover a preference paid through a bank in Israel to its Tel Aviv law firm. The company’s only substantial business connection with the United States was its listing on NASDAQ. The court held that section 547 of the Bankruptcy Code did not apply, which was very likely correct. (The trustee apparently did not seek to apply Israeli law.)

Unfortunately, the court felt it had to apply the wrong-headed notion that Congress should be presumed to intend only a domestic application of American law. The “presumption against extraterritoriality” is a doctrine that makes a fool of Congress. It is self-evident and well-established that Congress would want the courts to use comity, international law, and other well-known tools to avoid an unwarranted intrusion into another nation’s affairs. But the presumptive rule imposes an intolerable burden on Congress by insisting it must recognize and label every instance in which a law should be applied to conduct that includes some international element. The obvious effect is to narrow the effect of regulatory law and to heighten the likelihood that regulations commanded by Congress will be evaded by well-counseled actors.  

The doctrine is especially destructive of true Congressional intent when applied to bankruptcy. The details of the analysis can be found in Avoidance of Pre-Bankruptcy Transactions in Multinational Bankruptcy Cases, an old article of mine that the court was kind enough to cite if not to heed. The key to the correct analysis is that bankruptcy is unlike other civil litigation that arises from past breaches of duty (“autopsy law” as Justice Farley calls it). Bankruptcy operates in real time on a single mass of assets and liabilities “wherever located” in the words of section 541. The quoted words were explicitly intended to include property anywhere in the world. To apply the presumption in bankruptcy amounts to an adoption of territorialism and an abandonment of reorganization or any other maximization of the value of a multinational debtor. If it is applied to section 547, it will become professional malpractice in a large case for a creditor’s lawyer to fail to evade the preference rules. And the same for fraudulent conveyances.

In every instance in which the presumption might apply in bankruptcy, the correct approach is a traditional choice of law analysis based upon significant contacts, giving a strong weight to the debtor’s home-country law. In Ampal, it seems apparent the COMI (center of main interests) of the debtor was in Israel and the proper law to apply was Israeli. (I would be delighted to hear from an Israeli lawyer the right result under that law.) That conclusion could lead us to the larger question about the proper role of a full bankruptcy proceeding in the United States for a debtor based elsewhere, but that important issue lies beyond this brief comment.

The decisional law in New York is now nicely balanced. E.g., In re Lyondell Chem. Co., 543 B.R. 127 (Gerber, J.). Compare, In re Elcoteq, Inc., 521 B.R. 189 (Houser, J.) (auto stay). One hopes the plain meaning of section 547 will be preserved when the matter reaches the court of appeals.

Comments

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF

Powered by TypePad