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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.


So why should COMI even matter if the case is filed here under Chapter 11, without seeking foreign involvement through Israel's "Chapter 15"? Unless and until a foreign case is filed, this case is it, and there is nothing in 547 or elsewhere in the Code to limit its applicability. That said, in many cases (but not here, because the defendant had filed a proof of claim), the result would be the same not because of bankruptcy law at all, but because the Court can't exercise personal jurisdiction over the putative defendant. In that case, the Trustee would need to sue abroad, and would then be asking the Israeli court to intervene, and THAT court could say Israel is the COMI and Israeli preference law applies. But the Defendant here had submitted to this jurisdiction by filing a claim, and along with that should go the full panoply of US Bankruptcy law. This case shows why this is a crazy result - not only is the preference not avoidable, but the claim was not even disallowed under 502(d). They keep the money and get more, stiffing the other creditors. That simply cannot be what Congress intended.

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