United States: Southern District Of New York Bankruptcy Court Rules That Avoidance Powers Apply Extraterritorially

Last Updated: March 31 2016
Article by Mark G. Douglas

Over the past 21 years, two U.S. district court judges in the Southern District of New York have held that the avoidance powers conferred on a bankruptcy trustee or chapter 11 debtor-in-possession under the Bankruptcy Code do not apply to pre-bankruptcy transfers made by a debtor outside the United States. However, a U.S. bankruptcy court judge in the same district recently reached the opposite conclusion in Weisfelner v. Blavatnik (In re Lyondell), 543 B.R. 127 (Bankr. S.D.N.Y. 2016). In Lyondell, bankruptcy judge Robert E. Gerber refused to dismiss a claim seeking avoidance of a fraudulent transfer under section 548 of the Bankruptcy Code on the ground that the challenged transfer occurred outside the U.S. According to Judge Gerber, Congress could not have intended to exclude extraterritorial transfers from avoidance under section 548 while explicitly defining property of the bankruptcy estate under section 541 of the Bankruptcy Code to include all of the debtor's property "wherever located and by whomever held."

The Presumption Against Extraterritoriality

"It is a longstanding principle of American law 'that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.' " EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991) (quoting Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949)). This "presumption against extraterritoriality" is a judicially developed rule of statutory construction whereby federal law is presumed not to apply to conduct or property outside the United States "unless a contrary intent appears." Morrison v. National Australia Bank Ltd., 561 U.S. 247, 255 (2010). In Smith v. United States, 507 U.S. 197, 204 n.5 (1993), the U.S. Supreme Court explained that this presumption is at least partially "the commonsense notion that Congress generally legislates with domestic concerns in mind." The presumption also "serves to protect against unintended clashes between our laws and those of other nations which could result in international discord." Arabian American, 499 U.S. at 248 (citing McCulloch v. Sociedad Nacional de Marineros de Honduras, 372 U.S. 10, 20–22 (1963))

Contrary intent is shown through "clear evidence," either in the statutory text or the "legislative purpose underlying it." Id. at 204. However, a law need not explicitly state that "this law applies abroad" to have extraterritorial effect, and context is relevant to infer the statute's meaning. Morrison, 561 U.S. at 255.

Courts generally perform a two-step inquiry in determining whether to apply the presumption against extraterritoriality. First, the court must determine whether the presumption applies by "identifying the conduct proscribed or regulated by the particular legislation in question" and by considering whether that conduct "occurred outside of the borders of the U.S." See Societe Generale plc v. Maxwell Commc'n Corp. plc (In re Maxwell Commc'n Corp. plc), 186 B.R. 807, 816 (S.D.N.Y. 1995), aff'd on other grounds, 93 F.3d 1036 (2d Cir. 1996). Second, if the presumption is implicated, the court must examine lawmakers' intent to determine whether Congress "intended to extend the coverage of the relevant statute to such extraterritorial conduct." Id.

Most courts have adopted a flexible approach in determining whether a transaction is extraterritorial. Many apply a "center of gravity" test, whereby the court examines the facts of the case to ascertain whether they have a center of gravity outside the U.S. See, e.g., French v. Liebmann (In re French), 440 F.3d 145, 149 (4th Cir. 2006), cert. denied, 549 U.S. 815 (2006); In re Florsheim Group Inc., 336 B.R. 126, 130 (Bankr. N.D. Ill. 2005). This analysis may involve consideration of "all component events of the transfer[]," Maxwell, 186 B.R. at 816, such as "whether the participants, acts, targets, and effects involved in the transaction at issue are primarily foreign or primarily domestic." French, 440 F.3d at 150.

Extraterritorial Operation of U.S. Bankruptcy Laws?

In certain respects, U.S. bankruptcy law has explicitly applied extraterritorially for more than 60 years. In 1952, due to confusion about the scope of a debtor's property to be administered by a bankruptcy trustee under the Bankruptcy Act of 1898, Congress inserted the phrase "wherever located" into section 70a of the Act "to make clear that a trustee in bankruptcy is vested with the title of the bankrupt in property which is located without, as well as within, the United States." H.R. Rep. No. 82-2320, at 15 (1952), reprinted in 1952 U.S.C.C.A.N. 1960, 1976; see also Pub. L. No. 82-456, 66 Stat. 420 (July 7, 1952). This language was preserved in section 541(a) of the Bankruptcy Code (enacted in 1978), which provides that the bankruptcy estate includes the debtor's property "wherever located and by whomever held." Similarly, 28 U.S.C. § 1334(e) gives federal district courts—and, by jurisdictional grant pursuant to 28 U.S.C. § 157(a), bankruptcy courts within each district—exclusive jurisdiction of all property of the debtor and its estate, "wherever located."

Many courts have concluded that, because the automatic stay in section 362(a) of the Bankruptcy Code expressly prohibits, among other things, acts to obtain possession of "property of the estate," the stay bars creditor collection efforts with respect to estate property located both within and outside the U.S. See, e.g., Milbank v. Philips Lighting Elecs. N. Am. (In re Elcoteq, Inc.), 521 B.R. 189 (Bankr. N.D. Tex. 2014); In re Nakash, 190 B.R. 763 (Bankr. S.D.N.Y. 1996).

However, the provisions of the Bankruptcy Code permitting avoidance of preferential or fraudulent transfers of property and allowing recovery of the property—e.g., sections 547, 548, and 550—do not expressly refer to "property of the estate." Furthermore, some courts, noting that section 541(a)(3) of the Bankruptcy Code provides that any "interest in property that the trustee recovers under section . . . 550" is part of the estate, have concluded that fraudulently transferred property is not estate property unless and until it is recovered by the trustee. See, e.g., FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992); accord Rajala v. Gardner, 709 F.3d 1031 (10th Cir. 2013). But see Am. Nat'l Bank of Austin v. MortgageAmerica Corp. (In re MortgageAmerica Corp.), 714 F.2d 1266, 1277 (5th Cir. 1983) ("[p]roperty fraudulently conveyed and recoverable under the Texas Fraudulent Transfers Act remains, despite the purported transfer, property of the estate within the meaning of section 541(a)(1)").

Two U.S. district court judges in the Southern District of New York have cited Colonial Realty as support for their holdings that the Bankruptcy Code's avoidance and recovery provisions do not apply extraterritorially. In In re Maxwell Commc'n Corp. plc, 186 B.R. 807 (S.D.N.Y. 1995), district judge Shira A. Scheindlin ruled that Congress did not clearly express its intention, in statutory language or elsewhere, for section 547 of the Bankruptcy Code to empower a trustee to avoid foreign preferential transfers.

In S.I.P.C. v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222 (S.D.N.Y. 2014), district judge Jed S. Rakoff addressed the extraterritorial effect of section 550, which authorizes the trustee to recover property (or its value) after a transfer of the property has been avoided. In ruling that section 550 does not apply extraterritorially, Judge Rakoff wrote:

Under the logic of Colonial Realty, whether "property of the estate" includes property "wherever located" is irrelevant to the instant inquiry: fraudulently transferred property becomes property of the estate only after it has been recovered by the Trustee, so section 541 cannot supply any extraterritorial authority that the avoidance and recovery provisions lack on their own.

513 B.R. at 230; accord Barclay v. Swiss Fin. Corp. Ltd. (In re Bankr. Estate of Midland Euro Exch. Inc.), 347 B.R. 708 (Bankr. C.D. Cal. 2006). Under the reasoning of the courts in Maxwell and Madoff, the language of section 541(a)(3) makes clear that Congress could not have intended the trustee's avoidance powers to apply extraterritorially, even though section 541 also clearly shows that lawmakers intended property of the estate to be defined broadly.

The bankruptcy court in Lyondell ruled to the contrary.


Lyondell Chemical Company ("LCC") was the target of a failed leveraged buyout ("LBO") in December 2007. The purchaser was Basell AF S.C.A. ("Basell"), a Luxembourg company. In connection with the LBO, LCC incurred $21 billion in secured debt. Of the loan proceeds, $12.5 billion was distributed to LCC's stockholders and nearly $1 billion was paid in fees, expenses, and other transaction costs. Basell made distributions to its own stockholders—including BI S.à.r.l., another Luxembourg company, which owned 99.99 percent of Basell's capital stock—prior to the transaction. The payments included a €100 million distribution two weeks before the LBO closed.

LCC filed for chapter 11 protection in the Southern District of New York in January 2009. Five adversary proceedings were filed in connection with the chapter 11 cases against LCC's old shareholders, Basell, Basell's principals, BI S.à.r.l., LCC's officers and directors, and certain other defendants challenging the LBO transactions under a variety of legal theories, including breach of fiduciary duty; intentional and constructive fraudulent transfer; unlawful dividend; and a host of additional bases for recovery under state law, the Bankruptcy Code, and the laws of Luxembourg.

Certain of the claims were premised on the €100 million distribution Basell made to its shareholders in December 2007, two weeks prior to the LBO transaction. The trustee of a litigation trust created pursuant to LCC's chapter 11 plan alleged, among other things, that the distribution was avoidable as a fraudulent transfer under section 548 of the Bankruptcy Code, and he sought recovery of the €100 million transfer under section 550. The defendants moved to dismiss, arguing, among other things, that sections 548 and 550 do not apply extraterritorially.

The Bankruptcy Court's Ruling

Bankruptcy judge Gerber first examined whether the conduct at issue was sufficiently foreign to require the application of the presumption against extraterritoriality. He concluded that, for purposes of the motion to dismiss, the complaint adequately alleged that the center of gravity of the distribution was outside the U.S. because, among other things, it alleged that the transfer occurred between two Luxembourg companies.

Next, Judge Gerber searched for clear evidence that Congress intended section 548 of the Bankruptcy Code to apply outside the U.S. No court, he explained, has found such clear evidence in the text of section 548 itself. Even so, he noted, the presumption against extraterritoriality does not require such an explicit stamp on each statutory provision. Instead, the presumption can be rebutted by unequivocal evidence from the context of the statute that Congress intended for it to apply extraterritorially.

For guidance on this issue, Judge Gerber looked to the Fourth Circuit's ruling in French, where the court held that Congress expressed an intent for section 548 to apply extraterritorially by adopting parallel language in sections 548 and 541(a):

Section 541 defines "property of the estate" as, inter alia, all "interests of the debtor in property.". . . In turn, [section] 548 allows the avoidance of certain transfers of such "interest[s] of the debtor in property.". . . By incorporating the language of [section] 541 to define what property a trustee may recover under his avoidance powers, [section] 548 plainly allows a trustee to avoid any transfer of property that would have been "property of the estate" prior to the transfer in question as defined by [section] 541 even if that property is not "property of the estate" now.

French, 440 F.3d at 152. Thus, contrary to Maxwell and Madoff, the Fourth Circuit concluded that it makes no difference whether unrecovered property which has been fraudulently transferred is property of the estate.

Persuaded by the reasoning in French, Judge Gerber distinguished the case before him from Colonial Realty. In Colonial Realty, he explained, the Second Circuit recognized that sections 541(a)(1) and (a)(3) "were speaking as of different times." Specifically, section 541(a)(1) "speaks of property of the estate 'as of the commencement of the case'; whereas section 541(a)(3) speaks of property that enters the estate at a later time, when it is recovered under section 550." The judge wrote, "That plainly correct observation by the Second Circuit falls far short of holding that property not in the estate as of the commencement of the case cannot be brought into the estate because it is in a foreign locale."

On the basis of these and other similar authorities (see Lawrence Westerbrook, Avoidance of Pre-Bankruptcy Transactions in Multinational Bankruptcy Cases, 42 Texas Int'l L.J. 899 (Summer 2007)), Judge Gerber held that Congress could not have intended for property anywhere in the world to enter the bankruptcy estate once recovered pursuant to the avoidance powers while simultaneously not intending for such powers to reach anywhere in the world. This conclusion, he wrote, rests on the necessity "to protect the in rem jurisdiction of the bankruptcy courts over assets that Congress has declared become property of the estate when recovered under section 541(a)(3).


Although Judge Gerber did not address the issue, he apparently did not see himself as bound by the rulings in Maxwell and Madoff. This is consistent with the majority approach that bankruptcy courts are not bound by decisions of a single district court judge (or even two district court judges) in a multijudge district. Thus, Lyondell stakes out new territory in the Southern District of New York on the extraterritorial reach of the Bankruptcy Code's avoidance powers.

The ruling is a positive development for parties challenging extraterritorial transfers of a U.S. debtor's assets. However, its practical limitations were evident even in Lyondell, where the court also held that the complaint failed to establish that the court could exercise personal jurisdiction over certain of the foreign defendant-transferees. Even if the Bankruptcy Code's avoidance powers apply extraterritorially on their face, lack of personal jurisdiction over a transferee would significantly complicate efforts to enforce them.

Judge Gerber is not the only bankruptcy judge in the Southern District of New York to consider cross-border issues recently in connection with avoidance actions. For example, in Hosking v. TPG Capital Mgmt., L.P. (In re Hellas Telecomms. (Luxembourg) II SCA), 535 B.R. 543 (Bankr. S.D.N.Y. 2015), bankruptcy judge Martin Glenn ruled that, in a chapter 15 case, even though U.K. law governed actual fraudulent transfer claims asserted by the liquidators of a foreign debtor, a U.S. bankruptcy court has jurisdiction to adjudicate the claims applying U.K. law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Mark G. Douglas
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.