By Fredric Sosnick, Douglas P. Bartner, Joel Moss, Solomon J. Noh and Ned S. Schodek of Shearman & Sterling LLP
On January 4, 2016, in one of the recent decisions In re Lyondell Chemical Company, et al., the U. S. Bankruptcy Court for the Southern District of New York deviated from S.D.N.Y. precedent and held that, despite the absence of clear Congressional intent, the avoidance powers provided for under Section 548 of the Bankruptcy Code can be applied extraterritorially. As a result, a fraudulent transfer of property of a debtor’s estate that occurs outside of the United States can be recovered under Sec. 550 of the Bankruptcy Code.
The lack of clear Congressional intent that avoidance powers apply to foreign transactions was the basis for prior decisions in the S. D. N. Y., which took the opposite view and held that the avoidance powers only apply domestically. Those courts reasoned that if Congress intended for the avoidance powers to have extraterritorial reach, it could have so stated either the relevant statutory provisions governing avoidance actions under the Bankruptcy Code or in Sec. 541 itself. In the current decision In re Lyondell, judge Gerber expressed his respectful disagreement to the extent that his decision is inconsistent with prior decisions recognizing the general presumption against extraterritoriality absent explicit language to the contrary. This ruling furthers uncertainty in the S. D. N. Y. as to whether transfers that occur abroad may be avoided in a Chapter 7 or 11 case.
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