A recent decision by the United States Bankruptcy Court for the District of Delaware addressed the issue of whether a transfer of a debtor's assets that occurred outside of the United States can be avoided and recovered under the avoidance powers of the Bankruptcy Code. In re FAH Liquidating Corp., 2017 Bankr. LEXIS 1609 (Bankr. D. Del. June 13, 2017). The Bankruptcy Court held that a trustee or debtor-in-possession can avoid and recover fraudulent conveyances (and, by extension, preferential transfers) that occurred outside of the United States.

The liquidating trustee appointed under the confirmed Chapter 11 plan in the Fisker Automotive bankruptcy proceedings sued BMW, seeking to recover fraudulent conveyances under sections 544 and 548 of the Bankruptcy Code in excess of $32 million. The underlying contracts between Fisker and BMW required Fisker to pay BMW in excess of $32 million to develop and produce engines and related parts for vehicles and to expand BMW's production capacity to accommodate Fisker's purchases.

BMW moved to dismiss the lawsuit for failure to state a claim upon which relief can be granted. BMW argued that transfers could not be avoided as fraudulent conveyances under section 548 of the Bankruptcy Code because section 548 does not apply to extraterritorial transactions. Under United States law, there exists a presumption that federal laws do not apply extraterritorially unless Congress intended them to.

The Bankruptcy Court first determined that the transfers by Fisker, whose corporate headquarters were located in California, to BMW, located in Germany, were extraterritorial. The Bankruptcy Court determined that the transfers were extraterritorial by applying the "center of gravity" test, assessing whether the operative facts occurred inside or outside of the United States. The Court determined that the transfers were extraterritorial because the work was to be undertaken by a German company pursuant to German contracts, which stated that they were governed by German law, that any dispute was to be adjudicated in Munich, Germany, and that the payment by Fisker to BMW was required to be paid in euros. Thus, the Court determined that the transfers at issue were foreign transactions.

The Court next considered whether the presumption against extraterritoriality was implicated. Noting a split in existing case law, the Court needed to determine whether Congress intended section 548 of the Bankruptcy Code to apply to extraterritorial transfers. The Court held that Congress intended for Bankruptcy Code section 548 to apply extraterritorially because section 548 allows a trustee or debtor-in-possession to recover an interest in the debtor's property, thereby incorporating section 541 of the Bankruptcy Code, which defines property of the estate to include, among other things, "all legal or equitable interests of the debtor in property as of the commencement of the case" without a geographical limitation. Citing prior case law, the Court held "[i]t would be inconsistent (such that Congress could not have intended) that property located anywhere in the world could be property of the estate once recovered under section 550, but that a trustee could not avoid the fraudulent transfer and recover that property if the center of gravity of the fraudulent transfer were outside of the United States." Slip op. at 13. Thus, because Congress, in defining property of the estate, did not impose a territorial limitation, the Court reasoned that a fraudulent conveyance under section 548 could be recovered even if the underlying transaction was extraterritorial. The Bankruptcy Court's Fisker decision followed decisions by the Bankruptcy Court for the Southern District of New York and the Fourth Circuit Court of Appeals.

The Fisker Court also held that the liquidating trustee's cause of action against BMW for unjust enrichment would survive the motion to dismiss and, therefore, permitted these causes of action to proceed ahead to discovery and ultimately to trial if no resolution is reached between the parties.

The Fisker decision is part of a growing trend by bankruptcy courts to apply the avoidance powers provided by the Bankruptcy Code outside of the United States to recover property for the benefit of the estate and its creditors, giving courts and plaintiffs broad jurisdiction and ability to recover assets for the benefit of creditors. Accordingly, foreign vendors and contract parties of U.S.-based companies in financial distress or heading toward bankruptcy need to be concerned with protecting themselves from potential fraudulent conveyance and preference claims and should take appropriate action to limit or eliminate any potential liability. Foreign creditors can no longer rely upon the presumption that the avoidance power actions of the Bankruptcy Code do not apply extraterritorially to insulate themselves from such potential liability.