Opinion
Case No.: 2:17-bk-21386-SK Adv No: 2:19-ap-01383-SK
07-29-2020
IN RE: ZETTA JET USA, INC., Debtor(s). Jonathan D. King, Plaintiff(s), v. Export Development Canada, Glove Assets Investment Limited, Minsheng Business Aviation Limited, Minsheng Financial Leasing Co., Ltd., Li Qi, Truly Great Global Limited, Universal Leader Investment Limited, Yuntian 3 Leasing Company Designated Activity Company, Yuntian 4 Leasing Company Designated Activity Company, Defendant(s).
John K. Lyons, DLA Piper LLP (US), Chicago, IL, for Plaintiff(s). Joshua M. Mester, Jones Day, Brian K. Condon, Arnold & Porter Kaye Scholer LLP, Oscar D. Ramallo, Los Angeles, CA, Daniel T. Moss, David S. Torborg, Jones Day, Washington, DC, Michael J. Edelman, Vedder Price, New York, NY, Allison B. Hudson, Vedder Price P.C., Chicago, IL, Scott H. Olson, Vedder Price, San Francisco, CA, for Defendant(s).
John K. Lyons, DLA Piper LLP (US), Chicago, IL, for Plaintiff(s).
Joshua M. Mester, Jones Day, Brian K. Condon, Arnold & Porter Kaye Scholer LLP, Oscar D. Ramallo, Los Angeles, CA, Daniel T. Moss, David S. Torborg, Jones Day, Washington, DC, Michael J. Edelman, Vedder Price, New York, NY, Allison B. Hudson, Vedder Price P.C., Chicago, IL, Scott H. Olson, Vedder Price, San Francisco, CA, for Defendant(s).
COURT'S MEMORANDUM OF DECISION ON: 1) "MOTION TO DISMISS COUNTS II, III, VI, VII, IX, X, XI, XII, AND XV OF ADVERSARY COMPLAINT," FILED BY YUNTIAN 3 LEASING COMPANY DESIGNATED ACTIVITY COMPANY AND YUNTIAN 4 LEASING COMPANY DESIGNATED ACTIVITY COMPANY, DOCKET #32; AND 2) "MOTION TO DISMISS COUNTS II, VI, VII, XI, XII, AND XV OF ADVERSARY COMPLAINT," FILED BY MINSHENG BUSINESS AVIATION LIMITED, DOCKET #44
Sandra R. Klein, United States Bankruptcy Judge
On 7/22/20, the Court heard: 1) the "Motion to Dismiss Counts II, III, VI, VII, IX, X, XI, XII, and XV of Adversary Complaint" (Y3/Y4 Motion), Docket #32, filed by Yuntian 3 Leasing Company Designated Activity Company and Yuntian 4 Leasing Company Designated Activity Company; and 2) the "Motion to Dismiss Counts II, VI, VII, XI, XII, and XV of Adversary Complaint" (Minsheng Motion), Docket #44, filed by Minsheng Business Aviation Limited.
Appearances were as noted on the record. All parties were given an opportunity to be heard. At the conclusion of the 7/22/20 hearing, the Court took the Y3/Y4 Motion and the Minsheng Motion under submission. A Copy of the Court's Memorandum of Decision is attached hereto.
Attachment
Before the Court are a: 1) "Motion to Dismiss Counts II, III, VI, VII, IX, X, XI, XII, and XV of Adversary Complaint" (Y3/Y4 Motion), filed by Yuntian 3 Leasing Company Limited Designated Activity Company (Yuntian 3) and Yuntian 4 Leasing Company Designated Activity Company (Yuntian 4, and together with Yuntian 3, Y3/Y4), AP Docket #32; and 2) a "Motion to Dismiss Counts II, VI, VII, XI, XII, and XV of Adversary Complaint" (Minsheng Motion) filed by Minsheng Business Aviation Limited (Minsheng Business), AP Docket #44. In support of the Y3/Y4 Motion, Y3/Y4 filed: 1) a "Declaration of Sushil Nair" (Nair 12/9/19 Decl.); 2) a "Declaration of Jeremy John Richmond" (Richmond 12/9/19 Decl.); 3) a "Declaration of David S. Torborg" (Torborg 12/9/19 Decl.); and 4) "Unpublished Opinions," AP Docket #s 32-34.
All references to "Zetta USA Docket" are to the docket in In re Zetta Jet USA, Inc., 17-bk-21386-SK. All references to "Zetta Singapore Docket" are to the docket in In re Zetta Jet PTE Ltd., 17-bk-21387-SK. All references to "AP Docket" are to the docket in Jonathan D. King v. Yuntian 3 Leasing Company Designated Activity Company et al., 19-ap-01383-SK (AP).
In the Minsheng Motion, Minsheng Business, which is an affiliate of Y3/Y4, indicates that it is represented by the same counsel as Y3/Y4 and that each substantive argument in the Y3/Y4 Motion applies "with full force to the Trustee's claims asserted against Minsheng" and it incorporates by reference the Y3/Y4 Motion. Minsheng Motion at 7. Minsheng Business did not file a separate reply. Therefore, the Court analyzes the Y3/Y4 Motion and Minsheng Motion together and the Court's reference to Y3/Y4 includes Minsheng Business.
On 1/31/20, Jonathan D. King (King), in his capacity as chapter 7 trustee (Trustee) of Zetta Jet USA, Inc. (Zetta USA) and Zetta Jet PTE, Ltd. (Zetta Singapore), filed a "Combined Opposition to Motions to Dismiss Adversary Complaint by Defendants Yuntian 3 Leasing Company Limited Designated Activity Company, Yuntian 4 Leasing Company Limited Designated Activity Company, Minsheng Business Aviation Limited, Universal Leader Investment Limited, Glove Assets Investment Limited, and Truly Great Global Limited" (Opposition). AP Docket #55. In support of the Opposition, the Trustee filed a "Declaration of John K. Lyons" (Lyons 1/31/20 Decl.). AP Docket #55.
The motion to dismiss filed by Universal Leader Investment Limited (UL), Glove Assets Investment Limited (GA), and Truly Great Global Limited (TG), Docket #45, is analyzed separately.
On 2/21/20, Y3/Y4 and Minsheng Business filed a "Reply in Further Support of Their Motions to Dismiss Counts II, III, VI, VII, IX, X, XI, XII, and XV of Adversary Complaint" (Reply). AP Docket #61. On 3/23/20, Y3/Y4 and Minsheng Business filed a "Request for Judicial Notice in Support of Defendants Motions to Dismiss" (Y3/Y4 RJN) and a "Supplemental Declaration of David S. Torborg" (Torborg 3/23/20 Decl.) in support of the Y3/Y4 Motion. AP Docket #s 93, 95. On 5/5/20, the Trustee filed a "Limited Omnibus Objection to Requests for Judicial Notice" (Objection to Y3/Y4 RJN), AP Docket #123, and a "Request for Judicial Notice in Support of Trustee's Oppositions to Motions to Dismiss Filed by Defendants" (Trustee RJN). AP Docket #122. On 7/13/20, Y3/Y4 filed a "Reply to Objections to Defendants Yuntian 3 Leasing Company Limited Designated Activity Company, Yuntian 4 Leasing Company Designated Activity Company, and Minsheng Business Aviation Limited's Request for Judicial Notice in Support of Defendants' Motions to Dismiss" (Y3/Y4 RJN Reply). AP Docket #149.
On 7/22/20, the Court held a hearing on the Y3/Y4 Motion and the Minsheng Motion during which counsel for the Trustee, Y3/Y4 and Minsheng Business appeared and were given an opportunity to be heard. At the conclusion of the hearing, the Court took the Motions under submission. Based on the argument in the pleadings and argument of counsel during the hearing, and for the reasons stated in the analysis below, the Court rules as follows: the Y3/Y4 Motion and Minsheng Motion are granted regarding Counts II, III, VI, IX, X, XI, and XII, with leave to amend, and are denied regarding Counts VII and XV. This memorandum constitutes the Court's findings of facts and conclusions of law regarding the legal sufficiency of the counts at issue in the Y3/Y4 Motion and the Minsheng Motion.
I. Facts
a. Bankruptcy Cases
On 9/15/17, Zetta USA and Zetta Singapore filed chapter 11 petitions (collectively, Cases). Zetta USA Docket #1; Zetta Singapore Docket #1. King was appointed as the chapter 11 trustee, and after the Cases were converted, he was appointed as the chapter 7 trustee. Zetta USA Docket #s 159, 452, 458.
b. Adversary Proceeding
On 9/13/19, the Trustee filed an adversary complaint (Complaint) against: 1) Yuntian 3, 2) Yuntian 4, 3) Minsheng Financial Leasing Co., Ltd. (Minsheng Financial), 4) Minsheng Business, 5) Export Development Canada (EDC), 6) UL, 7) GA, 8) TG, and 9) Li Qi (collectively, the Defendants), which alleges that Zetta Singapore was formed and run by a con artist, Geoffrey Cassidy (Cassidy), who, over a two-year period, with the help of the Defendants, obtained $10 million from kickbacks, bribes and embezzlement, while saddling the Debtors with almost $500,000,000 in unsustainable debt incurred by purchasing overpriced aircraft in a down market. AP Docket #1.
Minsheng Financial was served on 6/4/20. AP Docket #143.
The Complaint contains the following counts, which are at issue in Y3/Y4 Motion and the Minsheng Motion:
1) Avoidance and Recovery of Fraudulent Transfers (Plane 6 and Plane 7), under 11 U.S.C. §§ 548 and 550, against Li Qi, UL, GA, Yuntian 3, Minsheng Financial, and Minsheng Business (Count II);
2) In the Alternative, Avoidance and Recovery of Preference Transfer, under 11 U.S.C. §§ 547 and 550, against Yuntian 3 (Count III);
3) In the Alternative, Avoidance and Recovery of Fraudulent Transfers, under 11 U.S.C. §§ 548 and 550, against Minsheng Business and Yuntian 4 (Count VI);
4) In the Alternative, Turnover of Property of the Bankruptcy Estate, under 11 U.S.C. § 542, against Yuntian 4, Minsheng Business, and Minsheng Financial (Count VII);
5) Avoidance and Recovery of Preference Transfer, under 11 U.S.C. §§ 547 and 550, against EDC and Yuntian 4 (Count IX);
6) Avoidance and Recovery of Preference Transfer, under 11 U.S.C. §§ 547 and 550, against Yuntian 4 (Count X);
7) In the Alternative, Turnover of Property of the Bankruptcy Estate, under 11 U.S.C. § 542, against Yuntian 4, Minsheng Financial, and Minsheng Business (Count XI);
8) Avoidance and Recovery of Preference Transfers (Legal Fees Transfers), under 11 U.S.C. §§ 547 and
550, against Minsheng Business, Minsheng Financial, Yuntian 3, and Yuntian 4 (Count XII); and
9) Disallowance of Claims, under 11 U.S.C. § 502(d), against Minsheng Financial, Minsheng Business, Yuntian 3, Yuntian 4, UL, GA, and EDC (Count XV).
Complaint ¶¶ 179-209, 238-256, 270-307, 318-21.
II. Legal Standards
a. Motions to Dismiss Generally
Rule 12(b)(6) of the Federal Rules of Civil Procedure (FRCP or Rules) applies in adversary proceedings and provides that a party may assert the defense of "failure to state a claim upon which relief can be granted." Fed. R. Bankr. P. 7012(b) ; In re Kvassay, 2014 WL 2446181, at *9 (B.A.P. 9th Cir. May 30, 2014). A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the allegations in the complaint. Lee v. City of L.A., 250 F.3d 668, 688 (9th Cir. 2001) ; Student Loan Mktg. Ass'n v. Hanes, 181 F.R.D. 629, 634 (S.D. Cal. 1998). "A Rule 12(b)(6) dismissal may be based on either a ‘lack of a cognizable legal theory’ or ‘the absence of sufficient facts alleged under a cognizable legal theory.’ " Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121 -22 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990) ).
In resolving a Rule 12(b)(6) motion, the Court must construe the complaint in the light most favorable to the plaintiff, and accept all well-plead factual allegations as true. Johnson, 534 F.3d at 1122 ; Knox v. Davis, 260 F.3d 1009, 1012 (9th Cir. 2001). The Court, however, is not bound by conclusory statements, statements of law, and unwarranted inferences cast as factual allegations. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-57, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir. 1994).
"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ... a plaintiff's obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citations omitted). A complaint "must contain either direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory." Id. at 562, 127 S.Ct. 1955 (emphasis in original) (quoting Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984) ).
In Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), the Supreme Court elaborated on the Twombly standard:
To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." ... A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.... Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.
The allegations of a complaint, along with other materials properly before the court on a motion to dismiss, can establish an absolute bar to recovery. See Weisbuch v. Cty. of L.A., 119 F.3d 778, 783 n.1 (9th Cir. 1997) ("If the pleadings establish facts compelling a decision one way, that is as good as if depositions and other expensively obtained evidence on summary judgment establishes the identical facts."). Generally, when ruling on a Rule 12(b)(6) motion to dismiss, courts cannot consider material outside the pleadings. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 998 (9th Cir. 2018) ; Lee v. City of L.A., 250 F.3d 668, 688 (9th Cir. 2001). If matters outside of the pleadings are "presented to and not excluded by the court," the motion to dismiss is converted to a motion for summary judgment under Rule 56 and all parties must be given a "reasonable opportunity to present all the material that is pertinent to the motion." Fed. R. Civ. P. 12(d). There are, however, two exceptions to this rule: 1) matters that the Court can take judicial notice of under Rule 201 of the Federal Rules of Evidence ; and 2) the "incorporation-by-reference doctrine, which treats certain documents as if they were "part of the complaint itself." Khoja, 899 F.3d at 999, 1002.
The party seeking dismissal under Rule 12(b)(6) has the burden of proof. In re Reed, 532 B.R. 82, 88 (Bankr. N.D. Ill. 2015) ; In re Enron Corp., 316 B.R. 434, 449 (Bankr. S.D.N.Y. 2004).
III. Arguments and Analysis
a. RJN
In the Y3/Y4 RJN, Y3/Y4 request that the Court take judicial notice of numerous documents filed in the Cases and in this AP. Y3/Y4 RJN at 3-5. The Trustee responds that Y3/Y4 do not adequately identify what they seek to have judicially noticed, and many requests seek judicial notice of disputed facts or conclusions allegedly contained in or drawn from public documents, which is improper under Ninth Circuit law. Objection to Y3/Y4 RJN at 2, 4 (citing Baird v. BlackRock Inst. Tr. Co. NA, 403 F. Supp. 3d 765, 774 (N.D. Cal. 2019) ; Segura v. Felker, 2010 WL 5313770, at *2 n.1 (E.D. Cal Dec. 20, 2010) ). The Trustee objects to the requests to the extent that they do not merely seek judicial notice of the existence or filing of the documents themselves. Id. at 2. Y3/Y4 reply that their requests for judicial notice are appropriate and comply with the Court's past rulings, and they sufficiently identified the facts to be judicially noticed, which are relevant and not reasonably subject to dispute. Y3/Y4 RJN Reply at 3-10.
Under Federal Rule of Evidence (FRE) 201, the Court can take judicial notice of "a fact that is not subject to reasonable dispute because it: (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." In re James, 300 B.R. 890, 894 (Bankr. W.D. Tex. 2003). The burden is on the party requesting judicial notice. Id. (ruling that the party requesting judicial notice has the burden of persuading the Court that the fact is "appropriate for judicial notice").
The Court can take judicial notice of the fact that undisputed matters of public record were filed or recorded. Lee v. City of L.A., 250 F.3d 668, 688-89 (9th Cir. 2001) ; C.B. v. Sonora Sch. Dist., 691 F. Supp.2d 1123, 1138 (E.D. Cal. 2009) ("The Court may take judicial notice of matters of public record, including duly recorded documents, and court records available to the public through the PACER system via the internet."). And, the Court may take judicial notice of its own docket. In re Tuma, 916 F.2d 488, 491 (9th Cir. 1990) ("We may take judicial notice of bankruptcy records in the underlying proceeding.").
Of the documents that Y3/Y4 requested that the Court take judicial notice of, the Court only considered Zetta USA's and Zetta Singapore's bankruptcy petitions, and Yuntian 3's and Yuntian 4's proofs of claims. Zetta USA Docket #1, Zetta Singapore Docket #1, Zetta USA Docket Proofs of Claim #s 150, 151; Y3/Y4 RJN at 3-5. The Court can take judicial notice of the fact that these pleadings or proofs of claims were filed, but the Trustee is correct, it cannot take judicial notice of any of the facts stated or alleged in those documents. In re Eckert, 485 B.R. 77, 81 (Bankr. M.D. Penn. 2013) ("A bankruptcy judge may take judicial notice of his or her own docket.... However, the truth of the contents of those records is not inferred by a judge taking judicial notice of the records."); In re Harmony Holdings, LLC, 393 B.R. 409, 413 (Bankr. D. S.C. 2008) ("[W]hile the Court may take judicial notice of the fact that a document or pleading has been filed for certain purposes, [citation], it does not necessarily take judicial notice of the facts contained within the pleading. Admission into evidence of facts contained within a pleading filed with a court must also be evaluated using the remaining evidentiary rules ....").
Similarly, the Court can take judicial notice of the proofs of claims filed in the Cases that are mentioned in the unopposed Trustee RJN at 2-3. The Court, however, cannot take judicial notice of any facts stated or alleged in those documents.
b. Incorporation by Reference
The "incorporation-by-reference" doctrine treats certain documents as if they were "part of the complaint itself." Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1002 (9th Cir. 2018). The incorporation by reference doctrine permits courts "to take into account documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the [plaintiff's] pleading." Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005) (citations and internal quotations omitted). A defendant may offer such a document, and the court may treat it as part of the complaint, and may assume that its contents are true for purposes of a 12(b)(6) motion to dismiss. U.S. v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). The incorporation by reference doctrine is designed to prevent "artful pleading by plaintiffs," who select only portions of documents that support their claims and omit portions of those very documents that weaken—or "doom"—their claims. Khoja, 899 F.3d at 1002-03.
In support of their positions, both sides relied extensively on documents that were not attached to the Complaint. The Court relies on the following exhibits attached to and authenticated by the Torborg 12/9/19 Decl.:
1) ¶ 6 Ex. B (9/20/16 "Aircraft Lease Agreement" for a plane with msn 9606 between Wells Fargo as trustee for Yuntian 3 as Lessor and TVPX as trustee for Zetta Jet Global 6000-2 Limited as Lessee),
2) ¶ 9 Ex. E (9/20/16 "Aircraft Lease Agreement" for a plane with msn 9688 between Wells Fargo as trustee for Yuntian 3 as Lessor and TVPX as trustee for Zetta Jet Global 6000-3 Limited as Lessee),
3) ¶ 12 Ex. H (10/26/16 "Aircraft Lease Agreement" for a plane with msn 6076 between Wells Fargo as trustee for Yuntian 4 as Lessor and TVPX as trustee for Zetta Jet Challenger 650-1 Limited as Lessee),
Complaint ¶ 112.
Complaint ¶ 112.
Complaint ¶ 124.
4) ¶ 14 Ex. J (9/20/16 $40 million invoice for the sale of an aircraft msn 9606, with Wells Fargo as trustee for UL as seller and Wells Fargo as trustee for Yuntian 3 as buyer),
5) ¶ 15 Ex. K (9/20/16 $40 million invoice for the sale of an aircraft msn 9688 with Wells Fargo as trustee for GA as seller and Wells Fargo as trustee for Yuntian 3 as buyer),
6) ¶ 16 Ex. L (9/19/16 "Payment Instructions - MSN 9606" addressed to IATS),
7) ¶ 17 Ex. M (9/19/16 "Payment Instructions - MSN 9688" addressed to IATS),
8) ¶ 18 Ex. N (7/20/16 "Inward Remittance Advice" regarding a $1,999,990 transfer from Zetta Singapore to Minsheng Business),
9) ¶ 19 Ex. O (9/12/16 to 9/14/16 Bank of Ireland "Balance and Transaction Report" showing a 9/13/16 $1,794,983.50 transfer and a 9/14/16 $1,794,983.50 from Zetta Singapore to Yuntian 3),
10) ¶ 20 Ex. P (9/19/16 "Outward Remittance Advice," showing a $40 million transfer from Minsheng Business to IATS),
11) ¶ 21 Ex. Q (9/19/16 "Outward Remittance Advice," showing a 9/19/16 $40 million transfer from Minsheng Business to IATS),
12) ¶ 22 Ex. R (9/21/16 "Inward Remittance Advice," showing a $6,205,120 transfer from IATS to Minsheng Business),
13) ¶ 23 Ex. S (9/21/16 "Inward Remittance Advice," showing a $6,205,120 transfer from IATS to Minsheng Business),
14) ¶ 24 Ex. T (12/1/16 to 12/31/16 Bank of Ireland "Balance and Transaction Report" showing a 12/22/16 $1,964,257.43 transfer, and a 12/23/16 $1,964,257.43 transfer from Zetta Singapore to Yuntian 3),
15) ¶ 25 Ex. U (3/1/17 to 3/31/17 Bank of Ireland "Balance and Transaction Report" showing a 3/20/17 $3,917,342.22 transfer from Zetta Singapore to Yuntian 3),
16) ¶ 26 Ex. V (6/1/17 to 6/30/17 Bank of Ireland "Balance and Transaction Report" showing a 6/27/17 $3,906,759.14 transfer from Zetta Singapore to Yuntian 3),
17) ¶ 27 Ex. W (7/1/17 to 7/31/17 Bank of Ireland "Balance and Transaction Report" showing a 7/26/17 $63,140.28 transfer from Zetta Singapore to Yuntian 4).
Complaint ¶ 108.
Complaint ¶ 108.
Complaint ¶ 106.
Complaint ¶ 106.
Complaint ¶¶ 112, 190, 195; Sch. B.
Complaint ¶¶ 112, 190, 195; Sch. B.
Complaint ¶ 106.
Complaint ¶ 106.
Complaint ¶ 106.
Complaint ¶ 106.
Complaint ¶¶ 112, 190, 195 ; Sch. B.
Complaint ¶¶ 112, 190, 195; Sch. B.
Complaint ¶¶ 112, 190, 195 ; Sch. B.
Complaint ¶ 281; Sch. C.
The Complaint references and relies on each of these exhibits. Therefore, consideration of this evidence is appropriate and does not convert this motion into a motion for summary judgment.
In support of the Opposition, the Trustee submitted a number of documents attached to and authenticated by the Lyons 1/31/20 Decl. The Trustee, however, presented no authority—and the Court was unable to locate any—indicating that it would be appropriate for the Court to consider documents submitted by the plaintiff when ruling on a motion to dismiss. Therefore, the Court will not consider any documents attached to the Lyons 1/31/20 Decl. because it believes that doing so would be an improper application of the incorporation by reference doctrine. See U.S. v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003) (stating that defendants may offer documents to be incorporated by reference) (emphasis added).
c. The Extraterritorial Application of 11 U.S.C. §§ 547, 548, and 550
Y3/Y4 argue that the Complaint's fraudulent transfer and preference claims should be dismissed because the Bankruptcy Code's avoidance and recovery provisions do not apply extraterritorially to transactions that are overwhelmingly foreign in nature. Y3/Y4 Motion at 11-12 (citing In re Bankr. Estate of Midland Euro Exch. Inc., 347 B.R. 708, 715 (Bankr. C.D. Cal. 2006) ). According to Y3/Y4, absent "clearly expressed congressional intent to the contrary," federal laws are construed to only apply domestically. Id. at 22 (citing RJR Nabisco, Inc. v. European Cmty., ––– U.S. ––––, 136 S. Ct. 2090, 2100, 195 L.Ed.2d 476 (2016) ). Y3/Y4 claim that the avoidance claims against them do not overcome the presumption against extraterritoriality because: 1) Congress did not affirmatively state that the Bankruptcy Code's avoidance and recovery provisions apply extraterritorially; and 2) the claims at issue relate to foreign transactions. Id. Y3/Y4 contend that filing proofs of claim in a bankruptcy case has no bearing on the applicability of the presumption against extraterritoriality. Id. at 26.
The Trustee responds that the presumption against extraterritoriality does not require dismissal of the Complaint because: 1) the Bankruptcy Code's avoidance statutes apply extraterritorially; 2) the presumption does not apply when the conduct occurs within the United States, and the parties here structured their aircraft transactions to "close through the United States" to obtain FAA registration and operate the planes under Zetta USA's Part 135 Certificate; and 3) the underlying obligations that the Trustee seeks to avoid were incurred in the United States: all payments were in U.S. dollars and were made through U.S. correspondent banks. Opposition at 23-24. The Trustee asserts that Y3/Y4 waived the presumption against extraterritoriality by filing proofs of claim. Id. at 23.
Y3/Y4 reply that the presumption against extraterritoriality requires dismissal of the avoidance and recovery claims, arguing that: 1) the Bankruptcy Code's avoidance and recovery provisions do not apply extraterritorially; and 2) the transfers at issue were foreign in nature and this case does not involve "domestic obligations." Reply at 16-27. They contend that filing proofs of claim does not extend the Bankruptcy Code's avoidance and recovery provisions. Id. at 19-21.
1. The Presumption Against the Extraterritorial Application of Federal Law
"Absent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application." RJR Nabisco, Inc. v. European Cmty., ––– U.S. ––––, 136 S. Ct. 2090, 2100, 195 L.Ed.2d 476 (2016). The question is not whether a court thinks "Congress would have wanted" a statute to apply to foreign conduct "if it had thought of the situation before the court" but whether Congress has "affirmatively and unmistakably instructed that the statute will do so." Id. "When a statute gives no clear indication of an extraterritorial application, it has none." Id. (quoting Morrison v. National Australia Bank Ltd., 561 U.S. 247, 255, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) ).
The Supreme Court has announced a two-step framework for analyzing extraterritoriality issues. First, courts analyze whether "the presumption against extraterritoriality has been rebutted—that is whether the statute provides a clear, affirmative indication that it applies extraterritorially." Id. at 2101. Second, courts examine a statute's "focus" to determine whether the case involves a domestic application. Id. If the relevant conduct occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the relevant conduct occurred in a foreign country, then the case involves an impermissible extraterritorial application even though some conduct occurred in the United States. Id.
2. The Language of the Statutes - 11 U.S.C. §§ 547, 548 and 550
Y3/Y4 argue that § 548 does not apply extraterritorially because neither its plain language nor reading in conjunction with other Bankruptcy Code provisions demonstrate congressional intent to apply § 548 extraterritorially. Y3/Y4 Motion at 22 (citing In re Estate of Midland Euro Exch. Inc., 347 B.R. 708, 719 (Bankr. C.D. Cal. 2006) (Mund, J.)). Y3/Y4 claim that § 548 addresses avoiding transfers of "an interest in the debtor in property," but the Bankruptcy Code does not define "property," and it does not provide any other "clear, affirmative indication" that this provision applies extraterritorially. Id. at 22-23 (citing In re CIL Ltd., 582 B.R. 46, 92 (Bankr. S.D.N.Y. 2018), amended on reconsideration, 2018 WL 3031094 (Bankr. S.D.N.Y. June 15, 2018) ; RJR Nabisco, Inc. v. European Cmty., ––– U.S. ––––, 136 S. Ct. 2090, 2100, 195 L.Ed.2d 476 (2016) ). Y3/Y4 highlight that §§ 547 and 550 also lack any clear indication that Congress intended extraterritorial application. Id. at 23 (citing In re Arcapita Bank B.S.C.(c), 575 B.R. 229, 245 (Bankr. S.D.N.Y. 2017) ).
Y3/Y4 contend that other statutes, like 11 U.S.C. § 541(a)(1) and 28 U.S.C. § 1334(e)(1), expressly provide for extraterritorial application, and Congress's failure to express an affirmative intent to apply §§ 547, 548, and 550 extraterritorially, limits them to their terms. Id. (citing In re Ampal-Am. Israel Corp., 562 B.R. 601, 612 (Bankr. S.D.N.Y. 2017) ; Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 265, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) ; CIL, 582 B.R. at 92 ). According to Y3/Y4, without evidence of Congress's intent to extend §§ 547, 548, or 550 beyond the United States, the presumption against extraterritorial application has not been rebutted. Id. at 23-24 (citing Midland Euro, 347 B.R. at 719 ; In re Maxwell Commc'n Corp. plc (Maxwell I), 186 B.R. 807, 820-21 (S.D.N.Y. 1995) ; Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222, 231 (S.D.N.Y. 2014) ( Madoff II ), rev'd on other grounds, 917 F.3d 85 (2d Cir. 2019) ; CIL, 582 B.R. at 92 ). And, Y3/Y4 assert that the Ninth Circuit has held that policy considerations alone do not overcome the presumption against extraterritoriality. Id. at 24 (citing Midland Euro, 347 B.R. at 718 ). The Trustee counters that there is no "clear statement rule" to determine congressional intent, and context can be consulted. Opposition at 24 (citing Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 265, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) ; WesternGeco LLC v. ION Geophysical Corp., ––– U.S. ––––, 138 S. Ct. 2129, 2137, 201 L.Ed.2d 584 (2018) ; In re French, 440 F.3d 145, 150 (4th Cir. 2006) ; In re Lyondell Chem. Co., 543 B.R. 127, 151 (S.D.N.Y. 2016) ). According to the Trustee, Congress's intent to apply the Bankruptcy Code's avoidance sections extraterritorially is "evident" in its text and overall statutory scheme. Id. The Trustee highlights that § 541 (a) defines property of the estate as all "interests of the debtor in property ... wherever located and by whomever held," which he argues demonstrates that a bankruptcy trustee is vested with title of the bankrupt in property which is located domestically and abroad. Id. (citing French, 440 F.3d at 151 ). The Trustee asserts that Congress intended § 548 to apply to all property that, absent a prepetition transfer, would have been property of the estate, wherever that property is located. Id. at 24-25 (citing French, 440 F.3d at 151 ; Lyondell, 543 B.R. at 151-55 ; Sec. Investor Protection Corp. v. Madoff Inv. Sec. LLC, 480 B.R. 501, 527 (Bankr. S.D.N.Y. 2012) ( Madoff I ); In re FAH Liquidating Corp., 572 B.R. 117, 124 (Bankr. D. Del. 2017) ).
The Trustee argues that Midland Euro is not binding authority, and the Ninth Circuit has not considered the extraterritorial application of §§ 547, 548, and 550. Id. at 25 (citing Camreta v. Greene, 563 U.S. 692, 709 n.7, 131 S.Ct. 2020, 179 L.Ed.2d 1118 (2011) ). And, the Trustee claims that Midland Euro conflicts with French and both Madoff I and Lyondell rejected Midland Euro and followed French. Id. The Trustee highlights that the court in Madoff I explained that Midland Euro "misunderstood French's holding," and § 548's reference to § 541 shows Congress' intent to grant the Trustee authority to avoid and recover all transfers that would have been property of the estate—even if not currently property of the estate—including "assets fraudulently transferred overseas." Id. (citing Madoff I ).
The Trustee argues that it is "hard to believe" that Congress intended the Bankruptcy Code to apply extraterritorially regarding property of the estate, but not regarding what would have been property of the estate but for a fraudulent transfer. Id. (citing Lyondell, 543 B.R. at 154 ). The Trustee notes that Congress's failure to apply § 548 to transfers outside of the United States creates a "loophole" for "unscrupulous debtors" to transfer their assets to shell entities abroad and avoid the Bankruptcy Code's reach. Id. (citing Midland Euro, 347 B.R. at 718 ). The Trustee questions why courts should "ascribe bad policy" to Congress and determine that United States avoidance laws do not apply when courts can apply United States laws "as Congress would wish." Id. at 25-26 (citing Jay Lawrence Westbrook, Avoidance of Pre-Bankruptcy Transactions in Multinational Bankruptcy Cases, 42 Tex. Int'l L.J. 899, 910 (2007) ).
In the Reply, Y3/Y4 highlight that the text of §§ 547 and 548 does not demonstrate extraterritorial intent and the Trustee does not argue to the contrary. Reply at 16. Y3/Y4 describe the Trustee's "textual" argument as a "strained" interpretation, which ignores § 541's definition of estate property as: 1) "all legal or equitable interests of the debtor in property as of the commencement of the case ," and 2) any "interest in property that the trustee recovers under section ... 550." Id. (emphasis in original) (citing §§ 541(a)(1) and (a)(3) ). Y3/Y4 argue that a plain reading of this text shows that "property of the estate" does not include interests of the debtor in property that were transferred prepetition and a majority of courts have held that property transferred by a debtor prepetition becomes estate property "only after it has been recovered by the bankruptcy trustee ." Id. (emphasis in original) (citing In re Rosenblum, 545 B.R. 846, 854 n.5 (Bankr. E.D. Pa. 2016) ; In re Huber, 2013 WL 6184986, at *3 (Bankr. W.D. Wash. Nov. 25, 2013) ; In re Fehrs, 391 B.R. 53, 72 (Bankr. D. Idaho 2008) ; In re Colonial Realty Co., 980 F.2d 125, 131 (2d Cir. 1992) ). Y3/Y4 contend that the majority view includes Midland Euro, which found that neither § 548's plain language nor its reading with other Bankruptcy Code sections show congressional intent to apply § 548 extraterritorially. Id. at 16-17.
Y3/Y4 argue that the court in French disregarded § 548's "plain reading" and instead took a "logical leap" in concluding that § 548 applies extraterritorially based on § 541. Id. at 17. Y3/Y4 claim that the Supreme Court in Morrison rejected French's attempt to discern whether Congress would have wanted a statute to apply extraterritorially. Id. (citing Keller Found./Case Found. v. Tracy, 696 F.3d 835, 844-45 (9th Cir. 2012) ). Y3/Y4 assert that Morrison held that "possible interpretations of statutory language do not override the presumption against extraterritoriality," and the same is true here. Id. at 17-18 (citing Morrison, 561 U.S. at 264, 130 S.Ct. 2869 ; RJR Nabisco, Inc. v. European Cmty., ––– U.S. ––––, 136 S. Ct. 2090, 2108, 195 L.Ed.2d 476 (2016) ). They argue that the Supreme Court prescribed the type of "speculation" that the Trustee engages in. Id. at 18 (citing Morrison, 561 U.S. at 261, 130 S.Ct. 2869 ).
Y3/Y4 contend that RJR Nabisco teaches that courts must apply the presumption against extraterritoriality separately to each statutory provision. Id. (citing RJR Nabisco, 136 S. Ct. at 2108 ). According to Y3/Y4, the Trustee's argument and the French court's analysis conflating §§ 541 and 548 is inconsistent with RJR Nabisco's guidance. Id. Y3/Y4 characterize the Trustee's argument regarding the Bankruptcy Code's "overall statutory scheme" as an attempt to "fill in the gaps in the textual argument with policy considerations." Id. Y3/Y4 argue that even where policy considerations arguably support extraterritorial application, they are insufficient to overcome the presumption against extraterritoriality. Id. (citing Midland Euro, 347 B.R. at 718 ).
Finally, Y3/Y4 claim that the "weight of authority" has found that Congress did not intend § 548 to apply extraterritorially. Id. at 18 n.5 (citing In re CIL Ltd., 582 B.R. 46, 92 (Bankr. S.D.N.Y. 2018), amended on reconsideration, 2018 WL 3031094 (Bankr. S.D.N.Y. June 15, 2018) ; In re Ampal-Am. Israel Corp., 562 B.R. 601,612 (Bankr. S.D.N.Y. 2017) ; In re Sherwood Investments Overseas Ltd., Inc., 2016 WL 5719450, at *11 (M.D. Fla. Sept. 30, 2016) ; Madoff II, 513 B.R. 222, 228-31 (S.D.N.Y. 2014), rev'd on other grounds, 917 F.3d 85 (2d Cir. 2019) ; Maxwell I, 186 B.R. 807, 820 (S.D.N.Y. 1995) ).
Title 11 United States Code § 547(b) provides that a trustee may avoid "any transfer of an interest of the debtor in property" to or for the benefit of a creditor, for or on account of an antecedent debt, made on or within 90 days before the petition date, while the debtor was insolvent, and which enables the creditor to receive more than it would if the case were a chapter 7, the transfer had not been made, and the creditor received payment under the Bankruptcy Code. Title 11 United States Code § 548(a)(1) provides that a trustee may avoid any transfer of "an interest of the debtor in property" made or incurred by the debtor within two years of the petition date if the debtor: A) acted with the intent to hinder, delay or defraud, or B) received less than reasonably equivalent value and: i) was insolvent on the date of the transfer or became insolvent because of the transfer; ii) was engaged in business or about to engage in business for which any property remaining was an unreasonably small capital; or iii) intended to incur or believed that it would incur debts beyond its ability to repay.
Title 11 United States Code § 550 provides that if a transfer is avoided under §§ 547 and 548, the trustee may recover for the benefit of the estate the property transferred.
Neither the Supreme Court nor the Ninth Circuit has addressed whether §§ 547 or 548 apply extraterritorially and there is disagreement among the lower courts regarding the issue. The majority of cases, which follow Midland Euro, hold that §§ 547 and 548 do not have extraterritorial application. See In re Estate of Midland Euro Exch. Inc., 347 B.R. 708 (Bankr. C.D. Cal. 2006) (declining to apply § 548 extraterritorially); In re Sherwood Investments Overseas Ltd., Inc., 2016 WL 5719450 (M.D. Fla. Sept. 30, 2016) (same); In re CIL Ltd., 582 B.R. 46 (Bankr. S.D.N.Y. 2018) (same); Madoff II, 513 B.R. 222 (S.D.N.Y. 2014), rev'd on other grounds, 917 F.3d 85 (2d Cir. 2019), petition for cert. denied ––– U.S. ––––, 140 S.Ct. 2824, 207 L.Ed.2d 157 (2020) (same); In re Maxwell Communication Corp. plc, 186 B.R. 807 (S.D.N.Y. 1995) (predating Midland Euro and declining to apply § 547 extraterritorially); In re Ampal-Am. Israel Corp., 562 B.R. 601 (Bankr. S.D.N.Y. 2017) (declining to apply § 547 extraterritorially). A minority of courts, which follow French, hold that Congress intended § 548 to apply extraterritorially. See In re French, 440 F.3d 145 (4th Cir. 2006) (applying § 548 extraterritorially); In re Lyondell Chem. Co., 543 B.R. 127 (Bankr. S.D.N.Y. 2016) (same); In re FAH Liquidating Corp., 572 B.R. 117 (Bankr. D. Del. 2017) (same); Sec. Investor Protection Corp. v. Madoff Inv. Sec. LLC, 480 B.R. 501 (Bankr. S.D.N.Y. 2012) (same and accusing the Midland Euro court of "misunderstanding" French ).
The cases that address extraterritoriality often do not distinguish between §§ 547 and 548 because the relevant language is the same in both statutes. In re Arcapita Bank B.S.C.(c), 575 B.R. 229, 244 n.6 (Bankr. S.D.N.Y. 2017) (noting that both §§ 547 and 548 allow a trustee "avoid any transfer of an interest of the debtor in property").
In French, George W. Liebmann (Liebmann), the chapter 7 trustee for Betty Irene French's estate (BIF), filed a § 548(a)(1)(B) avoidance action against BIF's children, Randy Lee French (RLF) and Donna Marie Shaka (DMS), to whom she had transferred a house in the Bahamas. In re French, 440 F.3d 145, 148 (4th Cir. 2006). BIF bought the house in 1976 and gifted it to RLF and DMS in Maryland in 1981, but they did not record the deed until "mid-2000," after BIF's financial problems began. Id. BIF's creditors filed an involuntary chapter 7 petition against her in October 2000, and a few years later, Liebmann filed an avoidance action against RLF and DMS, alleging that the transfer of the Bahamas house was a constructively fraudulent transfer. Id. RLF and DMS moved to dismiss, arguing among other things that § 548 did not apply because of the presumption against extraterritoriality. Id. at 149. The bankruptcy court rejected this argument, the district court affirmed, and RLF and DMS appealed. Id.
The Fourth Circuit found that "several indicia of congressional intent" rebutted the presumption against extraterritoriality: 1) § 541 defines "property of the estate" broadly as all of the debtor's property "wherever located," which includes foreign and domestic property; 2) § 548 allows a trustee to avoid certain transfers of "interest[s] of the debtor in property;" and 3) Congress "incorporate[ed]" the language of § 541 to define what property a trustee may recover under his or her § 548 avoidance powers. Id. at 151 -52. According to the Fourth Circuit, Congress manifested its intent that § 548 apply to all property that, absent a prepetition transfer, would have been "property of the estate," before the transfer in question, even if the property was not "property of the estate" now. Id. at 151 (emphasis in original).
Midland Euro involved a § 548 and § 550 action filed by Christopher Barclay (Barclay), the chapter 7 trustee for the consolidated estate of Midland Euro, Inc. (MEI), Midland Euro Exchange, Inc. (MEEI), Midland Group, Inc. (MGI), and other related entities (collectively Midland Entities), to set aside $897,000 they paid to the Swiss Financial Corporation, Ltd. (SFC), a foreign exchange brokerage. In re Estate of Midland Euro Exch. Inc., 347 B.R. 708, 710-11 (Bankr. C D. Cal. 2006) (Mund, J.). MGI was a Barbados corporation set up to hold proceeds of a Ponzi scheme, and it opened a trading account with SCF, which was formed under English law and headquartered in London. Id. at 712. The Midland Entities transferred $1 million from MEEI's Lloyd's Bank account in London to SFC's HSBC Bank account in New York. Id. at 713. Then, SFC transferred those funds to an unspecified bank account in England and took $897,000. Id. After involuntary bankruptcy petitions were filed against the Midland Entities, Barclay sued SFC. Id.
SFC moved to dismiss the complaint, arguing, among other things, that based on the plain language of § 548, Congress did not intend for it to apply extraterritorially. Id. at 711, 715. Barclay countered that Congress intended to apply § 548 extraterritorially, arguing that a decision otherwise would create a "loophole" in the Bankruptcy Code by allowing unscrupulous debtors to hide their assets abroad and outside the reach of the United States bankruptcy system. Id. at 711, 718.
The court granted SFC's motion to dismiss, observing that nothing in § 548's text demonstrated that Congress intended it to apply extraterritorially. Id. at 717, 720. The court then examined § 541 in conjunction with § 548, to determine whether it showed congressional intent to apply the latter extraterritorially. Id. at 717-18. The court noted that there was a split of authority regarding whether "property of the estate" defined in § 541 includes property that could be, but had not yet been, recovered as a fraudulent transfer. Id. It held that allegedly fraudulent transfers do not become property of the estate until they are avoided. Id. (citing In re Saunders, 101 B.R. 303, 304-05 (Bankr. N.D. Fla. 1989) ; FDIC v. Hirsch (In re Colonial Realty Co., 980 F.2d 125, 131 (2d Cir. 1992) ; Dunes Hotel Assocs. v. Hyatt Corp., 245 B.R. 492, 504-05 (D.S.C. 2000) ).
The court recognized that policy considerations favored extraterritorial application of § 548 because failing to extend § 548 to extraterritorial transfers creates a "loophole" for unscrupulous debtors to freely transfer their assets to shell entities abroad. Id. at 718. But, the court balanced this policy concern with the presumption against extraterritoriality's purpose to protect against unintended clashes between American law and other nations' laws, which could result in "international discord." Id. And, it noted that in the Ninth Circuit, policy concerns alone are insufficient to overcome the presumption against extraterritoriality. Id. (citing Subafilms, Ltd. v. MGM-Pathe Communications Co., 24 F.3d 1088, 1096 (9th Cir. 1994) (en banc)).
The court in Midland Euro took issue with a "logical leap" made by the Fourth Circuit in French, that by "incorporating" the language of " § 541 to define what property a trustee may recover," § 548 allows a trustee to avoid any transfer of property that "would have been " property of the estate before the transfer in question. Id. at 718-19 (emphasis in original). The court stated that this reasoning "presumes" that the debtor retains a "legal or equitable" interest in the property that was transferred prepetition and ignores the language of §§ 541(a)(1) and (a)(3) that the debtor must have an interest in the property "as of the commencement of the case" and that property of the estate includes "any interest in property that the trustee recovers under" § 550. Id. at 719 (emphasis in original). According to the court in Midland Euro, the Bankruptcy Code is "very clear to any ordinary reader": fraudulently transferred property only becomes property of the estate when the transfer has been set aside. Id. The court described French's methodology as "unclear and convoluted" and noted having a "great deal of trouble" following it. Id. The court concluded by suggesting that the "true reason" the Fourth Circuit extended extraterritorial application to § 548 was because it sought to uphold the "purposes" of the Bankruptcy Code's avoidance provisions to prevent debtors from illegitimately disposing of property that should be available to their creditors. Id. The court reiterated, however, that in the Ninth Circuit, policy considerations alone are not valid grounds for overcoming the presumption against extraterritoriality. Id. (citing Subafilms, Ltd. v. MGM-Pathe Communications Co., 24 F.3d 1088, 1096 (9th Cir. 1994) ).
The Trustee urges the Court to adopt French's holding that Congress intended to apply the Bankruptcy Code's avoidance provisions extraterritorially but the Court agrees with Judge Mund that French's reasoning is "convoluted" and hard to follow. Midland Euro, 347 B.R. at 719. If Congress "clearly," "affirmatively," and "unmistakably" intended §§ 547 and 548 to apply extraterritorially, it would not have expressed its intent in such an unclear way as the court in French thought, which has led to such disagreement among the courts.
According to the Trustee, "[t]here is no ‘clear statement rule’ to determine Congressional intent, rather, ‘context can be consulted as well.’ " Opposition at 24 (quoting Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 265, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) ; citing WesternGeco LLC v. ION Geophysical Corp., ––– U.S. ––––, 138 S. Ct. 2129, 2137, 201 L.Ed.2d 584 (2018) ; French, 440 F.3d at 150 ; In re Lyondell Chem. Co., 543 B.R. 127, 151 (S.D.N.Y 2016) ). He argues that Congress's intent to apply the Bankruptcy Code's avoidance and recovery provisions extraterritorially is evident from its text and overall statutory scheme, citing § 541(a)(1), which defines estate property as all "interests of the debtor in property ... wherever located and by whomever held." Id. The Trustee, however, selectively quotes from Morrison, which states:
[W]e do not say, as the concurrence seems to think, that the presumption against extraterritoriality is a "clear statement rule," if by that is meant a
requirement that a statute say "this law applies abroad." Assuredly context can be consulted as well.
Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 265, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) (internal citations omitted). According to the Supreme Court, "when a statute provides for some extraterritorial application, the presumption against extraterritoriality operates to limit that provision to its terms," and "the presumption against extraterritoriality must be applied separately" to each statutory provision. Morrison, 561 U.S. at 265, 130 S.Ct. 2869 ; RJR Nabisco, Inc. v. European Cmty., ––– U.S. ––––, 136 S. Ct. 2090, 2108, 195 L.Ed.2d 476 (2016) (stating that "the presumption against extraterritoriality must be applied separately to both RICO's substantive prohibitions and its private right of action"). Therefore, to the extent that the Trustee advocates that the Court consider § 541(a)(1) to define the property that he can avoid under § 548, the Court declines to do so.
Finally, the Trustee urges the Court to adopt French for policy reasons, but there are a number of problems with this request. First, the question is not whether "Congress would have wanted " a statute to apply to foreign conduct if it had thought of the situation before the court, but whether Congress "affirmatively and unmistakably" instructed that the statute will do so. RJR Nabisco, Inc. v. European Cmty., ––– U.S. ––––, 136 S. Ct. 2090, 2100, 195 L.Ed.2d 476 (2016) (emphasis added). Second, in the Ninth Circuit, policy considerations alone do not overcome the presumption against extraterritoriality. Subafilms, Ltd. v. MGM-Pathe Communications Co., 24 F.3d 1088, 1096 (9th Cir. 1994) (rejecting the argument that the presumption against extraterritoriality can be overcome if there would be "adverse effects within the United States" and indicating that the "ultimate touchstone of extraterritoriality" is determining Congress' intent); Midland Euro, 347 B.R. at 719 (stating that in the Ninth Circuit, policy considerations alone are insufficient to overcome the presumption against extraterritoriality). And finally, it is for Congress, and not the courts, to weigh good and bad policy regarding the extraterritorial application of §§ 547 and 548. See Midland Euro, 347 B.R. at 720 (indicating that "Congress is the ultimate arbiter of the laws it enacts and it has the power to alter the language of the statute to clearly manifest its intent.").
In a footnote, the Trustee contends that Midland Euro did not consider § 541(a)(3). Id. at 26 n.13 (citing Jay Lawrence Westbrook, Avoidance of Pre-Bankruptcy Transactions in Multinational Bankruptcy Cases, 42 Tex. Int'l L.J. 899, 908 (2007) ). As discussed above, it did.
3. Relevant Transactions
Y3/Y4 assert that courts look to a statute's "focus" to determine whether the claims at issue call for "improper foreign application." Y3/Y4 Motion at 24 (citing RJR Nabisco, Inc. v. European Cmtv.. ––– U.S. ––––, 136 S. Ct. 2090, 2101, 195 L.Ed.2d 476 (2016) ). They contend that the focus of the Bankruptcy Code's avoidance and recovery provisions is the initial transfer, which depletes property that would have become property of the estate. Id. (citing In re CIL Ltd., 582 B.R. 46, 93 (Bankr S.D.N.Y. 2018) ; In re Maxwell Commc'n Corp. plc by Homan (Maxwell II), 93 F.3d 1036, 1047 (2d Cir. 1996) ; In re Maxwell Commc'n Corp. plc (Maxwell I), 186 B.R. 807, 817 (S.D.N.Y. 1995) ).
This analysis includes only the facts alleged in the Complaint regarding Yuntian 3, Yuntian 4, and Minsheng Business.
Y3/Y4 argue that here, the relevant transactions are "indisputably foreign" because: 1) none of the parties in interest were located in the United States, but instead they "hail from" Singapore, China, Hong Kong, Ireland, Canada, and the British Virgin Islands (BVI); 2) the funds came from and were transferred to entities outside the United States; 3) the relevant agreements required application of English law; and 4) the specific acts relevant to each transfer occurred abroad. Id. at 17, 24-25 (citing Torborg 12/9/19 Decl. ¶¶ 5, 8, Exs. A & D at § 11.3; Complaint ¶¶ 20, 22, 24, 26, 28, 41 -45, 97-99, 106, 108, 122-24).
Y3/Y4 argue that the Complaint "clouds" the nature of the transactions by attributing acts to "Zetta" when in fact only Zetta Singapore was involved in any of the financial transfers at issue. Id. at 24 n.13 (citing Complaint ¶ 112; Torborg 12/9/19 Decl. ¶¶ 18-27, Exs. N, O, P, Q, R, S, T, U, V, W).
Y3/Y4 contend that the following transactions alleged in the following counts were foreign:
a) Count II - 11 U.S.C. §§ 548, 550 (Avoidance and Recovery of Fraudulent Transfers regarding Planes 6 and 7):
1. a 7/20/16 $2 million "goodwill payment" from Zetta Singapore's account in Singapore, to Minsheng Business's Hong Kong account, and $15.3 million in rent payments from Zetta Singapore's Singapore account to Yuntian 3's account in Ireland. Y3/Y4 Motion at 19-20, 25; Complaint ¶¶ 190, 195; Torborg 12/9/19 Decl. Ex. N; Schedule B;
2. a 9/19/16 $12.4 million transfer ($12.4 Million Transfer) from Minsheng Business's Hong Kong account to an Insured Aircraft Title Service, Inc. (IATS) escrow account in New York to buy Planes 6 and 7. Two days later, the $12.4 Million Transfer was resent to Minsheng Business's Hong Kong account and Minsheng Business used the funds to pay fees, down payments and deposits for four new Challenger aircraft, with approximately $6.8 million applied to the deposit for Plane 12 and approximately $5.55 million for the purchase of three aircraft that were not delivered (Undelivered Aircraft). Y3/Y4 Motion at 16-18, 20, 25; Complaint ¶¶ 190, 194;
b) Count III - 11 U.S.C. §§ 547, 550 (Avoidance and Recovery of Preference Transfers as an alternative to Count II): recovery of $3,906,759 of rental payments ($1,963,379.57 for Plane 6 and $1,963,379.57 for Plane 7) made from Zetta Singapore's account in Singapore to Yuntian 3's account in Ireland on 6/27/17, Y3/Y4 Motion at 18-19, 27; Complaint ¶¶ 198-200; Schedule B;
c) Count VI - 11 U.S.C. §§ 548, 550 - (Avoidance and Recovery of the $12.4 Million Transfer as an alternative to Count II), Y3/Y4 Motion at 20, 25, 27; Complaint ¶ 240;
d) Count IX - 11 U.S.C. §§ 547, 550 (Avoidance and Recovery of Preference Transfers): a 7/26/16 $956,244.53 rental payment regarding Plane 12 made within 90 days of the petition date from Zetta Singapore's account in Singapore to an EDC account for the benefit of
There is no allegation or information regarding where the EDC account was located.
Yuntian 4, Y3/Y4 Motion at 20, 25 (citing Torborg 12/9/19 Decl. ¶¶ 24-27, Exs. T, U, V, W; Complaint ¶ 271); Complaint ¶¶ 271, 276-78; Schedule C;
e) Count X - 11 U.S.C. §§ 547, 550 (Avoidance and Recovery): a 7/26/17 $63,140.28 transfer regarding Plane 12 from Zetta Singapore's Singapore account to Yuntian 4's Ireland account, Y3/Y4 Motion at 19-20, 27; Complaint ¶ 281; Schedule C;
f) Count XII - 11 U.S.C. §§ 547, 550 (Avoidance and Recovery of Preference Transfers): recovery of $652,757 in legal fees (Legal Fees Transfers) that Zetta Singapore paid from its Singapore account to various law firms for the benefit of Minsheng Business, Minsheng Financial, Yuntian 3, and Yuntian 4, Y3/Y4 Motion at 20, 25; Complaint ¶¶ 298, 305-06; Schedule F; and
g) Count XV - 11 U.S.C. § 502(d) (Disallowance of Claims), Complaint ¶ 321.
Y3/Y4 argue that the $17.3 million in goodwill and rental payments at issue in Counts II and III regarding Planes 6 and 7, and the $63,140 rental payment at issue in Count X regarding Plane 12, were sent from Zetta Singapore's account in Singapore directly to their Ireland accounts. Y3/Y4 Motion at 19, 25 (citing Torborg 12/9/19 Decl. ¶¶ 24-27, Exs. T, U, V, W; Complaint ¶ 271). Y3/Y4 claim that the $12.4 Million Transfer at issue in Counts II and IV originated in Minsheng Business's Hong-Kong-based account and the funds were almost immediately returned to that same account, without ever entering the control or accounts of Zetta Singapore or Zetta USA. Id. at 25 (Torborg 12/9/19 Decl. ¶¶ 16-17, 22-23, Exs. L, M, R, S; Complaint ¶ 106). Y3/Y4 assert that this transfer's "fleeting," two-day connection to a U.S.-based escrow agent, IATS, and the parties' use of nominal U.S.-based intermediaries to facilitate the transactions is immaterial. Id at 17-18, 25-26 (Torborg 12/9/19 Decl. ¶¶ 16-17, 22-23, Exs. L, M, R, S; Complaint ¶ 108; Kiobel v. Royal Dutch Petroleum Co., 569 U.S. 108, 124-25, 133 S.Ct. 1659, 185 L.Ed.2d 671 (2013) ; Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 266, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) ). According to Y3/Y4, Yuntian 3, acting through its trustee, Wells Fargo, entered into two "Sale and Leaseback Purchase Agreements" with UL and GA, respectively, and TVPX ARS Inc. (TVPX), acting as trustee for Zetta Jet 6000-2 and Zetta Jet 6000-3, to buy and lease back Planes 6 and 7; with TVPX and Wells Fargo acting on behalf of Yuntian 3, Zetta Jet 6000-2 and Zetta Jet 6000-3, "the real parties in interest." Id. at 17 n.6 (citing Complaint ¶¶ 20, 108).
Y3/Y4 contend that the $956,245 rent payment at issue in Count IX was between two foreign entities, Zetta Singapore and EDC, and there is no allegation that these transfers touched the United States. Id. at 25 (citing Complaint ¶ 271).
Y3/Y4 claim that the $652,757 of Legal Fees Transfers at issue in Count XII were only putatively related to the Planes 6 and 7 sale and leasing transaction, and the Trustee alleges in conclusory fashion that the Legal Fees Transfers were for their benefit. Id. at 20. And, Y3/Y4 argue that the Legal Fees Transfers that Zetta Singapore paid law firms under Planes 6, 7, and 12's sale and leasing agreements and the Undelivered Aircraft were inherently foreign transactions. Id. at 25 (citing Complaint ¶ 298; Sch. F).
According to Y3/Y4, because all of the "relevant conduct" occurred outside the United States, the challenged transfers were extraterritorial. Id. (citing Kiobel v. Royal Dutch Petroleum Co., 569 U.S. 108, 124, 133 S.Ct. 1659, 185 L.Ed.2d 671 (2013) ; In re CIL Ltd., 582 B.R. at 93 ). Y3/Y4 argue that the "minimal contacts" with the United States here are insufficient for the Court to find that the relevant conduct was domestic. Id. at 26. They highlight that in Midland Euro, the court held that the relevant conduct occurred abroad even though the funds were transferred through a bank account in New York. Id. They note that in Maxwell I, the relevant transfers occurred between foreign entities but derived from the sale of U.S. assets and the initial transfer was routed through the transferee's bank account in New York and the court concluded that the funds briefly touching a U.S.-based account was incidental. Id. Y3/Y4 emphasize that in Loginovskaya, the Second Circuit held that the relevant transfer was foreign even though funds were wired to New York. Id. (citing Loginovskaya v. Batratchenko, 764 F.3d 266, 275 (2d Cir. 2014) ).
The Trustee responds that the relevant conduct occurred in the United States. Opposition at 29. He contends that the test for whether the relevant conduct was extraterritorial is "flexible" and allows courts to consider all components of the transfers, including whether the participants, acts, targets, and effects involved in the transactions are primarily foreign or primarily domestic. Id. (citing In re FAH Liquidating Corp., 572 B.R. 117, 124 (Bankr. D. Del. 2017) ). The Trustee asserts that Y3/Y4 ignore the domestic focus of the transactions at issue: "three planes, financed through closings in the U.S., involving transfers into and through the U.S. bank accounts, using U.S. corporate trusts to serve as fronting lessors/lessees, registered with the FAA, operated by a domestic debtor, and generating the income for the transfers the Trustee seeks to avoid and recover." Id.
The Trustee claims that the Debtors and the "Defendants" deliberately structured the planes' acquisitions and the "disguised financing loans" to close in and flow through the United States, highlighting that: 1) the Defendants required the planes to be registered with the FAA and to be subleased to Zetta USA; 2) the Defendants and the Debtors ensured that the disguised financing transactions closed in the United States; 3) the Defendants and the Debtors used U.S. corporate trustees to hold legal title to the planes and act as nominal owners, lessors, and lessees; 4) the Defendants and the Debtors used U.S. escrow agents with U.S. bank accounts who paid proceeds to the Defendants', the Debtors', and Bombardier's U.S. bank accounts; 5) the Defendants and the Debtors required that the planes be maintained at a U.S. maintenance facility; 6) the security interests were filed in the United States; and 7) the Defendants and the Debtors required all payments be made in U.S. dollars, so that the transfers had to be made directly from U.S. banks or through U.S. correspondent banks. Id. at 21-22, 29-30 (emphasis in original) (citing Complaint ¶¶ 55, 112, 124; Lyons 1/31/20 Decl. ¶¶ 9-11, Exs. C, D, & E; Torborg 12/9/19 Decl. ¶¶ 14-15, 20-21, Exs. J, K, P, & Q).
The Trustee argues that the parties' nationalities are irrelevant and the transactions at issue involved lending money to the Debtors to buy and operate United States-based planes under the FAA's regulatory scheme. Id. at 30. According to the Trustee, the fact that some of the parties were foreign does not change the "focus" of the transfers from the United States. Id. (citing In re Arcapita Bank B.S.C., 575 B.R. 229, 245 (Bankr. S.D.N.Y. 2017) ).
Regarding choice-of-law provisions, the Trustee contends that: 1) they do not make transactions extraterritorial because the focus is on the parties' conduct, not a contractual choice-of-law clause; and 2) a court can disregard a choice-of-law clause, which does not bind third parties, such as a bankruptcy trustee. Id. (citing In re Eagle Enters., Inc., 223 B.R. 290 (Bankr. E.D. Pa. 1998) ).
The Trustee argues that even though TVPX and Wells Fargo were "nominal" players, they were also critical because U.S. corporate trusts were necessary for the planes to be registered with the FAA, and without FAA registration and Zetta USA's Part 135 Certificate, the planes had no commercial value. Id. The Trustee claims that this situation is a "far cry" from the use of "professionals" in CIL. Id.
Finally, the Trustee asserts that the transfers through U.S. bank accounts were not "fleeting" but critical to maintain the U.S. focus of the transactions. Id. at 31. The Trustee contends that all transfers made at the closing on the "Minsheng Refinancing" occurred in the United States because the transfers were made from a U.S. bank account by IATS, a U.S. escrow agent. Id. (citing Y3/Y4 Motion at 25). The Trustee argues that the court in Arcapita found that the defendants' use of a bank in New York "touched and concerned the United States" and displaced the presumption against extraterritoriality, and Arcapita distinguished Maxwell I and Loginovskaya as cases that involved a U.S. bank on only one side of the challenged transfer. Id. (citing Arcapita, 575 B.R. at 245 ; Midland Euro, 347 B.R. 708 ). The Trustee contends that here, as in Arcapita, all parties to the "Minsheng Refinancing" agreed to use a domestic escrow agent and its domestic bank account to complete the transfers. Id. The Trustee claims that this deliberate use of U.S. banking law by the parties on both sides of the transfers provides sufficient contact with the United States to make the $12.4 Million Transfer to Minsheng Financial at issue in Counts II, VI, and VII domestic transfers. Id. The Trustee asserts that using U.S. dollars as the denomination of payment further supports this conclusion. Id. at 31 n.18 (citing FAH Liquidating Corp., 572 B.R. at 124 ).
According to the Complaint, the Minsheng Refinancing was a June to September 2016 multi-step, multi-party transaction that involved "Minsheng" refinancing Planes 6 and 7. Complaint ¶¶ 96-116. !t is described in more detail below.
As discussed below, the evidence shows that the $12.4 Million Transfer was to Minsheng Business.
Y3/Y4 reply that if the conduct relevant to the statute's focus occurred in a foreign country, then the case involves an impermissible extraterritorial application, "regardless of whether other conduct occurred in [the] U.S." Reply at 22 (emphasis in original) (citing RJR Nabisco, Inc., 136 S. Ct. at 2094 ). Y3/Y4 assert that the focus of the avoidance and recovery provisions is the "initial transfer ." Id. (emphasis in original) (citing In re CIL Ltd., 582 B.R. 46, 93 (Bankr. S.D.N.Y. 2018) ; In re Picard, ex rel. Bernard L. Madoff Inv. Sec. LLC, 917 F.3d 85, 99 (2d Cir. 2019), petition for cert. denied ––– U.S. ––––, 140 S.Ct. 2824, 207 L.Ed.2d 157 (2020) ; In re Ampal-Am. Israel Corp., 562 B.R. 601,614 (Bankr. S.D.N.Y. 2017) ; In re Maxwell Commc'n Corp. plc by Homan (Maxwell II), 93 F.3d 1036, 1047 (2d Cir. 1996) ). Y3/Y4 contend that the Trustee focuses on "tangential" details, and the Complaint does not plead substantial connections between the transfers and the United States. Id. Y3/Y4 highlight that all of the transfers were among foreign entities, and the property at issue allegedly belonged to Zetta Singapore, the initial transferor. Id. at 22-23 (citing Complaint ¶¶ 20, 22, 24, 26, 28, 41-45, 97-99, 106, 108, 122-24, 190, 194-95, 199; Zetta USA Docket #897). According to Y3/Y4, courts give significant weight to the nationality and location of the parties. Id. at 23 (citing In re CIL, 582 B.R. at 93-94 ; In re Maxwell (Maxwell I), 186 B.R. 807, 817 (S.D.N.Y. 1995) ; In re Sherwood Investments Overseas Ltd., Inc., 2015 WL 4486470, at *20 (Bankr. M.D. Fla. July 22, 2015), aff'd 2016 WL 5719450 (M.D. Fla. Sept. 30, 2016) ).
Y3/Y4 contend that: 1) the $15.3 million in rental payments at issue in Count II, the $3,906,759.14 in rental payments at issue in Count III, and the $63,140.28 rental payment at issue in Count X were sent directly from Zetta Singapore's account in Singapore to their accounts in Ireland; and 2) the $956,244.53 rental payment in Count IX involved two foreign entities, Zetta Singapore and EDC, and there has been no suggestion that the transfer touched the United States. Id. (citing Torborg 12/9/19 Decl. ¶¶ 24-27, Exs. T, U, V, W). Y3/Y4 assert that because these transfers occurred entirely abroad, they are not domestic and cannot be avoided. Id. at 23-24 (citing In re Ampal-Am. Israel Corp., 562 B.R. 601, 614 (Bankr. S.D.N.Y. 2017) ; In re Sherwood, 2015 WL 4486470 ). Y3/Y4 claim that the currency used in a transaction does not necessarily have any bearing on whether the transaction is domestic, and the bank account statements attached to the Motion indicate that the transfers originated in Singapore and arrived in an account in Ireland with "USD" as the account's designated currency. Id. at 24 (citing Banco Safra S.A. - Cayman Islands Branch v. Samarco Mineracao S.A., 2019 WL 2514056, at *5 (S.D.N.Y. June 18, 2019) ; Torborg 12/9/19 Decl. ¶¶ 24-27, Exs. T, U, V, W). Y3/Y4 argue that there is no basis to believe (or allegation in the Complaint) that the funds were not in U.S. dollars before the transfers or that they otherwise passed through U.S. banks. Id.
Y3/Y4 assert that the $12.4 Million Transfer at issue in Counts II and IV originated in Minsheng Business's Hong-Kong-based account and was almost immediately returned to that account without ever entering the Debtors' control. Id. (citing Torborg 12/9/19 Decl. ¶¶ 16-17, 22-23, Exs. L, M, R, S; Complaint ¶ 106). They claim that the funds' brief landing in a U.S. escrow account does not defeat the presumption against extraterritoriality. Id. at 24-25 (citing Midland Euro, 347 B.R. at 715 ; Maxwell I, 186 B.R. at 817 & n.5 ; Banco Safra S.A., 2019 WL 2514056, at *5 ). Y3/Y4 contend that Arcapita is distinguishable because the initial transfers occurred in the United States, whereas here, as in Midland Euro, Maxwell I, and Banco Safra, the initial transfers occurred abroad. Id. at 25. Y3/Y4 add that the Bankruptcy Code's avoidance and recovery provisions do not apply to mere "conduits," such as escrow agents. Id. (citing In re Williams, 104 B.R. 296, 299 (Bankr. C.D. Cal. 1989) ).
In a footnote, Y3/Y4 argue that the $652,757 Legal Fees Transfers that the Trustee seeks to avoid in Count XII involved either zero U.S. contacts, or at most only one side of the transfer was U.S.-based. Id. at 25 n.8 (citing Complaint ¶ 298).
Finally, Y3/Y4 contend that any "incidental and tangential touchpoints" are insufficient to displace the presumption against extraterritoriality. Id. They highlight that using U.S. corporate trusts so that the planes could be registered with the FAA and operated under Zetta USA's Part 135 Certificate was "nominal." Id. at 26. Y3/Y4 assert that there is no suggestion that Wells Fargo and TVPX had an economic interest in the transactions or engaged in any conduct that Congress sought to regulate under §§ 547 and 548. Id. Y3/Y4 argue that the use of U.S.-based professionals does not transform a foreign transaction into a domestic one. Id. (citing In re CIL, 582 B.R. at 96 ; Ampal, 562 B.R. at 613 ). They claim that FAA certificates are irrelevant to the Bankruptcy Code's avoidance and recovery provisions, and structuring a transaction to comply with FAA registration requirements has no bearing on where the transfers took place and has little application to the claims against them. Id. Y3/Y4 emphasize that when they and Minsheng Business became involved with the Debtors, the Debtors already had a Part 135 Certificate and FAA registration, and structuring the Minsheng transaction to comply with the FAA's requirements does not convert an overwhelmingly foreign transaction into a domestic one. Id. (citing Complaint ¶¶ 60-61). Y3/Y4 conclude that the issue of how the Debtors would use and maintain assets is ancillary to the transfers themselves and not the focus of §§ 547 and 548. Id.
The question of whether transactions are foreign or domestic depends "very heavily" on the facts of each case. In re Arcapita Bank B.S.C.(c), 575 B.R. 229, 246 (Bankr. S.D.N.Y. 2017). Recent Supreme Court decisions have analyzed the "focus" of statutes to determine whether a case involves domestic or foreign applications of statutes. RJR Nabisco, Inc. v. European Community, ––– U.S. ––––, 136 S. Ct. 2090, 195 L.Ed.2d 476 (2016) ; Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010).
Morrison involved National Australia Bank Limited (National), whose "ordinary shares" were traded on the Australian Stock Exchange Limited and on other foreign securities exchanges, but not on any American exchange. Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 251, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010). In 1998, National bought Florida mortgage-servicing company HomeSide Lending, Inc. (HomeSide) and until 2001, National touted the success of HomeSide's business. Id. at 251-52, 130 S.Ct. 2869. After Australian citizens Russell Leslie Owen (Owen) and Brian and Geraldine Silverlock (Silverlocks) bought National shares, National announced that it was writing down the value of HomeSide's assets by more than $2 billion. Id. at 252, 130 S.Ct. 2869. Owen and the Silverlocks sued National and HomeSide in the District Court for the Southern District of New York for violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, seeking to represent a class of foreign purchasers of National's ordinary shares. Id. at 252-53, 130 S.Ct. 2869. National and HomeSide moved to dismiss for failure to state a claim under Rule 12(b)(6) and lack of subject matter jurisdiction under Rule 12(b)(1). Id. at 253, 130 S.Ct. 2869. The district court dismissed under Rule 12(b)(1), finding that it had no jurisdiction because the acts in the United States were "at most, a link in the chain of an alleged overall securities fraud scheme that culminated abroad." Id. The Second Circuit affirmed because "[t]he acts performed in the United States did not ‘compris[e] the heart of the alleged fraud.’ " Id. at 253-54, 130 S.Ct. 2869.
The Supreme Court affirmed, although it noted that the extraterritorial reach of § 10(b) is a merits question, not a subject matter jurisdiction question. Id. at 254, 130 S.Ct. 2869. The Court then indicated that 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." Id. at 255, 130 S.Ct. 2869 (citations and internal quotation marks omitted). After holding that the Exchange Act contained no affirmative indication that § 10(b) applied extraterritorially, the Supreme Court focused on Owen's and the Silverlocks' argument that Florida was where HomeSide and its executives engaged in the deceptive conduct and where HomeSide executives made misleading public statements. Id. at 265-66, 130 S.Ct. 2869. The Supreme Court held that these American contacts were insufficient to displace the presumption against extraterritoriality because "it is a rare case of extraterritorial application that lacks all contact with the territory of the United States." Id. at 266, 130 S.Ct. 2869. (emphasis in original). The Court continued that "the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case." Id. (emphasis in original).
The Supreme Court highlighted that the "focus" of the Exchange Act is the purchase and sale of securities in the United States, not where the deception occurred. Id. Because National's ordinary shares were not listed on a domestic exchange, and all aspects of the purchases occurred outside the United States, the Supreme Court stated that the case should have been dismissed under 12(b)(6), based on failure to state a claim. Id. at 266, 273, 130 S.Ct. 2869.
According to the Supreme Court, the two tests that the Second Circuit had developed for determining whether conduct was foreign or domestic in the context of § 10(b)—an "effects test," that was premised on an effect on American securities markets and a "conduct test," that was premised on wrongful conduct in the United States—were inappropriate. Id. at 257-61, 130 S.Ct. 2869. The Supreme Court reasoned that the "results of judicial-speculation-made law—divining what Congress would have wanted if it had thought of the situation before the court—demonstrate the wisdom of the presumption against extraterritoriality" because instead of guessing "anew in each case," the presumption can be applied in all cases, which preserves a stable background against which Congress can legislate with predictable effects. Id. at 261, 130 S.Ct. 2869.
In Nabisco, RJR Nabisco, Inc. (RJR) and other unspecified parties allegedly participated in a global money-laundering scheme involving the illegal sale of drugs and cigarettes in various countries. RJR Nabisco, Inc. v. European Community, ––– U.S. ––––, 136 S. Ct. 2090, 2098, 195 L.Ed.2d 476 (2016). The European Community and 26 of its member states sued RJR in the Eastern District of New York for civil violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), and RJR moved to dismiss the complaint, arguing that RICO does not apply to racketeering activity occurring outside U.S. territory or to foreign enterprises. Id. at 2098-99. The district court agreed with RJR and dismissed the RICO claims as impermissibly extraterritorial, but the Second Circuit reinstated those claims, concluding that Congress had clearly communicated its intent that RICO applied to extraterritorial conduct. Id. at 2099. The Supreme Court granted certiorari because the lower courts disagreed regarding RICO's extraterritorial application. Id.
The Supreme Court stated that to determine whether a case involves a domestic application of a statute, courts must look to the "focus" of the statute. Id. at 2101. According to the Court, "[i]f the conduct relevant to the statute's focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory." Id.
The Court noted that "when a statute provides for some extraterritorial application the presumption against extraterritoriality operates to limit that provision to its terms." Id. at 2102 (quoting Morrison, 561 U.S. at 265, 130 S.Ct. 2869 ). The Court held that the complaint did not impermissibly allege extraterritorial violations of the RICO Act because the pattern of racketeering activity involved predicate offenses that were either committed in the United States or in a foreign country in violation of a predicate statute that applied extraterritorially. Id. at 2105. Section 1964(c), however, required that a civil RICO plaintiff allege and prove a domestic injury, recovery was not available for foreign injuries, and the European Community and the member states had stipulated to waive their claims for domestic injuries, so the Court held that the RICO claims had to be dismissed. Id. at 2111.
Most recently, the Supreme Court expanded on the "focus" of a statute by indicating that it is the "object of its solicitude," which can include the conduct that it "seeks to regulate" and the parties and interests it "seeks to protect" or vindicate. WesternGeco LLC v. ION Geophysical Corp., ––– U.S. ––––, 138 S. Ct. 2129, 2137, 201 L.Ed.2d 584 (2018) (quoting Morrison, 561 U.S. at 267, 130 S.Ct. 2869 ).
To determine the conduct that is relevant to the analysis, the Court must consider the "focus" of the avoidance and recovery provisions ( §§ 547, 548, and 550 ), which is "the initial transfer that depletes the property that would have become property of the estate." In re CIL, 582 B.R. at 93 ; see also In re Ampal-Am. Israel Corp., 562 B.R. 601, 613 (Bankr. S.D.N.Y. 2017) (same); In re Picard, ex rel. Bernard L. Madoff Inv. Sec. LLC, 917 F.3d 85, 91, 93, 98 (2d Cir. 2019), petition for cert. denied ––– U.S. ––––, 140 S.Ct. 2824, 207 L.Ed.2d 157 (2020) ("[I]n actions involving both [ § 548 and § 550 ], § 550(a) regulates the debtor's initial transfer."); In re Sherwood Investments Overseas Ltd., Inc., 2015 WL 4486470, at *19 (Bankr. M.D. Fla. July 22, 2015), aff ' d 2016 WL 5719450 (M.D. Fla. Sept. 30, 2016) ("Courts applying the extraterritoriality presumption to fraudulent transfers typically hold that the proper focus is the transfers sought to be avoided, not the parties' relationship or locus." (emphasis in original)).
In several of the cases cited by the parties, the courts found that the relevant conduct was extraterritorial.
In Maxwell I, Maxwell Communication Corporation plc (MCC) sold significant portions of its U.S. assets and used some of the proceeds to repay overdraft balances to Barclays Bank plc (Barclays) (£2 million), National Westminster Bank plc (NatWest) (£71.5 million), and Societe General (SocGen) (£5.7 million). In re Maxwell Communication Corp. plc, 186 B.R. 807, 813 (S.D.N.Y. 1995). After MCC filed bankruptcy in the U.S. and England, MCC and examiner Richard A. Gitlin (Gitlin), who had been appointed to harmonize the two bankruptcy proceedings, filed complaints against Barclays, NatWest, and SocGen to avoid and recover the transfers. Id. at 812. MCC, Barclays, and NatWest were English companies, and SocGen was a French company. Id at 812-13. The bankruptcy court dismissed the complaints based in part on the presumption against extraterritoriality. Id. at 815. On appeal, MCC and Gitlin argued that the transfers were not extraterritorial because the money derived from the sale of U.S. assets. Id. at 816.
The district court affirmed, noting that a § 547 analysis requires courts to consider all events involving the transfers, and viewing the transfers in this manner resulted in a finding that they occurred overseas. Id. at 816-17. The court considered that: 1) MCC, Barclays, NatWest, and SocGen were all foreign entities whose relationship was "centered in England;" 2) the antecedent debts underlying the transfers arose from MCC's overdrafts on accounts maintained with banks in England and governed by English law; and 3) MCC repaid its debts by transferring funds to accounts in the U.K. Id. at 817. The court noted that the transferred funds were proceeds from the sale of U.S. assets, which depleted the availability of MCC's assets to satisfy creditors' claims. Id. But, the court stated that the source of the funds was "at best only one component" of the conduct proscribed by § 547, and even assuming the transfers were initiated in the U.S. after U.S. asset sales, this conduct was more appropriately described as a "preparatory step" to the transfers. Id.
MCC and Gitlin appealed, and the Second Circuit in Maxwell II affirmed but declined to decide "whether, setting aside considerations of comity, the ‘presumption against extraterritoriality’ would compel a conclusion that the Bankruptcy Code does not reach the pre-petition transfers at issue." In re Maxwell Communication Corp. plc by Homan (Maxwell II), 93 F.3d 1036, 1055 (2d Cir. 1996).
In CIL, CIL Limited (CIL), a Cayman Islands entity, transferred an equity interest in CEVA Group Plc (CEVA Group), a U.K. entity, to CEVA Holdings LLC (CEVA Holdings), a Marshall Islands entity. In re CIL Ltd., 582 B.R. 46, 68 (Bankr. S.D.N.Y. 2018). CIL filed a petition commencing provisional liquidation proceedings in the Grand Court of the Cayman Islands, and shortly thereafter, an involuntary chapter 7 petition was filed against it in the Bankruptcy Court for the Southern District of New York. Id. at 56. Salvatore LaMonica (LaMonica), the chapter 7 trustee for CIL, filed a complaint against CEVA Logistics Finance B.V. (CEVA Finance), CEVA Group, and CEVA Holdings (together with CEVA Finance and CEVA Group, CEVA Entities), to avoid and recover the transfer under §§ 544, 548, 550, and 551. Id. at 56, 68. The CEVA Entities moved to dismiss the avoidance claims based on the presumption against extraterritoriality, and LaMonica countered that the transfer was not extraterritorial. Id. at 82-83, 94.
The court held that the transfer was extraterritorial because: 1) it was among foreign entities and allegedly harmed foreign creditors; and 2) it was accomplished outside the United States by i) CIL, acting through its boards at meetings chaired in London, consenting to CEVA Group's recapitalization and restructuring, and ii) CEVA Group issuing "New CEVA Shares" in accordance with U.K. law during a meeting of shareholders in London, attended by a CIL representative who consented to the issuance. Id. at 93-94. LaMonica argued that the court had to consider all components of the transfers, and the "center of gravity" was the United States because the scheme to divest CIL of the CEVA Group equity was "planned and hatched" in the United States. Id. at 94. The court rejected this argument for several reasons: 1) CIL's professionals were in the Cayman Islands and performed significant work there; 2) negotiating and documenting the transfer in the United States was not enough to make the transaction domestic; 3) it was questionable whether the "component parts test" advocated by LaMonica, remained relevant after the Supreme Court's rejection in Morrison of the similar "conduct and effects test" used by the Second Circuit to determine where conduct occurred; and 4) even under LaMonica's "center of gravity" test, the issuance of the "New CEVA Shares" was not a domestic transaction. Id. at 94-96.
In Ampal-American, New York holding company Ampal-American Israel Corp. (Ampal) instructed Bank Hapoalim in Tel Aviv to transfer 344,322.64 New Israeli Shekels (NIS) from its account to a Bank Hapoalim account of its Israeli law firm, Goldfarb Seligman & Co. In re Ampal-Am. Israel Corp., 562 B.R. 601, 603-04 (Bankr. S.D.N.Y. 2017). Within 90 days of the transfer, Ampal filed bankruptcy. Id. at 604. Alex Spizz (Spizz), the chapter 7 trustee for Ampal, filed a §§ 547 and 550 complaint to avoid and recover the NIS transfer. Id. at 603. The court determined that the presumption against extraterritoriality prevented Spizz from avoiding the transfer, because it occurred in Israel between a U.S. transferor headquartered in Israel and an Israeli transferee accomplished entirely through accounts at the same Israeli bank. Id. The court acknowledged that Goldfarb's legal services had some U.S. connections, including Ampal's shares being traded on the NASDAQ, Goldfarb's services involving legal work related to Ampal's SEC and NASDAQ filings, Goldfarb rendering opinions on Israeli law for inclusion in Ampal's annual report, and a Goldfarb partner attending meetings in New York regarding the filing of Ampal's bankruptcy case. Id. at 613 & n.14. But, the court highlighted that most of these services were performed in Israel, and even where claims "touch and concern" the United States, they must do so with "sufficient force" to displace the presumption against extraterritoriality. Id. at 613-14.
In Sherwood, Royal Bank of Scotland N.V. (RBS), located in the Netherlands, financed complex derivatives trading for Sherwood Investments Overseas Limited, Inc. (Sherwood), a BVI corporation. In re Sherwood Investments Overseas Ltd., Inc., 2015 WL 4486470, at *1, 20 (Bankr. M.D. Fla. July 22, 2015), aff ' d 2016 WL 5719450 (M.D. Fla. Sept. 30, 2016). Because Sherwood did not meet RBS's risk criteria, it was not a "formal" client of RBS. Id. at *4. But, they created a "workaround:" Sherwood operated through an approved counterparty, UBS, a Swiss bank. Id. When Sherwood and RBS wanted to execute a trade, RBS sent instructions to Sherwood and, if approved, to UBS, who paid the required amount from funds in Sherwood's UBS accounts. Id.
In September 2008, Sherwood transferred almost $1.3 million to RBS. Id. at *18. It then filed bankruptcy and an avoidance action against RBS, alleging that the $1.3 million transfer was avoidable and recoverable under §§ 548 and 550. Id. RBS moved for summary judgment based on the presumption against extraterritoriality, claiming that the transfers occurred entirely abroad. Id. Sherwood countered that the "center of gravity" of its relationship with RBS was in the United States because: 1) its principal, Julian Benscher (Benscher), lived in and directed trades from and initiated all of his contacts with RBS from the United States; 2) it kept all of its books and records in the United States; and 3) it operated an orchid growing subsidiary, Sherwood Farms, from the United States. Id. at *19.
The court stated that the proper focus is the transfers sought to be avoided, not the parties' relationship or locus. Id. (emphasis in original). According to the court, the transfers were foreign because: 1) the transfers were made from Sherwood's accounts at UBS in Switzerland to RBS's accounts in England; 2) Sherwood was a BVI corporation, and RBS was a Netherlands entity; and 3) all trading and creation of the underlying securities purchased with the transfers was performed in London. Id. at *20, 21. The court stated that the "minimal contacts" with the United States—Benscher living in and initiating the transfers from Florida and RBS having U.S. branches—did not displace the presumption against extraterritoriality because even if claims "touch and concern" the United States, they must do so with sufficient force to displace the presumption. Id. at *20.
In FAH, Bayerische Moteren Werke Aktiengesellschaft (BMW) executed agreements with Fisker Automotive Holdings, Inc. and Fisker Automotive, Inc. (together FAH Cos.), Delaware corporations headquartered in California, for the installation of BMW engines and parts into FAH-made vehicles. In re FAH Liquidating Corp., 572 B.R. 117, 121, 124 (Bankr. D. Del. 2017). FAH Cos. then transferred approximately $32,579,799 to BMW, but faced many difficulties, including battery pack safety recalls and the loss of their lending facility provided through the U.S. Department of Energy (DOE). Id. at 121-22. FAH Cos. filed a voluntary chapter 11 petition, and Emerald Capital Advisors Corp. (Emerald), in its capacity as trustee for the FAH Liquidating Trust, filed a complaint against BMW, a German corporation with its principal place of business in Munich, to avoid and recover the alleged constructively fraudulent transfers under §§ 542, 544, 548, and 550. Id. at 120-22. BMW moved to dismiss the complaint, arguing that the transfers were foreign because: 1) they involved development work by a German company based on German contracts, which required application of German law; and 2) BMW was to perform the work in Germany in exchange for FAH Cos. paying in Euros. Id. at 123, 124. Emerald countered that the transfers were not extraterritorial and highlighted that the transfers: 1) originated from the United States; 2) were made by a Delaware corporation headquartered in California; and 3) were made using funds provided by a DOE loan program. Id. at 124.
FAH Cos. made the payments in Euros, and the Court approximated the amount in dollars. Id. at 122 n.5.
The court focused on the "center of gravity" and held that it was Germany because: 1) the agreements specified milestones to be achieved at BMW's production facilities in Germany; 2) the agreements had provisions mandating the forum for disputes as Munich; 3) German law applied; and 4) payments were required in Euros. Id. at 124-25. Although the court recognized that the transfers originated in the United States from a Delaware corporation, it concluded that these facts were insufficient to overcome the "primarily foreign nature" of the agreements. Id. at 124.
In contrast to the cases mentioned immediately above, courts in other cases have found that the transfers at issue were domestic.
In Arcapita, Arcapita Bank B.S.C.(c) (Arcapita), a Bahraini investment bank, made investments through Bahrain Islamic Bank (BisB), which was headquartered in Bahrain, and Tadhamon Capital B.S.C. (Tadhamon), a Bahraini corporation and a subsidiary of a Yemini bank, under agreements that were negotiated and signed in Bahrain and provided that Bahrain law governed. In re Arcapita Bank B.S.C., 575 B.R. 229, 233-34 (Bankr. S.D.N.Y. 2017). Arcapita transferred $10 million from its JP Morgan Chase account in New York to a correspondent account at the same New York bank maintained by BisB and BisB bought commodities for Arcapita through a London broker. Id. at 234. The next day, Arcapita made two $10 million transfers from its JP Morgan Chase account to an account at HSBC Bank in New York which was a correspondent bank account maintained by Tadhamon's bank in Bahrain, and the funds were then immediately transferred to Tadhamon's account at a bank in Bahrain. Id. Less than a month after the transfers, Arcapita filed a voluntary chapter 11 petition. Id. The committee of unsecured creditors (Committee) filed a § 547 avoidance action against BisB and Tadhamon to avoid and recover the transfers. Id. at 233, 235, 243.
BisB and Tadhamon moved to dismiss the complaint, arguing that the transfers in the United States by themselves were not enough to overcome the presumption against extraterritoriality, and the focus should be on when the payment was completed. Id. at 244. The Committee countered that the challenged conduct was domestic. Id. The court held that BisB's and Tadhamon's "receipt of the transferred funds in New York correspondent bank accounts" was at the "heart" of the § 547 cause of action. Id. at 239. The court rejected BisB's and Tadhamon's argument that the parties expected Bahraini law to apply and the United States had no interest in regulating transactions involving Bahraini parties for investments made outside of the U.S. Id. It held that the link between the United States, as the regulating state, and the regulated activity in question was sufficiently strong given that the transfers took place through use of U.S. correspondent bank accounts. Id.
In Picard, Bernard L. Madoff Investment Securities LLC (Madoff Securities), a U.S.based entity transferred billions of dollars from its New York JP Morgan Chase account to several foreign "feeder funds," which then transferred the money to foreign investors. In re Picard, ex rel. Bernard L. Madoff Inv. Sec. LLC, 917 F.3d 85, 91, 93 (2d Cir. 2019), petition for cert. denied ––– U.S. ––––, 140 S.Ct. 2824, 207 L.Ed.2d 157 (2020). Irving H. Picard (Picard), the trustee for the liquidation of Madoff Securities, filed avoidance and recovery actions under §§ 548 and 550 against the foreign feeder funds, which moved to dismiss. Id. at 91. The bankruptcy court and district court held that the avoidance and recovery claims should be dismissed based on the presumption against extraterritoriality or international comity principals. Id. at 91, 94. Both courts reasoned that Picard could not recover property that one foreign entity received from another foreign entity. Id.
A "feeder fund" is an entity that pools money from numerous investors and then places it into a "master fund" on their behalf. Id. at 92. A "master fund," which is what Madoff Securities advertised its funds to be, pools investments from multiple feeder funds and then invests the money. Id.
The Second Circuit reversed, noting that when a trustee seeks to avoid and recover subsequently transferred property under §§ 548(a) and 550(a), the relevant transfer that must be avoided is the initial transfer. Id. at 98. The Second Circuit rejected the lower courts' test that considered the subsequent transfer, reasoning that the relevant conduct was Madoff Securities's "fraudulent transfer of property, not the transferees' receipt of property." Id. at 100 (emphasis in original). The court expressed no opinion regarding whether a domestic debtor or a transfer of property from a U.S. bank account would be sufficient to support a finding of a domestic transfer. Id. at 99 n.9. Because Madoff Securities was a domestic entity, which transferred property from its U.S. bank account to the feeder funds, the court held that the transfers were domestic. Id.
Determining whether a transfer is extraterritorial is fact dependent and the Court will consider the parties, the transactions, the choice of law provisions, the FAA registration and Part 135 Certificate, the maintenance of the aircraft at a U.S. airbase and the security interests, the location of the closings, the nominal trustees, and the denomination of the payments.
i. Parties
Here, all the parties involved in the relevant transactions are foreign; they are from Singapore, the BVI, Hong Kong, China, Ireland, and Canada. Complaint ¶ 60 (Zetta Singapore was incorporated in Singapore), ¶ 20 (the Zetta BVI Subsidiaries are BVI companies), ¶ 24 (TG is a BVI company), ¶ 26 (GA is a BVI company), ¶ 28 (UL is a BVI company), ¶ 22 (Li Qi, who was a director and insider of Zetta Singapore and is the director of UL, TG, and GA, resides in Hong Kong), ¶ 42 (Minsheng Business is a company organized under Chinese law with a principal place of business in Hong Kong), ¶ 41 (Minsheng Financial is a company organized under Chinese law with a principal place of business in Beijing), ¶ 43 (Yuntian 3 is a company organized under Irish law with a principal place of business in Dublin), ¶ 44 (Yuntian 4 is a company organized under Irish law with a principal place of business in Dublin), ¶ 45 (EDC is an agency wholly owned by the Government of Canada, with a principal place of business in Ottawa).
Although the Trustee claims that the nationality of the parties is irrelevant, the majority of cases addressing the issue find that the parties' nationalities is relevant. Compare In re Maxwell Communication Corp. plc, 186 B.R. 807, 817 (S.D.N.Y. 1995) (considering that MCC, NatWest, Barclays, and SocGen were all foreign entities); In re CIL Ltd., 582 B. R. 46, 93-94, 96 (Bankr. S.D.N.Y. 2018) (holding that a transfer was foreign in part because it was made among entities from the U.K., the Cayman Islands, and the Marshall Islands); In re Ampal-Am. Israel Corp., 562 B.R. 601, 613 (Bankr. S.D.N.Y. 2017) (holding that a transfer was foreign in part because it was from an American transferor headquartered in Israel to an Israeli transferee); and In re Sherwood Investments Overseas Ltd., Inc., 2015 WL 4486470, at *20-21 (Bankr. M.D. Fla. July 22, 2015), aff'd 2016 WL 5719450 (M.D. Fla. Sept. 30, 2016) (holding that transfers were foreign in part because Sherwood was a BVI corporation and RBS was a Netherlands entity); with In re Arcapita Bank B.S.C., 575 B.R. 229, 243-244, 247 (Bankr. S.D.N.Y. 2017) (holding that the transfers were domestic even though the parties were all from Bahrain, and rejecting the argument that the parties' nationality should be considered); see also In re FAH Liquidating Corp., 572 B.R. 117,124 (Bankr. D. Del. 2017) (not mentioning the parties' German and American nationalities in its reasoning for concluding that the transfers were foreign, but applying a "flexible" test that allows courts to consider all component events of the transfers, including "whether the participants, acts, targets, and effects involved in the transaction at issue are primarily foreign or primarily domestic"); In re Picard, ex rel. Bernard L. Madoff Inv. Sec. LLC, 917 F.3d 85, 97-99 (2d Cir. 2019), petition for cert. denied ––– U.S. ––––, 140 S.Ct. 2824, 207 L.Ed.2d 157 (2020) (noting that the focus of §§ 548 and 550 is the initial transfer, and holding that a domestic debtor's transfer of property from the United States was domestic).
The Trustee's contention, that the nationality of the parties is irrelevant, is surprising given that a page earlier he advocates for a "flexible" approach that allows courts to consider facts including "whether the participants ... involved in the transaction at issue are primarily foreign or primarily domestic." Opposition at 29 (citing FAH Liquidating Corp., 572 B.R. at 124 ).
ii. Transactions
A. Count II - Avoidance and Recovery of Fraudulent Transfers (Plane 6 and Plane 7), under 11 U.S.C. §§ 548 and 550, against Li Qi, UL, GA, Yuntian 3, Minsheng Financial, and Minsheng Business
I. $17.3 Million in Goodwill and Rental Payments
In Count II, the Trustee seeks to avoid and recover all goodwill and rent transfers made on Plane 6 and Plane 7, totaling over $17.3 million, which are identified in Schedule B. Complaint ¶ 190.
Section 548 allows a trustee to "avoid any transfer ... of an interest of the debtor in property" under certain circumstances, and § 550(a) provides that to the extent a transfer is avoided under §§ 547 or 548, the trustee may recover the property transferred.
Schedule B and the Exhibits attached to the Torborg 12/9/19 Decl. reveal the following transfers :
There is a slight difference in the transfer amounts as alleged by the Trustee and as reflected in Y3/Y4's exhibits. Y3/Y4 attribute the differences to bank withholding fees. Y3/Y4 Motion at 19 n. 11.
Date Transferor Transferee Amount Exhibit 7/20/16 Zetta Minsheng $2,000,000.00 Ex. N Singapore Business 9/13/16 Zetta Yuntian 3 $1,795,008.50 Ex. O Singapore 9/14/16 Zetta Yuntian 3 $1,795,008.50 Ex. O Singapore 12/22/16 Zetta Yuntian 3 $1,964,282.43 Ex. T Singapore 12/23/16 Zetta Yuntian 3 $1,964,282.43 Ex. T Singapore 3/20/17 Zetta Yuntian 3 $3,917,342.22 Ex. U Singapore 6/27/17 Zetta Yuntian 3 $3,906,759.14 Ex. V Singapore
The $2,000,000 transfer to Minsheng Business was sent by Zetta Singapore from its Hong Kong and Shanghai Banking Corporation Limited (HSBC) account in Singapore, to Minsheng Business's China Minsheng Bank account in Hong Kong. Torborg 12/9/19 Decl. ¶ 17, Ex. M (indicating that Minsheng Business had an account with "CHINA MINSHENG BANK HONG KONG BRANCH" in "H.K.," with an account ending in "2-214"); ¶ 18, Ex. N (showing a $2,000,000 transfer was sent to "MINSHENG BUSINESS AVIATION LIMITED," to an account ending in "2214," the "Name of Remitter" was "ZETTA JET PTE.LTD. 700 WEST CAMP ROAD04-10 JET AVIATN ONESELETARAEROSP PKSINGAPORE 49," the "Remitting Bank" was "THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED, SINGAPORE SINGAPORE", and the Remittance Information referenced "GOODWILL DEPOSIT"). The six transfers to Yuntian 3 on 9/13/16, 9/14/16, 12/22/16, 12/23/16, 3/20/17 and 6/27/17 were sent by Zetta Singapore from its Singapore HSBC account to Yuntian 3's Bank of Ireland account in Ireland. Torborg 12/9/19 Decl. ¶¶ 19, 24-26, Exs. O, T, U, V (indicating that the transfers to Yuntian 3's Bank of Ireland account were from: "0181 ZETTA JET PTE.LTD. 700 WEST CAMP ROAD04-10 JTC AVIATN ONESELETARAEROSP PKSINGAPORE").
II. $12.4 Million Transfer
The Trustee also seeks to avoid and recover a $12.4 Million Transfer, which was transferred from Minsheng Business through an IATS escrow account, and back to Minsheng Business, as part of the "Minsheng Refinancing." Complaint ¶¶ 96-116, 194. The Complaint describes the Minsheng Refinancing as follows. In June 2016, Cassidy approached Li Qi about "Minsheng" refinancing Zetta Singapore's purchase of Planes 6 and 7. Complaint ¶ 98. Cassidy proposed using the refinance proceeds from "Minsheng" to pay off the amount due and owing on Plane 7, while leaving in place the obligations regarding Plane 6, with the remainder of the proceeds to be disbursed to Zetta Singapore and Minsheng Business. Complaint ¶ 99. The first step of the Minsheng Refinancing was an adjustment of the purchase prices of Planes 6 and 7, where the new aircraft purchase prices were more than the principal due on the aircraft. Complaint ¶¶ 104-05. The second step involved entering into new purchase agreements with "Minsheng" and Yuntian 3 with Minsheng buying each plane under a disguised financing structure. Complaint ¶ 106. From the proceeds at closing, $55 million went to Universal Leader to pay off Plane 7, $12.4 million went to "Minsheng" to pay fees and down payments and deposits for four Bombardier Challenger aircraft, and an additional amount went to Zetta Singapore. Complaint ¶ 106. The Complaint alleges that the Debtors would repay the total amount "Minsheng" paid to refinance the planes by making debt service payments disguised as "rent" payments under disguised finance leases entered into with "Minsheng's" affiliate, Yuntian 3. Complaint ¶ 107. On 9/20/16, Yuntian 3, by and through its trustee, Wells Fargo, entered into new purchase agreements for Planes 6 and 7. Complaint ¶ 108. The final step of the "Minsheng Refinancing" was the closing on 9/21/16. Complaint ¶ 111.
At issue in Count II is the 9/19/16 $12.4 Million Transfer, which involved two separate $6,205,120 million transfers, regarding Planes 6 and 7, from Minsheng Business's Hong Kong account to lATS's escrow account in New York, and two days later, those funds were sent back to Minsheng Business's Hong Kong account. Torborg 12/9/19 Decl. ¶¶ 16-17, 20-23, Exs. L (showing 9/19/16 payment instructions, from Wells Fargo as trustee for Yuntian 3, including a $6,205,120 payment to Minsheng Business's China Minsheng Bank Hong Kong account ending in 2-214 and a $15,000 payment to lATS's New York account, regarding a Bombardier Global 6000 Aircraft with MSN 9606, which is Plane 6), M (showing 9/19/16 payment instructions from Wells Fargo as trustee for Yuntian 3 including a $6,205,120 payment to Minsheng Business's China Minsheng Bank Hong Kong account ending in 2-214 and a $15,000 payment to lATS's New York account, regarding a Bombardier Global 6000 Aircraft with MSN 9688, which is Plane 7), P (showing a 9/19/16 $40 million remittance from Minsheng Business's Hong Kong account to lATS's Bank of America account in New York, regarding a plane with serial number 9606), Q (showing a 9/19/16 $40 million remittance from Minsheng Business's Hong Kong account to lATS's New York Bank of America account, regarding a plane with serial number 9688), R (showing a 9/21/16 $6,205,120 remittance from IATS'S New York account to Minsheng Business's Hong Kong account ending in 2214 regarding a plane with serial number 9688), S (showing a 9/21/16 $6,205,120 remittance from lATS's New York account to Minsheng Business's Hong Kong account ending in 2214, regarding a plane with serial number 9606).
Although the Trustee argues that the $12.4 Million Transfer was domestic because it passed through a domestic escrow account, Opposition at 31 (citing In re Arcapita Bank B.S.C., 575 B.R. 229, 233-34 (Bankr. S.D.N.Y. 2017) ), the Court disagrees. Arcapita is distinguishable because the transferor there sent money from its own account in New York to correspondent accounts in New York maintained by the transferees (or the transferees' banks). In re Arcapita Bank B.S.C., 575 B.R. 229, 233-34 (Bankr. S.D.N.Y. 2017). In contrast, as discussed above, Minsheng Business sent the $12.4 Million Transfer from its Hong Kong account, through lATS's New York intermediary account, and those funds were returned to Minsheng Business's Hong Kong account two days later.
The Court finds that Maxwell I and Banco Safra are persuasive because the facts in those cases are more analogous to those at issue here. In both Maxwell I and Banco Safra, funds transferred through New York accounts rather than between New York accounts and the courts found that the transfers were foreign. See In re Maxwell Communication Corp. plc, 186 B.R. 807, 817-18 n.5 (S.D.N.Y. 1995) (finding that MCC's initial transfer from its London account to Barclays's New York account, and Barclays's immediate credit of the funds to the outstanding balance on MCC's London overdraft account with Barclays were foreign); Banco Safra S.A. - Cayman Islands Branch v. Samarco Mineracao S.A., 2019 WL 2514056, at *5 (S.D.N.Y. June 18, 2019) (holding that transactions were extraterritorial even though bonds were bought and sold "through" bank accounts in New York, because the plaintiff did not allege that the money was transferred from a U.S. account or to a U.S. account, and if money passing "through" a New York account could make a transaction domestic, there would be no "limiting principle" given that New York is the financial capital of the world, and many wire transfers and other financial transactions pass through New York).
Further, as Y3/Y4 correctly note, ITAS, an escrow agent, was "merely a conduit" through which funds flowed from Minsheng Business's Hong Kong account back to Minsheng Business's Hong Kong account, and the fact that ITAS's account was in New York does not alter the analysis. In re Williams, 104 B.R. 296, 299 (Bankr. C.D. Cal. 1989). B. Count III - Avoidance and Recovery of Preference Transfer, under 11 U.S.C. §§ 547 and 550, in the alternative to Count II, against Yuntian 3
Count III, an alternative to Count II, seeks to avoid and recover the 6/27/17 $3,906,759.14 transfer from Zetta Singapore to Yuntian 3. Complaint ¶¶ 197-98, Schedule B. Like § 548, § 547 allows a trustee to "avoid any transfer ... of an interest of the debtor in property" in certain situations, and § 550(a) states that the trustee may recover the property transferred to the extent a transfer is avoided under § 547. For the reasons stated above, the transfer at issue in Count III was an exclusively foreign transfer, which was sent from Zetta Singapore's HSBC account in Singapore to Yuntian 3's Bank of Ireland account in Ireland.
C. Count VI - Avoidance and Recovery of Fraudulent Transfers, under 11 U.S.C. §§ 548 and 550, in the alternative to Count II, against Minsheng Business and Yuntian 4
Count VI is an alternative to Count II and seeks to avoid and recover the $12.4 Million Transfer. Complaint ¶¶ 239-40, 250. As analyzed above, the $12.4 Million Transfer from Minsheng Business's Hong Kong account through lATS's New York account, which was transferred two days later back to Minsheng Business's Hong Kong account, was an extraterritorial transfer.
D. Count IX - Avoidance and Recovery of Preference Transfer, under 11 U.S.C. §§ 547 and 550, against EDC and Yuntian 4
In Count IX, the Trustee seeks to avoid a 7/26/17 $956,244.53 transfer from Zetta Singapore to EDC regarding Plane 12. Complaint ¶ 271; Schedule C. The Complaint indicates that this transfer benefited Yuntian 4 (and EDC) because it reduced the debt that Yuntian 4 owed EDC for financing Plane 12, and it seeks recovery from EDC as the initial transferee. As discussed above, the Complaint and the exhibits that are properly incorporated by reference, demonstrate that Zetta Singapore had one account, at HSBC in Singapore. Neither Y3/Y4 nor the Trustee provides evidence regarding the account to which the $956,244.53 transfer was sent, but the location of that account is irrelevant because the "focus" of the avoidance and recovery provisions ( §§ 547, 548, and 550 ) is "the initial transfer that depletes the property that would have become property of the estate." In re CIL, 582 B.R. at 93 ; see also In re Ampal-Am. Israel Corp., 562 B.R. 601, 613 (Bankr. S.D.N.Y. 2017) (same); In re Picard, ex rel. Bernard L. Madoff Inv. Sec. LLC, 917 F.3d 85, 98 (2d Cir. 2019), petition for cert. denied ––– U.S. ––––, 140 S.Ct. 2824, 207 L.Ed.2d 157 (2020) ("[l]n actions involving both [ § 548 and § 550 ], § 550(a) regulates the debtor's initial transfer.").
E. Count X - Avoidance and Recovery of Preference Transfer, under 11 U.S.C. §§ 547 and 550, against Yuntian 4
In Count X, the Trustee seeks to avoid and recover a 7/26/17 $63,140.28 transfer from Zetta Singapore to Yuntian 4. Complaint ¶ 281; Schedule C. That transfer was sent from Zetta Singapore's HSBC account in Singapore to Yuntian 4's Bank of Ireland account in Ireland, Torborg 12/9/19 Decl. ¶ 27, Ex. W, and there are no allegations that it ever touched the United States.
F. Count XII - Avoidance and Recovery of Preference Transfers (Legal Fees Transfers), under 11 U.S.C. §§ 547 and 550, against Minsheng Business, Minsheng Financial, Yuntian 3, and Yuntian 4
In Count XII, the Trustee seeks to avoid and recover the following transfers that Zetta Singapore made from its account in Singapore to various law firms for attorneys' fees and costs for the benefit of Minsheng Business, Minsheng Financial, Yuntian 3, and/or Yuntian 4:
Complaint 298 and Schedule F.
The names of two of the law firms (the Beijing Rui Bai Lawfirm and Beijing Dacheng Law Offices LLP) suggest that the transfers were extraterritorial, but it is impossible to tell whether that is true or where the remaining payments were sent. Although the Complaint does not contain this information and the Trustee does not address this issue, Y3/Y4 argue that the transfers involved either zero American contacts, or at most only one side of the transfer was U.S.-based. Reply at 25 n.8 (citing Complaint 298). The focus of § 547 is "the initial transfer that depletes the property that would have become property of the estate." In re Ampal-American Israel Corp., 562 B.R. 601, 613 (Bankr. S.D.N.Y. 2017). Here, as noted, the initial transfer was from Zetta Singapore's HSBC Singapore account. Complaint ¶ 298 ("Zetta [Singapore] made certain transfers (the ‘Legal Fees Transfers’) to various law firms ...").
Although the Trustee mentions that the Debtors' initial purchase of Plane 6 was made using Bombardier's U.S. bank account, the Trustee does not seek to avoid this transfer and the use of Bombardier's U.S.-based account is irrelevant. Opposition at 21 (citing Complaint ¶ 85).
iii. Choice of Law
Y3/Y4 claim that the parties' agreements contained choice of law clauses requiring the application of English law, Y3/Y4 Motion at 24-25, but the cases that have addressed this issue have not agreed on the relevance of choice of law provisions. Compare In re Arcapita Bank B.S.C., 575 B.R. 229 (Bankr. S.D.N.Y. 2017) (ignoring the parties' Bahrain choice of law clause and finding that transfers were domestic); with In re FAH Liquidating Corp., 572 B.R. 117, 124-25 (Bankr. D. Del. 2017) (finding that the transactions were German in part because the agreements had provisions mandating the application of German law and the forum for disputes as Munich).
iv. FAA Registration and Part 135 Certificate
Regarding the Trustee's position that the transactions were domestic because the Master Leases required the planes to be FAA registered and operated under Zetta USA's Part 135 Certificate, and without FAA registration and Zetta USA's Part 135 Certificate the planes would have "no commercial value," Opposition at 21, 29 (emphasis in original), the focus of the Bankruptcy Code's avoidance and recovery provisions is the transfers , not other conditions in contracts or lease agreements. See RJR Nabisco, Inc. v. European Community, ––– U.S. ––––, 136 S.Ct. 2090, 2101, 195 L.Ed.2d 476 (2016) (directing courts to look to the "focus" of a statute to determine whether a case involves a domestic application of it); In re CIL Ltd., 582 B.R. 46, 93 (Bankr. S.D.N.Y. 2018) (providing that the "focus" of the avoidance and recovery provisions is "the initial transfer that depletes the property that would have become property of the estate").
The Master Lease for Plane 6 (Plane 6 Master Lease) involved Yuntian 3, through Wells Fargo as trustee, leasing Plane 6 to TVPX, as trustee for Zetta Jet 6000-3, pursuant to an Aircraft Lease Agreement dated 9/20/16. Complaint ¶ 112; Torborg 12/9/19 Decl. ¶ 6 Ex. B. The Master Lease for Plane 7 (Plane 7 Master Lease) involved Yuntian 3, through Wells Fargo as trustee, leasing Plane 7 to TVPX, as trustee for Zetta Jet 6000-2, pursuant to an Aircraft Lease Agreement dated 9/20/16. Complaint ¶¶ 112; Torborg 12/9/19 Decl. ¶ 9 Ex. E. The Master Lease for Plane 12 (Plane 12 Master Lease) involved Yuntian 4, through trustee Wells Fargo, leasing Plane 12 to TVPX, as trustee for Zetta Jet 650-1, pursuant to an Aircraft Lease Agreement dated 10/26/16. Complaint ¶ 124.
v. Maintenance of Aircraft at a U.S. Base and Security Interests
The Trustee contends that there is a strong U.S. nexus here because under the Planes 6, 7, and 12 Master Leases, the planes had to be maintained at a U.S. base and the security interests were all filed in the United States. Opposition at 22, 29-30 (citing Lyons 1/31/20 Decl. ¶¶ 9-11, Exs. C, D, E). The Trustee highlights that the Master Leases provided that the lessee, TVPX as trustee for Zetta BVI Subsidiaries, "shall ‘ensure that operational control over the Aircraft is maintained in the Aircraft Base,’ which is ‘the principal place of business of the Operator in the United States of America.’ " Opposition at 22 n.10 (quoting Lyons 1/31/20 Decl. ¶¶ 9-11, Exs. C, D, E); see also Complaint ¶ 112 (indicating that TVPX acted as trustee for Zetta Jet 6000-3 and Zetta Jet 6000-2 in the transactions for Planes 6 and 7, respectively), ¶ 124 (alleging that Yuntian 4, through its trustee Wells Fargo, leased Plane 12 to TVPX as trustee for Zetta Jet 650-1). The Trustee notes that the Plane 12 Master Lease indicated that the mortgage encumbering the plane was a "first priority New York law mortgage and security agreement ... which shall be registered with the FAA." Id. at 22 n.11 (quoting Lyons 1/31/20 Decl. ¶ 11, Ex. E). These facts, however, are irrelevant to the analysis because they do not address the transfers themselves but instead involve other contract provisions or requirements. See RJR Nabisco, Inc. v. European Community, ––– U.S. ––––, 136 S.Ct. 2090, 2101, 195 L.Ed.2d 476 (2016) ; In re CIL Ltd., 582 B.R. 46, 93 (Bankr. S.D.N.Y. 2018).
vi. The Closings, Subleases to Zetta USA, and the Nominal Trustees
The Trustee claims that the aircraft were financed through closings in the United States but the exhibits he cites merely indicate that Wells Fargo, "not in its individual capacity but solely as owner trustee under" trust agreements with UL (Ex. J) and GA (Ex. K), bought two Bombardier aircraft as trustee for Yuntian 3: Plane 6 (Ex. J), and Plane 7 (Ex. K). Opposition at 21-22, 29 (citing Torborg 12/9/19 Decl. ¶¶ 14-15, 20-21, Exs. J, K, P, Q). None of the exhibits specify that a closing occurred (or was to occur) in the U.S. Even if they did, however, it would not make a difference because the focus of the Bankruptcy Code's avoidance and recovery provisions is the initial fraudulent transfer of property. Similarly, although the Trustee contends that the aircraft had to be subleased to Zetta USA to operate, that fact does not concern the actual transfers he seeks to avoid and recover. Id. at 29.
The Trustee highlights the parties' use of U.S. corporate trustees to hold legal title to the planes and act as nominal owners, lessors, and lessees and argues that the use of the "nominal" trustees was critical for the planes to be registered with the FAA. Opposition at 21,29, 30 (citing Complaint ¶¶ 49-50, 108, 124; Y3/Y4 Motion at 17 n.6). The Complaint alleges that: 1) Wells Fargo has its principal place of business in Utah and, in its capacity as trustee, is a party to trust agreements with Yuntian 3 and Yuntian 4 where it acted as the owner trustee of Planes 6, 7, and 12; and 2) TVPX is a Wyoming corporation that, as trustee, acted as the registered owner of Planes 6, 7, and 12 for three "Zetta BVI Subsidiaries" in the transactions for those aircraft. Complaint ¶¶ 49, 50, 112, 124.
As explained above, however, the focus of the Bankruptcy Code's avoidance and recovery provisions is the transfers, not FAA registration, and the Complaint stresses that the use of Wells Fargo and TVPX as nominal trustees related to FAA registration. Complaint ¶ 49 (alleging that Wells Fargo acted as the owner-trustee of Planes 6, 7, and 12), ¶ 50 (indicating that TVPX acted as the registered owner of Planes 6, 7, and 12, and in the aviation industry, it is commonplace for non-citizen U.S. corporate trusts to be formed as an option for the registration of aircrafts in the United States with the FAA (emphasis added)), ¶ 108 (Yuntian 3, by and through Wells Fargo, entered into purchase agreements for Planes 6 and 7 with Universal Leader and TVPX as trustee for Zetta BVI subsidiaries, and Wells Fargo and TVPX acted on behalf of Yuntian 3 and the Zetta BVI Subsidiaries "solely as trustees"), ¶ 124 (Yuntian 4, through Wells Fargo, leased Plane 12 to TVPX acting as trustee for a Zetta BVI Subsidiary, and TVPX, as trustee, sub-leased Plane 12 to Zetta USA, which was the entity that actually operated Plane 12, and Wells Fargo and TVPX acted on behalf of Yuntian 4 and the Zetta BVI Subsidiary "solely as trustees").
Using American professionals in a transaction is not enough to make the transaction domestic. CIL Ltd., 582 B.R. at 96 (stating that CIL retained professionals outside the United States, but even if the relevant transfer had been negotiated and documented by professionals in the United States, it would not have been enough to make the transfer a domestic transaction); Ampal, 562 B.R. at 613-14 (holding that where legal services had some U.S. connections—a company's stock was traded on the NASDAQ, and an attorney performed legal work regarding SEC and NASDAQ filings—it did not result in the transactions being domestic); In re Lyondell Chem. Co., 543 B.R. 127, 150-51 & n.91 (S.D.N.Y. 2016) (acknowledging that the managers of BI S.a.r.l. and Basell GP were probably in New York when they approved the shareholder distributions at issue, but indicating that under Morrison, the court must target its inquiry on the "focus" of congressional concern, and the connection to the United States was not sufficiently strong for the transfer to be considered domestic); In re Sherwood Invs. Overseas Ltd., Inc., 2016 WL 5719450, at *11 (M.D. Fla. Sept. 30, 2016) (finding that the debtor-in-possession failed to overcome the presumption against extraterritoriality where its dealings with RBS had, at most, a "tangential connection" with the United States, even though the debtor-in-possession's principal and his normal RBS trader had "several conversations" in New York).
vii. Denomination of Payments
The Trustee claims that because all rent payments had to be made in U.S. dollars, any transfers had to be made either directly from U.S. banks or through U.S. correspondent banks, but he does not cite any allegations in the Complaint to support this argument. Opposition at 30. Even assuming this were true, the denomination of payments generally has no bearing on whether transactions are foreign or domestic. See Banco Safra S.A. - Cayman Islands Branch v. Samarco Mineracao S.A., 2019 WL 2514056, at *5 (S.D.N.Y. June 18, 2019) (holding, in an action for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, consummating transactions for Brazilian bonds with U.S. dollars was insufficient to plead a domestic transaction because the currency used does not necessarily have any bearing on whether a purchase or sale is domestic, and U.S. dollars can be used anywhere); see also In re Maxwell Communication Corp. plc, 186 B.R. 807, 817-18 (S.D.N.Y. 1995) (concluding that the transfers were foreign despite the payment in U.S. dollars). Further, as Y3/Y4 highlight, there is no allegation that the funds were not already held in U.S. dollars before the transfers. Reply at 24.
viii. Relevant Transaction Conclusion
For the reasons stated above, the Court finds that the transactions at issue in Counts II, III, VI, IX, X, and XII regarding Yuntian 3, Yuntian 4, and Minsheng Business, are extraterritorial.
d. Proofs of Claim
Y3/Y4 argue that the fact that they filed proofs of claims in the bankruptcy case has no "bearing on the presumption against extraterritoriality." Y3/Y4 Motion at 26. They allege that before the Supreme Court decided Morrison v. Nat'l Australia Bank, Ltd, 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010), some courts mistakenly considered the presumption to be a jurisdictional issue and suggested that filing proofs of claims subjected a party to the court's jurisdiction. Id. at 26-27 (citing Hong Kong and Shanghai Banking Corp., Ltd. v. Simon (In re Simon), 153 F.3d 991, 997 (9th Cir. 1998) ). Y3/Y4 contend that the presumption against extraterritoriality is not a jurisdictional issue but rather one of statutory interpretation: "to ask what conduct [a statute] reaches is to ask what conduct [it] prohibits, which is a merits question." Id. at 27 (quoting Morrison, 561 U.S. at 254, 130 S.Ct. 2869 ). They highlight that the Supreme Court later described the presumption against extraterritoriality as a "canon of statutory construction." Id. (quoting RJR Nabisco, Inc. v. European Community, ––– U.S. ––––, 136 S. Ct. 2090, 2100, 195 L.Ed.2d 476 (2016) ).
Y3/Y4 contend that filing a proof of claim is irrelevant regarding whether: 1) §§ 547, 548 and 550 reach extraterritorial conduct; or 2) the initial transfers that the Trustee seeks to avoid occurred domestically or extraterritorially. Id. (citing In re Ampal-Am. Israel Corp., 562 B.R. at 614 (S.D.N.Y. 2017) ). They argue that Simon is distinguishable because § 541, the provision at issue in that case, expressly provides that an estate includes property "wherever located and by whomever held" evidencing Congress' intent that it should be applied extraterritorially. Id. at 27 n.14. They also highlight that in Simon, the Ninth Circuit held that a creditor's attempt to circumvent the discharge injunction "would have ‘substantial effects within the United States.’ " Id. (quoting Simon, 153 F.3d at 997 ).
The Trustee responds that the Defendants' "deliberate and voluntary decision" to file proofs of claims waives the presumption against extraterritoriality. Opposition at 26. He contends that the law in this Circuit is clear, when a creditor files a proof of claim, "it forfeits any right to challenge the extraterritorial application of this Court's equitable power to adjudicate the debtors' claims under the Bankruptcy Code." Id. (emphasis in original) (quoting In re Simon, 153 F.3d at 997 ; citing Diaz-Barba v. Kismet Acquisition, LLC, 2010 WL 2079738, at *7 (S.D. Cal. May 20, 2010) ; In re Interbulk. Ltd., 240 B.R. 195, 199 (Bankr. S.D.N.Y. 1999) ). The Trustee contends that because the Defendants filed proofs of claims totaling $286,696,238.84, they forfeited any challenges to the Court's power to apply the Bankruptcy Code extraterritorially. Id. at 26-27. According to the Trustee, Simon is "in line" with Supreme Court precedent addressing a bankruptcy court's equitable power to "adjudicate avoidance claims as part of the claims adjustment process." Id. at 27 (citing Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) ; Katchen v. Landy, 382 U.S. 323, 333, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) ; Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ).
The Trustee discounts the argument that Simon was wrongfully decided on "jurisdictional grounds" because a bankruptcy court cannot overrule binding precedent based on an argument that the precedent is wrong. Id. (citing Hart v. Massanari, 266 F.3d 1155, 1170 (9th Cir. 2001) ). He asserts that the quote from Morrison that the Defendants highlight was not the Supreme Court's statement or holding, but rather the foreign defendant's assertion. id. The Trustee contends that In re Ampal-Am. Israel Corp., 562 B.R. 601 (S.D.N.Y. 2017), is inapposite because it is based on Maxwell II, 93 F.3d 1036 (2d Cir. 1996), which expressly declined to address the presumption against extraterritoriality. Id. at 27-28 & n.14.
Y3/Y4 reply that the Trustee misreads Simon. Reply at 19. They claim that it did not hold that creditors filing proofs of claims (acts of litigants) can define the extraterritorial reach of statutes (an act of Congress). Id. Instead, Y3/Y4 argue that the Ninth Circuit in Simon held that, allowing a creditor to disregard a discharge order would have "substantial effects within the United States" and the presumption against extraterritorial application of a statute was inapplicable because the case involved a domestic application of the discharge injunction. Id. They contend that the "substantial effects" test employed by Simon was overruled by the Supreme Court in Morrison. Id. at 19 n.6.
According to Y3/Y4, the court in Simon noted that "[b]y acceding to bankruptcy court jurisdiction so that it might recover" the creditor "forfeited any right it had to claim that the court lacked the power to enjoin [the creditor] from commencing a post-bankruptcy collection proceeding against the debtor." Id. at 20 (emphasis added) (quoting Simon, 153 F.3d 991, 997 (9th Cir. 1998) ). Y3/Y4 assert that this holding relies on the principle that "he who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide by the consequences of that procedure. Id. (quoting Stern v. Marshall, 564 U.S. 462, 496, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (internal quotations omitted); Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) ). They claim that this principle is consistent with their reliance on the presumption against extraterritoriality to challenge the merits of the Trustee's claims. Id.
Y3/Y4 contend that they are not challenging the Court's "power to adjudicate avoidance claims" or the Court's ability to exercise personal jurisdiction over defendants who file proofs of claims. Id. And, they assert that the Trustee's reliance on Stern, Langenkamp, and Katchen, is unavailing because none of those cases involved the presumption against extraterritoriality or held that filing a proof of claim permits trustees to extend statutes beyond their bounds. Id. According to Y3/Y4, the presumption against extraterritoriality is a tool of statutory construction. Id. They reiterate that in Morrison the Supreme Court stated that determining the extraterritorial reach of a statute "is a merits question" in contrast to jurisdictional questions which address a "tribunal's power to hear a case." Id. at 21 (quoting Morrison, 561 U.S. at 254, 130 S.Ct. 2869 ). They contend that where intervening Supreme Court authority is clearly irreconcilable with prior precedent, lower courts are bound by the Supreme Court's ruling. Id. And, they note that the issues decided by the Supreme Court need not be "identical" to be controlling but instead the higher court must have "undercut the theory or reasoning underlying the prior circuit precedent" so that the cases are "clearly irreconcilable." Id. (quoting Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) ).
Y3/Y4 argue that the Trustee's citation to Diaz-Barba v. Kismet Acquisition, LLC 2010 WL 2079738 (S.D. Cal. May 20, 2010), and In re Interbulk, Ltd., 240 B.R. 195 (Bankr. S.D.N.Y. 1999), is unavailing because the courts in those cases framed the issues as whether the court had subject matter jurisdiction over extraterritorial transactions, which is the characterization of the presumption against territoriality that the Supreme Court rejected in Morrison. Id. at 21, n.7. Y3/Y4 conclude that Morrison's holding that "the presumption against extraterritoriality is a merits question, and not an issue of whether the court has the ‘power’ to consider the claim, is clearly irreconcilable with a reading of Simon that says a creditor cannot invoke the presumption because it is a challenge to the court's power to decide the claim." Id. (emphasis in original).
In Simon, Hong Kong and Shanghai Banking Corporation Ltd. (HSBC), which is incorporated in Hong Kong, has offices in the United States, and frequently does business here, lent $24 million to Odyssey International Holdings, Ltd. (Odyssey), which was incorporated in the British Virgin Islands and had offices in Hong Kong. Hong Kong and Shanghai Banking Corp., Ltd. v. Simon (In re Simon), 153 F.3d 991, 994 (9th Cir. 1998). William Neil Simon (Simon), Odyssey's major shareholder who lived in Hong Kong, guaranteed the loan. Id. Shortly thereafter, and facing $200 million in debt, Simon traveled to the United States and filed a personal chapter 7 bankruptcy case. Id. Simon listed the guarantee in his schedules and HSBC filed a $37 million proof of claim for its share in a $200 million syndicated bank loan. Id. It did not file a proof of claim for Simon's guarantee of the loan nor did it object to Simon's discharge. Id.
Simon received a discharge, which prohibited creditors whose debts were discharged from "instituting or continuing any action or employing any process or engaging in any act to collect" debts as personal liabilities of Simon. Id. A week later, HSBC filed an adversary proceeding, seeking declaratory judgment that: 1) the discharge did not enjoin HSBC from enforcing the guarantee in Hong Kong; 2) the discharge be modified to permit prosecution of the guarantee in Hong Kong; and 3) if HSBC chose to commence collection proceedings in Hong Kong, it would not be subject to sanctions in the United States. Id. at 994-95. The bankruptcy court granted Simon's 12(b)(6) motion to dismiss. Id. at 995. The district court affirmed, concluding that: 1) the Bankruptcy Code conferred in rem jurisdiction over all property of the estate, wherever located and enjoining actions to preserve the court's in rem jurisdiction would not be an extraterritorial application of the court's equitable powers; and 2) because HSBC had "submitted to the jurisdiction of the bankruptcy court by participating in the bankruptcy," the court did not act extraterritorially by issuing the discharge injunction. Id. HSBC appealed, primarily arguing that the § 524 discharge injunction constituted an improper extraterritorial application of a statute. Id.
The Ninth Circuit began its analysis by noting that Congress has the authority to enforce its laws beyond the United States' borders and whether Congress has done so is a question of statutory construction. Id. According to the Ninth Circuit, "Congress clearly intended extraterritorial application of the Bankruptcy Code" because filing a petition creates an estate and § 541(a) provides that a bankruptcy estate is comprised of a debtor's legal and equitable property "wherever located and by whomever held." Id. at 996. The Ninth Circuit noted that the district court in which a bankruptcy case is filed has exclusive in rem jurisdiction over all estate property. Id.
It held that a bankruptcy court may exercise its in rem jurisdiction to protect estate property wherever the property is located when issuing a discharge injunction under § 524 and the district court properly determined that Simon's discharge enjoined HSBC from beginning collection against any estate property regardless of location. Id.
The Ninth Circuit noted that the more difficult question was whether a bankruptcy court could enjoin a foreign collection action against a debtor personally or regarding assets that were not part of the estate property, if the creditor was not a party to the United States bankruptcy proceeding. Id. at 996-97. According to the Ninth Circuit, it did not need to address that issue because HSBC "fully participated in the Simon bankruptcy", thus surrendering to United States jurisdiction. Id. at 997. The Circuit noted that "allowing a participating creditor to disregard bankruptcy court orders would have ‘substantial effects within the United States,’ " and it found that the presumption against extraterritoriality was inapplicable. Id.
HSBC argued that the fact that it filed a proof of claim was irrelevant, because it was unrelated to Simon's personal guarantee of the loan to Odyssey. Id. The Ninth Circuit disagreed, noting that:
When a creditor submits to bankruptcy court jurisdiction by filing a proof of claim ... to collect all or a portion of a debt, it assumes certain risks.... By acceding to bankruptcy court jurisdiction so that it might recover a portion of the money it was owed [HSBC] forfeited any right it had to claim that the court lacked the power to enjoin [it] from commencing a post-bankruptcy collection proceeding against the debtor. Clearly, [HSBC]'s participation in the bankruptcy subjected it to the court's discharge order pursuant to 11 U.S.C. § 524. A sanction for violating that order is not an improper extraterritorial application of United States laws.
Id. at 997.
The Ninth Circuit's conclusion in Simon, is instructive regarding the current dispute: § 541 includes all of a debtor's property regardless of location, a district court has exclusive in rem jurisdiction over all property of a bankruptcy estate, and a bankruptcy court may exercise its in rem jurisdiction to protect estate property in issuing a discharge injunction under § 524. Id. at 996. And, the discharge injunction was correctly applied to HSBC because its participation in the bankruptcy subjected it to the otherwise valid orders of the bankruptcy court. Id. at 999.
Contrary to the Trustee's urging, Simon does not mandate that the Court find that Y3/Y4's filing proofs of claims waived the presumption against extraterritoriality for numerous reasons. Simon addressed the reach of § 541, which governs estate property "wherever located", and the § 524 discharge injunction. The Ninth Circuit indicated that "Congress intended the extraterritorial application of the Bankruptcy Code as it applies to property of the estate" and it was dealing with a domestic application of the Bankruptcy Code because district courts have in rem jurisdiction over all estate property. Simon, 153 F.3d at 996. In contrast, none of the statutes at issue, §§ 547, 548, or 550, contain such expansive language as § 524. And, as analyzed above, the conduct at issue in the Complaint did not occur domestically and none of the statutes at issue apply to the extraterritorial conduct alleged in the Complaint. To the extent that Simon held that creditors, who file proofs of claims submit to the "jurisdiction" of the bankruptcy court, id. at 997, that holding is contrary to Morrison, which unequivocally stated that determining the extraterritorial reach of a statute is a merits question rather than a jurisdictional one. Morrison, 561 U.S. at 254, 130 S.Ct. 2869. Further, only Congress, and not litigants, can determine the breadth of a statute. If the Court were to accept the Trustee's position, it would effectively expand the reach of §§ 547, 548 and 550, beyond what those statutes provide, which Morrison indicated, courts should not do. Morrison, 561 U.S. at 255, 130 S.Ct. 2869 (indicating that a statute applies extraterritorially only if "the affirmative intention of the Congress [is] clearly expressed to give a statute extraterritorial effect" (internal quotations omitted)).
Because Simon is unpersuasive, so, too, is Diaz-Barba v. Kismet Acquisition, LLC, 2010 WL 2079738 (S.D. Cal. May 20, 2010), which, in dicta, cited Simon for the proposition that "when a party affirmatively invokes the jurisdiction of the bankruptcy court, the presumption against extraterritoriality does not apply to that party," and In re Interbulk, Ltd., 240 B.R. 195 (Bankr. S.D.N.Y. 1999), is distinguishable because the transactions at issue were domestic.
Finally, the Trustee's citation to Stern v. Marshall, 564 U.S. 462, 498, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), and Langenkamp v. Culp, 498 U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990), is unavailing. None of those cases addressed or involved extraterritorial application of the Bankruptcy Code or provide support for the Trustee's position that filing a proof of claim extends a statute beyond its bounds. e. Counts VII (Undelivered Aircraft) and XI (Plane 12) - Turnover Under § 542
As analyzed above, the Court concludes that Counts II, III, VI, IX, X, and XII must be dismissed because §§ 547, 548, and 550 do not apply extraterritorially, the relevant transactions were foreign, and filing proofs of claims does not waive the presumption against extraterritoriality. Therefore, the Court need not address the substantive arguments regarding those counts.
Y3/Y4 claim that the Trustee has not adequately plead turnover claims, which fail as a matter of law. Y3/Y4 Motion at 44 (citing In re Process Am., Inc., 588 B.R. 82, 98 (Bankr. C.D. Cal. 2018) ). They highlight that the Trustee alleges "upon information and belief" that they or one of the Minsheng entities "sold" the Undelivered Aircraft and Plane 12 to a third party, and the Debtors have a right to the "profit, if any" on those sales. Id. (citing Complaint ¶¶ 254-55, 295-96). They argue that the multiple levels of speculation in the Complaint's allegations are insufficient to plausibly state a claim. Id. (citing Eclectic Properties East, LLC v. Marcus & Millichap Co., 751 F.3d 990, 996-97 (9th Cir. 2014) ; Fowler v. Univ. of Phoenix, Inc., 2019 WL 1746576, at *9 (S.D. Cal. Apr. 18, 2019), aff'd 817 Fed.Appx. 442 (9th Cir. 2020) ; Miller v. City of Los Angeles, 2014 WL 12610195, at *5 (C.D. Cal. Aug. 7, 2014) ; Gold River, LLC v. La Jolla Band of Luiseno Mission Indians, 2011 WL 6152291, at *2 (S.D. Cal. Dec. 9, 2011) ). Y3/Y4 contend that neither they nor the Minsheng entities bought the three Undelivered Aircraft, Zetta Singapore cancelled the orders for those planes a week before the petition date, and Yuntian 4 received official cancellation notices from Bombardier. Id. at 44 n.28 (citing Zetta USA Docket #537, Ex. D).
Y3/Y4 assert that the Trustee has no turnover rights as a matter of law because Yuntian 4 repossessed Plane 12 on 11/29/17, and once the repossession rights arose, 11 U.S.C. § 1110(a)(1) provides that the relevant contract terms governed the parties' rights. Id. at 44-45 (citing United Airlines, Inc. v. U.S. Bank N.A., 406 F.3d 918, 922 (7th Cir. 2005) ). Y3/Y4 indicate that the Aircraft Lease Agreements for Planes 6, 7, and 12 provided that they had the right to repossess and dispose of the aircraft in their sole authority as they saw fit in the event of default and the Debtors did not have any ownership rights until the lease terms ended, all rental payments were made, and all obligations were performed. Id. at 45 (citing Torborg 12/9/19 Decl. ¶¶ 6, 9, 12, Exs. B II ¶¶ 22.1,23.1.1(a), 23.3, 23.5; E §§ 22.1,23.1.1(a), 23.3, 23.5; H §§ 22.1, 23.1.1(a), 23.3, 23.5). Finally, Y3/Y4 argue that the turnover claims are premised on "equity" interests funded entirely or mostly from the $12.4 Million Transfer, which were never property of the Debtors and cannot support equity in the aircraft. Id. (citing Complaint 120-21,253, 292-93).
The Trustee responds that Counts VII and XI state § 542 turnover claims. Opposition at 56. Regarding Count VII, he asserts that the Complaint pleads that "Minsheng" received $5.5 million in transfers for payment on the Undelivered Aircraft, and if those aircraft were completed and resold, he would be entitled to a portion of any profits. Id. (citing Complaint ¶ 242). The Trustee contends that he plead this claim on information and belief because "Minsheng" refused to provide any detail regarding what happened to the $5.5 million payment despite clear requests for this information, and "Minsheng" did not refer to it in the relevant proofs of claims. Id. (citing Claim #s 110-11, 122-25, 148-51). The Trustee argues that the notices of default cited by "Minsheng" show that Minsheng had the option to make the payments necessary to cure the default, and the Complaint pleads enough for him to obtain discovery regarding what happened to the $5.5 million payment. Id. at 56 n. 31 (citing Docket # 537, Ex. D).
Regarding Count XI, the Trustee claims that there are two independent bases for the Debtors' interest in the profits from the sale of Plane 12: 1) they bought Plane 12 through a disguised financing arrangement, Complaint ¶ 123; and 2) they paid millions of dollars towards the purchase of Plane 12, Complaint ¶¶ 120, 293. Id at 56. He asserts that Minsheng's rights under § 1110 and the disguised financing arrangements are not unfettered. Id. at 57. The Trustee argues that failing to perform obligations under § 1110 within 60 days after the filing of the cases only removes the protection of the automatic stay, and Y3/Y4 must still comply with applicable law in exercising their remedies under the security documents. Id. (citing Crocker Nat'l Bank v. Emerald, 221 Cal. App. 3d 852, 861, 270 Cal.Rptr. 699 (1990) ). According to the Trustee, Y3/Y4 were required to comply with Article 9 of the Uniform Commercial Code (UCC) and "other relevant similar requirements under applicable law," and their compliance "may be a potential defense to the Trustee's turnover count but it is not obvious from the face of the Complaint." Id. (citing ASARCO, LLC v. Union P. R. Co., 765 F.3d 999, 1004 (9th Cir. 2014) ).
Y3/Y4 reply that Counts VII and XI are premised on speculative assertions that they or Minsheng Business "sold" Challenger aircraft to third parties and that the Trustee has the right to "profits" from these alleged sales as property of the estate. Reply at 43 (citing Complaint ¶ 254-55, 295-96). They argue that the Opposition only confirms the speculative nature of the Trustee's turnover claim regarding the Undelivered Aircraft, and the Trustee ignores that Zetta Singapore cancelled the Undelivered Aircraft orders, and they and Minsheng Business never received those planes. Id. (citing Zetta USA Docket #537, Ex. D). Y3/Y4 contend that the suggestion that Minsheng Business did not respond to inquiries regarding what happened to the $5.5 million "paid" toward the Undelivered Aircraft is irrelevant to the claim seeking recovery of any "profit" from a "sale" of the planes. Id. And, Y3/Y4 assert that the Trustee cannot save his claims by asserting a purported lack of information. Id. at 43 n.21 (citing Franklin v. Curry, 738 F.3d 1246, 1252 n.6 (11th Cir. 2013) ). Y3/Y4 reiterate their argument that the Trustee's claim that the $5.5 million transfer itself was fraudulent is baseless. Id. at 43.
Y3/Y4 next argue that § 1110 precludes the turnover claims as a matter of law, because no matter how the transactions are characterized (whether as a true lease or a "disguised financing" arrangement), § 1110 provides that the parties' contractual rights and remedies shall control and are not limited or otherwise affected by any other provision of the Bankruptcy Code or by any power of the Court. Id. at 43-44 & n.22 (quoting 11 U.S.C. § 1110(a)(1) ; citing In re UAL Corp., 299 B.R. 509, 517 (Bankr. N.D. Ill. 2003), aff'd, 411 F.3d 818 (7th Cir. 2005) ; 7 Collier on Bankruptcy P. 1110.02 (16th ed. 2019)). Y3/Y4 highlight that the Trustee does not assert that the Debtors had any ownership rights under the contracts until the end of the lease terms and all obligations had been performed. Id. at 44 (citing Torborg 12/9/19 Decl. ¶¶ 6, 9, 12, Exs. B § 22.1, E § 22.1, H § 22.1). Finally, Y3/Y4 indicate that the Trustee does not articulate any basis for suggesting that they or Minsheng Business violated the UCC or other "applicable law" in repossessing Plane 12. Id.
Section 542(a) provides that:
[A]n entity ... in possession, custody, or control, during the case, of property that the trustee may use, sell or lease under section 363 ... shall deliver to the trustee ... such property, or the value of such property, unless the property is of
inconsequential value or benefit to the estate.
To prevail on a turnover cause of action, the trustee must show, by a preponderance of the evidence that: 1) the property is in the possession, custody, or control of a noncustodial third party; 2) the property constitutes property of the estate; 3) the property is of a type that the trustee could use, sell or lease pursuant to section 363; and 4) the property is not of inconsequential value or benefit to the estate. In re Newgent Golf, Inc., 402 B.R. 424, 435 (Bankr. M.D. Fla. 2009). The moving party bears the burden of proof. In re Irwin, 509 B.R. 808, 816 (Bankr. E.D. Penn. 2014) (stating that the party asserting a § 542(a) claim bears the burden of proving all the elements of § 542(a), including that the defendant is in possession of the relevant property of the estate).
Y3/Y4 are correct that the Complaint pleads "upon information and belief" that on completion of the Undelivered Aircraft, "Minsheng" or Yuntian 4 sold the planes to a third party for a profit (Count VII), and after the repossession of Plane 12, "Minsheng" or Yuntian 4 sold it and its contents to a third party (Count XI). Complaint ¶¶ 254, 295. And, the Complaint alleges that "any" profit is the property of the Debtors' estates and is subject to turnover. Complaint ¶¶ 255; 296. But, the authority cited by Y3/Y4 is unpersuasive because the complaints at issue were dismissed because of insufficient factual allegations and not because of information-and-belief pleading. Eclectic Properties East, LLC v. Marcus & Millichap Co., 751 F.3d 990 (9th Cir. 2014) ; Fowler v. Univ. of Phoenix, Inc., 2019 WL 1746576, at *9 (S.D. Cal. Apr. 18, 2019), aff'd 817 Fed.Appx. 442 (9th Cir. 2020) ; Miller v. City of Los Angeles, 2014 WL 12610195, at *5 (C.D. Cal. Aug. 7, 2014) ; Gold River, LLC v. La Jolla Band of Luiseno Mission Indians, 2011 WL 6152291, at *2 (S.D. Cal. Dec. 9, 2011).
Further, the law in this circuit is clear; pleadings based on information and belief in some situations, are sufficient. Soo Park v. Thompson, 851 F.3d 910, 928 (9th Cir. 2017) ("The Twombly plausibility standard ... does not prevent a plaintiff from pleading facts alleged upon information and belief where the facts are peculiarly within the possession and control of the defendant or where the belief is based on factual information that makes the inference of culpability plausible."); Miller v. City of Los Angeles, 2014 WL 12610195, at *5 (C.D. Cal. Aug. 7, 2014) (recognizing that the plaintiff's "information and belief" pleading was allowed and "necessary at times"); see also Mireskandari v. Daily Mail and General Trust PLC, 2013 WL 12129642, at *4 (C.D. Cal. July 31, 2013) ("The Federal Rules of Civil Procedure allow parties to plead facts on ‘information and belief’ if the facts ‘will likely have evidentiary support after a reasonable opportunity for further investigation or discovery.’ " (citations omitted)).
1. The property is in the possession, custody, or control of a noncustodial third party
In Counts VII and XI, the Trustee seeks turnover of the profits from the sale of the Undelivered Aircraft and Plane 12, respectively, from "Minsheng" or Yuntian 4, Complaint ¶¶ 254, 295-96, which is sufficient to allege that the funds are in the possession, custody, or control of a third party.
2. The property constitutes property of the estate
i. Count VII - Undelivered Aircraft
The Complaint alleges that: 1) the first step of the Minsheng Refinancing was for Zetta Singapore and GA to enter into an "Aircraft Sale and Purchase Agreement" for Plane 6 in August 2016, and for Zetta Singapore and UL to enter into an "Aircraft Sale and Purchase Agreement" for Plane 7 in August 2016, where the new purchase price for Planes 6 and 7 in these agreements was more than the principal then due on the aircraft; 2) the second step of the Minsheng Refinancing involved entry into new purchase agreements with "Minsheng" and Yuntian 3 where "Minsheng" bought Planes 6 and 7 under a disguised financing structure; 3) the proceeds disbursed during the Minsheng Refinancing included the $12.4 Million Transfer to Minsheng Business, which was a transfer of the Debtors' property, and $5.5 million of which was for amounts allegedly due and owing on the Undelivered Aircraft; 4) on the Petition Date, the Undelivered Aircraft were still being constructed by Bombardier; and 5) upon information and belief, upon completion of the construction of the Undelivered Aircraft, "Minsheng" or Yuntian 4 sold the planes to a third party for profit; and 6) because of their liquidation, the Debtors did not receive any benefit from the $5.5 million transferred for the Undelivered Aircraft. Complaint ¶¶ 104-06, 241-42, 254.
Y3/Y4 argue that the $5.5 million transfer cannot support equity in the Undelivered Aircraft because it was never property of the Debtors. Y3/Y4 Motion at 45 (citing ¶¶ 120-21, 253, and 292-93). Their argument, however, is contrary to the Complaint's allegations that: 1) the $12.4 Million Transfer to Minsheng Business was a transfer of the Debtors' property and $5.55 million of which was for amounts owing on the Undelivered Aircraft, Complaint ¶ 120; and 2) because of their liquidation, the Debtors did not receive any benefit from that transfer. Complaint ¶ 121. When ruling on a motion to dismiss, the Court must accept these allegations as true. Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1122 (9th Cir. 2008) ; Knox v. Davis, 260 F.3d 1009, 1012 (9th Cir. 2001).
Y3/Y4 argue that Zetta Singapore cancelled the orders for the Undelivered Aircraft a week before the petition date, and Yuntian 4 received official cancellation notices from Bombardier, Y3/Y4 Motion at 44 n.28 (citing Zetta USA Docket #537, Ex. D), but the Court cannot consider Zetta USA Docket #537, Ex. D, because the exhibit is not authenticated, and even if it were authenticated, it does not show that Zetta Singapore cancelled the orders but rather that Bombardier sent Yuntian 4 three "Termination Notice[s]" due to a default in payment by Yuntian 4. Orr v. Bank of Am., NT & SA, 285 F.3d 764, 773 (9th Cir. 2002) (stating that documents must be authenticated before they can be admitted); Evans v. Bd. of Educ. Sw. City Sch. Dist., 2010 WL 1849273, at *3 (S.D. Ohio 2010) (indicating that "unauthenticated documents are inadmissible under the Federal Rules of Evidence.").
ii. Count XI - Plane 12
The Complaint alleges that: 1) as part of the Minsheng Refinance, $6,852,560 of the $12.4 Million Transfer to Minsheng Business was for amounts due and owing on Plane 12 and was a transfer of the Debtors' property; 2) after the $12.4 Million Transfer, Zetta Singapore made transfers totaling approximately $3,109,452.67 towards the purchase of Plane 12; 3) the proof of claim filed by Yuntian 4 indicates that on 11/30/17, Yuntian 4 repossessed Plane 12, and its claims will be reduced to the extent of any mitigation of damages actually received; 4) upon information and belief, after the repossession of Plane 12, Minsheng or Yuntian 4 sold Plane 12 and its contents to a third party; and 5) if Minsheng or Yuntian 4 sold Plane 12 for more than the outstanding debt due from the Debtors, the profit from the sale is property of the Debtors' estates. Complaint ¶¶ 123, 241, 292-96. For the reasons stated above, Y3/Y4's assertion, that the $12.4 Million Transfer was not the Debtors' property, is contrary to the Complaint's allegations.
Section 1110(a)(1) provides that "the right of a secured party with a security interest in equipment ... or of a lessor or conditional vendor of such equipment, to take possession of such equipment in compliance with a security agreement, lease, or conditional sale contract, and to enforce any of its other rights or remedies, under such security agreement, lease, or conditional sale contract, to sell, lease, or otherwise retain or dispose of such equipment, is not limited or otherwise affected by any other provision of this title or by any power of the court." This section "takes aircraft out of the automatic stay ... and entitles secured lenders and financing lessors to repossess their collateral." United Airlines, Inc. v. U S. Bank N.A., 406 F.3d 918, 922 (7th Cir. 2005). There are only two exceptions under § 1110(a)(2) and § 1110(b), which are not at issue here.
The Trustee argues that the Debtors bought Plane 12 through a disguised financing arrangement, Opposition at 56, and the Complaint makes a similar allegation. Complaint ¶ 123 ("On October 26, 2016, Zetta [Singapore] purchased Plane 12 through a leveraged lease finance arrangement."). But, it does not matter whether the Plane 12 Master Lease was a true lease or a disguised financing as alleged in the Complaint because it did not provide the Debtors a right to purchase Plane 12 until the end of the lease term. Torborg 12/9/19 Decl. ¶ 12 Ex. H § 22.1 (indicating that: if "(a) no Default has occurred and is continuing; and (b) Lessee has paid all amounts due to Lessor ... in full, Lessee shall, have an option to purchase the Aircraft on the last day of the Lease Term for the Option Price." ), Ex. H § 23.3 (providing that if an "Event of Default" has occurred and is continuing, "Lessor may at its option ... (a) accept such repudiation and ... terminate the leasing of the Aircraft ... whereupon all rights of the Lessee under this Agreement cease; ... (b) proceed by appropriate court action ...; (c) take possession of the Aircraft ... or cause the Aircraft to be redelivered to Lessor ...; (d) require Lessee to redeliver the Aircraft to Lessor ...; and/or (e) apply all or any portion of prepaid Rent held by Lessor under this agreement ... to any amounts due and payable by Lessee which are unpaid ..."). Y3/Y4 are correct that under Plane 12's Master Lease, they had a right to foreclose on Plane 12 upon default. Torborg 12/9/19 Decl. ¶ 12 Ex. H § 23.3. And, it is undisputed that the aircraft was repossessed on 11/30/17. Complaint ¶ 295. After repossession, the estate had no interest in the aircraft, and any profit from a sale of Plane 12 would not be property of the estate.
The "Lease Term" started on the "Delivery Date" and was to continue for 84 months. Torborg 12/9/19 Decl. ¶ 12, Ex. H § 3.1.
Finally, the Trustee's argument regarding Y3/Y4's compliance with the UCC is unavailing because the Complaint does not suggest that Y3/Y4 violated the UCC. And, the Trustee's citation to Crocker Nat'l Bank v. Emerald, 221 Cal. App. 3d 852, 270 Cal.Rptr. 699 (1990), is unpersuasive because the UCC was at the "core" of the controversy. Id. at 859, 270 Cal.Rptr. 699 (noting that the core of the controversy was California Uniform Commercial Code § 9504, which provides that when a debtor defaults, the secured party can liquidate the security and apply the proceeds to any unpaid debt, and the collateral sale must be done in a "commercially reasonable manner" with notice to the debtor).
3. The property is of a type that the Trustee could use, sell or lease pursuant to section 363 or that the Debtors could exempt under § 522
Here, the property at issue is money, and Y3/Y4 do not suggest that this element is unsatisfied.
4. The property is not of inconsequential value or benefit to the estate
Although it is unclear how much money the Trustee seeks to recover in Counts VII and XI, Y3/Y4 do not argue that the profits are of inconsequential value or benefit to the estate.
For the reasons stated above, the Complaint pleads a turnover claim regarding the Undelivered Aircraft (Count VII) but not regarding Plane 12 (Count XI).
To the extent that the Trustee seeks turnover of the $12.4 Million Transfer itself, that transfer was extraterritorial for the reasons stated above.
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f. Count XV - Disallowance Under § 502
The Complaint alleges as follows: 1) § 502(d) provides that the claim of any entity from which property is recoverable under 11 U.S.C. §§ 542 or 550, or that is a transferee of a transfer avoidable under 11 U.S.C. §§ 547 or 548, shall be disallowed unless the transferee has paid the amount for which it is liable under 11 U.S.C. §§ 542 or 550 ; 2) the Defendants are entities from which property is recoverable under 11 U.S.C. §§ 542 or 550 or transferees of transfers which are avoidable under 11 U.S.C. §§ 547 or 548 ; 3) pursuant to 11 U.S.C. § 502(d), any and all claims of the Defendants against the Debtors must be disallowed until such time as the Defendants pay the Trustee the amounts required or turn over the property that is recoverable. Complaint ¶¶ 319-21.
Y3/Y4 argue that because none of the underlying claims asserted against them pleads a plausible claim, Count XV, seeking disallowance under § 502(d), must be dismissed. Y3/Y4 Motion at 45. The Trustee counters that the Complaint states numerous viable claims, and it states a claim for disallowance. Opposition at 59. Y3/Y4 do not address disallowance in the Reply.
Title 11 U.S.C. § 502(d) provides as follows:
[T]he court shall disallow any claim of any entity from which property is recoverable under section 542 [or] 550 ... of this title or that is a transferee of a transfer that is avoidable under section ... 547 [or] 548 ... of this title....
See also 4 Collier on Bankruptcy ¶ 502.05[1] (" Section 502(d) is generally operative: (1) when the trustee has secured an order to the claimant for a turnover of property under sections 542 and 543 ; [and] (2) when the trustee, having successfully avoided transfers under the sections dealing with the trustee's avoidance powers (including sections 544, 547 and 548 ), may recover under section 550."); see generally In re Plastech Engineered Products, Inc., 394 B.R. 147, 155 (Bankr. E.D. Mich. 2008) (stating that § 502(d) is designed to assure equal distribution of a bankruptcy estate's assets and it does so by restoring assets to the estate and delaying or prohibiting payments to creditors who have not repaid an avoidable transfer or turned over estate property).
Here, because Count VII is not dismissed, Count XV remains viable. g. Leave to Amend
Y3/Y4 summarily argue that the Complaint should be dismissed without leave to amend. Motion at 3.
The Trustee responds that in the event of dismissal, the Court should grant leave to amend, which should be granted unless the Court determines that the pleading could not possibly be cured by the allegation of other facts. Opposition at 59 (citing Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc); Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001) ; Knevelbaard Dairies v. Kraft Foods, Inc., 232 F.3d 979, 983 (9th Cir. 2000) ).
Y3/Y4 reply that the Court should deny leave to amend. Reply at 44. They claim that the dispositive facts relevant to the extraterritoriality and comity inquiries are known and undisputed. Id. (citing Rentmeester v. Nike, Inc., 883 F.3d 1111, 1125 (9th Cir. 2018) ; Nunes v. Ashcroft, 375 F.3d 805, 808 (9th Cir. 2004) ; Cuoco v. Moritsugu, 222 F.3d 99, 112 (2d Cir. 2000) ). They also contend that the Opposition identifies no additional facts that would cure the deficiencies in the Trustee's claims, and the Trustee's inability to adequately plead his claims after two years of investigation is not attributable to a lack of knowledge or failure to vigorously pursue the claims. Id. Y3/Y4 conclude that the claims, "filed on the eve of the expiration of the statute of limitations, simply lack merit." Id.
Federal Rule of Bankruptcy Procedure 7015 provides that Rule 15 of the FRCP applies to supplemental and amended pleadings in bankruptcy cases. Rule 15(a)(2) indicates that "a party may amend its pleading only with the opposing party's written consent or the court's leave. The court should freely give leave when justice so requires."
Courts have the discretion to grant or deny leave to amend a complaint. Swanson v. U.S. Forest Serv., 87 F.3d 339, 343 (9th Cir. 1996). "In exercising this discretion, a court must be guided by the underlying purpose of Rule 15 to facilitate decision on the merits, rather than on the pleadings or technicalities." United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981). Consequently, the policy to grant leave to amend is applied with "extreme liberality." Id.
Parties seeking leave to amend have the initial burden to show a legitimate reason for seeking amendment. See Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962) ; Advanced Cardiovascular Sys., Inc. v. SciMed Life Sys., Inc., 989 F. Supp. 1237, 1241 (N.D. Cal. 1997). Assuming the movant meets that burden, the burden then shifts to the party opposing amendment to show that leave to amend is not warranted. Advanced Cardiovascular Sys., Inc., 989 F. Supp. at 1241 ("Once a party seeking leave to amend has given a legitimate reason for amendment, the burden shifts to the party opposing amendment to demonstrate why leave to amend should not be granted.") (citing Genentech, Inc. v. Abbott Labs., 127 F.R.D. 529, 530-31 (N.D. Cal. 1989) ). The party opposing amendment must demonstrate that the following factors warrant denial of leave to amend:
1. Bad faith;
2. Undue delay;
3. Prejudice to the opposing party; and
4. Futility of amendment.
Ditto v. McCurdy, 510 F.3d 1070, 1079 (9th Cir. 2007) (internal citations omitted); Smith v. Chrysler Corp., 938 F. Supp. 1406, 1412 (S.D. Ind. 1996) ("Defendants have the burden of showing that the amendment is sought in bad faith, that it is futile, or that it would cause substantial prejudice, undue delay or injustice.") (internal citations omitted); see also Reed v. Dynamic Pet Prod., 2016 WL 4491597, at *1 (S.D. Cal. 2016).
Of the factors courts analyze when adjudicating motions for leave to amend, the potential for prejudice to the opposing party "carries the greatest weight." Id. The opposing party has the burden of establishing prejudice. DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 187 (9th Cir.1987). Absent prejudice or a strong showing of any of the remaining factors, "there exists a presumption under Rule 15(a) in favor of granting leave to amend." Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (emphasis in original).
"Futility of amendment can, by itself, justify the denial of a motion for leave to amend." Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995). "For an amendment to be futile, it must appear on its face that it is not actionable." Coble v. Derosia, 2011 WL 444961, at *4 (E.D. Cal. Feb. 8, 2011).
Because of the policy to grant leave to amend with "extreme liberality," and there have been no previous amendments, the Court finds that it is appropriate to grant the Trustee leave to amend Counts II, III, VI, IX, X, XI, and XII. See Banco Safra S.A. - Cayman Islands Branch v. Samarco Mineracao S.A., 2019 WL 2514056, at *2-3 (S.D.N.Y. June 18, 2019) (indicating that the defendants' motion to dismiss a previous version of the complaint based "principally" on the presumption against extraterritoriality was denied without prejudice, and the plaintiff was allowed to amend the complaint to add facts that were submitted in support of the plaintiff's opposition to the motion to dismiss; and dismissing the complaint at issue with prejudice because of the plaintiff's "repeated failures to cure" and notice from the court that it would not have another opportunity to sufficiently allege a domestic transaction).
IV. Conclusion
For the reasons stated above, the Motion is granted regarding Counts II, III, VI, IX, X, XI, and XII, which are dismissed with leave to amend, and the Motion is denied regarding Counts VII and XV. Pursuant to LBR 9021-1(b)(1)(B), Y3/Y4 and Minsheng Business must serve and lodge a proposed order via LOU within 7 days of the filing of this memorandum of decision.