The Presumption Against Extraterritoriality and Doctrine of International Comity
In French v. Liebmann (In re French), 440 F.3d 145 (4th Cir. 2006) (French), the U.S. Court of Appeals for the Fourth Circuit recently provided important guidance as to when a bankruptcy court has jurisdiction to avoid a fraudulent transfer of foreign property notwithstanding the presumption against extraterritoriality of U.S. laws and the doctrine of international comity.
Two longstanding principles of American law are (1) the presumption against enforcement of U.S. statutes beyond the territorial bounds of the United States (the “presumption against extraterritoriality”), which was recognized by the Supreme Court in EEOC v. Aramco Am. Oil Co., 499 U.S. 244, 248 (1991) (Aramco); and (2) the recognition that there are circumstances in which the application of U.S. law should give way to the application of foreign law, giving due regard to international duty and the concerns of another nation for the rights of its citizens or others under protection of its laws (the “doctrine of international comity”). There is little case law on the issue of when these principles may limit the power of bankruptcy courts, particularly in the enforcement of avoidance powers. In perhaps the most well-known case addressing this issue, Maxwell Communication Corp. PLC v. Societe General PLC (In re Maxwell Communication Corp. PLC.), 186 B.R. 807 (S.D.N.Y. 1995) (Maxwell), adversary proceedings to avoid the transfer of funds to the defendants within 90 days of commencement of the bankruptcy case were dismissed based on the presumption against extraterritoriality and the doctrine of international comity. In Maxwell, the funds transferred consisted of proceeds from the sale of the U.S. assets of the debtor, an English company, which was simultaneously the subject of an English insolvency proceeding.
In French, the debtor deeded a property in the Bahamas to her children. To avoid the high Bahamian transfer taxes, the children delayed recording the deed. Nearly 20 years later, the children recorded the deed when the debtor began experiencing financial problems. The trustee sued the children to avoid the transfer of the property as a constructively fraudulent transfer. The children filed a motion to dismiss the case on the grounds that, among other things, the presumption against extraterritoriality precluded Bankruptcy Code §548 from applying to transfers of foreign property.
The bankruptcy court and the district court denied the motion to dismiss, and the Fourth Circuit affirmed. The Fourth Circuit first noted that it previously had never defined when conduct is deemed extraterritorial for purposes of the presumption. The court adopted a flexible test taking into account “all components of the transfer” – the participants, acts, targets and effects involved – to determine whether a fraudulent transfer occurred extraterritorially.
In the French case, the transferor (debtor) and the “victims” of the fraudulent transfer, except for one Bahamian creditor, all were in the United States, so the effects of the transfer were felt most strongly in the United States. While the court noted that the effect of the action on title to Bahamian property does weigh in favor of extraterritoriality, even if the presumption applied, it was still appropriate in French to apply the Code to avoid the transfer, as the presumption must give way when, as recognized in Aramco, Congress makes clear its intent to enforce U.S. laws beyond the boundaries of the United States. The Fourth Circuit found the necessary clear intent in §541 of the Code, which defines property of the estate to include property “wherever located,” and thus encompasses both domestic and foreign property. Although the Fourth Circuit recognized a debate among the courts as to whether property of the estate includes property the debtor fraudulently transferred pre-bankruptcy, the court held that Congress made clear its intent that §548 apply to all property, including foreign property that would have been property of the estate but for the pre-petition transfer. Therefore, the presumption against extraterritoriality was held not to prevent the trustee’s fraudulent transfer action under §548.
The Fourth Circuit also held that the importance of applying the Code to recover fraudulent transfers overrode any considerations of international comity. In the French case, the transferees argued that under Bahamian law the transfer would not be avoidable absent proof of an actual intent to defraud. Turning to the factors enumerated in Restatement (Third) of Foreign Relations Law §403 (1987), for determining when it is appropriate to forego application of U.S. laws, the court held that the United States had a stronger interest in regulating the transaction in question, as part of the debtor’s bankruptcy estate, as most of the relevant activities took place in the United States and all but one of the parties affected were in the United States.
Without further guidance from the Supreme Court on exactly what language or legislative history is sufficient for a provision of the Bankruptcy Code to satisfy the requirements of Aramco to override the presumption against extraterritoriality, it remains to be seen whether the Fourth Circuit’s holding that Congress intended §548 to apply beyond the borders of the United States will be followed by other circuits. For now, the law in the Fourth Circuit is clear. The presumption against extraterritoriality does not prevent bankruptcy courts from avoiding fraudulent transfers of foreign property under §548.