The case of In re French, 440 F.3d 145 (4th Cir. 2006) presented the question of whether a U.S. Bankruptcy Court can avoid a constructively fraudulent transfer of foreign real estate between U.S. residents. The court held that the presumption against extraterritoriality, assuming it applied, did not prevent the application of the fraudulent transfer statute and that the doctrine of international comity did not require application of Bahamian bankruptcy law rather than the U.S. Bankruptcy Code.
In this case, the Chapter 7 trustee filed an adversary proceeding to avoid the transfer of the Bahamian real property by the debtor to her children. The trustee alleged that the debtor and the transferees had engaged in a constructively fraudulent transfer because the debtor had been insolvent at the time of the transfer and received less than a reasonably equivalent value in exchange. See 11 USC section 548(a)(1)(B). The transferees filed a motion to dismiss and argued that the section 548 should not apply to foreign property based on the presumption against extraterritoriality and that considerations of international comity counseled the application of Bahamian rather than U.S. bankruptcy law.
The court noted that it is a principle of American law that legislation of Congress is meant to apply only within the territorial jurisdictio of the U.S. unless a contrary intent appear. The court stated that although the parties had assumed that the application of section 548 to the transfer here is extraterritorial, the court needed to consider whether the presumption against extraterritorial application applies at all. The court noted that the U.S., courts only apply this presumption against extraterritoriality when a party seeks to enforce a statute beyond the territorial boundaries of the United States. EEOC v. Arabian Am. Oil Co., 499 U.S. 244 (1991). The presumption has no bearing when the conduct which Congress seeks to regulate occurs largely within the U.S., ie. when regulated conduct is domestic rather than extraterritorial. Envtl. Def. Fund, Inc. v. Massey, 986 F.2d 528, 531 (D.C.Cir.1993).
The court stated that although it had never defined when conduct is extraterritorial for purposes of the presumption, it has recognized that a similar inquiry-defining “foreign conduct”-is particularly challenging in cases (like this one) that involve a “mixture of foreign and domestic elements.” Dee-K Enters., Inc. v. Heveafil Sdn. Bhd., 299 F.3d 281, 286 (4th Cir.2002).The court concluded that a flexible test taking into account all component events of the transfer is appropriate to determine whether an allegedly fraudulent transfer occurred
extraterritorially. The court noted that the perpetrator and most of the victims of the fraudulent transfer were located in the U.S and the effects of this transfer were felt most strongly in the U.S. and not in the Bahamas. The court also found significant that domestic facts and conduct established both of the elements of the section 548 constructively fraudulent transfer, ie. the insolvency of the debtor and the receipt of less than a reasonably equivalent value. The court found the recordation of the deed in the Bahamas as insignificant as a foreign fact or conduct. The court though did recognize as important the fact that the real property was located in the Bahamas as the law has long recognized the powerful interest that states and nations have in the real property within their boundaries and that the strength of that interest explains why the law of the situs generally applies to real property.
But the court held that it need not resolve the “slippery question” of whether there was extraterritorial application as even if it were assumed that the application of the Bankruptcy Code would be extraterritorial, the presumption against extraterritoriality does not prevent its application to the transfer herein. The court concluded that the presumption must give way when Congress exercises its undeniable authority to enforce its laws beyond the territorial boundaries of the United States as it did with section 548.
The transferees next argued that even if the presumption against extraterritoriality does not prevent extension of section 548 to the transaction, that the court should refrain from applying the statute under the doctrine of international comity, particularly as this is a dispute concerning real property which should be governed by the law of the situs. The court reviewed what the Supreme Court has referred to as the factors as to the application of the doctrine of international comity and concluded that these factors did not require the court to refrain from applying the U.S. Bankruptcy Code in favor of Bahamian bankruptcy law.
