The ability of a bankruptcy trustee to avoid fraudulent or preferential transfers is a fundamental part of U.S. bankruptcy law. However, when an otherwise avoidable transfer by a U.S. entity takes place outside the U.S. to a non-U.S. transferee—as is increasingly common in the global economy—courts disagree as to whether the Bankruptcy Code’s avoidance provisions apply extraterritorially to avoid the transfer and recover the transferred assets. Several bankruptcy and appellate courts have addressed this issue in recent years, with inconsistent results.
The U.S. Court of Appeals for the Second Circuit recently had an opportunity to weigh in on this question in In re Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, 917 F.3d 85 (2d Cir. 2019) ("Madoff"). A three-judge panel of the Second Circuit vacated a bankruptcy court order dismissing a trustee’s litigation against various non-U.S. defendants to recover payments by a U.S. debtor that were allegedly avoidable as intentionally fraudulent transfers.
The bankruptcy court had ruled that the claims against these subsequent foreign transferees must be dismissed because section 550(a)(2) of the Bankruptcy Code, which provides for the recovery of avoided fraudulent transfers from subsequent transferees, does not apply extraterritorially, and because principles of international comity limited the provision’s scope. In vacating the dismissal, the Second Circuit held that neither the "presumption against extraterritoriality" nor the doctrine of comity barred recovery because: (i) section 550(a)(2) works in tandem with section 548, which "focuses on the debtor’s initial transfer of property"; (ii) the initial transfer occurred within the U.S., meaning that the case involved domestic, rather than foreign, application of section 550(a); and (iii) comity did not warrant dismissal of the recovery actions because the interest of the U.S. in applying the Bankruptcy Code’s avoidance and recovery provisions "outweighs the interest of any foreign state."
Notably, however, because the Second Circuit found that the case involved a domestic application of section 550(a), it "express[ed] no opinion on whether § 550(a) clearly indicates its extraterritorial application."
On May 23, 2019, the Second Circuit stayed the effectiveness of its ruling pending a decision by the U.S. Supreme Court on the foreign transferees’ petition for a writ of certiorari.
The Presumption Against Extraterritoriality
"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.’" EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991) (quoting Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949)). This "presumption against extraterritoriality" is a judicially developed rule of statutory construction whereby federal law is presumed not to apply to conduct or property outside the United States "unless a contrary intent appears." Morrison v. National Australia Bank Ltd., 561 U.S. 247, 255 (2010). Contrary intent is shown through "clear evidence," in either the statutory text or the "legislative purpose underlying it." Smith v. United States, 507 U.S. 197, 204 (1993). However, a law need not explicitly state that "this law applies abroad" to have extraterritorial effect, and context is relevant to infer the statute’s meaning. Morrison, 561 U.S. at 255.
In Morrison and RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (2016), the Supreme Court outlined a two-step approach to determine whether the presumption against extraterritoriality forecloses a claim. First, the court examines "whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially." Nabisco, 136 S. Ct. at 2101; accord Morrison, 561 U.S. at 255. If the conclusion is that the presumption has been rebutted, the inquiry ends.
If the presumption has not been rebutted, the court must determine whether the case involves a domestic application of the statute by examining its "focus." If the conduct relevant to the statute’s focus occurred in the U.S., "the case involves a permissible domestic application even if other conduct occurred abroad." Nabisco, 136 S. Ct. at 2101; accord Morrison, 561 U.S. at 266–67. However, if the conduct relevant to the focus of the statute did not occur in the U.S., "the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory." Id.; accord Societe Generale plc v. Maxwell Commc’n Corp. plc (In re Maxwell Commc’n Corp. plc), 186 B.R. 807, 816 (S.D.N.Y. 1995) ("Maxwell I"), aff’d on other grounds, 93 F.3d 1036 (2d Cir. 1996) ("Maxwell II").
Most courts have adopted a flexible approach in determining whether a transaction occurred in the U.S. or was extraterritorial for this purpose. Many apply a "center of gravity" test, whereby the court examines the facts of the case to ascertain whether they have a center of gravity outside the U.S. See, e.g., French v. Liebmann (In re French), 440 F.3d 145, 149 (4th Cir. 2006), cert. denied, 549 U.S. 815 (2006); In re Florsheim Group Inc., 336 B.R. 126, 130 (Bankr. N.D. Ill. 2005). This analysis may involve consideration of "all component events of the transfer[]," Maxwell I, 186 B.R. at 816, such as "whether the participants, acts, targets, and effects involved in the transaction at issue are primarily foreign or primarily domestic." French, 440 F.3d at 150.
Extraterritorial Operation of U.S. Bankruptcy Law
In certain respects, U.S. bankruptcy law has explicitly applied extraterritorially for nearly 70 years. In 1952, due to confusion about the scope of a debtor’s property to be administered by a bankruptcy trustee under the Bankruptcy Act of 1898, Congress inserted the phrase "wherever located" into section 70a of the act "to make clear that a trustee in bankruptcy is vested with the title of the bankrupt in property which is located without, as well as within, the United States." H.R. Rep. No. 82-2320, at 15 (1952), reprinted in 1952 U.S.C.C.A.N. 1960, 1976; see also Pub. L. No. 82-456, 66 Stat. 420 (July 7, 1952). This language was preserved in section 541(a) of the Bankruptcy Code (enacted in 1978), which states that the bankruptcy estate includes the debtor’s property "wherever located and by whomever held." Section 541(a) provides further that such property includes various "interests" of the debtor in property. Similarly, 28 U.S.C. § 1334(e) gives federal district courts—and, by referral pursuant to 28 U.S.C. § 157(a), bankruptcy courts within each district—exclusive jurisdiction of all property of the debtor and its estate, "wherever located."
Many courts have concluded that, because the automatic stay imposed by section 362(a) of the Bankruptcy Code expressly prohibits, among other things, acts to obtain possession of "property of the estate," the stay bars creditor collection efforts with respect to estate property located both within and outside the U.S. See, e.g., Milbank v. Philips Lighting Elecs. N. Am. (In re Elcoteq, Inc.), 521 B.R. 189 (Bankr. N.D. Tex. 2014); In re Nakash, 190 B.R. 763 (Bankr. S.D.N.Y. 1996).
However, the provisions of the Bankruptcy Code permitting avoidance and recovery of preferential or fraudulent transfers—i.e., sections 544, 547, 548, and 550—do not expressly refer to "property of the estate" as that term is defined in section 541 or even to section 541 itself. Instead, section 544(a) permits the trustee to avoid certain transfers of "property of the debtor"; sections 544(b)(1), 547(b) and 548(a)(1) provide for the avoidance of "an interest of the debtor in property"; and section 550 permits the trustee to recover "the property transferred" or its value from the transferee.
Furthermore, some courts, noting that section 541(a)(3) of the Bankruptcy Code provides that any "interest in property that the trustee recovers under section . . . 550" is part of the estate, have concluded that fraudulently or preferentially transferred property is not estate property unless and until it is recovered by the trustee. See, e.g., FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992) (if property that has been fraudulently transferred is included in "property of the estate" under section 541(a)(1), section 541(a)(3) is rendered meaningless with respect to property recovered pursuant to fraudulent transfer actions); accord Rajala v. Gardner, 709 F.3d 1031 (10th Cir. 2013). But see Am. Nat’l Bank of Austin v. MortgageAmerica Corp. (In re MortgageAmerica Corp.), 714 F.2d 1266, 1277 (5th Cir. 1983) ("[p]roperty fraudulently conveyed and recoverable under the Texas Fraudulent Transfers Act remains, despite the purported transfer, property of the estate...
