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The Curious Case of Extraterritoriality and Fraudulent Transfer Under the Bankruptcy Code
The fraudulent transfer provisions of the Bankruptcy Code give trustees broad power to avoid transfers of property that were made by the debtor before the bankruptcy case if either: 1) the debtor transferred the property with actual intent to hinder, delay or defraud creditors; or 2) the debtor received less than reasonably equivalent value in exchange for the transferred property. 11 U.S.C. §548(a)(1). If the transfer is avoidable, then a separate provision of the Bankruptcy Code gives trustees power to recover the property from the initial transferee or any subsequent transferee who received the property directly or indirectly from the initial transferee. 11 U.S.C. §550(a). In cases where trustees seek to recover property from subsequent transferees located outside the United States who received the property from transferors also located outside the United States, the question arises whether the Bankruptcy Code's fraudulent transfer recovery provision reaches that transaction — in other words, whether §550(a) applies extraterritorially to allow trustees to recover property from foreign subsequent transferees.
The U.S. Court of Appeals for the Second Circuit recently issued an opinion in In re Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities, Case No. 17-2992 (2d Cir. Feb. 25, 2019) (BLMIS) concluding that trustees can pursue recovery from foreign subsequent transferees who received property in transactions that occurred entirely outside the United States. The opinion reversed two lower court rulings and arguably conflicts with Supreme Court precedent on extraterritoriality of U.S. legislation.
Extraterritoriality and Fraudulent Transfer
Courts are divided on the issue of whether the fraudulent transfer recovery provision applies extraterritorially. In re CIL Ltd., 582 B.R. 46, 92-93 (Bankr. S.D.N.Y. 2018) (collecting cases); see also, R. Antonoff et al., New York Bankruptcy Courts Grapple With Territorial Limits of U.S. Bankruptcy Code, Pratt's J. Bankr. L. 185 (June 2018). Most cases hold that it does not apply extraterritorially. See, In re CIL Ltd., 582 B.R. at 95-96. Other cases allowed recovery from foreign subsequent transferees in certain circumstances. See, In re Arcapita Bank B.S.C.(c), 575 B.R. 329 (Bankr. S.D.N.Y. 2017); In re Lyondell Chem. Co., 543 B.R. 127 (Bankr. S.D.N.Y. 2016). The rulings are generally based upon two principal doctrines: 1) The presumption against extraterritoriality; and 2) international comity.
The presumption against extraterritoriality provides that the reach of U.S. legislation applies only domestically unless a contrary congressional intent is apparent. See, RJR Nabisco v. European Cmty., 136 S. Ct. 2090, 2100 (2016); Morrison v. Nat'l Australian Bank Ltd., 561 U.S. 247, 255 (2010). “When a statute gives no clear indication of an extraterritorial application, it has none.” Morrison, 561 U.S. at 255. To determine if a statute applies extraterritorially, courts conduct a two-part analysis. First, courts determine whether the statue “gives a clear, affirmative indication that it applies extraterritorially.” RJR Nabisco, 136 S. Ct. at 2101. If it does, the inquiry ends there. In re CIL Ltd., 582 B.R. at 83-84. If not, then courts look to the statute's focus and the facts of the case to determine whether the conduct the statute regulates occurred domestically or not.
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