Fourth Circuit determines that
presumption against extraterritoriality does not bar application of U.S.
Bankruptcy Code to avoid debtor’s transfer of Bahamian realty
In 1976, Betty Irene French (the
debtor), a resident of Maryland, bought a house in the Bahamas. At a Christmas
party in 1981 in Maryland, she gave a deed to the property to her children,
Randy Lee French and Donna Marie Shaka (the transferees). To avoid high local
transfer taxes, however, the transferees did not immediately record the deed in
the Bahamas. In the late 1990s, however, the debtor and her husband were
running into financial problems; accordingly, in mid-2000, the transferees
decided to record the deed in the Bahamas. In October 2000, Mrs. French’s
creditors filed an involuntary Chapter 7 bankruptcy petition against her in
Maryland. The bankruptcy court entered an Order for Relief in January 2001.
In August 2002, the bankruptcy
trustee filed a proceeding against the transferees to avoid the transfer of the
Bahamian property and to recover the property or its fair market value for the
benefit of the estate. The trustee alleged that the debtor and the transferees
had engaged in a constructively fraudulent transfer in breach of the Bankruptcy
Code since the debtor had been insolvent at transfer time and had not received
a reasonably equivalent value in return. See 11 U.S.C. Section
548(a)(1)(B)(2000).
The transferees moved to dismiss.
Relying on the presumption against extraterritoriality, they argued that the
court should not apply Section 548 to transfers of foreign property. The
bankruptcy court denied the motion. The trustee then moved for summary
judgment. The bankruptcy court granted it, and the district court confirmed. On
the transferees’ appeal, the U.S. Court of Appeals for the Fourth Circuit
affirms.
The Court explains. “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.’” [Slip op. 3 (quoting EEOC v. Arabian Am.
Oil Co., 499 U.S. 244, 248 (1991))]. This presumption applies only when a party
seeks to apply a U.S. statute to conduct that took place beyond U.S.
territorial boundaries.
The Fourth Circuit opines that,
in determining whether a transaction is foreign or domestic, “a court should
consider whether the participants’, acts, targets, and effects involved in the
transaction at issue are primarily foreign or primarily domestic.” [Slip op. 4]
In this case, the perpetrator and most of the victims of the fraudulent transfer
have long been located in the U.S. In addition, the conduct constituting the
constructive fraud took place in the U.S.
A factor that merits special
weight in the balancing test, of course, is the fact that the situs of the real
property is the Bahamas.
“The law has long recognized the
powerful interest that states and nations have in the real property within
their boundaries.” [Slip op. 5] Nevertheless, the Court finds that the language
of the Bankruptcy Code clearly intends the “property of the estate” to include
both domestic and foreign assets. The Code expressly disallows certain
transfers of estate property and empowers the trustee to get it back. In the
Code, Congress clearly tried to prevent debtors from improperly disposing of
estate property that would otherwise be available to creditors, irrespective of
its location. Therefore, the usual presumption against extraterritoriality does
not bar the application of Section 548 here.
Citation: In re French,
2006 WL 328392, No. 05-1054 (4th Cir. February 14, 2006).
**** Mr. William B. Blanchard (“Bill Blanchard”) is a Real Estate Attorney with offices in St. Charles and Oakbrook Terrace, Illinois. Bill specializes in representing real estate clients for purchases and sales as well as home owner real estate tax assessment appeals. Mr. Blanchard is General Counsel for Gaia Title, Inc. a title insurance agency and settlement services provider. The Company is owned by real estate attorneys who demand exemplary title insurance services and accurate and efficient settlement services. As General Counsel he is responsible for title examination, commitment and policy review, escrow settlement supervision and regulatory review. - Attorney Profile: https://solomonlawguild.com/william-b-blanchard%2C-esq - Attorney News: https://attorneygazette.com/william-blanchard%2C-esq#40b43d7b-94b2-48d3-b055-1979a636f1e7
