T. Brandon Welch, the Territorial Avoidance Power of the Bankruptcy Code

• Publication year: 2011

THE TERRITORIAL AVOIDANCE POWER OF THE BANKRUPTCY CODE

INTRODUCTION

As international insolvencies become more frequent, the legal issues underlying these insolvencies grow commensurately more important. Among the many legal questions that arise in an international bankruptcy, the authority of a bankruptcy court to adjudicate rights to foreign-based assets remains one of the most fundamental and least resolved. Avoidance of fraudulent or preferential transfers of foreign-based assets represents one crucial subset of this issue. With the accelerating pace of globalization and the prevalence of foreign debtors availing themselves of American bankruptcy courts, the avoidance of such transfers will confront the bankruptcy system more frequently. Yet, the law lacks clarity in this area because the Bankruptcy Code ("Code") does not explicitly define its extraterritorial power. Consequently, recent court interpretations have yielded a split in authority.

This split in authority centers on whether the avoidance sections of the Code empower the trustee to avoid transfers of property located in foreign jurisdictions. This split arises because of differing views on the strength and substance of two important legal theories: the presumption against extraterritoriality and the doctrine of comity. The presumption against extraterritoriality is a rule of statutory construction positing that a statute applies only within the territorial boundaries of the prescribing state unless the language of the statute indicates clear contrary intent.¹The presumption serves as a means of preventing international discord and correlating the application of a law with likely congressional intent, among other ends.²Because the Code contains no overt statement of extraterritorial application of its general provisions or of the specific reach of its avoidance sections, any attempt to avoid a transfer of foreign property implicates the presumption. Premised on similar concerns as the presumption, comity is either a doctrine of abstention to foreign proceedings or an affirmative disavowal of jurisdiction to adjudicate a dispute.³An attempt to avoid a foreign transfer also involves comity since nations regulate property within their borders. Foreign regulations can purport to apply to a debtor's property within that jurisdiction, leaving comity to ensure that the most significant of conflicting interests prevails.

The strength of the presumption determines when the inference of extraterritorial application from the statutory language is appropriate. Likewise, the outcome of a comity analysis depends on the particular strand of comity employed by the court and the weight attached to factors in the analysis. With such nuanced doctrines, it is hardly surprising that courts have reached divergent outcomes on similar facts. On the one hand, the bankruptcy court of the Central District of California held that an allegedly preferential transfer to a foreign creditor was not recoverable for lack of congressional intent to apply the Code extraterritorially.⁴The court in Midland applied the presumption against extraterritoriality to dismiss the action for the avoidance of the transfer,⁵specifically rejecting the trustee's argument that the transfer was domestic since its primary effects were felt within the United States.⁶

With the matter resolved, the court in Midland declined to address whether it should abstain from jurisdiction on the grounds of international comity.⁷

On the other hand, a panel of the Fourth Circuit affirmed the avoidance of a constructively fraudulent transfer of Bahamian real property to the debtor's children.⁸The transferees in French asserted essentially the same defenses as the transferee in Midland.⁹First, the transferees contended that the presumption against extraterritoriality prevented application of Sec. 548 of the Code to Bahamian real property.¹⁰Second, the transferees argued that international comity dictated abstention by American courts in favor of Bahamian law.¹¹The court rejected the first claim because the primary effects of the constructive fraud were within the United States¹²and because Congress showed sufficient intent to include foreign property in the estate.¹³The comity argument did not avail the transferees since the totality of the circumstances showed a stronger American interest in the controversy.¹⁴The strong interest of the situs of property did not overcome the factors favoring the United States.¹⁵

This Comment will investigate the intersection of the presumption against extraterritoriality, international comity, and the avoidance mechanisms of the Code. Whether viewed through the lens of the presumption against extraterritoriality or the doctrine of comity, United States courts should accept that their mandate to adjudicate insolvencies is not absolute. Part I will briefly examine the history of the presumption against extraterritoriality and then analyze how the presumption applies to the Code and its avoidance powers. Part I will demonstrate that, as a threshold matter, the Code, and particularly its avoidance mechanisms, do not apply extraterritorially. Part II will then explore the doctrine of international comity and its relation to the presumption against extraterritoriality and to avoidance powers. The discussion of comity will show that even where the presumption against extraterritoriality may be overcome, many factual circumstances and policy implications weigh in favor of either deferring to foreign courts or affirmatively limiting United States prescriptive jurisdiction.

I. EXTRATERRITORIALITY

Congress has the power to apply its laws in foreign countries.¹⁶

Nevertheless, the existence of this authority does not address the underlying issue of whether Congress intended to prescribe law outside of the physical boundaries of the United States.¹⁷The Supreme Court has addressed this second question through varying formulations of the presumption against extraterritoriality.¹⁸The presumption is a canon of construction which asserts that statutes should be interpreted to apply only domestically absent express contrary language.¹⁹The following section will examine the historical development of the presumption against extraterritoriality.

A. Overview

Under the presumption against extraterritoriality, a court will not infer congressional intent for extraterritorial prescription from statutory silence.²⁰

Statutory "boilerplate language which can be found in any number of congressional Acts, none of which have ever been held to apply overseas" does not reflect "the intent of Congress as to the extraterritorial application of [a] statute."²¹The presumption can be overcome by some "clearly expressed purpose" to apply a law extraterritorially.²²The Court has fashioned a three- step analysis for determining such a purpose: (1) examine the statutory language; (2) review legislative history; and (3) consider administrative opinions.²³Statutory language in particular must be highly explicit to constitute a clear purpose.²⁴Even statutes purporting to apply to anyone or everyone fail to pass the presumption without some further statement of extraterritorial intent.²⁵A statute must show "affirmative evidence" of congressional intent to apply so expansively.²⁶Even words that "comprehend the whole human race" apply only domestically because the legislature rarely intends to regulate the entire world.²⁷

After revitalizing the presumption in Aramco, the Supreme Court has applied the presumption against extraterritoriality in a diverse body of law.²⁸

For example, the presumption weighed in favor of finding that the Federal Tort Claims Act did not apply to injuries in Antarctica.²⁹The Court recently held that federal laws against firearm possession by felons apply only to persons convicted by domestic courts.³⁰Moreover, a provision of the Immigration and Nationality Act has been found to apply only domestically, allowing the President to interdict refugees at sea.³¹Although the Supreme Court has never applied the presumption against extraterritoriality in a bankruptcy case, the Court's widespread reliance on this canon shows why the presumption should serve as a default rule in bankruptcy as well. Indeed, lower courts have applied the Supreme Court's formulations of the presumption in the bankruptcy context.³²

B. The Primary Effects Exception to the Presumption Against

Extraterritoriality

The categorization of domestic and extraterritorial conduct is often the decisive factor in issues of extraterritoriality.³³A court can avoid the presumption against extraterritoriality simply by defining conduct as domestic.³⁴Courts redefine conduct in this manner by focusing on the location of the effects of the conduct in question rather than on the location of the conduct itself.³⁵Judge Learned Hand illustrated this principle in United States v. Aluminum Co. of America ("Alcoa"),³⁶where the United States filed suit under the Sherman Anti-Trust Act for monopolistic practices.³⁷In Alcoa, the conduct was arguably extraterritorial because the defendant imported ingots into the United States through a Canadian subsidiary.³⁸On the other hand, it was arguably domestic because the defendant's dominant market position in the United States raised domestic aluminum prices.³⁹The Court in Alcoa held that the Act was violated by conduct geographically outside the United States.⁴⁰Later courts have viewed this as an attractive means of sidestepping the presumption against extraterritoriality.⁴¹

C. Justifications for the Presumption Against Extraterritoriality

There are several persuasive justifications for the presumption.⁴²Two such justifications appear in Foley Bros. First, "Congress is primarily concerned with domestic conditions."⁴³Second, a sovereign nation must cede some authority to the United States over the regulated conduct for the domestic regulations to be valid.⁴⁴

The first justification is rooted in common sense. Assuming that...