Christopher R. Barclay v. Swiss Finance Corporation Limi

OCR transcription for search; preserved printed pages are authoritative

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FILED
UNITED STATES BANKRUPTCY CoURT| | M6 [5 206
2 L DISTRICT OF CALIFORNIA Ge,
——rate Beouty Cierk
3 VRNANDO VALLEY DIVISION
4
5 eat
In re er Case No. SV 03-13981-GM
6 a {Includes cases previously
Substantive $-Consolidated designated as Bk. Case Nos. SV
7 Bankrup Estates of MIDLAND 03-13982-AG, SV 03-13986-AG, SV
EURO EXCHANGE INC,; MIDLAND BURO, 03-13987-AG, SV 03-13989-AG]
8 INC.; MIDLAND GROUP INC.; MOSHE
LEICHNER AND ZVI LEICHNER Adv. No. AD 05-01381-GM
9 Chapter 7
10 Debtors MEMORANDUM OF OPINION RE
11 MOTION TO DISMISS PURSUANT TO

F.R.C.P. 12(b) (6)
12]| CHRISTOPHER R. BARCLAY , as

trustee of the herein HEARING
13 Substantively Consolidated DATE: JULY 19, 2006

Bankruptcy Estates of Midland TIME: 1:30 p.m.
14] Buro Exchange, Inc., Midland PLACE: COURTROOM 303

Euro, Inc., Midland Group, Inc., 21041 BURBANK BLVD.
15 Moshe Leichner, and Zvi Leichner, WOODLAND HILLS, CA 91367
16

Plaintiff,

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vs.
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SWISS FINANCE CORPORATION

19) LIMITED, aka SWISS FINANCE
CORPORATION, a foreign company;
20] and DOES 1-10, Inclusive,

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99 Defendants

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AUTHENTIC jED

U.S. GOVERNMENT

INFORMATI
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I. INTRODUCTION

This action is one of many proceedings stemming from a massive
Ponzi scheme run in Southern California between 1999 and 2003. The
complaint alleges that beginning in 1999, Midland Euro, Inc. (MEI),
Midland Euro Exchange, Inc. (MEEI), Midland Group, Inc. (MGI), and
other related entities (collectively “the Debtor” or “Midland
Entities”) were used by their founders, owners, and principals -
Moshe and Zvi Leichner (“the Leichners”) - to collect money from
investors all over the world with a promise of extraordinary returns
from trades in the foreign exchange market. Instead, later proceeds
were diverted to repay earlier investors.

The scheme unraveled in 2003. Moshe and Zvi Leichner each
pleaded guilty to felony fraud and money-laundering charges and were
sentenced to twenty years and eleven years in federal prison,
respectively, and a restitution judgment of $98 million.! On May 8,
2003, involuntary Chapter 7 bankruptcy petitions were filed against
the Leichners and the Midland Entities. By the bankruptcy court's
order entered on May 16, 2003, the Debtors’ Estates were
substantively consolidated. Thereafter, on June 18, 2003, a Chapter
7 Trustee was appointed by the Court. As of today, proofs of claim
totaling more than $100 million have been filed against the Estate,
including millions of dollars owed to investors.

This adversary proceeding is an attempt by the Trustee to set
aside and recover allegedly fraudulent transfers of at least $897,000
paid by the Debtor in fees and commissions to a foreign exchange

brokerage - Swiss Financial Corporation, Ltd. (SFC).

* United States v. Moshe Leichner and Zvi Leichner, U.S.D.C. No. CR
03-568, U.S. District Court for the Central District of California.

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II. PROCEDURAL HISTORY

On June 16, 2005, the Trustee filed a complaint against SFC
pleading two claims for relief under 11 U.S.C. §548 (a) (1) (A) and 11
U.S.C. §550(a) and seeking to recover fraudulent transfers of at
least $897,000. Thereafter, on June 12, 2006, SFC filed a motion to
dismiss the complaint for failure to state a claim for relief. The
motion was made pursuant to Rule 12(b) (6) of the Federal Rules of
Civil Procedure, as made applicable by Rule 7012(b) of the Federal
Rules of Bankruptcy Procedure. The motion also argued that Congress
did not intend 11 U.S.C. §548? to apply extraterritorially and that
the Court should abstain from exercising jurisdiction over this
action on the grounds of international comity.

The Trustee filed his opposition to the motion to dismiss on July
5, 2006, asserting that sufficient facts have been pleaded to
overcome the motion to dismiss. With respect to 11 U.S.C. 8548, the
Trustee argued that Congress intended to extend its reach
extraterritorially, that at least one circuit court reached the same
conclusion, and that holding otherwise would create a loophole in the
Bankruptcy Code by creating the means for unscrupulous debtors to
conceal their assets abroad and therefore outside the reach of the
U.S. bankruptcy system. In addition, the Trustee asserted that the
facts pleaded in the complaint fall within the exception to the
presumption against extraterritoriality and that the international
comity doctrine should not prevent this Court from exercising its
jurisdiction.

On July 12, 2006, SFC filed its reply to the Trustee’s

* Unless otherwise specified, all references to statutes are to il

United States Code.

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Opposition. A hearing was held on July 19, 2006. Based on the
motions filed with the Court and the information provided at the
hearing, and for the reasons that follow, I am granting the motion to
dismiss without leave to amend. This memorandum constitutes my
findings of fact and conclusions of law with regard to the legal

sufficiency of the Trustee’s complaint.

III. STANDARD OF REVIEW
In addressing a motion to dismiss pursuant to F.R.C.P. 12 (b) (6),
as made applicable by Rule 7012(b) of the Federal Rules of Bankruptcy
Procedure, this Court is limited to reviewing the facts pleaded in
the complaint. A complaint should not be dismissed for failure to
state a claim unless it appears beyond doubt that the plaintiff can
preve no set of facts in support of his claim which would entitle him

to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). For the

purposes of this motion, all allegations of material fact in the
complaint are taken as true and construed in the light most favorable

to the nonmoving party. See, e.g., Parks School of Business, Inc. v.

Symington, 51 F.3d 1480, 1484 (9th Cir. 1995).

IV. STATEMENT OF FACTS
A. The Trustee’s Complaint
For the purposes of this motion, the facts pleaded in the
Trustee’s complaint are uncontroverted. The complaint alleges that
MGI was a Barbados corporation set up by the Leichners in December
2000 to hold title to proceeds of the Ponzi scheme. (Complaint 415).
To create an aura of legitimacy and to be able to market itself as a

successful currency trader, MGI contacted SFC in or about May 2002,

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requesting to open a foreign exchange trading account. (923). At the
time, SFC was a foreign exchange brokerage formed under the laws of
England and headquartered in London. (45).

SFC conducted an investigation of the Debtor in order to
ascertain its true financial condition prior to opening a margin
trading account (permitting the Debtor to trade on credit). (24).

As part of the investigation, SFC communicated with the Leichners in
Los Angeles County, California and learned that the Leichners were
the principals of MGI. (9923 - 24).

Upon discovering that the Leichners were the principals of MGI,
SFC knew or consciously avoided knowledge of “serious and substantial
legal and financial problems” involving the Leichners and companies
they controlled. (4§25 - 26). Specifically, SFC learned the following
facts:

i. Moshe Leichner was insolvent beginning no later than 1998 and
there were unsatisfied judgments of at least $100,000
against him. (48). |

2. Moshe Leichner filed a bankruptcy petition in the U.S.
Bankruptcy Court for the Central District of California on
or about June 22, 1998, which was dismissed without a
discharge. (49).

3. In March 2000, the California Department of Corporations
issued a cease and desist order against Zvi Leichner and
Midland Euro Exchange Trust (MEET). (414).

4. There was a judgment in the amount of $800,000 against Zvi
Leichner in litigation entitled Rawashdeh v. Mansour, et.

al., Case No. BC 191035 in the Los Angeles County Superior

Court. (927). The complaint alleged causes of action for,

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among other things, fraud and breach of fiduciary duty
arising out of the defendants’ operation of a foreign
currency trading business. (917).

5. There was a lawsuit filed in the Los Angeles County Superior
Court on or about October 9, 2001, to recover $16 million
from the Leichners, Midland Euro, Inc. (MEI), and Midland
Euro Exchange, Inc. (MEEI) for breach of contract,
conversion, and fraud. (418). The lawsuit was entitled Al

Baraka Intl. Investment Co., Ltd. v. Midland Euro Exchange,

inc., et al., L.A.S.C, No. BC 259482. (418). A preliminary

injunction against MEI and MEEI, restricting them from
transferring assets, was issued in November 2001. (22).

6. On or about October 31, 2001, the National Futures
Association (“NFA”), a self-regulatory organization of
which MEI was a member, suspended MEI's membership in NFA
“to protect MEI’s customers.” (919). A publicly available
declaration submitted by the NFA described false and/or
deceitful financial conduct committed by MEI and its
management. (4919).

7. On or about November 19, 2001, the United States Commodity
Futures Trading Commission (the “CFTC”) announced its
intention to suspend or restrict MEI’s registration with
the CFTC as a futures merchant. (420).

The Trustee further contends that in May 2002, despite knowing or
consciously avoiding knowledge of these widespread legal and
regulatory actions against the Leichners and their companies (MEI,
MEEI, and MEET), SFC decided to open a trading account for MGI in

order to profit from the proposed $1 million deposit and subsequent

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trading fees (926). on May 22, 2002, the Debtor made a wire transfer
of $1 million from MEEI’s Lloyds Bank account in London to SFC’s HSBC
Bank USA account in New York. (727). From New York, the deposit was
transferred by SFC to an unspecified bank account in England.
Thereafter, from approximately May 22, 2002 until shortly before
the May 8, 2003 involuntary bankruptcy filings, the Debtor conducted
currency trades in the SFC account. (929). The exact nature of these
trades is not described in the complaint and is being disputed by the
parties. At the hearing, SFC stated that it acted as a bona fide
middleman connecting third parties interested in taking opposite
sides in trading on currency fluctuations. It took a small fee for
its services. The Trustee disagreed, claiming that SFC took an
active position in at least some of the trades, and effectively
engineered a casino-like trading system where the only party that
could potentially profit from the trades was SFC. I need not resolve
this dispute because, regardless of how the trading operated, the
parties agree that SFC transferred $897,000 from MGI’s initial $1
million deposit and whether it was to cover SFC’s fees and
commissions (according to SFC) or profits (according to the Trustee)

(f29) is not relevant to this motion.

B. The Trustee’s Claims

The Trustee is seeking to set aside and recover the allegedly
fraudulent transfers of at least $897,000 under two provisions of the
U.S. Bankruptcy Code - 11 U.S.C. §548 and §550 - which provide in
relevant part:

The trustee may avoid any transfer of an interest of the

debtor in property, or any obligation incurred by the

debtor, that was made or incurred on or within one year

before the date of the filing of the petition, if the debtor

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voluntarily or involuntarily made such transfer or incurred

such obligation with actual intent to hinder, delay, or

defraud any entity to which the debtor was or became, on or
after the date that such transfer was made or such

obligation was incurred, indebted. §548 (a) (1) (A).

And,

The trustee may recover, for the benefit of the estate, the

property transferred, or, if the court so orders, the value

of such property, from:

(1) the initial transferee of such transfer or the entity

for whose benefit such transfer was Made; or

(2) any immediate or mediate transferee of such initial

transferee. §550({a).

C. SFC’s Motion to Dismiss

SFC’s motion to dismiss and its reply to the Trustee's
opposition, filed on June 12 and July 12, 2006, correspondingly,
argue that the complaint should be dismissed on three
independent grounds.

Pirst, SFC asserts that the complaint fails to state a
claim because it is missing specific facts to show that SFC
acted in bad faith in accepting the transfer from the Debtor.
SFC contends that bad faith of the transferee is an affirmative
element of the Trustee’s prima facie case.

Second, SFC argues that Congress did not intend to apply
the fraudulent transfer provisions of §548 extraterritorially.
According to SFC, the conduct in question occurred outside the
territorial borders of the United States and absent a clear
indication of congressional intent to the contrary, a
presumption against extraterritoriality bars application of the
statute to foreign entities and transactions.

Finally, SFC contends that the doctrine of international

comity should lead the Court to abstain from exercising its

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jurisdiction in this matter. According to the declaration
submitted by SFC, the U.S. and English laws conflict. Under
English law, fraudulent intent on the part of the transferee
must be shown. Under U.S. law, the transferee can be liable
without a showing of actual fraudulent intent. Given that the
laws conflict, that the “center of gravity” of the transaction
was in England, and that England has an interest in having its
own laws applied to transactions on its territory, SFC is asking
the Court to abstain from exercising the jurisdiction it
otherwise has. I will consider the merits of each of these

arguments in turn.

IV. DISCUSSION
A. Failure to State a Claim
SFC’s first argument for dismissal is that while the
Trustee has pleaded a Ponzi scheme, he also needs to plead
enough facts to prove that SFC did not act in good faith in
receiving the transfers. (SFC Motion, p. 14-15). SFC cites In

re Agricultural Research Technology Group, Inc., 916 F.2d 528,

535 (9th Cir. 1990), in support of the proposition that in order
for the Trustee to recover, “the defendant must have knowledge
or actual notice of circumstances sufficient to put the
transferee upon inquiry as to whether the debtor intended to
delay or defraud its creditors.” (SFC Motion, p. 15).

SFC’s interpretation of what needs to be proven to state a
fraudulent transfer claim is inaccurate and the quote above is

taken out of context. In re Agricultural Research stands for

the proposition that the defendant’s knowledge of the debtor’s

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intent to defraud creditors might be sufficient to prove that
the defendant acted in bad faith; it does not imply that lack of
good faith is part of the prima facie showing the Trustee needs
to make in order to prove his case. Indeed, the opposite is
true, as many courts have acknowledged: good faith is an
affirmative defense available to SFc. See Collier on Bankruptcy
$548.10 (15th Ed. rev. 2006) (stating that section 548 is based
on the Uniform Fraudulent Conveyance Act); In re Cohen, 199 B.R.
709, 719 (B.A.P. 9th Cir. 1996) ("The issue of good faith under
UFTA §8{a) is a defensive matter as to which the defendants
asserting the existence of good faith have the burden of

proof’); In re Candor Diamond Corp., 76 B.R. 342, 349 n.4

(Bankr. S.D.N.Y. 1987) (holding that transferee’s intent is only
relevant for the purposes of a good faith defense and is not
part of the trustee's prima facie case to recover fraudulent
transfers pursuant to 11 U.S.C. §548). Therefore, under
§548 (a) (1) (A), the essential elements of the Prima facie
fraudulent transfer case are that within less than one year
prior to the bankruptcy filing, the Debtor made a transfer of
its property to SFC with actual intent to hinder, delay, or
defraud the debtor’s creditors.

SFC agrees that the Trustee properly pleaded that the
Debtor was engaged in running a Ponzi scheme. (SFC Motion, p.
14). The mere existence of the Ponzi scheme is sufficient to
prove the Debtor’s actual intent to hinder, delay, or defraud

its creditors. See In re Agricultural Research, 916 F.2d at 535

(citing Conroy v. Schott, 363 F.2d 90, 92 (6th Cir. 1966); In re

Indep. Clearing House Co., 77 B.R. 843, 860 (D. Utah 1987))}; In

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re Old Naples Securities, Inc., 343 B.R. 310, 319 (Bankr. M.D.

Fla. 2006) (“Proof of a Ponzi scheme by itself establishes
actual intent to hinder, delay, or defraud creditors.”). Per
the complaint, Midland Entities filed for bankruptcy on May 8,
2003 and the alleged transfers occurred between May 22, 2002 and
May 8, 2003, within one year of the filing. Therefore, the
Trustee properly pleaded a prima facie case of fraudulent

transfers under 11 U.S.C. §548,

B. Presumption Against Extraterritoriality
SFC’s. second argument is that failure to dismiss the
Trustee’s complaint would result in extraterritorial application
of §548, which is contrary to congressional intent as expressed
by the plain language of the statute. It isa long-settled
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.” See In re

Maxwell Comme'n Corp., 170 B.R. 800, 809 (S.D.N.Y. 1994) (citing

Equal Employment Opportunity Comm'n v. Arabian Am. Oil Co., 499

U.S. 244, 248 (1991)}.

The parties agree that allowing the Trustee to proceed with
his claims would result in extraterritorial application of §548.
The transferor was a Barbados corporation, the transferee was an
English corporation, the funds originated from a bank account in
London and, although transferred through a bank account in New
York, eventually ended up in another bank account in England.

Whether Congress intended to extend the reach of the

fraudulent transfer statute extraterritorially is a matter of

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great practical concern for the parties. If the
extraterritorial application of §548 is upheld, the Trustee
would be able to recover from SFC by merely proving the
existence of a Ponzi scheme and the fact that the transfers
actually occurred. Otherwise, the Trustee will not only face
the logistical difficulties of bringing the suit in England, but
he will also have to prove, under British law, that SFC had
actual knowledge of the Midland Entities’ scheme to defraud its

creditors,

C. Exception to the Presumption Against Extraterritoriality
Prior to analyzing the presumption against extraterritorial
application of the statute, I must address the Trustee’s
contention that the presumption does not apply here because the
“regulated conduct" was “intended to, and resulted in,

substantial effects within the United States.” See In re Simon,

153 F.3d 991, 995 (9th Cir. 1998) {citing Laker Airways, Ltd. v.

Sabena Belgian World Airlines, 731 F.2d 909, 925 (D.C. Cir.

1984)). The Trustee argues that this exception applies because
SFC knew or reasonably should have known that the allegedly
fraudulent transfer was part of a larger criminal scheme
concocted by the Leichners for the sole purpose of defrauding
American creditors, hiding stolen assets, and avoiding the reach
of U.S. regulators. According to the Trustee, if proven, such
knowledge is strongly corroborative of SFC’s intent to interfere
with U.S. regulatory authorities and falls within the exception
to the presumption against extraterritoriality.

The Trustee’‘s reading of the exception is misguided.

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Keeping in mind that this is a Rule 12(b){6) motion to dismiss,
the question the Court must address is whether the facts pleaded
in the complaint, taken as true and construed in the light most
favorable to the Trustee, are sufficient to establish that
“regulated conduct” was “intended to, and resulted in,
substantial effects within the United States.” The focus of the
exception is on the conduct itself - the allegedly fraudulent
transfer - and not on the knowledge and intent of the transferee
in accepting the funds. Second, the exception only applies to
“regulated conduct,” a concept that neither party has addressed.

Black’s Law Dictionary defines “regulation” ag “1. The act
or process of controlling by rule or restriction <the federal
regulation of the airline industry>... 3. A rule or order,
having legal force, usu. issued by an administrative agency
<Treasury regulations explain and interpret the Internal Revenue
Code>.” From that, it can be inferred that “regulated conduct”
is the “act or process” controlled by either judicial or
administrative rule or restriction. Previous applications of
the exception reflect this interpretation. In Laker Airways,
foreign airlines engaged in anti-competitive behavior that was
heavily regulated by the U.S. antitrust statutes. In In re
Simon, a foreign creditor attempted to pursue collection abroad
of a debt discharged in a domestic bankruptcy in violation of
the injunction issued by the court.

These decisions are clearly distinguishable from the facts
of the Trustee’s case. The transfers to SFC occurred prior to
the filing of the bankruptcy petition, and, with a single

exception discussed below, were not subject to any rulings or

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regulations of the U.S. courts or administrative agencies. Thus
the conduct was not “regulated,” and the exception does not
apply.

The only fact pleaded in the complaint that could trigger
this exception is the injunction issued by the Los Angeles
County Superior Court in November 2001 against one of the
Leichners’ companies - MEEI - restricting it from transferring
assets. SFC allegedly disregarded the injunction by accepting a
$1 million transfer from MEEI's bank account in London.
Transfer in violation of the injunction constitutes “regulated
conduct.” However, the question this Court must address is
whether the violation qualifies as a “substantial” effect. See

Consolidated Gold Fields Ple. v. Minorco, S.A., 871 F.2d 252,

262 (2nd Cir. 1989) (“In determining whether certain effects
qualify as ‘substantial,’ courts have been reluctant to apply
our laws to transactions that have only remote and indirect
effects in the United States”). While none of the cases the
Court had an opportunity to review discusses what qualifies as a
“substantial” effect, the facts here certainly do not add up to
one.

Some general guidelines the Courts have considered in
measuring “substantiality” are the number of people impacted by
the defendant's conduct, the dollar amount of damages caused,
and the scale of disruption in U.S. commercial activity. In
Laker Airways, for instance, several foreign airlines conspired
to engage in anti-competitive behavior that drove a discount
U.S. airline - Laker Airways ~ out of business. At the time,

Laker was carrying one out of every seven scheduled air

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passengers between the United States and England. The anti-
competitive behavior affected hundreds of Laker’s employees and
thousands of passengers. Laker suffered multi-million-dollar
damages and the U.S. public was forced to pay higher prices for
transatlantic travel. In Laker Airways, the Court found it
“beyond dispute” that antitrust laws governed foreign airlines’
behavior because they intended to, and their actions resulted
in, substantial effects within the United States. Laker Airways,
731 F.2d at 925. In SFC’s case, on the other hand, the effects
of the alleged injunction violation are not “substantial.”

There is only the plaintiff in the injunction suit who was
injured by SFC’s conduct, the damages are comparatively
insignificant, and the impact on the U.S. commerce in general is
de minimis. The Trustee did not meet his burden of proof and the
exception to the presumption against extraterritoriality does

not apply.

D. Extraterritorial Application of 11 U.S.c. §548

Next, the Court needs to address whether Congress intended
universal extraterritorial application of the fraudulent
transfer provisions codified in §548. This is an issue of first
impression in the Ninth Circuit, with a split of opinion in the
other circuits and a petition for writ of certiorari pending
with the Supreme Court, asking, inter alia, to clarify
congressional intent on this issue. Most recently, the Fourth
Circuit upheld extraterritorial application of 8548. See In re
French, 440 F.3d 145 (4th Cir. 2006), cert. petition pending,

U.S. __ (filed May 15, 2006). A bankruptcy court in the Second

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Circuit, however, dealing with the Trustee’s avoidance power
under the similar preferential transfer statute - 11 U.S.C. §547
- held that the lack of clearly expressed congressional intent

prevents its extraterritorial application. See In re Maxwell

Comm'n. Corp., 170 B.R. 800, 814 (Bankr. S.D.N.Y¥.-1994), affd

on other grounds, In re Maxwell, 93 F.3d 1036 (2nd Cir. 1996),

The starting point in statutory construction is the
language of the statute itself. Nothing in the text of 8548
indicates congressional intent to apply it extraterritorially.

Next, the Court looks at other sections of the Bankruptcy

Code to see if they shed light on congressional intent. See

United Savings Ass’n vy. Timbers of Inwood Forest Associates, 484
U.S. 365, 371 (1988) (*A provision that may seem ambiguous in
isolation is often clarified by the remainder of the statutory
scheme - because the same terminology is used elsewhere in a
context that makes its meaning clear, or because only one of the
permissible meanings produces a substantive effect that is
compatible with the rest of the law.”). |

It was suggested that §548 read in conjunction with §541 of
the Code demonstrates congressional intent to apply §548
extraterritorially. Section 541 provides that “property of the
estate” includes property “wherever located and by whomever
held.” There is a split among cireuits on whether “property of
the estate” includes property that could be, but has not yet
been, recovered as the object of a fraudulent transfer. See In
re French, 440 F.3d at 151-2, n.2. The majority of the courts
have concluded that property held by third-party transferees

only becomes “property of the estate” after the transfer has

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been avoided. See id. (citing In re Saunders, 101 B.R. 303, 304-

05 (Bankr. N.D. Fla. 1989); FDIC v. Hirsch (In re Colonial

Realty Co.), 980 F.2d 125, 131 (2d Cir. 1992); Dunes Hotel
Assocs. v. Hyatt Corp., 235 B.R. 492, 504-05 (D.Ss.c. 2000)); but

see id. (citing Cullen Ctr. Bank & Trust _v. Hensley (In re

Criswell), 102 F.3d 1411, 1417 (5th Cir. 1997); Am. Natl. Bank

v. MortgageAmerica Corp. (In re MortaqageAmerica Corp.), 714 F.2d

1266, 1275 (Sth Cir. 1983)).

I need not address the intricacies of this dispute.
Suffice it to say that the Fifth Circuit’s approach in Criswell
to what constitutes “property of the estate” is susceptible to
criticisms well articulated in other courts’ decisions. I find
the reasoning of the majority more logical and defensible.
Thus, I hold that allegedly fraudulent transfers do not become
property of the estate until they are avoided.

Since neither the plain language of the statute nor its
reading in conjunction with other parts of the Code establish
congressional intent to apply §548 extraterritorially, I now

turn to other considerations.

E. Policy
In interpreting the statute, the Court must first draw a
line between advancing the policy goals of the bankruptcy system
and interpreting indicia of congressional intent. It is
undeniable that policy considerations favor extraterritorial
application of 11 U.S.C. §548. The efficacy of the bankruptcy
proceeding depends on the court’s ability to control and marshal

the assets of the debtor wherever located. In re Simon, 153 F.3d

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at 996 (quoting In re Rimsat, 98 F.3d 956, 961 (7th Cir. 1996))

(emphasis added). Failure to extend application of §548 to
transfers outside the territorial borders of the United States
creates a loophole for unscrupulous debtors to freely transfer
their assets to shell entities abroad and avoid the reach of the
Bankruptcy Code. See, generally, David M. Green and Walter
Benzija, Spanning the Globe: The Intended Extraterritorial Reach
of the Bankruptcy Code, 10 Am. Bankr. Inst. L. Rev. 85, 86-7
(2002) (advocating extraterritorial application of the U.S.
Bankruptcy Code on policy grounds).

These policy considerations, however, must be balanced
against the presumption against extraterritoriality, which
serves to protect against unintended clashes between our laws
and those of other nations which could result in international

discord. See E.E.0.C. v. Arabian American Oil Co., 499 U.S. 244,

248 (1991). The Ninth Circuit has held that policy
considerations alone are insufficient to overcome the

presumption against extraterritoriality. See Subafilms, Ltd. v.

MGM-Pathe Communications Co., 24 F.3d 1088, 1096 (9th Cir. 1994)

(en banc) (“...the ultimate touchstone of extraterritoriality
consist[s] of an ascertainment of congressional intent; courts
[do] not rest solely on the consequences of a failure to give a

statutory scheme extraterritorial application.”).

F. Fourth Circuit’s Recent Decision

Prior to the Fourth Circuit’s decision in In re French, no

court had ever held that Congress intended extraterritorial

application of §548. The Trustee advocates the adoption of the

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holding in In re French by this Court. The problem with the
conclusion reached by the Fourth Circuit is that it requires the
Court to make a logical leap that I am not prepared to make.

The analysis in In re French starts with two correct

premises: (1) §541(a) (1) defines “property of the estate” as,
inter alia, all “legal or equitable interests of the debtor in
property as of the commencement of the case” and {2) §548 allows
the avoidance of certain transfers of such “interest[s] of the
debtor in property.” Based on this, the Fourth Circuit reaches
the following conclusion: “By incorporating the language of §541
to define what property a trustee may recover under his
avoidance powers, §548 plainly allows a trustee to avoid any
transfer of property that would have been ‘property of the
estate’ prior to the transfer in question - as defined by §541 -
even if that property is not ‘property of the estate’ now.” See

In re French, 440 F.3d at 151. (emphasis in the original).

This reasoning apparently presumes that the debtor retains
a “legal or equitable” interest in the property transferred pre-
petition, or to paraphrase, that “property of the estate”
includes property transferred but not yet recovered. It ignores
the language in §541(a)(1) and (a}(3) that the debtor must have
an interest in the property “as of the commencement of the case”
and that property of the estate includes “any interest in
property that the trustee recovers under section... 550 ... of
this title.” (emphasis added). When the plain meaning of the
language of the statute is clear, the courts need only enforce
it. This statute seems very clear to any ordinary reader:

property that has been fraudulently transferred oniy becomes

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property of the estate when the transfer has been set aside.
Even if these provisions do not meet the plain meaning

test, to read them as was done by the Fifth Circuit in In re

Criswell, 102 F.3d 1411, 1416 (Sth Cir. 1997) (cited by the

Fourth Circuit in support of its decision in In re French), is
to violate a maxim of statutory interpretation that holds that
the court should attempt to give meaning and effect to every

word, clause and section of a statute. See Chickasaw Nation v.

U.S., 534 U.S. 84, 93 (2001) (citing U.S. v. Menasche, 348 U.S.

528, 538-39 (1955}). While the maxims of statutory
interpretation are not mandatory rules, in the case of

§541 (a) {1) and (a) (3), they do help to clarify what Congress
intended.

In re French totally ignores §541(a)(3) and uses an unclear
and convoluted method to reach its conclusion. I have a great
deal of trouble following the Fourth Circuit’s reasoning and am
not persuaded that it leads to the proper conclusion. Thus I
find no basis for holding that Congress intended the trustee’s
avoiding powers to apply extraterritorially.

Perhaps the true reason the Fourth Circuit extended
application of §548 extraterritorially lies in the next
paragraph, which acknowledges that such “interpretation fully
accords with the purposes of the Bankruptcy Code’s avoidance
provisions, which is to prevent debtors from illegitimately
disposing of property that should be available to their

creditors." See In re French, 440 F.3d at 152. However, as

noted above, the Ninth Circuit does not view policy

considerations alone as valid grounds for overcoming the

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presumption against extraterritoriality. See Subafilms, 24 F.3d
at 1096 (*...the ultimate touchstone of extraterritoriality
consist[s] of an ascertainment of congressional intent; courts
[do] not rest solely on the consequences of a failure to give a
Statutory scheme extraterritorial application.”). Therefore,
since I can find no evidence of congressional intent to extend
the application of §548 extraterritorially, the Trustee may not

pursue his claims against SFC under this statute.

G. International Comity
SFC's third argument for dismissal is based on the doctrine
of international comity. Under this doctrine, courts sometimes
defer to the laws or interests of a foreign country and decline
to exercise the jurisdiction they otherwise have. See Mullica v.

Occidental Petroleum Corp., 381 F. Supp. 2d 1134, 1155 (C.D.

Cal. 2005). “In the legal sense, comity: is neither a matter of
absolute obligation, on the one hand, nor of mere courtesy and

good will, on the other.” In re Simon, 153 F.3d at 998. “But it

is a recognition which one nation allows within its territory to
the legislative, executive or judicial acts of another nation,
having due regard both to international duty and convenience and
to the rights of its own citizens or of other persons who are
under the protection of its laws.” Id.

SFC urges the Court to dismiss the Trustee’s complaint
because U.S. and English fraudulent transfer laws lead to
conflicting outcomes; because the “center of gravity” of the
transaction is in England; and because England has greater

interest in adjudicating this dispute. Given the Court’s

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holding that §548 does not apply extraterritorially, I need not

reach the substance of this argument.

V. CONCLUSION

The Trustee’s complaint to avoid and recover fraudulent
transfers in the amount of at least $897,000 is hereby dismissed
without leave to amend pursuant to Rule 12(b) (6) of the Federal
Rules of Civil Procedure, as made applicable in bankruptcy by
Rule 7012(b) of the Federal Rules of Bankruptcy Procedure. The
Trustee properly pleaded a prima Facie case under 11 U.S.C.
§548. However, I can not find any evidence that would elucidate
congressional intent to broadly extend application of the
fraudulent transfer provisions of the Bankruptcy Code outside
the territorial borders of the United States. Absent such
indicia of congressional intent, the presumption against
extraterritoriality bars application of the statute to a foreign
transfer.

The Court recognizes that its decision does nothing to
close the loophole in the Bankruptcy Code that allows dishonest
debtors to avoid the reach of the U.S. bankruptcy system by
hiding the assets abroad. At the same time, Congress is the
ultimate arbiter of the laws it enacts and it has the power to
alter the language of the statute to clearly manifest its
intent. This is particularly so given that Congress recognizes
the need to verbalize its intent in order to overcome the
presumption against extraterritoriality. In 1952 Congress
amended section 541 of the Code to define property of the estate

as all property “wherever located.” See In re French, 440 F.3d

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at 151. In passing the amendment, Congress explained that the
amendment “make[s] 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.” See id. (quoting
H.R, Rep. No. 82-2320, at 15 (1952), reprinted in 1952
U.S.C.C.A.N. 1960, 1976). In light of such a clearly-worded
amendment to another section of the Bankruptcy Code and the
exception in §541(a) (3) to property which has not yet been
recovered under the trustee's strong-arm powers, the only
logical interpretation of congressional silence with respect to
11 U.S.C. §548 is that the presumption against

extraterritoriality must stand.

DATED; 8/S/oe
et A Raheehe. ane

GERALDINE MUND
United States Bankruptcy Judge

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CERTIFICATE OF MAILING
1, PHILIP HARRAWAY 2

regularly appointed and qualified clerk of the United States Bankruptcy Court
for the Central District of California, do hereby certify that in the
performance of my duties as such clerk, I personally mailed to each of the
parties listed below, at the addresses set opposite their respective names, a

copy of the

MEMORANDUM OF OPINION RE MOTION TO DISMISS
PURSUANT TO F.R.C.P. 12(b) (6)

in the within matter. That said
envelope containing said copy was deposited by me in a regular Wee States
mailbox in the City of Los Angeles, in said District, on 7© Ow

Chapter 7 Trustee

Christopher Barclay, Trustee
LECG, LLC

600 Anton Boulevard, Suite 1350
Costa Mesa, CA 92626

Leonard I. Gumport

Aleksandra Zimonjic

Gumport | Reitman

550 South Hope Street, Suite 825

los Angeles, CA 90071

Attorneys for Christopher Barclay, Chapter 7 Trustee

Howard Steinberg

Irell & Manelia LLP

1800 Avenue of the Stars, Suite 900
Los Angeles, CA 90067-4276

U.S. Trustee - Interoffice Mail
c/o Jennifer Braun

Woo Hencatstag

Clerk)

24