Liebmann v. French et al

1 11 U.S.C. § 548.
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
In re: BETTY I. FRENCH * Case No. 01-6-3163-JS
*
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* * * * * * * * * * * * * * *
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RANDY LEE FRENCH et al. *
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v. * Civil Action No. WMN-04-1947
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GEORGE LIEBMANN, TRUSTEE *
*
MEMORANDUM
This is an appeal from a Bankruptcy Court decision under
Section 548 of the Bankruptcy Code1 which avoided as
fraudulent the transfer of certain real property located in
the Bahamas. The underlying facts are largely uncontested.
At issue is the permissible extraterritorial reach of Section
548. Apparently, no other federal court has addressed this
specific issue in a reported decision, aside from the decision
of Bankruptcy Judge James F. Schneider in this action,
Liebmann v. French, 303 B.R. 774 (Bankr. D. Md. 2003).
The facts underlying Judge Schneider’s decision follow.
The Debtor, Betty I. French, acquired the property in question
in November 1976. The Debtor asserts, and this Court accepts
for the purposes of this appeal, that she gifted the deed to
the real property to her children, Appellants Randy Lee French
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and Danna Marie French, on December 25, 1981, as a Christmas
present. According to Appellants, the Debtor presented this
gift to them in Maryland. The deed was not immediately
recorded, however. Appellants assert that substantial
Bahamian recording taxes made it undesirable to do so at the
time, and that it was their understanding that, under Bahamian
law, the transfer was complete, valid, and final upon the
delivery of the deed.
In the late 1990s, Appellants’ father, Elwood Dean
French, began to experience serious financial difficulties.
Appellants assert that in response to their father’s
deteriorating financial condition they determined to record
the deed in the Bahamas so that “their ownership of the
property would not be adversely affected somehow by Mr.
French’s financial difficulties.” Appellants’ Brief at 6.
Appellants hired a Bahamian lawyer for that purpose and on
June 21, 2000, the deed was duly recorded among the land
records of the Bahamas Registrar General.
On October 20, 2000, a creditor filed an involuntary
Chapter 7 bankruptcy petition against Appellants’ mother. On
August 22, 2002, Appellee, as Trustee for the Chapter 7
estate, filed an adversary action under Sections 548 and 550
of the Code to avoid the pre-petition transfer of the Bahamian
property and to recover that property or its fair market value
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2 Section 548(a)(1)(B) provides that the trustee can avoid
any transfer of an interest of the debtor in property that was
made within one year prior to the filing of the petition if
the debtor “received less than a reasonably equivalent value
in exchange for such transfer” and “was insolvent on the date
that such transfer was made . . . or became insolvent as a
result of such transfer.”
3 Section 548(a)(1)(A) provides that the trustee can avoid
any transfer of an interest of the debtor in property that was
made within one year prior to the filing of the petition if
the debtor made such a transfer “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 . .
., indebted.”
3
for the benefit of the estate. The Trustee alleged that the
property was transferred for no consideration, within 12
months of the filing of the bankruptcy petition, and at a time
that the Debtor was insolvent and thus, was constructively
fraudulent under Section 548(a)(1)(B).2 In the alternative,
the Trustee asserted that the transfer was made with the
actual intent to defraud the Debtor’s creditors and thus,
could be avoided under Section 548(a)(1)(A).3
With the Complaint, the Trustee filed a motion for a
temporary restraining order, preventing Appellants from
transferring or encumbering the Bahamian property for a period
of ten days. The Bankruptcy Court granted that motion and
later issued a preliminary injunction prohibiting the same.
Appellants moved to dismiss the Trustee’s claim on three
grounds. First, Appellants argued that the transfer took
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place in 1981 when the deed was gifted to them, regardless of
when it was recorded. Second, Appellants asserted that the
“presumption against extraterritoriality” barred the
application of Section 548 to transfers of real property
located outside of the United States. Appellants’ third
argument was that under principles of “international comity,”
the Bankruptcy Court should refrain from applying Sections 548
and 550 extraterritorially in this case. The Bankruptcy Court
denied the motion, finding that the argument that the transfer
actually occurred in 1981 involved a factual dispute
inappropriate for resolution on a motion to dismiss. After
reviewing decisions of numerous other courts upholding the
extraterritorial application of other provisions of the
Bankruptcy Code, the Bankruptcy Court held that neither the
presumption against extraterritoriality nor the doctrine of
international comity warranted dismissal under the facts
presented.
Shortly thereafter, the Trustee filed a motion for
summary judgment. After a hearing, the Bankruptcy Judge
granted the motion as to the Trustee’s claim of constructively
fraudulent transfer. The Court found that under Section
548(d)(1) of the Bankruptcy Code, the transfer of the property
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4 That section provides that a transfer does not occur
until it is perfected against a bona fide purchaser. Thus,
for the purposes of the Bankruptcy Code, the transfer did not
take place until the deed was recorded on June 21, 2000.
5
occurred in June of 2000.4 Because there was no dispute that
the conveyance was a gift without consideration, and that the
Debtor was insolvent at that time, the Bankruptcy Court
determined that the conditions for avoidance under Section
548(a)(1)(B) had been met. Because the transfer could be
avoided under Section 548(a)(1)(B), the Bankruptcy Court did
not reach the merits of Trustee’s claim of intentional fraud
under Section 548(a)(1)(A).
In this appeal, Appellants contend that the Bankruptcy
Court erred in refusing to dismiss the avoidance action under
the presumption against extraterritoriality and/or the
doctrine of international comity. Because the applicability
of the presumption against extraterritoriality is a pure
question of law, this Court reviews the decision of the
Bankruptcy Court as to that issue de novo. As to whether the
Bankruptcy Court should have declined to exercise its
jurisdiction over the matter based upon the doctrine of
international comity, that question was a matter of that
court’s discretion which this Court reviews under an abuse of
discretion standard. For the reasons that follow, this Court
concludes that the Bankruptcy Court’s decision was correct in
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5 See American Banana v. United Fruit Co., 213 U.S. 347
(1909); Foley Bros., Inc. v. Filardo, 336 U.S. 281 (1949).
6 In Aramco, the Court held that Title VII of the Civil
Rights Act did not apply to employment activities that took
place abroad.
6
both regards.
Although it has it roots in some earlier decisions of the
Supreme Court,5 the “presumption against extraterritoriality”
was first denominated as such in Equal Employ. Opportunity
Commission v. Arabian American Oil Co. (Aramco), 499 U.S. 244
(1991).6 As explained in Aramco, "[i]t 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.'"
Id. at 248(quoting Foley Bros., 336 U.S. at 285). This
presumption against extraterritorial effect is based on the
common-sense notion that Congress is "primarily concerned with
domestic conditions" when it legislates. Foley Bros., 336
U.S. at 285. Courts are required to assume that Congress acts
with knowledge of this presumption and in Aramco, the Supreme
Court instructed that unless there is "'the affirmative
intention of the Congress clearly expressed,'" courts must
conclude that a federal statute does not apply outside the
United States. Aramco, 499 U.S. at 248 (quoting Benz v.
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7 In Smith, the Court held that the presumption against
extraterritoriality barred an action under the Federal Tort
Claims Act based on conduct that took place in Antarctica.
8 In Sale, the Court invoked the presumption against
extraterritoriality to preclude provisions of the Immigration
and Naturalization Act from applying to Haitian refugees
apprehended in international waters.
7
Compania Naviera Hidalgo, 353 U.S. 138, 147 (1957)).
While Aramco would seem to require some “clear statement”
in the statute itself indicating the congressional intent that
the statute be applied extraterritorially, that requirement
appears to have been relaxed by the Supreme Court in Smith v.
United States, 507 U.S. 197 (1993).7 Under Smith, there must
only be “clear evidence” of congressional intent to apply the
statute extraterritorially. 507 U.S. at 204. In discerning
congressional intent in the statute at issue in Smith, Chief
Justice Rehnquist looked to the overall structure of the act,
the legislative history, and other non-textual sources. Id.
at 201-03. In another Supreme Court decision issued shortly
after Smith, Sale v. Haitian Centers Council, Inc., 509 U.S.
155 (1993),8 the Court indicated that it looked at “all
available evidence” about the statute in order to discern
congressional intent, including the legislative history, the
place of the particular provision within the statutory scheme,
and the relevance of the statute to the overall body of law of
which it was a part, i.e., immigration law. 509 U.S. at 177.
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Furthermore, lower courts considering the presumption
against extraterritoriality have concluded that where
congressional intent concerning extraterritorial application
cannot be divined courts can examine additional factors to
determine whether the presumption should be disregarded in a
particular case. Hong Kong & Shanghai Banking Corp., Ltd. v.
Simon (In re Simon), 153 F.3d 991, 995 (9th Cir. 1998). First,
"the presumption is generally not applied where the failure to
extend the scope of the statute to a foreign setting will
result in adverse effects within the United States."
Environmental Defense Fund, Inc. v. Massey, 986 F.2d 528, 531
(D.C. Cir. 1993) (citing Steele v. Bulova Watch Co., 344 U.S.
280 (1952)). Second, the presumption is not applicable when
the regulated conduct is "intended to, and results in,
substantial effects within the United States." Laker Airways,
Ltd. v. Sabena Belgian World Airlines, 731 F.2d 909, 925 (D.C.
Cir. 1984).
While prior to Judge Schneider’s opinion in this action,
no reported decision has applied these principles in the
context of Section 548 of the Bankruptcy Code, courts have
upheld the extraterritorial application of numerous other Code
provisions, as noted by Judge Schneider. For example, in
Simon, the Ninth Circuit concluded that a violation of a
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Section 524 discharge injunction by a foreign creditor outside
the United States was sanctionable by a United States
Bankruptcy Court. 153 F.3d at 995-96. In Nakash v. Zur (In
Re Nakash), 190 B.R. 763 (Bankr. S.D.N.Y. 1996), the court
held that the automatic stay of Section 362 should be given
extraterritorial application so as to protect a debtor from a
receiver’s filing of an insolvency proceeding against it in
Israel. In In re Dow Corning Corp., 287 B.R. 396 (E.D. Mich.
2002), the district court held that the Code’s prohibition of
post-confirmation litigation against a reorganized debtor
applied equally to litigation initiated abroad.
The fundamental framework of the Bankruptcy Code compels
these results. As the Seventh Circuit noted in upholding the
application of the Code’s automatic stay provision to halt an
action instituted by the receiver of a debtor in the
Federation of St. Kitts and Nevis, “the efficacy of the
bankruptcy proceeding depends on the [bankruptcy] court’s
ability to control and marshal the assets of the debtor
wherever located.” Underwood v. Hilliard (In re Rimsat,
Ltd.), 98 F.3d 956, 961 (7th Cir. 1996). This ability is
specifically provided for in the Code’s delineation of the
scope of the debtor’s estate: “the estate is comprised of the
debtor’s legal or equitable interests in property ‘wherever
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located and by whomever held.’” In re Simon, 153 F.3d 996
(quoting 11 U.S.C. § 541(a), emphasis supplied in Simon). As
commentators have aptly observed, “the Bankruptcy Code was
drafted with the realization that the Code’s key provisions
would be applied extraterritorially when needed to effectuate
its principal goals of asset preservation and equitable
distribution of the same to holders of allowed claims.” David
M. Green and Walter Benzija, “Spanning the Globe: The Intended
Extraterritorial Reach of the Bankruptcy Code,” 10 Am. Bankr.
Inst. L. Rev. 85, 93 (Spring, 2002).
In this action, a Maryland debtor gave a deed to her son
and daughter residing in Maryland and Virginia, respectively.
The gift, according to Appellants, was made in Maryland.
There is no dispute that had the deed related to real property
located within the borders of the United States, the
Bankruptcy Court could properly avoid the gift and return the
property to the Debtor’s estate for the benefit of the
creditors. Given the clear congressional intent expressed in
the Bankruptcy Code that property of a debtor be treated the
same whether located here or abroad, the Court can find no
principled reason to reach a different result as to property
subject to a pre-petition transfer avoidance action. The
identical concerns for marshaling and equitably distributing
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assets for the benefit of creditors are implicated.
Here, as they did before the Bankruptcy Court, Appellants
rely heavily on a series of decisions related to the
extraterritorial application of the Code’s preferential
transfer provision in Section 547. See In re Maxwell
Communications Corp., 170 B.R. 800 (Bankr. S.D.N.Y. 1994),
aff’d, 186 B.R. 807 (S.D.N.Y. 1995), aff’d, 93 F.3d 1036 (2nd
Cir. 1996). In that action, Bankruptcy Judge Tina Brozman
concluded that Congress did not intend for Section 547 to be
applied extraterritorially. As an alternative holding, she
concluded that the avoidance actions before her should be
dismissed under principles of international comity. The
district court affirmed on both grounds. The Second Circuit,
however, did not reach the question as to whether the Code’s
preference provisions could be applied extraterritorially,
affirming instead only on the comity ground.
In a law review article that this Court finds
particularly enlightening, the bankruptcy court’s decision in
Maxwell received some criticism. See Suzanne Harrison, “The
Extraterritoriality of the Bankruptcy Code: Will the Borders
Contain the Code?,” 12 Bankr. Dev. J. 809 (1996). That
article, written before the Second Circuit issued its
decision, anticipated the result on appeal and suggested that
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the lower courts should have limited their consideration to
the issue of comity. Id. at 843. The author suggested, and
this Court agrees, that lower courts’ presumption of
extraterritoriality analysis would have benefitted from
examining congressional intent in the context of the Code as a
whole instead of the specific provision in isolation. Courts
should “interpret each section in such a fashion as ‘to
preserve an overall sense and design, in light of the policies
sought to be achieved.’” Id. at 831 (quoting Hill v. Spencer
Savings & Loan Ass’n (In Re Bevill), 83 B.R. 880, 887-88
(D.N.J. 1988)).
In a subsequent decision, Judge Brozman limited her
earlier holding in Maxwell. See Interbulk Ltd. v. Louis
Dreyfus Corp. (In re Interbulk, Ltd.), 240 B.R. 195 (Bankr.
S.D.N.Y. 1999). In Interbulk, a chapter 11 trustee sought to
avoid, under Section 547, an attachment that a creditor had
obtained from a French court a few weeks before the debtor
filed its bankruptcy petition. When the creditor attempted to
rely on the series of decisions in Maxwell “as the linchpin
for its argument that there is a presumption against the
extraterritorial application of United States preference
laws,” Judge Brozman responded:
What [the creditor] fails to realize
is that there are critical distinctions
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between the facts of Maxwell and those
present here.
In Maxwell, there were parallel
bankruptcy proceedings in England and the
United States for the debtor, an English
corporation. The joint administrators
appointed by the high court in London and
the examiner appointed by this court
entered into a procedural protocol (the
"Protocol") to coordinate their efforts to
administer the two cases as a single
estate. The Protocol provided for the
creation of a single pool of assets in
which creditors from both countries could
share by filing claims in either
jurisdiction. Three foreign (to the United
States) creditors (the "Creditors") had
received transfers overseas from the debtor
within 90 days of the debtor's bankruptcy
filings. All three filed claims in
England, but not here. Cognizant that the
administrators contemplated suit in the
United States to recover the preferences
from them, the Creditors sought
unsuccessfully, in England, to enjoin the
administrators from commencing suit under
section 547 of the Code. The
administrators then filed adversary
complaints in this court to recover the
transfers from the Creditors. The
Creditors promptly moved for dismissal,
pursuant to Fed. R. Civ. P. 12(b)(6), for
failure to state a claim upon which relief
could be granted. The Creditors argued
that the transfers were extraterritorial in
nature and considerations of comity
prevented the use of section 547 to avoid
them. I concluded that section 547 was not
meant by Congress to apply
extraterritorially and that inasmuch as the
center of gravity of these transfers was
indeed extraterritorial, they could not be
avoided. I alternatively concluded that
principles of international comity dictated
tht the avoidance actions had to be dismissed.
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Interbulk, 240 B.R. at 198-99.
Like Interbulk, the instant case is readily
distinguishable from Maxwell on its facts. Here, there is no
international aspect to the transaction at issue other than
the happenstance that the property represented by the deed is
in the Bahamas. To the extent that this Court’s conclusion
is at odds with the legal conclusion of the lower courts in
Maxwell, this Court respectfully disagrees with those
holdings.
Aside from their reliance on the Maxwell decisions,
Appellants’ primary argument for the conclusion that Judge
Schneider erred is premised on the observation that Bahamas
property was not actually property of the estate until after
the transfer was avoided. Appellants note that several of the
cases relied upon by the court below that applied the
Bankruptcy Code extraterritorially did so under the legal
fiction that, because bankruptcy court’s have constructive
possession over estate property, the foreign property is
“legally” located within the jurisdictional boundaries of the
court, regardless of its actual location. See, e.g., Simon,
153 F.3d at 996. By constructively locating the foreign
property within domestic borders, a court can avoid directly
confronting the presumption against extraterritoriality.
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Appellants are correct that Judge Schneider appears to
have based his decision, at least in part, on a finding that
the Bahamas property was property of the estate. See 303 B.R.
at 783 (“Regardless of the fact that the land in question is
located in the Bahamas, it is property of the estate within
the subject matter jurisdiction of this Court pursuant to
Section 541(a).”). Appellants are also correct that this
conclusion would be at odds with a substantial body of case
law, including a decision of Judge Schneider, that holds that
property recovered by the trustee pursuant to his avoidance
powers is not property of the estate until it is actually
recovered. See In re Murray, 214 B.R. 271 (Bankr. D. Mass.
1997); In re Yellow Cab Co-op. Ass'n, 178 B.R. 265 (Bankr. D.
Colo. 1995); In re Saunders, 101 B.R. 303 (Bankr. N. D. Fla.
1989); see also Allnutt v. Friedman (In Re Allnutt), 1995 U.S.
Dist. Lexis 4870 (D. Md. 1995) (affirming decision of Judge
Schneider). The conclusion that the real property was not
property of the estate, however, does not alter this Court’s
conclusion as to the non-applicability of the presumption.
Confronting the presumption head on, this Court finds that
“all available evidence” demonstrates that Congress did intend
for the key provisions of the Bankruptcy Code to be applied
extraterritorially for the reasons stated above.
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In the alternative, even if one concluded that the
evidence of congressional intent was less than compelling, the
Court finds that the so-called Massey exceptions referenced
above would compel the Court to disregard the presumption in
this instance. Allowing a debtor to defraud creditors,
whether constructively or intentionally, by giving away
significant foreign assets to family members, would
undoubtedly “result in adverse effects within the United
States." Massey, 986 F.2d at 531. In the context of
increasing globalization, to not apply Section 548
extraterritorially would provide the potential to deprive
creditors of significant assets merely on the happenstance
that they had been cached overseas.
Turning to Appellants’ argument based on principles of
“international comity,” this Court finds even less support.
International comity is defined as “the 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.” Hilton v. Guyot, 159 U.S. 113,
164 (1895). International comity “is neither a matter of
absolute obligation, on the one hand, nor of mere courtesy and
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good will, upon the other.” Id. at 163. Appellants
acknowledge that comity is typically invoked where there are
competing proceedings in two countries and further acknowledge
that, in this instance, there are no legal proceedings in the
Bahamas that would conflict with the bankruptcy action here.
Instead, Appellants rely on a second aspect of
international comity that was laid out by Justice Scalia in a
dissenting opinion in Hartford Fire Ins. Co. v. California,
509 U.S. 764 (1993), one that does not arise out of
conflicting proceedings. As summarized by Justice Scalia,
this principle provides that “a nation having some ‘basis’ for
jurisdiction to prescribe law should nonetheless refrain from
exercising that jurisdiction ‘with respect to a person or
activity having connections with another state when the
exercise of such jurisdiction is unreasonable.’” Id. at 818
(quoting Restatement (Third) of Foreign Relations Law of the
United States § 403(1)). Whether the exercise of jurisdiction
in a specific context is reasonable turns on a number of
factors including, inter alia:
the extent to which the activity takes
place within the territory [of the
regulating state],
the connections, such as nationality,
residence, or economic activity, between
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the regulating state and the person
principally responsible for the activity to
be regulated,
the character of the activity to be
regulated,
the importance of regulation to the
regulating state,
the extent to which other states
regulate such activities, and the degree to
which the desirability of such regulation
is generally accepted,
the extent to which another state may
have an interest in regulating the
activity, and
the likelihood of conflict with
regulation by another state.
Id., 509 U.S. at 818-19 (citations omitted). Furthermore, in
discussing international comity in the context of a bankruptcy
action, the Ninth Circuit in Simon has added, “[i]f any
philosophy can be attributed to the structure of the Code it
is that of deference to the country where the primary
insolvency proceeding is located, including the United States
if the plenary proceeding is located here, and flexible
cooperation in the administration of assets.” Simon, 153
F.3d at 998.
The activity at issue here is the transfer of property.
While the property transferred may be located in the Bahamas,
the transfer took place in Maryland. The only individuals
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with any relationship to, interest in, or potential interest
in the property - the debtor, the trustee, the Appellants, and
the creditors – are all residents of the United States. No
Bahamian individual or entity has any stake in the
determination of ownership in the property. Under these
circumstances, the Bankruptcy Court did not err in finding
international comity concerns insufficient to compel it to
withhold action.
Accordingly, the decision of the Bankruptcy Court will be
affirmed. A separate order will issue.
/s/
William M. Nickerson
Senior United States District Judge
Dated: December , 2004
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