District Court finds Fraudulent Transfer Provisions of the Bankruptcy Code do not apply Extraterritorially

The World in U.S. Courts: Winter 2016 - Bankruptcy | September.30.2016

In re Sherwood Invs. Overseas Ltd., Inc., US District Court for the Middle District of Florida, September 30, 2016

Debtor-plaintiff sought to recover two stock settlement payments paid to the defendant as “fraudulent transfers.” The defendant moved for summary judgment, arguing that the presumption against extraterritorial application of federal statutes barred the debtor’s claims under the bankruptcy code because the conduct that gave rise to the allegedly fraudulent transfers—transfers to a Netherlands entity by a British Virgin Islands entity, where all trading and creation of the underlying securities purchased with the transfers was performed in London—occurred outside the US. The Bankruptcy Court for the Middle District of Florida agreed with the defendant and submitted to the District Court a Proposed Memorandum Opinion granting summary judgment to the defendant. The debtor objected, positing that the Bankruptcy Court had misapplied the presumption against extraterritorial application of a federal statute to conduct outside the US.

The District Court disagreed. It first observed that there is a presumption against a federal statute’s extraterritorial reach unless a clear indication of contrary intent appears in the statute itself or its legislative history. The Court also noted that neither the Supreme Court nor the Court of Appeals for the Eleventh Circuit has addressed the presumption of extraterritoriality in the context of the Bankruptcy Code’s fraudulent transfer provisions, and other courts disagree on the issue. Based on its review of the relevant provisions and their legislative history, the Court found no indication of congressional intent to apply the fraudulent transfer provisions extraterritorially.

The debtor further argued that, because the statute defines property of the estate as essentially all property in which the debtor holds an interest “wherever located,” Congress must have intended to apply the Bankruptcy Code with respect to property of the estate beyond the territorial boundaries of the US. However, the Court pointed out that the statute limits property of the estate to property recovered as a fraudulent transfer. Therefore, the debtor’s argument could only be valid if the allegedly fraudulent transfers had already been avoided and the funds already recovered.

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