Vol 3 (2006) - Issue 5

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In re French: Extraterritorial Application of the US Bankruptcy Code’s Fraudulent Conveyance Provisions

Introduction
Given the increasingly global nature of business – and thus of corporate bankruptcies – the extent to which the United States Bankruptcy Code (the ‘Bankruptcy Code’)1 will be applied extraterritorially to address US debtors’ assets and interests in other jurisdictions is an issue of critical importance. Although the US Supreme Court has not squarely addressed the issue, a number of lower court decisions, while somewhat inconsistent in their analysis, have moved in the direction of enforcing key Bankruptcy Code provisions extraterritorially in order to fulfil the purposes of the Bankruptcy Code. The US Court of Appeals for the Fourth Circuit (the ‘Fourth Circuit’) continued this trend in its recent decision in In re French,2 holding that a debtor’s prepetition transfer of foreign real property may be set aside as a constructively fraudulent transfer under the Bankruptcy Code, and that neither the presumption against extraterritoriality nor the doctrine of international comity warranted a different result.
Background
A. The presumption against extraterritoriality
Although it is clear that the US Congress has the authority to enforce its laws beyond the borders of the United States,3 it is not always clear whether Congress intended this result with respect to particular statutes. United States courts have long been mindful that extraterritorial enforcement involves practical difficulties as well as issues of respect for the sovereignty of other nations, and that ‘unintended clashes between our laws and those of other nations … could result in international discord’.4 These concerns, as well as the need to establish a framework within which to discern congressional intent, gave rise to the longstanding principle of US law referred to as the ‘presumption against extraterritoriality’: the rebuttable presumption that ‘“legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States”’.5
A frequently cited US Supreme Court case, Equal Employment
Opportunity Commission v. Arabian American Oil Company (‘Aramco’),6 defined the necessary intent as the ‘“affirmative intention of the Congress clearly expressed”’.
7 This test, sometimes referred to as the ‘clear statement’ standard, suggested that the requisite intent must appear in the language of the statutory provision at issue. Subsequent Supreme Court cases, however (as well as recent lower court rulings such as the Fourth Circuit decision in In re French), have explained that it is not a ‘clear statement’ but rather ‘clear evidence of congressional intent’8 that is required, and have looked to ‘all available evidence’, including legislative history and the overall statutory scheme, to determine whether there exists a clear expression of congressional intent.9 Moreover, cases have held that laws may be applied extraterritorially even where congressional intent cannot
be discerned if the activities being regulated would have substantial effects in the United States or if failure to apply the statute extraterritorially would result in adverse effects in the United States.10 Thus, the nature and purpose of the particular statute or the nature of the activities regulated could effectively overcome the presumption.