In re French

• Decision Date: 14 February 2006
• Docket Number: No. 05-1054.,05-1054.
• Citation: 440 F.3d 145
• Parties: In re Betty I. FRENCH, Debtor. Randy Lee French; Donna Marie Shaka, Appellants, v. George W. Liebmann, Trustee-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 145

440 F.3d 145

In re Betty I. FRENCH, Debtor Randy Lee French; Donna Marie Shaka, Appellants, v. George W. Liebmann, Trustee-Appellee.

No. 05-1054.

United States Court of Appeals, Fourth Circuit.

Argued: November 29, 2005.

Decided: February 14, 2006.

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Stanton J. Levinson, Silver Spring, Maryland, for Appellants. Orbie R. Shively, GEORGE W. LIEBMANN, P.A., Baltimore, Maryland, for Appellee.

Before WILKINSON, MICHAEL, and MOTZ, Circuit Judges.

Affirmed by published opinion. Judge MOTZ wrote the opinion, in which Judge MICHAEL joined. Judge WILKINSON wrote a separate concurring opinion.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

This appeal presents the question of whether a United States bankruptcy court can avoid a constructively fraudulent transfer of foreign real property between United States residents. The transferees here argue that the presumption against extraterritoriality and the doctrine of international comity preclude application of the Bankruptcy Code. Both the bankruptcy court and the district court rejected these arguments and allowed avoidance. For the reasons that follow, we affirm.

I.

In 1976, Betty Irene French, a resident of Maryland, purchased a house in the Bahamas. At a Christmas party held in Maryland in 1981, she gave a deed of gift to the Bahamian property to her children, Randy Lee French, a resident of Maryland, and Donna Marie Shaka, a resident of Virginia (hereinafter "the transferees"). Assertedly to avoid high Bahamian transfer taxes, the transferees decided not to immediately record the deed in the Bahamas.

In the late 1990s, Mrs. French and her husband began experiencing serious financial problems. Concerned by this downturn, the transferees decided at last to record the deed in the Bahamas, a task they accomplished through a Bahamian attorney in mid-2000. In October 2000, Mrs. French's creditors filed an involuntary Chapter 7 bankruptcy petition against her. The bankruptcy court entered an Order for Relief on January 29, 2001.

On August 22, 2002, the bankruptcy trustee, George W. Liebmann, filed an adversary proceeding against the transferees to avoid the transfer of the Bahamian property and to recover the property or its fair market value for the benefit of the estate.¹ In his complaint, the trustee alleged (in pertinent part) that the debtor and the transferees had engaged in a constructively fraudulent transfer, as defined by the Bankruptcy Code, because the debtor had been insolvent at the time of the transfer and had received less than a reasonably equivalent value in exchange. See 11 U.S.C. § 548(a)(1)(B) (2000).

The transferees conceded that the debtor never received a reasonably equivalent value for her gift of the Bahamian property, and they further conceded that the debtor was insolvent in 2000, when the deed was recorded. These facts would normally be sufficient to establish constructive fraud.

Nevertheless, the transferees filed a motion to dismiss before the bankruptcy court based on two grounds. First, they invoked the presumption against extraterritoriality, contending that because of it § 548 should not apply to transfers of foreign property. Second, they maintained that considerations of international comity counseled the application of Bahamian (rather than United States) bankruptcy law, which assertedly would allow the transferees to retain the Bahamian property.

The bankruptcy court rejected the transferees' arguments and denied their motion to dismiss. Liebmann v. French (In re French), 303 B.R. 774 (Bankr.D.Md. 2004). The trustee then moved for summary judgment, which the bankruptcy court granted by finding the transfer to be constructively fraudulent; the district court affirmed. French v. Liebmann (In re French), 320 B.R. 78 (D.Md.2004). The transferees noted a timely appeal.

II.

"It 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.'" EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248, 111 S.Ct. 1227, 113 L.Ed.2d 274 (1991) [hereinafter Aramco] (quoting Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285, 69 S.Ct. 575, 93 L.Ed. 680 (1949)). However, courts only apply this presumption against extraterritoriality when a party seeks to enforce a statute "beyond the territorial boundaries of the United States." Id.; see also Kollias v. D & G Marine Maint., 29 F.3d 67, 72 (2d Cir.1994). The presumption has no bearing when "the conduct which Congress seeks to regulate occurs largely within the United States" — that is, when regulated conduct is domestic rather than extraterritorial. Envtl. Def. Fund, Inc. v. Massey, 986 F.2d 528, 531 (D.C.Cir. 1993). Thus, before deciding how the presumption affects the interpretation of a given statute, a court should consider whether the presumption applies at all. Both parties have treated the application of § 548 to the transfer here as extraterritorial. This assumption may not be warranted.

This court has never defined when conduct is extraterritorial for purposes of the presumption. We have recognized, however, that a similar inquiry — defining "foreign conduct" — is particularly challenging in cases (like this one) that involve a "mixture of foreign and domestic elements." Dee-K Enters., Inc. v. Heveafil Sdn. Bhd., 299 F.3d 281, 286 (4th Cir.2002).

In this case too, we believe that any definition must eschew rigid rules in favor of a more flexible inquiry into the "place" of regulated conduct. Minimal contact with the United States should not automatically render conduct domestic. See Gushi Bros. Co. v. Bank of Guam, 28 F.3d 1535, 1538 (9th Cir.1994); Kollias, 29 F.3d at 72; Maxwell Commc'n Corp. PLC v. Societe Generale PLC (In re Maxwell Commc'n Corp.), 186 B.R. 807, 817 (S.D.N.Y.1995) [hereinafter Maxwell II]. Nor should minor contact with another country suffice to render conduct extraterritorial. See Massey, 986 F.2d at 531-32; Maxwell Commc'n Corp. plc v. Societe Generale PLC (In re Maxwell Commc'n Corp.), 170 B.R. 800, 809 (Bankr.S.D.N.Y. 1994) ("Not every transaction that has a foreign element represents an extraterritorial application of our laws."); Jay Westbrook, The Lessons of Maxwell Communications, 64 Fordham L.Rev. 2531, 2538 (1996). To avoid these extremes, we have held for purposes of the Sherman Antitrust Act that, in determining whether conduct is "foreign" or "domestic," "a court should consider whether the participants, acts, targets, and effects involved" in the transaction at issue "are primarily foreign or primarily domestic." Dee-K Enters., 299 F.3d at 294. We think that an equally flexible test taking into account "all component events of the transfer[ ]," Maxwell II, 186 B.R. at 816, is appropriate to determine whether an allegedly fraudulent transfer occurred extraterritorially.

In this case, the perpetrator and most of the victims of the fraudulent transfer — all except a single Bahamian creditor — have long been located in the United States. Given these facts, the effects of this transfer were (naturally) felt most strongly here, and not in the Bahamas.

We also find it significant that the conduct constituting the constructive fraud occurred in the United States. Section 548 defines a constructively fraudulent transfer, inter alia, as one where (1) the debtor was insolvent, and (2) the debtor received "less than a reasonably equivalent value in exchange." 11 U.S.C. § 548(a)(1)(B); see also In re GWI PCS 1 Inc., 230 F.3d 788, 805 (5th Cir.2000). Here, domestic facts and conduct establish both elements. The determination of Mrs. French's insolvency relies almost entirely upon a comparison of domestic debts and assets. And the decision not to provide a "reasonably equivalent value" for the transfer was made in the United States as well — whether we consider the relevant decision to be Mrs. French's gift of the deed in 1981, or the transferees' recordation of the deed in 2000.

However, we recognize that two aspects of this transfer indisputably involve foreign facts and conduct. The first is relatively insignificant: the transferees' Bahamian lawyer recorded their deed to the property in the Bahamas. The physical place where the deed was recorded is at most "incidental" to the actual conduct proscribed by § 548. See Gushi Bros., 28 F.3d at 1538-39. Moreover, although the act of recordation necessarily took place abroad, the transferees themselves may well have been located in the United States both when they decided to record the deed and when they arranged for the Bahamian lawyer's services (the record is not clear on this point).

More importantly, the transferees emphasize that the real property at issue in this case is located in the Bahamas. At first blush, this fact does not seem critical because § 548 focuses not on the property itself, but on the fraud of transferring it. In this case, the facts underlying the fraud occurred here. However, the law has long recognized the powerful interest that states and nations have in the real property within their boundaries; the strength of that interest explains why the law of the situs generally applies to real property. See, e.g., Oakey v. Bennett, 52 U.S. 33, 44-45, 11 How. 33, 13 L.Ed. 593 (1850); Robinson v. Campbell, 3 Wheat. 212, 16 U.S. 212, 219, 4 L.Ed. 372 n.a (1818); Restatement (Second) of Conflict of Laws § 223 comm. b (1974); cf. Robby Alden, Note, Modernizing the Situs Rule for Real Property Conflicts, 65 Tex. L.Rev. 585, 591-98 (1986-1987) (summarizing arguments on the importance of the location of real property); but cf. Cent. Va. Cmty. Coll. v. Katz, 546 U.S. ___, 126 S.Ct. 990, ___ L.Ed.2d ___, 2006 WL 151985, at *8 (Jan. 23, 2006) ("[The] exercise [of bankruptcy jurisdiction] does not, in the usual case, interfere with state sovereignty even when States' interests are affected.").

Given this long history, the...