The historical record confirms that Congress intended the “wherever” here to extend around the world. But in one important respect, this world domination is limited, as a New York court confirmed recently. Foreign investors receiving fund transfers to non-U.S. accounts, take note!
A non-U.S. transferee might understandably resent and resist demands under U.S. law by a U.S. trustee to turn over assets related to a U.S. bankruptcy case, especially if the transferee was unaware of any U.S. connection.
For example, if the debtor had transferred funds to a foreign bank, which in turn transferred the funds on to the non-U.S. party, it may well be entirely unclear to the ultimate recipient that the funds originated from a U.S. entity. Even if the U.S. source of the funds were apparent, if the transaction was predominantly centered outside the U.S., what legitimate business does U.S. law have meddling in foreign affairs?
Let it not be said that U.S. law is insensitive to these concerns, as a powerful pair of jurisprudential limitations protect non-U.S. transferees in such circumstances. A high-profile example of the problem and the limitations appeared in the landmark cross-border bankruptcy of Maxwell Communication Corporation plc in the 1990s. In light of its broad international footprint, Maxwell initiated Chapter 11 proceedings in New York along with administration proceedings in London.
Shortly before its insolvency filings, Maxwell had sold significant portions of its U.S. assets, and it subsequently transferred more than US$100 million of the proceeds to pay down overdraft balances on London bank accounts owed to British and French banks. The case administrators ultimately sought to recover and redistribute that money as preferential pre-petition transfers, and since English insolvency law was too restrictive to enable a recovery, they enlisted the aid of the U.S. court.
While recovery of transfers like these is otherwise commonplace in U.S. bankruptcy cases, the New York bankruptcy court refused to apply the U.S. claw-back law, even though that would deprive Maxwell’s creditors of a large benefit.2 The New York court based its decision on two related limitations on the extraterritorial reach of U.S. law.
First, under longstanding doctrine, U.S. law is presumed not to apply outside the territorial limits of the U.S. unless Congress clearly intended an extraterritorial reach. Congress might choose to allow U.S. law to apply abroad, as in the statute mentioned above defining the worldwide scope of the bankruptcy estate, but that intention must be clear from the statute or its history. In the case of the provisions on avoidance of pre-petition transfers, no such intention is clearly reflected in the legislative record.
Of course, not every application of U.S. law that affects a non-U.S. party can be properly characterized as “extraterritorial.” The court set up a “center of gravity” test for examining the “component events” of the transfer, such as the location of the transferee and transferor, the source of the funds transferred, and the motivation for and location of the transfer.
Although the US$100 million originated from sales of U.S. assets, and the debtor was soon to be involved in a U.S. bankruptcy case in which the recipient banks were making claims, Maxwell was an English corporation, the overdraft debts had been incurred in London, the transfers were made in London or, at least, used to satisfy debts located in London, and though the recipient banks had New York branches (one of which was even used to route the U.S. dollar denominated payments), they were British or French companies. The center of gravity of the transfers, then, was outside the U.S., and since the presumption against extraterritoriality had not been rebutted, U.S. law could not reach these transfers.
Second, and on a related note, the New York court refused to apply U.S. law out of deference to and to avoid conflict with the nation whose laws more appropriately applied here: England. The longstanding choice-of-law doctrine of international comity compelled the court to cede to the law of the jurisdiction having the greatest interest in the disputed event. Returning to the “component events” and their national contact points here, the court concluded again that England had the dominant interest in the transfers and parties in this dispute, and so U.S. law should yield to English law in any event.
A similar battle played out just a few months ago, and the New York court confirmed that its approach remains the same. As part of his efforts to deal with the detritus of the Madoff investment fraud scheme, the trustee of Madoff’s failed firm sought to recover payments that had ultimately made their way to non-U.S. investors.
The Madoff firm made the payments originally to its clients, non-U.S. feeder funds, who then transferred the funds on to the funds’ investors. U.S. law provided for recovery from such twice-removed transferee-investors, and these investors were well aware that the funds represented investment returns from a U.S. entity. It seemed eminently sensible for U.S. bankruptcy law to ratably redistribute the gains from these investors in order to more thinly spread the pain of loss among the many Madoff victims.
The New York district court on July 6, 2014,3 once again rebuffed this attempt to recover payments from non-U.S. recipients, invoking the presumption against extraterritoriality under circumstances very similar to those in the Maxwell case 20 years earlier. For reasons again similar to those in the Maxwell case, the Madoff court also noted the doctrine of international comity as an additional and independent basis for its decision, as the center of gravity of these payments was rather clearly not in the U.S. The Madoff feeder funds were BVI (Fairfield Sentry) or Cayman (Harley Int’l) entities, the investors who received the transfers were likewise non-U.S. entities, and the transferor and recipient accounts were all outside the U.S.
Unlike in the Maxwell case, the transfers from the feeder funds to the investors did not even originate in the U.S. The known U.S. original source of these funds was too slender a lever to shift the center of gravity of these transfers into the U.S. And with a non-U.S. concentration of parties and events, international comity dictated in any event that these transfers could only appropriately be governed by BVI, Cayman, or other non-U.S. law, especially since liquidation proceedings had already been commenced against the feeder fund-transferors in their home jurisdictions.
As in real estate valuation, the value of a transfer for purposes of U.S. bankruptcy law depends crucially on three words: location, location, location. This is one situation where careful planning can locate a transfer beyond eventual disruption by U.S. bankruptcy law.
- 11 USC s 541(a).
- See In re Maxwell Comm’n Corp., 186 B.R. 807 (S.D.N.Y. 1995).
- Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities, LLC, Case No. 12-mc-115 (JSR) (S.D.N.Y. 6 July 2014).