Reflections on the Extraterritorial Application of the Bankruptcy Code
Reflections on the Extraterritorial Application of the Bankruptcy Code
Although the Supreme Court has not addressed the issue of extraterritoriality in connection with the Code, the Court has issued decisions regarding the extraterritorial reach of other federal statutes. See American Banana Co. v. United Fruit Co., 213 U.S. 347 (1909) (holding that the Sherman Antitrust Act applied only to those uncompetitive practices commenced in the United States); Foley Bros. Inc. v. Filardo, 336 U.S. 281 (1949) (declining to extend the federal Eight Hour Law to Americans employed by U.S. companies abroad); Smith v. United States, 507 U.S. 197, 203-204 (1993) (refusing to apply the Federal Tort Claims Act extraterritorially); Sale v. Haitian Centers Council, 509 U.S. 155, 173-174 (1993) (finding that the presumption against extraterritorially applied to the Immigration and Nationality Act). Arguably the leading case concerning the extra-territorial application of a federal statute is E.E.O.C. v. Arabian American Oil Co. (Aramco), 499 U.S. 244 (1991).
There is...no indication whatsoever of a congressional intent that most sections of the Code be applied beyond the borders of the United States.
In Aramco, an employee of an American corporation sued his employer for discrimination under Title VII of the Civil Rights Act of 1964 following his discharge from his job at a Saudi Arabian facility. E.E.O.C. v. Arabian American Oil Co., 499 U.S. 244 (1991). The Court held that Title VII of the Civil Rights Act of 1964 was inapplicable to the discriminatory employment practices of U.S. employers who employed U.S. citizens overseas. Id. at 244. In reaching this decision, the Court relied on a "long-standing 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, otherwise known as the "presumption against extraterritoriality."
The Court began its analysis by rejecting the petitioners' argument that the broad jurisdictional language of Title VII revealed an intent on the part of Congress to apply Title VII extraterritorially. Id. at 249-51. Rather, the Court concluded that the language of Title VII was ambiguous. Id. at 251. The Court also noted that the jurisdictional language in question was the same "boilerplate language" of other statutes that it had previously found were not intended by Congress to apply extra-territorially. Id. The Court then went on to reject the petitioners' second statutory argument that Title VII's alien exemption provision manifested an intention by Congress to protect U.S. citizens employed by American companies outside of the United States. Id. at 253. The Supreme Court once again focused on the ambiguous language of Title VII and concluded that there was not clear congressional intent that Title VII should apply to U.S. citizens employed overseas. Id. The Supreme Court stated that without clear congressional intent, it was unwilling to "ascribe to that body a policy which would raise difficult issues of international law by imposing this country's employment-discrimination regime upon foreign corporations operating in foreign commerce." Id. at 255.
The Court next considered the EEOC's interpretation of Title VII. Id. at 256. Although acknowledging that the EEOC has the primary responsibility for enforcing Title VII, the Court refused to defer to the EEOC's interpretation of Title VII. Id. As the Supreme Court had done in a previous case, the Court concluded that Congress in enacting Title VII did not confer upon the EEOC the authority to promulgate rules or regulations pursuant to Title VII, and that any deference to the EEOC "will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements and all those factors which give it power to persuade, if lacking power to control." Id. at 257. In the Supreme Court's view, the EEOC's interpretation of Title VII did not meet this test for reasonableness and therefore could not be afforded deference. Id.
Finally, the Court noted that when Congress desires to extend a statute extraterritorially, it knows how to do so. Id. at 258. To illustrate this point, it recalled that the Age Discrimination in Employment Act, as originally drafted, did not provide for extraterritorial coverage and that Congress amended that statute to reach overseas in the wake of federal court decisions limiting its coverage to the territorial boundaries of the United States. Id. The Court reasoned that, if Congress so wished, it could and would take the same course with Title VII. Id.
The essential holding of the Supreme Court's decision in Aramco is that there is a presumption against the extraterritorial application of U.S. legislation that cannot be overcome absent an unmistakably clear2 intention that Congress intended the particular statute to apply to events and transactions occurring outside U.S. territory. Id. at 248.3 Bankruptcy courts have reached different conclusions in applying the "clear intent" mandate to the various provisions of the Bankruptcy Code, often ignoring the mandate in favor of a result that seems to be consistent with the court's view of the correct application of the Code.
In Maxwell Communication Corp. v. Societe Generale (In re Maxwell Communication Corp.), 186 B.R. 807, 817-19 (S.D.N.Y. 1995), the court held in a detailed and careful analysis of the issue that Code §547 could not be applied to transfers made in England from an English debtor to English creditors because, applying the Aramco holding, "nothing in the language or legislative history of §547 expresses Congress's intent to apply the statute to foreign transfers." Maxwell, 186 B.R. at 817. However, in French v. Liebmann (In re French), 320 B.R. 78, 85 (D. Md. 2004), the court held that Code §548 (the fraudulent-transfer avoidance statute) could be applied to recover a transfer made by a U.S. debtor to U.S. transferees, in which the deed transferring title to real property was executed in the United States but the property was located in the Bahamas, reasoning that "[i]n the context of increasing globalization, to not apply §548 extraterritorially would provide the potential to deprive creditors of significant assets merely on the happenstance that they had been cached overseas." Id. at 85. The reasoning of this decision is obviously driven more by a desire to achieve the "correct" result than by controlling precedent.
Section 541 has also been held to have been intended by Congress to apply extraterritorially. In Hong Kong & Shanghai Banking Corp. v. Simon (In re Simon), 153 F.3d 991, 996 (9th Cir. 1998), the court relied on the "wherever located"4 language of §541 to conclude that "Congress intended extraterritorial application of the Bankruptcy Code as it applies to property of the estate." In addition, in Nakash v. Zur (In re Nakash), 190 B.R. 763, 768 (Bankr. S.D.N.Y. 1996), the court held that the automatic stay found in §362, as well as §541, applied extraterritorially. The court held that the automatic stay applied to actions against the debtor as well as his property outside the United States because property of the estate, though located abroad, was implicated. Id. at 768.
Bankruptcy Code §§362 and 541(a) are provisions that the courts seem to agree may be applied extraterritorially, so as to bring estate property located outside U.S. territory under the control of the estate. For example, in Lykes Bros. Steamship Co. Inc. v. Hanseatic Marine Service (In re Lykes Bros. Steamship Co. Inc.), 207 B.R. 282, 287 (Bankr. M.D. Fla. 1997), the court held that both §§362 and 541 applied extraterritorially to all property "wherever located" in which the debtor has an interest, even where such property is located outside U.S. territory. Further, in Sinatra v. Gucci (In re Gucci), 309 B.R. 679, 683-84 (S.D.N.Y. 2004), the court held that Code §362 could be applied to prohibit actions against estate property located outside the United States, stating that "[i]f a creditor causes property of a Title 11 estate to be seized in a foreign country, that creditor has violated the automatic stay." Id. at 683-84. See, also, In re Yukos Oil Co., 321 B.R. 396, 406 (Bankr. S.D. Tex. 2005) (holding that "Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate...[t]his broad grant of jurisdiction extends to extraterritorial application of the Bankruptcy Code as it applies to property of the bankruptcy estate"); Europe Movieco Partners Ltd. v. United Pan-Europe Communications N.V. (In re United Pan-Europe Communications N.V.), Case No. 03 Civ. 1060, Chin, D.J., 2004 WL 48873 (S.D.N.Y. Jan. 9, 2004).
Under the Supreme Court's Aramco holding that "clear congressional intent" is required in order to justify the extraterritorial application of U.S. statutes, it is difficult to conclude that many, if not most, provisions of the Code should be applied to events and transactions occurring outside the United States. As the authors of Spanning The Globe: The Intended Extraterritorial Reach of the Bankruptcy Code concluded, "[w]e believe that Congress intended for the Bankruptcy Code to have an extraterritorial reach. What the decisions examined here reveal, however, is that such intent is less than clear; were it otherwise, the need for the jurisdictional gyrations would be obviated."5
However, in many of the cases in which the Code has been applied to events or transactions with a transnational element, the courts may have reached the correct result without applying the Code extraterritorially. In many of the cases, although the transaction may have had an international aspect, a closer look at the facts suggests that the transaction in question did not call for the extraterritorial application of the Code in the first place. For instance, in some cases, a party arguing against the extraterritorial application of a Code section had been participating in the bankruptcy case, such as by filing a proof of claim, and therefore subjected itself to the equitable jurisdiction of the bankruptcy court. See, e.g., Langenkamp v. C.A. Culp, 498 U.S. 42, 44 (1990); Travellers Int'l., AG v. Robinson, 982 F.2d 96, 98 (3d Cir. 1992). In addition, the particular conduct or transaction at issue may have an international component, but the "center of gravity" of such transaction or conduct may still be located in the United States. See, e.g., French, 320 B.R. at 83.
A court's initial inquiry in analyzing whether a statute was drafted with the intention that it be applied extraterritorially should be whether "the application which [is attempted] is extraterritorial at all...."
Maxwell Comm. Corp. v. Barclays Bank PLC (In re Maxwell Comm. Corp.), 170 B.R. 800, 809 (S.D.N.Y. 1994). This, in turn, requires a court to consider whether the conduct or transactions implicated by the dispute "occurred outside the borders of the [United States]." Id. at 816 (citing Gushi Bros. Co. v. Bank of Guam, 28 F.3d 1535, 1538-39 (9th Cir. 1994); Environmental Defense Fund v. Massey, 986 F.2d 528, 531 (D.C. Cir. 1993). To make this determination, a court should examine all components of conduct or a transaction to determine whether the "center of gravity" of such conduct or transaction lies outside the territorial boundaries of the United States. Maxwell Comm. Corp. v. Societe Generale PLC (In re Maxwell Comm. Corp.), 186 B.R. 807, 816-17 (S.D.N.Y. 1995).
In the French case, the court held that §548 could be applied to avoid and recover a transfer made by a U.S. debtor to U.S. transferees, in which a deed to real property located in the Bahamas was executed and delivered in the United States. 320 B.R. at 83. The court held that §548 could apply to the transaction in part because there was "no international aspect to the transaction at issue other than the happenstance that the property represented by the deed is in the Bahamas." Id. at 84. Thus, where the "center of gravity" of the transaction at issue is domestic, there is no need to consider the extraterritorial application of the particular Code section in question and no basis to conclude that it should have such an application.
In some cases, a court will rely on a foreign creditor's participation in a U.S. bankruptcy case to justify the application of U.S. law to a foreign transaction or occurrence. For example, in the Nakash case, the court held that the automatic stay applied to actions against the debtor and his property outside the United States. 190 B.R. at 768. The court relied, in part, on the fact that the party resisting the extraterritorial application of Code §362 had "submitted himself to the courts of the United States" by participating actively in the bankruptcy proceedings and seeking relief in other U.S. courts. Id. at 767-68. The court in Hong Kong and Shanghai Banking Corp. Ltd. v. Simon (In re Simon), 153 F.3d 991, 996 (9th Cir. 1998), held that Congress intended the extraterritorial application of the Code as it applied to property of the estate. The court relied on the fact that the creditor involved in that case had participated in the debtor's U.S. bankruptcy proceedings. Id. at 997. In both cases, the party in question was subject to the court's jurisdiction and the enforcement of its orders, so there was no real need to apply the Code extra-territorially. However, in Simon, the court noted that "[t]he more difficult problem is whether a bankruptcy court may enjoin a foreign collection action against the debtor personally, or as to assets which do not form part of estate property, if the creditor was not a party to the U.S. bankruptcy proceedings (Id.)," a question it did not reach.
With continued advances in transportation and communication technologies, and with the increased globalization of businesses and economies, it is likely that the issue of whether the provisions of the Code should apply extraterritorially will arise in many U.S. bankruptcy proceedings. Under the current state of the law, it appears that Code §541, which deals with property of the estate, is freely given extraterritorial effect by the courts. As to other provisions such as Code §362, to the extent such provisions impact estate property located outside the United States, courts will continue to parse the meaning of the Supreme Court's Aramco decision and develop case law around the requirement that clear congressional intent must be present in order to apply statutes to foreign conduct and transactions. However, it is difficult to conclude that the Aramco decision's mandate of clear congressional intent can be satisfied with respect to many provisions of the current Code. There is, simply put, no indication whatsoever of a congressional intent that most sections of the Code be applied beyond the borders of the United States. Moreover, many of the cases that purport to apply one section of the Code or another "extraterritorially" really do not call for such an application. Until Congress decrees otherwise, bankruptcy courts should tread carefully in this area.
Footnotes
1 Mr. Stratton is a partner in the Bankruptcy and Reorganization Group in the Wilmington, Del., office of Pepper Hamilton LLP. Mr. Stratton thanks Evelyn J. Meltzer and James C. Carignan for their assistance in preparing this article. Ms. Meltzer and Mr. Carignan are associates in the Bankruptcy and Reorganization Group in the Wilmington office of Pepper Hamilton LLP. Return to article
2 E.E.O.C. v. Arabian American Oil Co., 499 U.S. 244, 253 (1991) ("[I]f we were to permit possible, or even plausible, interpretations of language such as that involved here to override the presumption against extraterritorial application, there would be little left of the presumption"). Return to article
3 In Smith v. United States, 507 U.S. 197, 204 (1993), the Court revisited the issue of extraterritoriality and held that there must be "clear evidence" of congressional intent to apply a statute extraterritorially. Return to article
4 Code §541 provides that a debtor's bankruptcy "estate is comprised of all [specified] property, wherever located and by whomever held." 11 U.S.C. §541(a) (emphasis added). Return to article
5 Green, David M. and Benzija, Walter, "Spanning The Globe: The Intended Extraterritorial Reach of the Bankruptcy Code," 10 Am. Bankr. Inst. L. Rev. 85, 109 (Spring 2002). Return to article