Is a United States Bankruptcy Judge powerless to avoid and recover an "international fraudulent transfer" by a debtor for the benefit of the debtor's creditors?  Earlier this year, on February 14, 2006, the Fourth Circuit Court of Appeals, in In re French, 440 F.3d 145 (4th Cir. 2006), said NO!  The Fourth Circuit held that a chapter 7 bankruptcy trustee could avoid and recover a fraudulent transfer of a house in the Bahamas, by gift, from the debtor to her children.  The Fourth Circuit acknowledged that the Bankruptcy Code, and section 548, its fraudulent transfer provision, is an act of Congress and as such, is bound by the long settled 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.  However, the Fourth Circuit analyzed several sections of the Bankruptcy Code and concluded that Congress intended to allow avoidance of transfers of foreign property.  Therefore, the Fourth Circuit, concluded that the presumption against extraterritoriality did not apply.
 
However, on August 15, 2006, the United States Bankruptcy Court for the Central District Of California, in In re Midland Euro Exchange Inc., et al., 347 B.R. 708 (Bankr. C.D.Cal. 2006) says yes, disagreeing with the Fourth Circuit's analysis and concluding that a United States Bankruptcy Judge may be powerless to avoid and recover an "international fraudulent transfer." The Mildand Euro case involved a "massive Ponzi scheme run in Southern California between 1999 and 2003."  The Court dismissed a complaint by the chapter 7 trustee to avoid and recover a transfer by the debtor's Barbados corporation to an English corporation's New York bank account (which transfer eventually ended up in a bank account in England), holding that there was no evidence that Congress intended to extend the application of the fraudulent transfer provision of the Bankruptcy Code extraterritorially.  This decision is in line with an older decision of a bankruptcy court in New York in In re Maxwell, 170 B.R. 800, 814 (Bankr. S.D.N.Y. 1994), aff’d on other grounds, In re Maxwell, 93 F.3d 1036 (2nd Cir. 1996), which held that a foreign debtor could not avoid a preferential transfer, under section 547 of the Bankruptcy Code, to a foreign creditor because Congress did not clearly express its intent to have section 547 of the Bankruptcy Code be applied extraterritorially.
   
The Mildand Euro Court held that fraudulent transfers do not become property of the bankruptcy estate unless and until they are avoided by a trustee and the trustee could not rely on the fraudulent transfer provision of the Bankruptcy Code to avoid and recover the fraudulent transfer because that section of the Bankruptcy Code could not be applied extraterritorially.  The Court appreciated the fact that the "failure to extend the application of the fraudulent transfer provision of the Bankruptcy Code to transfers outside of the territorial borders of the United States creates a loophole for unscrupulous debtors to freely transfer their assets to shell entities abroad and avoid the reach of the Bankruptcy Code," but concluded that these policy considerations, "alone are insufficient to overcome the presumption against extraterritoriality."

The Mildand Euro Court held that the chapter 7 trustee was still able to bring the suit in England under the less favorable British law which requires proof of actual knowledge by the transferee of the transferor's scheme to defraud his creditors.  Until Congress changes the statute or the Mildand Euro Court's decision is reversed, section 548 of the Bankruptcy Code may not be a remedy available to creditors of those "dishonest" and "unscrupulous" debtors who commit international fraudulent transfers.