California Court Dismisses Adversary Proceeding Filed in a Bankruptcy Matter

It is not uncommon for trustees to file adversarial pleadings in bankruptcy matters, arguing that debtors fraudulently transferred assets or funds in an attempt to avoid obligations. While federal law prohibits such transfers within the United States, the applicable statute does not operate to allow for the avoidance of transfers that occur in other countries. This was demonstrated in a recent opinion issued in a California bankruptcy case, in which the court dismissed the creditor’s complaint. If you have questions regarding your obligations to creditors after you seek debt relief, it is smart to meet with a knowledgeable California bankruptcy lawyer to determine your rights.

The Facts of the Case

Allegedly, involuntary Chapter 7 bankruptcy petitions were filed against the debtor company and the debtor principals, after which the court consolidated the debtor estates. The court then appointed a trustee, and proof of claims totaling more than $100 million were filed against the debtors, most of which involved money owed to investors.

Reportedly, the trustee filed an adversary pleading asking to set aside and recover transfers he alleged were fraudulent. The transfers, which were fees and commissions totaling close to $900,000, were paid by the debtors to a foreign exchange brokerage. The debtors moved to dismiss the trustee’s complaint, arguing in part that the fraudulent transfer law did not apply to extraterritorial transfers.

Avoidance of Fraudulent Transfers Outside of the United States

The court explained that it is well established that laws enacted by Congress are only meant to apply within the territorial jurisdiction of the United States unless a different intent applies. The parties in the subject case agreed that allowing the trustee to proceed with his claims would result in an extraterritorial application of the fraudulent transfer law.

The trustee argued that the presumption against extraterritorial application of laws did not apply here because the regulated conduct intended to and did, in fact, result in substantial effects within the United States. Further, the trustee averred that the foreign exchange brokerage knew or should have known that the transfer in question was not only fraudulent but was part of a larger criminal scheme for the purpose of defrauding creditors.

The court found that the trustee improperly construed the exception and noted the only pertinent issue was whether the facts as alleged in the adversarial complaint were adequate to demonstrate regulated conduct that was intended to and did result in a significant impact within the United States. Guided by this principle, the court found that the trustee failed to demonstrate the exemption to the presumption against extraterritoriality should apply. Thus, the court dismissed the adversary complaint.

Speak to a Seasoned California Bankruptcy Attorney

Debts can quickly compound and become unmanageable, but many people are eligible to mitigate their financial losses via bankruptcy. If you are interested in alleviating your debts via bankruptcy, it is prudent to speak to an attorney as soon as possible. Matthew D. Roy is a seasoned California bankruptcy lawyer with the skills and experience needed to help you seek the best legal result possible under the facts of your case. You can reach Mr. Roy via the form online or by calling (916) 361-6028 to set up a conference.