United States: Southern District Of New York Holds In Madoff That The Bankruptcy Code Cannot Be Used To Recover Extraterritorial Transfers

Dealing a major blow to the trustee's efforts to recover fraudulent transfers on behalf of the bankruptcy estate of the company run by Bernard Madoff, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York held in SIPC v. Bernard L. Madoff Investment Securities LLC1 that the Bankruptcy Code cannot be used to recover fraudulent transfers of funds that occur entirely outside the United States. The decision is likely to have far-reaching implications for other cross-border insolvency cases.

Background

Certain foreign investment funds (so-called "feeder funds") that had pooled their customers' assets for the purpose of investing with Madoff withdrew funds from their Madoff accounts and subsequently transferred the funds abroad to various foreign entities, including their customers and certain banks. The Madoff trustee sued both the feeder funds (most of which were themselves in liquidation proceedings in their home countries following the collapse of the Madoff empire) and the subsequent transferees under section 550 of the Bankruptcy Code in an attempt to recover the transfers as fraudulent conveyances.2 Although section 550 authorizes trustees and debtors-in-possession to recover a debtor's fraudulent transfers not only from the direct recipients of the transfers but also, in some instances, from subsequent transferees, the subsequent transferees moved to dismiss the complaint on the ground that section 550 did not apply extraterritorially and thus did not enable the trustee to set aside transfers from a foreign transferor to a foreign transferee.

The Presumption Against Extraterritoriality

The court focused initially on whether the application of section 550, under the facts of the case, would constitute an extraterritorial application of the statute. Citing the Supreme Court's decision in Morrision v. Nat'l Australia Bank, Ltd.,3 the court noted that there is a long-standing legal presumption that federal statutes are intended to apply only within the territorial jurisdiction of the United States unless a clear contrary intent can be discerned from the statute and its context. The presumption against extraterritorial application of federal statutes, the court observed, furthers the important policy goal of avoiding clashes between US laws and those of other nations. The court rejected the trustee's argument that, because Congressional concern with regard to a liquidation under the Securities Investors Protection Act of 1970 ("SIPA") – a statute that incorporates by reference a number of provisions from the Bankruptcy Code, including section 550 – is the regulation of broker-dealers doing business in the US, the application of section 550 under the facts was inherently domestic and thus did not require extraterritorial application. The court found that a tangential or remote connection to a US debtor is insufficient to render every application of the Bankruptcy Code domestic, and, in any event, such an approach would be problematic from the standpoint of international comity. The court observed that section 550 (a recovery provision) and section 548 (a fraudulent transfer avoidance provision) each focuses on the property that has been transferred and the nature of the transaction rather than on the debtor itself. It found that, although the chain of transfers originated with Madoff in New York, the transfers (and the transferees) in question were predominantly foreign (i.e., foreign feeder funds had transferred funds abroad to foreign transferees). Thus, the required application of section 550 was extraterritorial. The court next focused on whether Congress had intended that section 550 be applied extraterritorially. It noted that under the Supreme Court's precedent in Morrison, there is a presumption that federal statutes are concerned primarily with domestic matters unless there is a clearly expressed intention by Congress to give that statute extraterritorial effect. The court determined that there was nothing in the language of section 550 to suggest such an intention, so it then looked to the context of that section, including surrounding provisions of the Bankruptcy Code, to see if such an intention could be found. It rejected the trustee's contention that such an intention is established by section 541 of the Bankruptcy Code, which defines "property of the estate" broadly enough to capture "property wherever located and by whomever held," and which is indirectly incorporated into the Bankruptcy Code's avoidance and recovery provisions. It found that argument "neither logical nor persuasive" because the Bankruptcy Code's broad definition of property of the estate does not imply that property is to be treated as property of the estate under section 541 prior to its recovery by the estate. Under the Second Circuit's decision in In re Colonial Realty Co.,4 property of the debtor that has been fraudulently transferred is not considered property of the estate until it has been recaptured. Thus, the court in Madoff concluded that nothing in the Bankruptcy Code overcame the presumption that section 550 should not be applied extraterritorially.

The court similarly found that nothing in section 78fff-(c)(3) of SIPA (which empowers a SIPA trustee to use the avoidance and recovery provisions of the Bankruptcy Code to recover customer property) overcame that presumption. The court found that SIPA has a predominantly domestic focus, which suggests that Congress did not intend to expand its reach beyond US borders. Despite the trustee's contention that a failure to apply section 550 extraterritorially would allow US debtors to fraudulently convey all of their assets offshore and then retransfer those assets to circumvent the reach of the US bankruptcy law, the court was not persuaded. It observed that the desire to avoid loopholes in the law must be weighed against the important policy served by the presumption against extraterritorial application of federal statutes – i.e., preventing squabbles between nations in the application of their respective laws. If any intentional fraud were found, the trustee might well have the ability to pursue his rights under the laws of the countries where the transfers occurred and thereby simultaneously avoid discord between the US and other countries. The court also rejected the trustee's argument that if extraterritorial application were not permitted, defendants that received transfers outside of the US would be treated more favorably than customer-beneficiaries of the SIPA estate. The court found the trustee's argument to be "disingenuous," as it was inconsistent with his position in prior litigation that indirect customers of Madoff, that invested through feeder funds, like many of the defendants in the present litigation, were not creditors of the US bankruptcy estate. The court held that the trustee had failed to rebut the presumption against extraterritorial application of federal statutes and was not entitled to use section 550 to pursue recovery of subsequent transfers that were purely foreign.

The Need to Consider Principles of International Comity

Although the foregoing ruling was dispositive, the court also held, in the alternative, that even if the trustee had rebutted the presumption, he would be precluded from using section 550 to pursue foreign transfers based upon principles of international comity. In performing the comity analysis, the court compared the interests of the US with those of the foreign jurisdictions, and noted that comity is particularly important in the context of bankruptcy. Under the facts, many of the feeder funds were already in liquidation proceedings in their home countries, and those countries had an interest in applying their own rules concerning avoidance of fraudulent transfers. It would be inappropriate, in the court's view, for the trustee to use SIPA to circumvent such foreign liquidations in order to make claims under a US statute with regard to which the defendants had no direct relationship. The investors in the foreign funds had no reason to believe that their relationships with the feeder funds would be governed by US law. Thus, the court found that the US did not have as great an interest in applying its own laws as the foreign jurisdictions did in applying theirs. The court dismissed the trustee's claims to the extent that they sought to recover purely foreign transfers and remanded to the bankruptcy court for further proceedings consistent with its opinion.

Conclusion

Judge Rakoff's decision makes clear that the avoidance and recovery powers of a trustee under the Bankruptcy Code in the international arena are limited by both the legal presumption against applying federal statutes extraterritorially and long-standing principles of comity. These limitations will have significant ramifications not only for the Madoff trustee, but also for debtors in possession and trustees in other cases. In addition to the restrictions imposed on asset recovery under section 550, it is possible that the decision could be used as a basis for attempting to chip away at other rights and protections afforded the estate under the Bankruptcy Code, such as the automatic stay, that generally have been regarded as having worldwide applicability.

Footnotes

1 No. 12-mc-115 (S.D.N.Y. July 7, 2014).

2 Section 550(a) provides in relevant part that "to the extent that a transfer is avoided under [certain specified sections of the Bankruptcy Code, including section 548 relating to fraudulent transfers], the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from – (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee." 11 USC. § 550(a).

3 130 S. Ct. 2869 (2010).

4 980 F.2d 125 (2d Cir. 1992).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions