By Mark Hamblett, New York Law Journal

Transfers made abroad between a foreign transferor and a foreign transferee cannot be recovered by the trustee administering the estate of Bernard L. Madoff Investment Securities, a federal judge has ruled.

Dealing a win to foreign banks and investment service providers, Southern District Judge Jed Rakoff (See Profile) held that the recovery provision of the Bankruptcy Code, §550(a)(2), is subject to the same limits on the extraterritorial reach of U.S. laws that apply to securities transactions and other federal laws under Morrison v. Nat’l Australia Bank Ltd., 130 S.Ct. 2869 (2010).

In Morrison, the Supreme Court held that the presumption against the extraterritorial application of U.S. laws applies against entirely foreign securities transactions, and the courts have since applied Morrison in other contexts.

Rakoff was confronted with the efforts of Irving Picard, the trustee appointed under the Securities Investor Protection Act (SIPA), to claw back monies from Bernard Madoff’s allies and “feeder funds” for victims of Madoff’s multi-billion dollar Ponzi scheme.

In Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities, 12-mc-115, Picard, a partner at Baker Hostetler, was seeking to recover billions of dollars that were transferred to the foreign feeder funds, and were then in turn sent along to banks and other service providers.

The defendant banks and service providers moved to dismiss claims against them, saying that §550(a)(2), which allows for such recovery, has no application extraterritorially.

Rakoff consolidated dozens of cases for decision on the issue and heard oral argument in the case on Sept. 21, 2012.

His conclusion, in an opinion issued Sunday, was that application of §550(a)(2) would be extraterritorial, and “Congress did not clearly intend such an application.”

“The trustee and SIPC argued that the ‘focus’ of congressional concern in a SIPA liquidation is the regulation of the SIPC-member U.S. broker-dealers, so that the application of any of the incorporated provisions of the Bankruptcy Code is inherently domestic,” Rakoff said. “But this argument proves too much. It cannot be that any connection to a domestic debtor, no matter how remote, automatically transforms every use of the various provisions of the Bankruptcy Code in a SIPA bankruptcy into purely domestic applications of those provisions.”

Picard argued that §541 of the code, which defines “property of the estate” to include specific property “wherever located and by whomever held,” is incorporated into the code’s avoidance and recovery provisions—indicating that Congress intended to have those provisions apply to property outside of the United States.

IMAGE: Irving Picard (left), the trustee administering the Madoff estate, and Judge Jed Rakoff.

For more on this story go to: http://www.newyorklawjournal.com/id=1202662171402/Judge-Denies-Madoff-Trustee-Recovery-of-Foreign-Transfers#ixzz36siakmfs