September 25, 2021

Presumption against extraterritoriality limits trustee’s ability to recover foreign transfers

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360_bernard_madoff_1212By Edward Neiger Edward Neiger From

In Securities Protection Corporation v. Bernard L. Madoff Investment Securities LLC (In re Madoff Securities), 2014 WL 2998557 (S.D.N.Y. July 6, 2014), the trustee appointed under Securities Investor Protection Act (SIPA) to administer the estate of the broker-dealer commenced an action under 550(a)(2) of the Bankruptcy Code to recover transfers to certain foreign “feeder funds” that were avoided under Bankruptcy Code section 548 from the ultimate recipients of the funds, the feeder funds’ investors. Bankruptcy Code section 548 states that a trustee may avoid actual or constructively fraudulent transfers of property of the debtor made within two years prior to the petition date. Bankruptcy Code section 550(a)(2) allows a trustee to recover a fraudulent transfer from any “immediate” or “mediate” transferee of the initial transferee. An immediate transferee receives the transfer from the initial transferee, while a mediate transferee receives the transfer later in the chain. The defendants moved to dismiss the actions on the basis that Bankruptcy Code section 550(a)(2) does not apply extraterritorially.

The defendants did not invest funds directly with Madoff Securities; rather they invested through certain feeder funds, most notably, Fairfield Sentry Limited which in turn invested 95% of its assets in Madoff Securities and is currently involved in its own liquidation proceeding in the British Virgin Islands. The trustee alleged that the defendants received recoverable subsequent transfers as customers of the feeder funds. The defendants moved to dismiss the complaints and the court addressed the following issue on a consolidated basis: whether SIPA and/or the Bankruptcy Code apply extraterritorially to recover avoided transfers from initial, immediate, or mediate foreign transferees.

The court concluded that (i) application of section 550(a)(2) would constitute extraterritorial application of the statute and (ii) Congress did not clearly intend such application. Citing Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), the court focused on the longstanding principle of American law that legislation of Congress is not intended to apply extraterritorially unless such intent is expressly stated. The court concluded that the suggested application of section 550(a)(2) in this setting would be extraterritorial, as the mere connection to a U.S. debtor is too tangential to deem such application domestic. Specifically, the court determined that the transaction regulated under section 550(a)(2) is the transfer of property to the subsequent transferee (not the relationship of that property to a U.S. debtor) and, therefore, the application of the statute would be extraterritorial. The court next examined whether such extraterritorial application was intended by Congress and determined that the language of the statute does not evince an intent for it to apply extraterritorially. The court also looked at surrounding Bankruptcy Code provisions, and in particular, section 541 of the Bankruptcy Code which references debtor’s property “wherever located.” In examining section 541, the court noted that property recovered pursuant to the trustee’s avoidance powers is separately included in Bankruptcy Code section 541(a)(3). The court concluded that the inclusion of this subparagraph indicates that property is not considered property of the estate until it is actually recovered. Based on the foregoing, the court held that Bankruptcy Code section 541 does not evince congressional intent to apply the provisions of section 550(a)(2) extraterritorially. Finally, the court noted that international comity concerns would provide a separate basis to preclude the trustee from recovering transfers made outside the United States to foreign transferees.


Practitioners should pay careful attention to a debtor’s international transactions in assessing whether transfers made outside the United States could be avoided. In addition to difficulties effectuating service and enforcing foreign judgments, presumption against extraterritorial application of the Bankruptcy Code may serve as a bar to recovery.

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