On July 6, 2014, in Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC,1 the United States District Court for the Southern District of New York (Judge Jed S. Rakoff), in granting a motion to dismiss, held that section 550(a)(2) of the Bankruptcy Code, which allows a trustee to recover property that is the subject of an avoided transfer from “any immediate or mediate transferee” of an initial transferee, does not apply extraterritorially to allow for the recovery of property transferred abroad from a foreign initial transferee to a foreign subsequent transferee. The District Court also found that given the factual circumstances of the case, even if section 550(a)(2) could be applied extraterritorially, such an application would be precluded by considerations of international comity.


The case involved foreign “feeder funds,” which pooled customers’ assets for investment with Bernard L. Madoff Investment Securities LLC (“Madoff Securities”). As customers of Madoff Securities, the feeder funds withdrew monies from Madoff Securities, which they subsequently transferred to their customers and managers. After Madoff Securities collapsed in late 2008, many of these funds entered into their own liquidation proceedings in their respective foreign countries. The trustee appointed under the Securities Investor Protection Act (“SIPA” ) to administer the estate of Madoff Securities (“Trustee”) sought to recover for the benefit of the estate not only the allegedly avoidable transfers made abroad by Madoff Securities to the foreign feeder funds, but also subsequent transfers of alleged Madoff Securities property made by those foreign funds to their foreign transferees.

District Court Analysis

  1. Presumption against Extraterritoriality

In determining whether there is a presumption against applying section 550(a)(2) extraterritorially, the District Court applied the two-prong test enumerated by the Supreme Court in Morrison v. Nat’l Australia Bank Ltd.2: (i) whether the factual circumstances at issue require an extraterritorial application of the relevant statutory provision; and (ii) whether Congress intended for the statute to apply extraterritorially.

The Trustee and the Securities Investor Protection Corporation (“SIPC”) argued that in a SIPA liquidation, Congress is concerned with the regulation of the SIPC-member U.S. broker-dealers and, therefore, the application of the relevant provisions of the U.S. Bankruptcy Code, incorporated by reference in SIPA, are inherently domestic and, therefore, do not require extraterritorial application in order to be enforceable against foreign subsequent transferees, such as the foreign investors in the foreign feeder funds. The District Court disagreed, finding that a mere connection to a U.S. debtor is insufficient on its own to make all applications of the U.S. Bankruptcy Code purely domestic.

The District Court therefore turned to the regulatory focus of the Bankruptcy Code’s avoidance and recovery provisions. The District Court found that section 550(a) focuses on “the property transferred” and the fact of its transfer, not the debtor. In the instant case, the transfer of property to a subsequent transferee is the action being regulated by section 550(a)(2), not the relationship of that property to the domestic debtor.  Although, the transfers originated with Madoff Securities in New York, the District Court found that this alone was insufficient to make the recovery of otherwise completely foreign subsequent transfers into a domestic application of section 550(a).

Next, the District Court analyzed the second prong of the Morrison test, whether Congress intended for section 550(a) to apply extraterritorially. In Morrison, the Supreme Court explained “‘unless there is the affirmative intention of the Congress clearly expressed’ to give a statute extraterritorial effect, ‘we must presume it is primarily concerned with domestic conditions’” and that “[w]hen a statute gives no clear indication of an extraterritorial application, it has none.” The District Court found nothing in the language of section 550(a) to suggest that Congress intended for that statute to apply to foreign transfers.

If nothing is found in the plain language of a statute, the next step is to look at the context of that statute, including surrounding provisions, to determine whether Congress nevertheless intended for that statute to apply extraterritorially. The Trustee focused on section 541 of the Bankruptcy Code, which defines “property of the estate” to include certain specified property “wherever located and by whomever held.”To have the benefit of the extraterritorial reach of the “wherever located and by whomever held” phrase of section 541, the Trustee argued that such phrase should be read into the avoidance and recovery provisions of the Bankruptcy Code, which use the phrase “an interest of the debtor in property” to define the transfers that may be avoided.  The District Court disagreed with the Trustee based on the holding in In re Colonial Realty Co.4  The District Court reasoned that “[u]nder the logic of Colonial Realty, whether ‘property of the estate’ includes property ‘wherever located’ is irrelevant to the instant inquiry: fraudulently transferred property becomes property of the estate only after it has been recovered by the Trustee, so section 541 cannot supply any extraterritorial authority that the avoidance and recovery provisions lack on their own.”5

The Trustee also made a policy argument that failing to apply section 550(a) extraterritorially would allow a U.S. debtor to fraudulently transfer assets outside of the U.S. to avoid the reach of U.S. bankruptcy law. The District Court held, however, that courts have to strike a balance to avoid unintended clashes between U.S. laws and those of other nations. If international fraud exists, then the Trustee should utilize the laws of the countries where such transfers occurred.

  1. International Comity

The District Court further concluded that even if the presumption against extraterritoriality were rebutted, the use of section 550(a) in the instant case would be precluded by concerns of international comity. The District Court applied a choice-of-law analysis to determine whether applying U.S. law would be reasonable under the circumstances, comparing the interests of the U.S. and the relevant foreign state. Currently, many of the feeder funds at issue are involved in their own liquidation proceedings abroad and investors in these funds had no reason to believe that U.S. law would apply. The District Court, therefore, ruled that the foreign jurisdictions have a greater interest in applying their own laws than does the U.S., and held that section 550(a) does not apply extraterritorially to allow for the recovery of subsequent transfers received abroad by a foreign transferee from a foreign transferor. The District Court dismissed the Trustee’s recovery claims to the extent that they seek to recover purely foreign transfers.


Although Judge Rakoff’s decision is in the context of a SIPA trustee seeking to avoid and recover foreign transfers in a broker-dealer liquidation under SIPA, it is based on an interpretation and prohibition on extraterritorial application of section 550(a)(2) of the Bankruptcy Code, which is a section that applies generally to all kinds of bankruptcy cases. Thus, the court’s reasoning regarding extraterritoriality may be applicable in all chapter 7 and chapter 11 cases under the Bankruptcy Code in which a trustee or debtor in possession seeks to recover under section 550(a)(2) property transferred by a foreign transferee to a subsequent foreign transferee. This decision serves as an important reminder that there may be territorial limitations on the reach of a trustee’s avoiding powers in both SIPA cases and in cases under the Bankruptcy Code.