Much Anticipated Extraterritoriality Ruling Could Have Far-Ranging Implications

On July 6, 2014, The Honorable Jed Rakoff issued a much-anticipated opinion deciding whether the US Bankruptcy Code could be applied extraterritorially to clawback transfers made from one non-US entity to other non-US entities (for convenience, we attach a copy of the decision).[1] The Court held that section 550(a) of the US Bankruptcy Code does not apply extraterritorially and, therefore, does not permit the recovery of subsequent transfers made abroad by a foreign transferor to a foreign transferee. Under this ruling, if a non-US person receives money from a company that later goes bankrupt and passes that money on to others outside of the US, while the transfers received by the initial recipient can be challenged under the US Bankruptcy Code (since they originated in the United States), the subsequent transfers made outside the United States cannot.


In the Madoff litigations, the SIPA Trustee seeks to clawback billions of dollars of transfers made by Bernard L. Madoff Securities Limited (BLMIS) to offshore feeder funds. These feeder funds are, therefore, alleged to be initial transferees. The Trustee alleges that the feeder funds transferred much of what they received from BLMIS to their investors, advisors and others. Those who received money from feeder funds are alleged to be subsequent transferees. Section 550 of the Bankruptcy Code permits a debtor to recover a challenged transfer not only from the initial transferee, but also from a subsequent transferee, where the subsequent transferee did not receive such a transfer in good faith and for value.

Since 2008, the SIPA Trustee has sued scores of subsequent transferees in clawback cases – if the feeder funds do not have the money, the theory goes, the SIPA Trustee can recover the money from those who do under the US Bankruptcy Code section 550.

Seeking to defend themselves against the Trustee’s claims, subsequent transferees challenged the SIPA Trustee’s attempts to clawback subsequent transfers from non-US transferees that received funds from non-US feeder funds. The issue was fully presented to Judge Rakoff in 2012. The argument was straightforward – section 550 of the US Bankruptcy Code should not apply outside of the United States because the statute does not provide for extraterritorial application and because extraterritorial application of this provision may interfere with the proper operation of legal systems outside of the United States.

In his July 6 decision, Judge Rakoff sided with the defendants, holding that unless the SIPA Trustee “can put forth specific facts suggesting a domestic transfer, his recovery actions seeking foreign transfers should be dismissed.” The Court held that “under Morrison, the transaction being regulated by section 550(a)(2) is the transfer of property to a subsequent transferee, not the relationship of that property to a perhaps-distant debtor.” Applying the law to the facts at hand, the Court explained that “[h]ere, the relevant transfers and transferees are predominantly foreign: foreign feeder funds transferring assets abroad to their foreign customers and other foreign transferees.” Moreover, the Court explained that “[a]lthough the chain of transfers originated with Madoff Securities in New York, that fact is insufficient to make the recovery of these otherwise thoroughly foreign subsequent transfers into a domestic application of section 550(a).” Finally, the Court also stated that using a correspondent bank in the United States to process dollar-denominated transfers is insufficient “to make otherwise foreign transfers domestic.”

The Court therefore held that where, as is the case in many of the Madoff clawback actions, “the transferor and the transferee reside outside of the United States, there is no plausible inference that the transfer occurred domestically,” and the Trustee’s claims must accordingly be dismissed. 


As this is an important decision for many of our clients, we wanted to distribute it quickly. It will take some time before the full implications of the Court’s decision are understood, but it is not too early to say that the decision is significant. As the dust settles, defendants and potential defendants in US clawback actions should determine whether any transfer about which they may be concerned took place outside of the United States. For any transfer taking place entirely outside of the United States, Judge Rakoff’s decision may provide important, and helpful, precedent.