Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 12-mc-115 (S.D.N.Y. July 6, 2014) [click for opinion]
The Trustee appointed under the Securities Investor Protection Act ("SIPA") to administer the estate of Bernard L. Madoff Investment Securities LLC sought to recover funds that were first transferred from Madoff Securities to foreign customers and then transferred to Defendants, certain foreign persons and entities. The transfers involved the use of so-called "feeder funds," which are foreign investment funds that pooled their customers' assets for investment with Madoff Securities and, at times, withdrew monies and transferred them abroad to customers and managers. Many of these feeder funds entered into liquidation in their home countries when Madoff Securities collapsed in 2008.
Pursuant to § 550(a)(2) of the Bankruptcy Code, the Trustee sought to recover not only the transfers made to the feeder funds, but also the subsequently transferred funds. Defendants sought to dismiss the Trustee's recovery claims to the subsequent transfers on the basis that § 550(a)(2) does not apply extraterritorially.
In determining whether the presumption against extraterritorial application of federal statutes should apply in this case, the court considered whether the application of § 550(a)(2) to the transfers at issue would constitute an extraterritorial application of the statute, and, if so, whether Congress clearly intended the statute to be applied extraterritorially.
As to the first question, the district court noted that the inquiry was properly focused on the transaction that the statute seeks to regulate. The Trustee and Securities Investor Protection Corp. ("SIPC") argued that the focus of congressional concern in a SIPA liquidation is the regulation of the SIPC-member U.S. broker-dealer, such that application of any of the applicable provisions of the Bankruptcy Code is inherently domestic. The district court rejected this broad approach as raising serious issues of international comity and held that a mere connection to a U.S. debtor is insufficient to make every application of the Bankruptcy Code domestic. Rather, the district court found that the regulatory focus of the specific avoidance and recovery provisions is on the property transferred and the fact of its transfer, not the relationship of that property to the debtor.
Considering the location of the transfer and the "component events" of the transactions, the court found that the transfers and transferees were predominantly foreign. The fact that the chain of transfers initially originated with Madoff Securities in New York was insufficient to make their recovery a domestic application of the statute. Thus the court concluded that recovery of the subsequent transfers would require an extraterritorial application of § 550(a)(2).
Turning to the second prong in the analysis, the court considered whether Congress had "clearly expressed" an intent to give the statute extraterritorial effect. As it was uncontested that the language of the statute itself did not suggest such an intent, the district court looked to "context," including surrounding provisions of the Bankruptcy Code. The Trustee argued that § 541 of the Bankruptcy Code, defining "property of the estate" to include certain property "wherever located and by whomever held," was incorporated into the avoidance and recovery provisions at issue. Rejecting this argument, the court reasoned that fraudulently transferred property becomes "property of the estate" only after it has been recovered by the Trustee, meaning that § 541 cannot demonstrate the requisite extraterritorial intent for the avoidance and recovery provisions. SIPA likewise uses the phrase "wherever located" to relate only to transferred property after recovery by the Trustee. More generally, the court found that SIPA did not indicate an intent by Congress to extend its reach extraterritorially given its "predominantly domestic focus."
Finally, the court was not persuaded by the Trustee's argument that policy concerns require an extraterritorial application of § 550(a) to avoid encouraging U.S. debtors to fraudulently transfer assets abroad and then retransfer them to avoid the reach of U.S. bankruptcy law. The court found that such concerns must be balanced with the presumption against extraterritoriality, and noted that, in instances of intentional fraud, a trustee may be able to utilize the laws of the countries where such transfers took place.
In the alternative, the district court concluded that, even if the presumption against extraterritoriality were rebutted, the Trustee's use of § 550(a) to reach the foreign subsequent transfers would be precluded on the basis of international comity, which the Second Circuit has stated "is especially important in the context of the Bankruptcy Code." The foreign jurisdictions where many of the feeder funds were in liquidation proceedings had a greater interest in applying their own laws pertaining to the transfers than did the United States.
Accordingly, the district court held that § 550(a) does not apply extraterritorially to allow for the recovery of subsequent transfers received abroad by a foreign transferee from a foreign transferor, and dismissed the Trustee's recovery claims for these transfers.