Kramer Levin Naftalis & Frankel LLP

The Bottom Line

In vacating judgments from both the District Court and the Bankruptcy Court of the Southern District of New York, the Second Circuit held, in In re Picard, 917 F.3d 85 (2d Cir. 2019), that the trustee (the “Trustee”) for the liquidation of Bernard L. Madoff Investment Securities LLC (the “Debtor”) may recover funds transferred to hundreds of foreign subsequent transferees using section 550(a)(2) of the Bankruptcy Code. The Second Circuit held that the initial transfer from a domestic debtor, not a subsequent transfer to or from a foreign entity, is the focus of a trustee’s fraudulent transfer and avoidance powers under sections 548(a)(1)(A) and 550(a)(2). In so holding, the Second Circuit negated the presumption against extraterritoriality and international comity principles applied by the lower courts to the property transfers. 

What Happened?


As part of Bernard Madoff’s Ponzi scheme, the Debtor transferred billions of dollars to foreign investors, including certain “feeder funds” that subsequently transferred the funds to hundreds of other foreign investors (the “Subsequent Transferees”) before filing liquidation proceedings in foreign courts. As part of the Debtor’s liquidation in Bankruptcy Court, the Trustee sued the Subsequent Transferees under section 550(a)(2) of the Bankruptcy Code seeking to recover those funds. The Trustee asserted that the initial transfers from the Debtor to the feeder funds were avoidable under section 548(a)(1)(A), and thus the Trustee could recover this property from the Subsequent Transferees under 550(a)(2).

Lower Court Opinions

In July 2014, the District Court held that the Trustee could not proceed with his actions against the Subsequent Transferees for two reasons: (1) the presumption against extraterritoriality limits the scope of section 550(a)(2), such that the Trustee could not recover property transferred from one foreign entity to another foreign entity, and (2) international comity principles limit the scope of section 550(a)(2).

On remand, the Bankruptcy Court dismissed the Trustee’s claims using the District Court’s reasoning. On international comity grounds, the court found that the United States had no interest in regulating the relationship between two foreign entities, and that the foreign nations where the feeder funds initiated their own liquidation proceedings had a greater interest in the validity or invalidity of the payments. Using the presumption against extraterritoriality, the Bankruptcy Court also held that the Trustee did not allege facts sufficient to support a domestic nexus based on the foreign locations of both the feeder funds and the Subsequent Transferees.

Circuit Court Opinion

The Second Circuit vacated the Bankruptcy Court’s judgment dismissing the Trustee’s lawsuits on both grounds. With respect to the presumption against extraterritoriality, the Second Circuit noted that an action may proceed if it involves a domestic application of the statute. Finding that section 550(a)(2) must be read in tandem with section 548(a)(1)(A) in the Trustee’s actions, the focus of the avoidance and recovery of the funds should be on the initial transfer from the Debtor to the feeder funds, not the subsequent transfer between two foreign entities. Thus, the Court held that the statute did have a sufficient domestic application because “a domestic debtor’s allegedly fraudulent, hindersome, or delay-causing transfer of property from the United States is domestic activity for the purposes of sections 548(a)(1)(A) and 550(a).” The Court reasoned that to hold any other way would “open a loophole,” whereby a fraudster could give his entity’s property to foreign friends and family members before bankruptcy and instruct those transferees to give the money to other foreign entities. This would make the property recovery-proof “even if the subsequent foreign transferee then sent the property to someone located in the United States.” The Court found that this would not align with the purpose of sections 548(a)(1)(A) and 550(a)(2).

The Circuit Court next addressed the dismissal of the Trustee’s actions on international comity grounds. The Court looked to its previously announced choice of law test in In re Maxwell Commc’n Corp., 93 F.3d 1036 (2d Cir. 1996) that takes into account both the interests of the United States and the foreign state in determining which law to apply. When a debtor is simultaneously in American and foreign liquidation proceedings, the foreign state typically has an interest in the proceedings. However, the Court founds that no such parallel proceeding existed here because the feeder funds, not the Debtor, were the subject of the foreign liquidations. Therefore, the United States’ compelling interest in allowing domestic estates to recover fraudulently transferred property outweighed the interests of any foreign state.

Why This Case is Interesting

This case will likely have a substantial impact on the reach of a trustee’s avoidance and recovery powers from both initial and subsequent transferees. While the focus in the lower courts’ decisions was the location of the transferees involved in the subsequent transfer, the Second Circuit clarified that it is the initial transfer that should be the focus of any analysis under sections 548(a)(1)(A) and 550. If a domestic (U.S.) debtor transfers funds from a domestic bank, a trustee’s recovery powers would apply under the Second Circuit’s analysis, thus making it harder for debtors to transfer funds to foreign persons or entities prior to bankruptcy.