“Fairfield Sentry” and the Extraterritorial Safe-Harbor:
The Second Circuit Extends § 546(e) to Foreign-Law and Common-Law Claims in Chapter 15 Proceedings

Introduction

The decision in In re Fairfield Sentry Ltd., Nos. 22-2101 & 23-965 (2d Cir. Aug. 5 2025) (“Fairfield VI”), arises from the collapse of Bernard L. Madoff’s Ponzi scheme, the ensuing liquidation of three British Virgin Islands feeder funds (Sentry, Sigma, Lambda) and a sprawling set of 300+ “claw-back” suits brought in New York by the BVI liquidators. The liquidators sought recovery of more than US $6 billion in redemption payments made to investors shortly before the scheme was exposed.

Two core issues dominated the consolidated appeals:

1. Whether a New York forum-selection clause in the investors’ Subscription Agreements conferred personal jurisdiction over 200-plus foreign defendants;
2. Whether the Bankruptcy Code’s securities safe-harbor, 11 U.S.C. § 546(e), as imported into Chapter 15 via § 561(d), bars all foreign-law and common-law claims— including constructive-trust claims— aimed at unwinding settlement payments connected to securities contracts.

Judge Menashi, writing for a unanimous panel (Nardini, Menashi, Lee, JJ.), answered Yes to both questions, thereby: (i) establishing nationwide personal jurisdiction through the subscription-based forum clause; and (ii) erecting a categorical safe-harbor defense that reaches extraterritorially and precludes not only foreign statutory avoidance claims but also foreign common-law remedies such as unjust enrichment and constructive trust. The ruling reverses the district court in part, eliminates the lone surviving constructive-trust counts, and dismisses all 300 suits in their entirety.

Summary of the Judgment

• Personal Jurisdiction – The phrase “any suit … with respect to this Agreement and the Fund” in the Subscription Agreement covers the liquidators’ claw-back suits; thus every defendant consented to New York jurisdiction.
• Extraterritorial Reach of § 546(e) – Section 561(d) furnishes an express, “unmistakable” indication that the securities safe-harbor applies in Chapter 15 cases even when the transfers, the debtor and the governing law are foreign.
• Scope of the Safe-Harbor – “Avoid” in § 546(e) is read broadly; the provision bars any claim—statutory or common-law, domestic or foreign—whose remedy is to unwind a covered “settlement payment” made “in connection with a securities contract.”
• Carve-out for Actual Fraud – The liquidators failed to plausibly allege that Citco (the administrator) acted with actual intent to hinder, delay or defraud creditors, and Citco’s supposed knowledge cannot be imputed to the Funds under the “adverse-interest” exception; the § 548(a)(1)(A) carve-out therefore does not save the claims.
• Outcome – All causes of action—BVI statutory, contract, quasi-contract, and constructive trust—are dismissed; district court affirmed in part and reversed in part.

Detailed Analysis

A. Precedents Cited and Their Influence

1. Coregis Ins. v. American Health Foundation, 241 F.3d 123 (2d Cir. 2001) – Construed “related to / with respect to” broadly; foundation for treating the forum clause as jurisdictional consent.
2. RJR Nabisco v. European Community, 579 U.S. 325 (2016); Morrison v. NAB, 561 U.S. 247 (2010) – Two-step test for presumption against extraterritoriality; Court applied it and found clear “step-one” rebuttal via § 561(d).
3. Abitron v. Hetronic, 600 U.S. 412 (2023) – Reaffirmed the two-step extraterritoriality framework; cited to clarify that a step-one finding eliminates the “focus” inquiry.
4. Merit Management v. FTI, 583 U.S. 374 (2018) – Described § 546(e)’s “transfer-by-transfer” focus; Court relied on Merit to emphasize that any avoidance theory hitting a covered transfer collides with the safe-harbor.
5. In re Tribune Co., 946 F.3d 66 (2d Cir. 2019) – Held that § 546(e) impliedly pre-empts state constructive-fraud claims; Fairfield extends Tribune by holding that the bar flows directly from the text, not only from pre-emption principles.
6. In re Picard, 917 F.3d 85 (2d Cir. 2019) – Domestic vs. foreign transfer analysis; cited to illustrate how courts localize transfers.
7. Kirscher v. KPMG, 15 N.Y.3d 446 (2010) & Restatement (Third) of Agency § 5.04 – Addressed “adverse-interest” rule; used to reject imputation of Citco’s knowledge.

B. The Court’s Legal Reasoning

1. Forum Clause and Personal Jurisdiction

The panel read “with respect to” as synonymous with “related to,” citing Coregis. Because every redemption flowed from the investors’ execution of the Subscription Agreements—which themselves referenced the Articles governing NAV calculation—the suits were “connected by reason of an established relation.” The court rejected a contrary “but-for” caricature, noting that transactions “clearly and directly” stemmed from the Agreements.

2. Extraterritorial Application of § 546(e)

• Textual hook: § 561(d) says securities-contract provisions “shall apply in a case under chapter 15 … and to limit avoidance powers to the same extent as in a proceeding under chapter 7 or 11.” The words “shall apply” supply the “clear, affirmative indication” demanded by Morrison.
• Practical necessity: A foreign representative in Chapter 15 lacks domestic avoidance powers; therefore § 561(d) must reach foreign-law claims or it would be a nullity. Canon against surplusage bolsters the reading.
• Historical context: Congress enacted § 561(d) after the near-collapse of Cayman-based LTCM. Its object was to insulate U.S. markets from foreign insolvency claw-backs—quintessentially extraterritorial.

3. Breadth of “Avoid” and Rejection of the Liquidators’ Statutory/Non-Statutory Divide

Section 546(e) begins: “Notwithstanding §§ 544, 545, 547, … the trustee may not avoid a settlement payment.” Far from limiting the bar to those enumerated statutes, the clause simply establishes that § 546(e) trumps them; the operative prohibition (“may not avoid”) is categorical. Because trustees can reach state or foreign law only via § 544(b), common-law constructive-trust or unjust-enrichment theories fall squarely within the ban. The court thus disagreed with district-court dicta relying on implied pre-emption—deeming the limitation textual, not merely structural.

4. Actual-Fraud Carve-Out

To pierce § 546(e), a claim must parallel § 548(a)(1)(A)—i.e., transfers imbued with actual intent to hinder, delay or defraud creditors. The liquidators could allege, at most, Citco’s recklessness in rubber-stamping fictitious NAVs, not “substantial certainty” or desired injury. Under the “adverse-interest” doctrine, Citco’s suspected misconduct could not be imputed to the Funds, whose boards and investors were themselves victims. Hence the carve-out was unavailable.

C. Anticipated Impact

1. Chapter 15 Landscape – Foreign liquidators must now reckon with an iron-clad safe-harbor that extinguishes most redemption-claw-backs involving securities contracts, regardless of the governing law or domicile of the parties.
2. Cross-Border Restructuring Strategy – Practitioners may need to pursue claims in the “home” forum (BVI, Cayman, etc.) rather than invoke U.S. recognition if the target transfers are settlement payments.
3. Investor Certainty – By reinforcing finality of redemption payments, Fairfield shields market participants who rely on swift, global settlement systems from retroactive exposure.
4. Precedential Weight – The decision aligns the Second Circuit with the Third and First Circuits on broad forum-clause enforcement, but uniquely fortifies § 546(e)’s extraterritorial reach—likely influencing circuits confronting similar Madoff-era feeder-fund cases.
5. Legislative Signal – Any future narrowing of the safe-harbor (proposals regularly surface) must now explicitly address Chapter 15 or risk partial ineffectiveness.

D. Complex Concepts Simplified

• Chapter 15 – U.S. framework for recognizing and assisting foreign insolvency proceedings; provides procedural rights but little substantive law unless U.S. cases under Chapters 7/11 are opened contemporaneously.
• § 546(e) Safe-Harbor – Shields “settlement payments” and transfers “in connection with securities contracts” from avoidance—promoting market stability.
• § 561(d) – A cross-reference that imports all securities-contract protections into Chapter 15 and limits avoidance powers “to the same extent” as in domestic bankruptcy.
• Presumption Against Extraterritoriality – Canon that U.S. statutes apply only within the United States unless Congress clearly states otherwise.
• Avoidance Powers – Statutory rights (e.g., §§ 544-548) allowing a trustee to unwind pre-petition transfers that harm creditors; broadened here to encompass functionally equivalent common-law actions.
• Constructive Trust – Equitable remedy forcing one who unjustly benefits from property to hold it for the rightful owner; in Fairfield, used to target redemptions allegedly obtained with knowledge of fraud.
• Adverse-Interest Exception – Agency rule precluding imputation of an agent’s knowledge to the principal when the agent acts entirely against the principal’s interests.

Conclusion

Fairfield VI cements two powerful propositions: (1) investors’ contractual forum clauses are robust enough to confer personal jurisdiction over global defendants; and (2) the securities safe-harbor not only travels across U.S. borders via § 561(d) but also blocks every manner of avoidance—statutory, equitable, or otherwise—aimed at settlement payments in a Chapter 15 context, unless actual fraudulent intent is plausibly alleged against the debtor itself. The ruling provides predictability to cross-border markets, but narrows the arsenal of foreign liquidators, compelling them to litigate primarily in their home courts or devise theories outside the safe-harbor’s ambit. Going forward, counsel advising offshore funds, administrators and redeeming investors should treat § 546(e) as a near-absolute defense in U.S. recognition proceedings, plan disputes around the governing forum clause, and—where fraud is suspected—focus on developing evidence of debtor-level intent before resorting to U.S. courts.