Madoff Liquidation: Extending Bankruptcy Recovery to Foreign Transferees

Madoff Liquidation: Extending Bankruptcy Recovery to Foreign Transferees

Introduction

The case In re: Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC (917 F.3d 85) represents a pivotal moment in bankruptcy law, particularly concerning the recovery of assets from foreign entities involved in fraudulent schemes.

This comprehensive commentary delves into the background of the case, the court's rationale, the legal precedents cited, and the broader implications of the judgment. The parties involved include Irving H. Picard, the trustee appointed to liquidate Madoff Securities, and various foreign transferees who received funds initially fraudulently transferred by Bernard Madoff.

Summary of the Judgment

The United States Court of Appeals for the Second Circuit addressed multiple consolidated appeals arising from the aftermath of Bernard Madoff’s infamous Ponzi scheme. The central issue revolved around whether the trustee, Irving H. Picard, could utilize §550(a)(2) of the Bankruptcy Code to recover assets from foreign transferees that were initially transferred fraudulently under §548(a)(1)(A).

The lower courts had dismissed the Trustee’s actions, citing the presumption against extraterritoriality and principles of international comity, which purportedly limited the reach of §550(a)(2) to domestic applications only. However, the appellate court disagreed, holding that neither doctrine barred the Trustee from recovering the assets. Consequently, the judgments from the lower courts were vacated, and the cases were remanded for further proceedings.

Analysis

Precedents Cited

The judgment extensively referenced key precedents that shaped its legal reasoning:

  • RJR Nabisco, Inc. v. European Community – Established the presumption against extraterritoriality.
  • Westerngeco LLC v. Ion Geophysical Corp. – Provided guidance on determining a statute's focus.
  • Morrison v. National Australia Bank Ltd. – Clarified that a statute's focus includes the conduct it seeks to regulate and the parties it aims to protect.
  • In re Maxwell Communications Corp. plc – Distinguished between prescriptive and adjudicative comity.
  • Altos Hornos de Mexico, S.A. v. Century International Arms, Inc. – Discussed standards for adjudicative comity.

These precedents were instrumental in the court's determination that §550(a)(2) could be applied to recover assets from foreign transferees.

Legal Reasoning

The court's legal reasoning was multifaceted:

  • Presumption Against Extraterritoriality: The court reaffirmed that, absent clear congressional intent, U.S. statutes are presumed to apply only domestically. However, by analyzing §550(a)'s focus in tandem with §548(a)(1)(A), the court concluded that the relevant conduct—the debtor’s fraudulent transfer—occurred within the United States, thereby falling within domestic application.
  • International Comity: Differentiating between prescriptive and adjudicative comity, the court focused on prescriptive comity. It determined that there was no substantial conflict between U.S. and foreign laws in this context that would necessitate deferring to foreign jurisdictions.
  • Statutory Interpretation: The court emphasized that §550(a) should not be read in isolation but in conjunction with §548(a)(1)(A), which targets the initial fraudulent transfer by the debtor. This integrated reading ensured that the statute's focus remained on the fraudulent conduct within the U.S., not on the subsequent foreign transfers.

Impact

This judgment has profound implications for bankruptcy proceedings, especially in cases involving international elements:

  • Enhanced Recovery Mechanism: Trustees can now pursue asset recovery from foreign transferees, broadening the scope of recovery beyond domestic entities.
  • Precedent for Future Cases: The decision sets a clear precedent that the Bankruptcy Code can apply to international transferees when the fraudulent transfer itself is domestic, potentially influencing similar cases globally.
  • International Legal Relations: While affirming the ability to recover assets internationally, the court balanced this with respect for international comity, ensuring that U.S. actions do not unduly interfere with foreign jurisdictions.

Complex Concepts Simplified

Presumption Against Extraterritoriality

This legal principle posits that U.S. laws are intended to apply within the United States unless there's clear evidence that Congress intended otherwise. It prevents U.S. statutes from being applied to actions occurring entirely outside its borders.

International Comity

International comity refers to the legal doctrine where U.S. courts recognize and enforce foreign laws and judicial decisions out of respect, without being bound by them. It ensures harmonious legal relations between nations.

Bankruptcy Code Sections

  • §548(a)(1)(A): Allows trustees to avoid (i.e., invalidate) transfers made with the intent to defraud creditors.
  • §550(a)(2): Empowers trustees to recover property from any subsequent transferee of a fraudulent transfer.

Feeder Funds

In the context of the Madoff scheme, feeder funds are investment entities that pooled money from numerous investors and invested it into Madoff Securities. They acted as intermediaries between individual investors and the master fund managed by Madoff.

Conclusion

The court's decision in In re: Irving H. Picard marks a significant development in bankruptcy law, particularly concerning the reach of asset recovery mechanisms across international borders. By affirming that §550(a)(2) can be applied to recover assets from foreign entities when the initial fraudulent transfer is domestic, the judgment strengthens the Trustee's ability to restitute victims of the Madoff scheme.

This ruling not only aids in the ongoing liquidation efforts but also sets a robust framework for addressing similar cases in the future. It balances the necessity of recovering assets for creditors with the respect for international legal principles, thereby reinforcing the integrity and efficacy of bankruptcy proceedings.

Case Details

Year: 2019
Court: UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Judge(s)

Wesley, Circuit Judge

Attorney(S)

ROY T. ENGLERT, JR., Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, D.C. (David J. Sheehan, Seanna R. Brown, Torello H. Calvani, Catherine E. Woltering, Baker & Hostetler LLP, New York, NY, for Plaintiff-Appellant Irving H. Picard; Howard L. Simon, Windels Marx Lane & Mittendorf, LLP, New York, NY; Matthew B. Lunn, Young Conaway Stargatt & Taylor, LLP, New York, NY, Special Counsel for the Trustee, on the brief), for Plaintiff-Appellant. JOSEPHINE WANG, General Counsel (Kevin H. Bell, Senior Associate General Counsel for Dispute Resolution, Nathanael S. Kelley, Associate General Counsel, on the brief), Securities Investor Protection Corporation, Washington, D.C., for Intervenor Securities Investor Protection Corporation. FRANKLIN B. VELIE, Sullivan & Worcester LLP, New York, NY; THOMAS J. MOLONEY, Cleary Gottlieb Steen & Hamilton LLP, New York, NY (Diarra M. Guthrie, Samuel P. Hershey, Cleary Gottlieb Steen & Hamilton LLP, New York, NY; Timothy P. Harkness, David Y. Livshiz, Jill K. Serpa, Freshfields Bruckhaus Deringer US LLP, New York, NY; Marshall R. King, Gibson, Dunn & Crutcher LLP, New York, NY; Jonathan G. Kortmansky, Mitchell C. Stein, Sullivan & Worcester LLP, New York, NY, on the brief), for Defendants-Appellees HSBC Holdings plc, et al., UBS AG, et al., First Peninsula Trustees Limited, et al., and BA Worldwide Fund Management Limited. Eugene R. Licker, Ballard Spahr LLP, New York, NY, for Defendants-Appellees Lighthouse Investment Partners, LLC, Lighthouse Supercash Fund Limited, and Lighthouse Diversified Fund Limited. Dean A. Ziehl (Harry D. Hochman, Alan J. Kornfeld, on the brief), Pachulski Stang Ziehl & Jones LLP, New York, NY, for Amicus Curiae National Association of Bankruptcy Trustees, in support of Plaintiff-Appellant. Roger P. Sugarman, Kegler, Brown Hill + Ritter, Columbus, OH, for Amici Curiae Professors of Conflict of Laws, in support of Plaintiff-Appellant. Andrea Dobin (Henry M. Karwowski, on the brief), Trenk, DiPasquale, Della Fera & Sodono, P.C., West Orange, NJ, for Amici Curiae Bankruptcy Law Professors, in support of Appeal and Reversal. David Molton, Brown Rudnick LLP, New York, NY, for Amicus Curiae Kenneth Krys, as Liquidator and Foreign Representative of Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited, in support of Plaintiff-Appellant and partial reversal. Daniel M. Sullivan (Matthew Gurgel, Benjamin F. Heidlage, on the brief), Holwell Shuster & Goldberg LLP, New York, NY, for Amici Curiae Brian Child, Christopher Hill, Nilani Perera, Martin Trott, and Andrew Willins, in support of Defendants-Appellees. George T. Conway III (Emil A. Kleinhaus, Joseph C. Celentino, on the brief), Wachtell, Lipton, Rosen & Katz, New York, NY, for Amicus Curiae Securities Industry and Financial Markets Association, in support of Defendants-Appellees. Richard A. Kirby, FisherBroyles, LLP, Washington, D.C. (Carole Neville, Dentons, New York, NY; Richard Levy, Pryor Cashman LLP, New York, NY, on the brief), for Amici Curiae Lanx BM Investments, LLC, et al., in support of Defendants-Appellees.

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