Second Circuit Holds that Madoff Trustee May Proceed with Recovering Money From Foreign Investors in Foreign Feeder Funds that Invested in Madoff Securities

Case Name: In Re: Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC

Date of Opinion: February 25, 2019

Opinion by: Judge Wesley


This decision involved 88 consolidated appeals stemming from Bernard Madoff’s Ponzi Scheme.  Many of the direct investors in Madoff Securities (Bernard Madoff’s New York investment firm) were “feeder funds”—entities that pool money from numerous individual investors and then place the pooled money into a “master fund,” like Madoff Securities.  Although Madoff Securities was supposed to then actually invest the money, it instead simply commingled the various investor money into a checking account at JPMorgan Chase.  Whenever an individual investor wanted to withdraw money from a feeder fund, the feeder fund would initiate a withdrawal request to Madoff Securities.  To satisfy the request, Madoff Securities would then transfer commingled investor money from the JP Morgan Chase account to the feeder fund, which in turn would transfer the money back to the individual investor.

After the Ponzi Scheme came to light and Madoff Securities was placed into liquidation, Irving Picard was appointed as Trustee for the Liquidation of Bernard Madoff Investment.  The Trustee sought to recover the moneys that had been “withdrawn” by individual investors from feeder funds that had pooled their money in Madoff Securities.  The Trustee argued that the transactions that occurred when Madoff Securities transferred the commingled moneys to the feeder funds (in response to investor requests) were voidable as fraudulent under § 548(a)(1)(A) of the Bankruptcy Code and could be recovered under § 550(a)(2) of the Bankruptcy Code by the Trustee.  The particular question in these appeals was whether the Trustee could recover such moneys even from foreign investors in foreign feeder funds that had invested in Madoff Securities.

The U.S. District Court for the Southern District of New York said no, holding that both the presumption against extraterritoriality and international comity principles limited the scope of § 550(a)(2).  Accordingly, the Bankruptcy Court dismissed the recovery actions against Appellees.

However, the Second Circuit disagreed and vacated the judgments of the bankruptcy court and remanded for further proceedings. The Second Circuit first looked at the lower court’s application of the presumption against extraterritoriality under § 550(a)(2), focusing on the whether the cases here involved a domestic application of the statute. Following the rule in RJR Nabisco, Inc. v. European Cmty., the court reiterated that the focus of the statute determined whether a case involved a domestic application of the statute. Applying WesternGeco LLC v. ION Geophysical Corp., the court concluded that one must look to § 548(a)(1)(A) to determine the focus of § 550(a), because these provisions worked in tandem.

The court began its domestic application analysis by pointing out that the unlawful depletion of the estate began with the initial transfer from Madoff Securities to the foreign feeder funds. It then looked at § 548(a)(1)(A), which permits a trustee to void any transfer of the debtor that the debtor made with intent to defraud the trustee. When the court looked at § 550(a) in tandem with § 548(a)(1)(A), it held that § 550(a) regulated a debtor’s fraudulent transfer of property, which in this case, was the initial the transfer from Madoff Securities to the foreign feeder funds and not the subsequent transfer by the feeder funds to its foreign investors. Therefore, the Court held that the transfer that must be avoided when a trustee seeks to recover subsequently transferred property under § 550(a) is the debtor’s initial transfer.

The Court then finished its domestic application analysis by determining whether the conduct relevant to the statute’s focus took place in the United States and, therefore, regulating that conduct involved a domestic application of the statute. Holding that a domestic debtor’s allegedly fraudulent transfer of property from the United States is domestic activity for purposes of §§ 548(a)(1)(A) and 550(a), the court concluded that the presumption against extraterritoriality did not prohibit that debtor’s trustee from recovering that property under § 550(a). The location of any initial or subsequent transferee is irrelevant.

On the issue of whether international comity barred these actions, the court went through its own analysis of prescriptive comity. The court conducted a choice of law test, balancing the interests of the United States and those foreign states in which liquidation proceedings against the foreign feeder funds were being held. The court held that the United States’ interests in settling these proceedings with its own domestic law sharply outweighed the interests of the foreign states and based its conclusion on a number of factors, including the fact that the feeder funds and not Madoff Securities were the debtors in the foreign court proceedings, the fact that the Trustee was not a creditor of the feeder funds, the fact that the Trustee’s recovery actions in the U.S. Bankruptcy Court were not duplicative of the liquidation proceedings being brought against the feeder funds in foreign courts, and the fact that the consolidation of the Trustee’s claims in federal court is more “equitable and orderly” than requiring him to litigate “different claims in different jurisdictions.” Therefore, the court ultimately concluded that prescriptive comity did not bar the Trustee’s recovery claims against foreign subsequent transferees regardless of whether the initial transferees are undergoing liquidation in foreign jurisdictions.

Summary by: Matla Garcia Chavolla

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