District Court Confirms that Madoff Trustee Cannot Recover Extraterritorial Transfers

On July 6, 2014, U.S. District Court Judge Jed S. Rakoff dismissed claims by the Madoff Securities SIPA trustee for the recovery of transfers made to foreign transferees on the grounds that section 550(a) of the Bankruptcy Code was not intended to apply extraterritorially.[1] Judge Rakoff also held that the trustee’s claims should be dismissed based on principles of international comity. In reaching these conclusions, Judge Rakoff confirmed what many had already suspected: foreign transfers between foreign entities are beyond the reach of U.S. bankruptcy courts, even when those transfers involve property that may have originated with a U.S. debtor. While Judge Rakoff’s ruling is likely to be the subject of an appeal, it does provide an increased measure of certainty that transfers received by foreign investment funds or investors from a foreign transferor cannot be clawed back by a U.S. Bankruptcy Court.

Judge Rakoff's Opinion

Section 550(a) of the Bankruptcy Code permits a trustee to recover, from either an immediate or subsequent transferee, property received as the result of an avoidable transfer. However, as the Supreme Court has made clear, “it is a longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.”[2] In dismissing the trustee’s recovery claims against the foreign transferees, Judge Rakoff first found that “although the chain of transfers originated with Madoff Securities in New York, that fact is insufficient to make the recovery of these otherwise thoroughly foreign subsequent transfers into a domestic application of section 550(a).”[3] As a result, the recovery of the transfers would require an extraterritorial application of Section 550(a), which Judge Rakoff found could not be justified, concluding that “nothing in [its] language suggests that Congress intended for [Section 550(a)] to apply to foreign transfers.”[4] In reaching this conclusion, Judge Rakoff explicitly rejected the trustee’s argument that, as they originated with Madoff Securities, the assets in question constituted “property of the [debtor’s] estate,” defined in Section 541 of the Bankruptcy Code to include certain property “wherever located and by whomever held.” Quoting the Second Circuit Court of Appeals’ decision in In re Colonial Realty Co.,[5] (“property is not to be considered property of the estate until it is recovered”), Judge Rakoff found that Section 541 “cannot supply any extraterritorial authority that the avoidance and recovery provisions lack on their own.”[6]

Judge Rakoff also found that the trustee’s recovery claims should be properly dismissed on the independent basis of principles of international comity, finding that “comity is especially important in the context of the Bankruptcy Code.”[7] Judge Rakoff concluded that extraterritorial application of Section 550(a)’s recovery provisions would encroach upon liquidation and bankruptcy proceedings occurring in foreign jurisdictions with “a greater interest in applying their own laws than . . . the United States.”[8]


According to Judge Rakoff, transfers between a foreign feeder fund and its foreign investors are extraterritorial in nature and Section 550(a) does not demonstrate a clear congressional intent to apply extraterritorially. Therefore, under the Supreme Court’s ruling in Morrison v. National Australia Bank Limited, the Madoff Securities SIPA trustee could not recover the property in question. Moreover, the recovery of such property would be barred by principles of international comity. While not a surprising result given the clear precedent, Judge Rakoff’s decision in this widely followed case should provide additional comfort to non-U.S. parties transacting outside of the United States that, at least on the facts presented here, the reach of Unites States law can extend only so far.

[1] Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC (In re Madoff Securities), 2014 WL 2998557, *1 (S.D.N.Y. July 6, 2014).

[2] Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869, 2877 (2010).

In re Madoff Securities, 2014 WL 2998557 at *3.

[4] Id. at *4.

[5] 980 F.2d 125, 131 (2d Cir. 1992).

[6] In re Madoff Securities, 2014 WL 2998557, at *5.

[7] Id. at *7.


For more information on the topic discussed, contact:

E-Alert is a quarterly newsletter that features the latest thinking from Tannenbaum Helpern's various departments.

08.20.2014  |  PUBLICATION: E-Alert  |  TOPICS: Bankruptcy, Litigation

This Page