On July 6, 2014, the US District Court for the Southern District of New York held in Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC that because section 550(a)(2) of the Bankruptcy Code may not be applied extraterritorially, the trustee cannot recover money transferred from a foreign investment fund to its foreign customers (No. 12-mc-115, (S.D.N.Y. July 6, 2014)).

Foreign investment funds served as "feeder funds" by pooling their customers' assets for investment with the defendant (Madoff Securities). At times, these foreign feeder funds withdrew money from Madoff Securities and then transferred it to their foreign customers, managers and others. The collapse of Madoff Securities caused the collapse of many of the foreign feeder funds because they had invested all or nearly all of their assets in Madoff Securities. The trustee appointed under the Securities Investor Protection Act (SIPA) to administer the estate of Madoff Securities sought to recover funds that were transferred by the foreign feeder funds to other foreign customers and managers.

The SDNY dismissed the trustee's claims to the extent that they sought to recover purely foreign transfers. The court cited the US Supreme Court's decision in Morrison v. Nat'l Australia Bank Ltd., which held that legislation of Congress applies only within the territorial jurisdiction of the United States unless a contrary intent appears (561 U.S. 247 (2010)). This presumption against extraterritorial application of federal statutes protects against inadvertent clashes between US law and the laws of other nations.

In determining whether the presumption against extraterritorial application of a statute applies in this case, the court considered whether:

As to the first prong, the court found that the focus of the Bankruptcy Code's avoidance and recovery provisions was "'the property transferred' and the fact of its transfer, not the debtor." The transfers at issue were foreign, taking place between foreign feeder funds and their foreign customers and other foreign transferees. Consequently, the recovery sought by the Trustee requires an extraterritorial application of section 550(a)(2).

Considering the second prong, the court held that the language of section 550 fails to convey an intent that the section apply to foreign transfers. The court rejected the Trustee's argument that section 541 of the Bankruptcy Code, which defines "property of the estate" to include property "wherever located and by whomever held," provides the requisite intent for extraterritorial application because the property at issue was transferred property, not property of the estate. The court further noted that SIPA primarily incorporates the avoidance and recovery provisions of the Bankruptcy Code and does not provide an independent basis for extraterritorial reach.

Finally, the SDNY rejected the Trustee's contention that policy concerns require the extraterritorial application of section 550(a) of the Bankruptcy Code. The Trustee argued that a US debtor could avoid the reach of US bankruptcy law by transferring its assets overseas and then transferring them again. The court explained that such concerns must be balanced against the presumption against extraterritoriality and that a trustee may be able to use the laws of the countries where transfers occurred to avoid fraudulent evasion of the Bankruptcy Code. Additionally, the court found that comity considerations weigh against the extraterritorial application of section 550(a) because many of the feeder funds at issue are undergoing liquidation proceedings in their own countries.

Practitioners should be aware that funds transferred from one foreign entity to another may not be recoverable under section 550 of the Bankruptcy Code.