Recent New York District Court Decision Limits Bankruptcy Trustee Recovery of Property Transferred Offshore

Section 550 of the US Bankruptcy Code allows for the bankruptcy trustee to recover for the benefit of the estate property transferred to an immediate transferee that can be avoided under other Code provisions. In a recent matter in the Madoff bankruptcy proceeding, Sec. Investor Prot. Corp v. Bernard L. Madoff Inv. Secs. LLC, 2014 U.S. Dist. Lexis 91508 (S.D. N.Y. July 6, 2014), the bankruptcy trustee sought to recover funds that had been transferred from Madoff Securities to certain foreign customers (feeder funds), who then in turn transferred funds to certain foreign persons and entities. The trustee sought to recover these subsequent transfers-transfers made abroad between a foreign transferor and a foreign transferee.

Since these transfers were foreign transfers between foreign feeder funds and their foreign customers, this action would require an extraterritorial application of Section 550 (a). It is a longstanding principle of U.S. law that legislation of Congress was meant to apply only within the jurisdiction of the United States. In determining if the presumption against extraterritoriality applies, a court must determine whether the factual circumstances require an extraterritorial application  and if so, whether Congress intended for the statute to apply extraterritorially.

The District Court found that the location of the subsequent transfers were predominately foreign transfers and thus would require an extraterritorial application. The District Court noted that nothing in the language of Section 550 suggested that Congress intended for this section to apply to purely foreign transfers. And, therefore, the presumption had not been rebutted by the trustee. Hence, the court found that Section 550 (a) cannot be used to pursue recovery of purely foreign subsequent transfers. Moreover, in view of the location of these transfers, foreign jurisdictions have a greater interest in applying their own laws than does the United States. The trustee’s use of Section 550 (a) would also be precluded by concerns of international comity.

Therefore, section 550(a) does not apply extraterritorially to allow for the recovery of subsequent transfers received abroad by a foreign transferee from a foreign transferor. Any recourse would have be through the laws of the country where the transfers occurred. However, transfers originating from the U.S. to a foreign party would not be treated in the same manner.