Madoff Trustee’s Avoidance Power Can Reach Foreign Transferees

April 27, 2020

The Bankruptcy Code provides that a debtor or a bankruptcy trustee may “avoid” or unwind certain transfers of a debtor’s property that were made or incurred before the bankruptcy filing date. Once such transfers are avoided, the Bankruptcy Code provides that the debtor or trustee may recover the value of the transfers from either the initial transferee or from any subsequent transferee. Domestic transfers are clearly subject to avoidance and recovery, but, in 2019, the Second Circuit decided that recovery can be had from subsequent foreign transferees so long as the initial transfer occurred within the United States.1 The foreign transferees have requested that the United States Supreme Court review the Second Circuit’s decision. On April 10, 2020, the U.S. Solicitor General, weighing in at the request of the Supreme Court, agreed with the Second Circuit and stated that the Supreme Court should deny the certiorari petition (i.e., not review the Second Circuit decision).

The Second Circuit Decision

The Second Circuit’s decision arose from the collapse of Bernard Madoff’s notorious Ponzi scheme and the consequent liquidation proceedings of his broker-dealer.2 As part of the liquidation proceedings, the trustee (the “Madoff Trustee”) alleged that Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) fraudulently transferred billions of dollars to foreign investors through foreign “feeder funds.” The Madoff Trustee sought to avoid these transfers and recover their value from the foreign investors as subsequent transferees.3 The bankruptcy court originally dismissed the claims, finding that the presumption against extraterritoriality4 limited the Bankruptcy Code’s avoidance and recovery powers to transactions that occurred within the United States.5 The bankruptcy court relied on precedent6 that focused on where the transfers were made and sent and the location or residence of the initial and subsequent transferee and noted that the subsequent transfers were all made by foreign companies in foreign locations.

The Second Circuit, however, reversed the bankruptcy court decision, noting that such a reading would provide an easy loophole and encourage parties to use foreign entities to avoid recovery risk. In its extraterritoriality analysis, the Second Circuit concluded that the relevant transfer for purposes of applying the presumption against extraterritoriality is the initial transfer, in contrast to the bankruptcy courts’ application to the subsequent (foreign-made) transfer. The Second Circuit therefore held that the transfers occurred in the United States (the location of the initial transfer). Accordingly, the presumption against extraterritoriality did not prohibit the Madoff Trustee’s recovery of subsequent foreign transfers.7

Foreign Transferees Seek Certiorari

Following the Second Circuit’s decision, the defendants in the case filed a petition for certiorari to the Supreme Court in August, which the Madoff Trustee opposed in October with the reasoning that there was no circuit split regarding the application of the presumption against extraterritoriality to the Bankruptcy Code’s avoidance powers, that would justify the Supreme Court’s review. In a December conference, the Supreme Court initially considered the certiorari petition and requested an opinion from the Solicitor General, likely due to the case’s strong connection with comity principles and its impact on international affairs. In a brief filed on April 10, the Solicitor General agreed with the Madoff Trustee and the Second Circuit opinion and recommended that the Supreme Court deny the certiorari petition, despite the large dollar amounts that are involved in the case. The Supreme Court is giving defendants time to respond to the brief.

The Supreme Court will consider the Solicitor General’s brief and decide on the petition in a May 2020 conference, at the earliest. If the Supreme Court denies the request to review, the Second Circuit’s opinion will govern the avoidance powers of a debtor or trustee in bankruptcy cases in the Second Circuit.8

In sum, foreign investors should understand that receipt of funds from foreign intermediaries may not protect them from a recovery action commenced in connection with a U.S. bankruptcy case.

S&K will continue to monitor this situation.


1 In re Picard, 917 F.3d 85 (2d Cir. 2019).

2 The liquidation proceedings occurred under the authority of the Securities Investor Protection Act of 1978 (“SIPA”), which establishes procedures for the expeditious and orderly liquidation of failed broker-dealers.

3 SIPA authorizes a trustee to “recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of [the Bankruptcy Code].” 15 U.S.C. § 78fff-2(c)(3).

4 The presumption against extraterritoriality is a long-standing principle which holds that unless a contrary intent is evident, congressional legislation is meant to apply only within the territorial jurisdiction of the Unites States. For an in-depth analysis in the context of the Bankruptcy Code’s avoidance powers, see “The Impact of the Presumption Against Extraterritoriality on Avoidance Actions” published in the Fall 2016 edition of Seward & Kissel’s Bankruptcy & Reorganization Report, which can be accessed here:

5 Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff), Nos. 08-01789 (SMB), 11-02732 (SMB), 2016 Bankr. LEXIS 4067 (Bankr. S.D.N.Y. Nov. 21, 2016). This decision applied the holdings of the district court opinion in Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222 (S.D.N.Y. 2014).

6 Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010); see also supra note 4.

7 However, potential other defenses could preclude recovery.

8 The Solicitor General’s Brief notes that issues concerning the extraterritorial application of the Bankruptcy Code have repeatedly arisen within the Second Circuit (New York, Connecticut, Vermont). Although the Fourth Circuit agrees with the Second Circuit, other circuits have yet to consider this question, and therefore, there is no controlling precedent on this issue.