Transcript
  • 8/12/2019 Mad Off Extra Territoriality

    1/19

  • 8/12/2019 Mad Off Extra Territoriality

    2/19

    2

    t he Bankr upt cy Code pr ovi si on al l owi ng f or such r ecover y, does not

    appl y ext r at er r i t or i al l y. The Cour t assumes f ami l i ar i t y wi t h t he

    under l yi ng f act s of t he Madof f Secur i t i es f r aud and ensui ng

    bankr upt cy and r ecount s her e onl y t hose f act s t hat ar e r el evant t o

    t he i nst ant i ssues.

    Cent r al t o t he quest i on her e pr esent ed i s t he r ol e of t he so-

    cal l ed f eeder f unds, f or ei gn i nvest ment f unds t hat pool ed t hei r

    own cust omer s asset s f or i nvest ment wi t h Madof f Secur i t i es. As

    cust omer s of Madof f Secur i t i es, t he f eeder f unds at t i mes wi t hdr ew

    moni es f r om Madof f Secur i t i es, whi ch t hey subsequent l y t r ansf er r ed

    t o t hei r cust omer s, manager s, and t he l i ke. When Madof f Secur i t i es

    col l apsed i n l at e 2008, many of t hese f unds whi ch had i nvest ed al l

    or near l y al l of t hei r asset s i n Madof f Secur i t i es l i kewi se

    ent er ed i nt o l i qui dat i on i n t hei r r espect i ve home count r i es. The

    Tr ust ee seeks t o r ecover not onl y t he al l egedl y avoi dabl e t r ansf er s

    made t o t he f eeder f unds but al so subsequent t r ansf er s of al l eged

    Madof f Secur i t i es cust omer pr oper t y made by t hose f unds t o t hei r

    i mmedi at e and medi at e t r ansf er ees. I t i s t he r ecover y of t hose

    subsequent t r ansf er s t r ansf er s made abr oad bet ween a f orei gn

    t r ansf er or and a f or ei gn t r ansf er ee t hat i s t he subj ect of t he

    i nst ant consol i dat ed pr oceedi ng.For exampl e, i n Oct ober 2011, t he Trust ee f i l ed an adver sar y

    proceedi ng agai nst CACEI S Bank Luxembourg and CACEI S Bank ( t oget her ,

    CACEI S) , seeki ng $50 mi l l i on i n subsequent t r ansf er s of al l eged

    Madof f Secur i t i es cust omer pr oper t y. See Decl . of J acl yn M.

  • 8/12/2019 Mad Off Extra Territoriality

    3/19

    3

    Met zi nger dat ed Mar . 23, 2013, Ex. A ( CACEI S Compl . ) 2, No. 12

    Ci v. 2434, ECF No. 2 ( S. D. N. Y. f i l ed Apr . 2, 2012) . CACEI S Bank

    Luxembour g i s a Luxembour g soci t anonyme oper at i ng t her e, whi l e

    CACEI S Bank i s a Fr ench soci t anonyme operat i ng i n Fr ance. I d.

    22- 23. Bot h ent i t i es s er ve as cust odi an banks and engage i n asset

    management f or cor por at e and i nst i t ut i onal cl i ent s. I d. 3, 22

    23.

    The Tr ust ee seeks t o r ecover al l eged Madof f Secur i t i es cust omer

    f unds r ecei ved by CACEI S. However , CACEI S di d not i nvest di r ect l y

    wi t h Madof f Secur i t i es; i nst ead, i t i nvest ed f unds wi t h Fai r f i el d

    Sent r y Li mi t ed and Har l ey I nt er nat i onal ( Cayman) Li mi t ed, t wo Madof f

    Secur i t i es f eeder f unds t hat i n t ur n i nvest ed CACEI S s asset s i n

    Madof f Secur i t i es . I d. 2. Fai r f i el d Sent r y i s a Br i t i sh Vi r gi n

    I sl ands ( BVI ) company t hat had i nvest ed mor e t han 95% of i t s

    asset s i n Madof f Secur i t i es . I d. I t i s cur r ent l y i n l i qui dat i on i n

    t he BVI and has set t l ed t he Trust ee s avoi dance and r ecover y act i on

    agai nst i t f or a f r act i on of t he Tr ust ee s i ni t i al c l ai m. See i d.

    24, 43. Har l ey i s a Cayman I sl ands company t hat was al so one of

    Madof f Secur i t i es l ar gest f eeder f unds, and i t i s now i n

    l i qui dat i on i n t he Cayman I sl ands. I d. 25. The Tr ust ee obt ai ned a

    def aul t j udgment agai nst Har l ey f or mor e t han $1 bi l l i on i n November2010. I d. 53. The Tr ust ee al l eges t hat CACEI S r ecei ved $50 mi l l i on

    i n r ecover abl e subsequent t r ansf er s as a cust omer of Fai r f i el d

    Sent r y and Har l ey, and he asser t s a r i ght t o r ecl ai m t hose t r ansf er s

    under 11 U. S. C. 550( a) ( 2) . See i d. 6069.

  • 8/12/2019 Mad Off Extra Territoriality

    4/19

    4

    CACEI S and t he ot her consol i dat ed def endant s have moved t o

    di smi ss t he Tr ust ee s compl ai nt s i n t hei r r espect i ve adver sar y

    pr oceedi ngs, ar gui ng t hat sect i on 550( a) ( 2) of t he Bankr upt cy Code

    does not appl y ext r at er r i t or i al l y and t her ef or e does not r each

    subsequent t r ansf er s made abr oad by one f or ei gn ent i t y t o anot her .

    These def endant s pr evi ousl y moved t o wi t hdr aw t he r ef er ence t o t he

    Bankr upt cy Cour t , and t he Cour t gr ant ed t hat mot i on on a

    consol i dat ed basi s wi t h r espect t o t he f ol l owi ng i ssue: whet her

    SI PA and/ or t he Bankr upt cy Code as i ncor porat ed by SI PA appl y

    ext r at er r i t or i al l y, per mi t t i ng t he Tr ust ee t o avoi d t he i ni t i al

    Tr ansf er s t hat wer e r ecei ved abr oad or t o r ecover f r om i ni t i al ,

    i mmedi at e, or medi at e f or ei gn t r ansf er ees. See Or der at 3, No. 12

    Mi sc. 115, ECF No. 167 ( S. D. N. Y. J une 7, 2012) . The Cour t r ecei ved

    br i ef i ng on t hi s i ssue f r om t he def endant s, t he Tr ust ee, and t he

    Secur i t i es I nvest or Pr ot ect i on Cor por at i on ( SI PC) and hear d or al

    ar gument on Sept ember 21, 2012. The Cour t concl udes t hat ( 1) t he

    appl i cat i on of sect i on 550( a) ( 2) her e woul d const i t ut e an

    ext r at er r i t or i al appl i cat i on of t he st at ut e, and ( 2) Congr ess di d

    not cl ear l y i nt end such an appl i cat i on. Mor eover , gi ven t he f act ual

    ci r cumst ances at i ssue i n t hese cases, even i f sect i on 550( a) ( 2)

    coul d be appl i ed ext r at er r i t or i al l y, such an appl i cat i on woul d bepr ecl uded her e by consi der at i ons of i nt er nat i onal comi t y. Thi s

    Opi ni on and Or der addr esses t hese i ssues i n t ur n and di r ect s f ur t her

    pr oceedi ngs upon r et ur n t o t he Bankr upt cy Cour t .

  • 8/12/2019 Mad Off Extra Territoriality

    5/19

    5

    I t i s a l ongst andi ng pr i nci pl e of Amer i can l aw t hat

    l egi sl at i on of Congr ess, unl ess a cont r ar y i nt ent appear s, i s meant

    t o appl y onl y wi t hi n t he t er r i t or i al j ur i sdi ct i on of t he Uni t ed

    St at es. Mor r i son v. Nat ' l Aust r al i a Bank Lt d. , 130 S. Ct . 2869,

    2877 ( 2010) ( quot i ng EEOC v. Ar abi an Amer i can Oi l Co. ( Ar amco) ,

    499 U. S. 244, 248 ( 1991) ) . Thi s pr esumpt i on agai nst ext r at er r i t or i al

    appl i cat i on of f eder al st at ut es ser ves t o pr ot ect agai nst

    uni nt ended cl ashes bet ween our l aws and t hose of ot her nat i ons whi ch

    coul d r esul t i n i nt er nat i onal di scor d. Ar amco, 499 U. S. at 248.

    I n det ermi ni ng whet her t he pr esumpt i on agai nst

    ext r at er r i t or i al i t y appl i es , t he Cour t must det er mi ne, f i r s t ,

    whet her t he f act ual ci r cumst ances at i ssue r equi r e an

    ext r at er r i t or i al appl i cat i on of t he r el evant s t at ut or y pr ovi s i on;

    and second, i f so, whet her Congr ess i nt ended f or t he st at ut e t o

    appl y ext r at er r i t or i al l y. See, e. g. , Mor r i son, 130 S. Ct . at 287788

    ( engagi ng i n t hi s anal ysi s wi t h r espect t o sect i on 10( b) of t he

    Secur i t i es Exchange Act of 1934, 15 U. S. C. 78j ( b) ) ; I n r e Maxwel l

    Commc' n Cor p. ( Maxwel l I ) , 186 B. R. 807, 816 ( S. D. N. Y. 1995)

    ( set t i ng out t hi s t wo- st ep i nqui r y i n anal yzi ng sect i on 547 of t he

    Bankr upt cy Code) .

    The Cour t t ur ns f i r st t o t he quest i on of whet her t he Tr ust ee suse of sect i on 550( a) her e i s i n f act an ext r at er r i t or i al

    appl i cat i on of t he st at ut e. I n Mor r i son, when det er mi ni ng whet her an

    under l yi ng U. S. - based decept i on was suf f i ci ent t o make appl i cat i on

    of sect i on 10( b) of t he Exchange Act domest i c, r at her t han

  • 8/12/2019 Mad Off Extra Territoriality

    6/19

    6

    ext r at er r i t or i al , t he Supr eme Cour t l ooked t o t he f ocus of

    congr essi onal concer n, or , i n ot her wor ds, t he t r ansact i ons t hat

    t he st at ut es seeks t o r egul at e. 130 S. Ct . at 2884.

    The Tr ust ee and SI PC ar gue t hat t he f ocus of congr ess i onal

    concer n i n a SI PA l i qui dat i on i s t he r egul at i on of t he SI PC- member

    U. S. br oker - deal er , so t hat t he appl i cat i on of any of t he

    i ncor por at ed pr ovi si ons of t he Bankr upt cy Code i s i nher ent l y

    domest i c. But t hi s ar gument pr oves t oo much. I t cannot be t hat any

    connect i on t o a domest i c debt or , no mat t er how r emot e, aut omat i cal l y

    t r ansf or ms ever y use of t he var i ous provi si ons of t he Bankr upt cy

    Code i n a SI PA bankr upt cy i nt o pur el y domest i c appl i cat i ons of t hose

    pr ovi si ons. On t he l evel of pol i cy, t hi s appr oach coul d r ai se

    ser i ous i ssues of i nt er nat i onal comi t y, as di scussed bel ow. And, as

    a mat t er of pr ecedent , Mor r i son suggest s t hat such a sweepi ng

    appr oach f ai l s t o engage i n t he necessar y anal ysi s of t he way i n

    whi ch t he st at ut es ar e ut i l i zed, as i t i s a r ar e case of pr ohi bi t ed

    ext r at er r i t or i al appl i cat i on t hat l acks al l cont act wi t h t he

    t er r i t or y of t he Uni t ed St at es. 130 S. Ct . at 2884. Accor di ngl y, a

    mer e connect i on t o a U. S. debt or , be i t t angent i al or r emot e, i s

    i nsuf f i ci ent on i t s own t o make ever y appl i cat i on of t he Bankr upt cy

    Code domest i c. Cf . Nor ex Pet r ol eum Lt d. v. Access I ndus. , I nc. , 631F. 3d 29, 33 ( 2d Ci r . 2010) ( per cur i am) ( st at i ng, i n t he cont ext of

    a RI CO cl ai m, t hat s i mpl y al l egi ng t hat some domest i c conduct

    occur r ed cannot suppor t a cl ai m of domest i c appl i cat i on) .

  • 8/12/2019 Mad Off Extra Territoriality

    7/19

    7

    The Cour t t her ef or e l ooks t o t he r egul at or y f ocus of t he

    Bankr upt cy Code s avoi dance and r ecover y pr ovi si ons speci f i cal l y. On

    a st r ai ght f or war d r eadi ng of sect i on 550( a) , t hi s r ecover y st at ut e

    f ocuses on t he pr oper t y t r ansf er r ed and t he f act of i t s t r ansf er ,

    not t he debt or . See 11 U. S. C. 550( a) ( al l owi ng a t r ust ee t o

    r ecover t he pr oper t y t r ansf er r ed . . . t o t he ext ent t hat a

    t r ansf er i s avoi ded under one of t he Bankr upt cy Code s avoi dance

    pr ovi si ons) . Mor eover , sect i on 548, t he avoi dance pr ovi si on t hat i s

    pr i mar i l y at i ssue i n t hese pr oceedi ngs, si mi l ar l y f ocuses on t he

    nat ur e of t he t r ansact i on i n whi ch pr oper t y i s t r ansf er r ed, not

    mer el y t he debt or i t sel f . See, e. g. , 11 U. S. C. 548( c) ( al l owi ng a

    t r ansf er ee who t akes f or val ue and i n good f ai t h . . . [ t o] r et ai n

    any i nt er est t r ansf er r ed . . . t o t he ext ent t hat such t r ansf er ee .

    . . gave val ue t o t he debt or i n exchange f or such t r ansf er ) ; cf . I n

    r e Maxwel l Commc' n Cor p. ( Maxwel l I I ) , 93 F. 3d 1036, 1051 ( 2d Ci r .

    1996) ( not i ng t hat scr ut i ny of t he t r ansf er i s at t he hear t of an

    avoi dance act i on) . Accor di ngl y, under Mor r i son, t he t r ansact i on

    bei ng r egul at ed by sect i on 550( a) ( 2) i s t he t r ansf er of pr oper t y t o

    a subsequent t r ansf er ee, not t he r el at i onshi p of t hat pr oper t y t o a

    per haps- di st ant debt or .

    To det er mi ne whet her t he t r ansf er s at i ssue i n t hi sconsol i dat ed pr oceedi ng occur r ed ext r at er r i t or i al l y, t he cour t

    consi der s t he l ocat i on of t he t r ansf er s as wel l as t he component

    event s of t hose t r ansact i ons. Maxwel l I , 186 B. R. at 817. Her e, t he

    r el evant t r ansf er s and t r ansf er ees are pr edomi nant l y f or ei gn:

  • 8/12/2019 Mad Off Extra Territoriality

    8/19

    8

    f or ei gn f eeder f unds t r ansf er r i ng asset s abr oad t o t hei r f or ei gn

    cust omer s and ot her f or ei gn t r ansf er ees. See, e. g. , CACEI S Compl .

    2. Thi s scenar i o i s si mi l ar t o ci r cumst ances f ound t o i mpl i cat e

    ext r at er r i t or i al appl i cat i ons of t he Bankrupt cy Code s avoi dance

    pr ovi si ons i n ot her cases. See, e. g. , Maxwel l I , 186 B. R. at 815

    ( f i ndi ng appl i cat i on of 11 U. S. C. 847 t o be ext r at er r i t or i al wher e

    t he ant ecedent debt s wer e i ncur r ed over seas, t he t r ansf er s on

    account of t hose debt s were made over seas, and t he r eci pi ent s . . .

    [ ar e] al l f or ei gner s) ; I n r e Mi dl and Eur o Exch. I nc. , 347 B. R. 708,

    717 ( Bankr . C. D. Cal . 2006) ( not i ng t hat t he par t i es agr eed t hat t he

    t r ust ee s cl ai ms woul d r esul t i n ext r at er r i t or i al appl i cat i on of

    [ 11 U. S. C. ] 548 wher e [ t ] he t r ansf er or was a Bar bados

    cor por at i on, t he t r ansf er ee was an Engl i sh cor por at i on, t he f unds

    or i gi nat ed f r om a bank account i n London and, al t hough t r ansf er r ed

    t hr ough a bank account i n New Yor k, event ual l y ended up i n anot her

    bank account i n Engl and) . Al t hough t he chai n of t r ansf er s

    or i gi nat ed wi t h Madof f Secur i t i es i n New Yor k, t hat f act i s

    i nsuf f i ci ent t o make t he r ecover y of t hese ot her wi se t hor oughl y

    f or ei gn subsequent t r ansf er s i nt o a domest i c appl i cat i on of sect i on

    550( a) . 1 See Maxwel l I , 186 B. R. at 81617 ( r ej ect i ng t he cl ai m t hat

    1 Nor i s t he f act t hat some of t he def endant s her e al l egedl y usedcor r espondent banks i n t he Uni t ed St at es t o pr ocess dol l ar -denomi nat ed t r ansf er s s uf f i ci ent t o make t hese f or ei gn t r ansf er sdomest i c. See, e. g. , Cedeno v. I nt ech Gr p. , I nc. , 733 F. Supp. 2d471, 472 ( S. D. N. Y. 2010) ( di smi ssi ng a RI CO cl ai m as i mper mi ssi bl yext r at er r i t or i al wher e [ t ] he scheme s cont act s wi t h t he Uni t edSt at es, however , were l i mi t ed t o t he movement of f unds i nt o and outof U. S. - based bank account s) .

  • 8/12/2019 Mad Off Extra Territoriality

    9/19

    9

    t he al l eged pr ef er ent i al t r ansf er s wer e domest i c because t he f unds

    f or t he t r ansf er s der i ved f r om t he sal e of U. S. asset s) ; cf .

    Mor r i son, 130 S. Ct . at 2886 ( r ej ect i ng t he not i on t hat t he sect i on

    10( b) cl ai m at i ssue was domest i c because a si gni f i cant por t i on of

    t he f r audul ent conduct occur r ed i n t he Uni t ed St at es) . Accor di ngl y,

    t he Cour t concl udes t hat t he subsequent t r ansf er s t hat t he Tr ust ee

    seeks t o r ecover her e ar e f or ei gn t r ansf er s and t hus woul d r equi r e

    an ext r at er r i t or i al appl i cat i on of sect i on 550( a) .

    The Cour t t her ef or e t ur ns t o t he second pr ong of t he

    ext r at er r i t or i al i t y i nqui r y: whet her such an ext r at er r i t or i al

    appl i cat i on was i nt ended by Congr ess. The Supreme Cour t has

    expl ai ned t hat unl ess t her e i s t he af f i r mat i ve i nt ent i on of t he

    Congr ess cl ear l y expr essed t o gi ve a st at ut e ext r at er r i t or i al

    ef f ect , we must pr esume i t i s pr i mar i l y concer ned wi t h domest i c

    condi t i ons. Mor r i son, 130 S. Ct . at 2877 ( quot i ng Ar amco, 499 U. S.

    at 248) . When a st at ut e gi ves no cl ear i ndi cat i on of an

    ext r at er r i t or i al appl i cat i on, i t has none. I d. I n deci di ng whet her

    Congr ess has cl ear l y expr essed s uch an i nt ent , t he Cour t l ooks

    f i r st t o t he l anguage of sect i on 550( a) , whi ch r eads:

    Except as ot her wi se pr ovi ded i n t hi s sect i on, t o t heext ent t hat a t r ansf er i s avoi ded under sect i on 544, 545,

    547, 548, 549, 553( b) , or 724( a) of t hi s t i t l e, t het r ust ee may r ecover , f or t he benef i t of t he est at e, t hepr oper t y t r ansf er r ed, or , i f t he cour t so or der s, t heval ue of such pr oper t y, f r om

    ( 1) t he i ni t i al t r ansf er ee of such t r ansf er or t heent i t y f or whose benef i t such t r ansf er was made; or( 2) any i mmedi at e or medi at e t r ansf eree of suchi ni t i al t r ans f er ee.

  • 8/12/2019 Mad Off Extra Territoriality

    10/19

    10

    11 U. S. C. 550( a) .

    Not hi ng i n t hi s l anguage suggest s t hat Congr ess i nt ended f or

    t hi s sect i on t o appl y t o f or ei gn t r ansf er s, and t he Tr ust ee does not

    ar gue ot her wi se. Cf . Maxwel l I , 186 B. R. at 819 ( [ N] ot hi ng i n t he

    l anguage or l egi sl at i ve hi st or y of [ 11 U. S. C. ] 547 expr esses

    Congr ess i nt ent t o appl y t he st at ut e t o f or ei gn t r ansf er s. ) ;

    Mi dl and, 347 B. R. at 717 ( Not hi ng i n t he t ext of [ 11 U. S. C. ] 548

    i ndi cat es congr essi onal i nt ent t o appl y i t ext r at er r i t or i al l y. ) .

    The Cour t t her ef or e l ooks t o cont ext , Mor r i son, 130 S. Ct . at

    2883, i ncl udi ng sur r oundi ng pr ovi si ons of t he Bankr upt cy Code, t o

    det er mi ne whet her Congr ess never t hel ess i nt ended t hat sect i on 550( a)

    appl y ext r at er r i t or i al l y.

    At t empt i ng t o r ebut t he pr esumpt i on agai nst

    ext r at er r i t or i al i t y, t he Tr ust ee f ocuses on sect i on 541 of t he

    Bankr upt cy Code, whi ch def i nes pr oper t y of t he est at e t o i ncl ude

    cer t ai n speci f i ed pr oper t y wher ever l ocat ed and by whomever hel d.

    11 U. S. C. 541( a) . I t i s uncont est ed her e t hat t he phr ase wher ever

    l ocat ed i s i nt ended t o gi ve t he Tr ust ee t i t l e over al l of t he

    debt or s pr oper t y, r egar dl ess of whet her i t i s physi cal l y pr esent i n

    t he Uni t ed St at es. See H. R. Rep. No. 82- 2320, at 10, r epr i nt ed i n

    1952 U. S. C. C. A. N. 1960, at 1976. Accor di ng t o t he Tr ust ee, sect i on

    541 i s i ncor por at ed i nt o t he avoi dance and r ecover y pr ovi si ons of

    t he Bankr upt cy Code, whi ch use t he phr ase an i nt er est of t he debt or

    i n pr oper t y t o def i ne t he t r ansf er s t hat may be avoi ded, a phr ase

  • 8/12/2019 Mad Off Extra Territoriality

    11/19

    11

    t hat i s r epeat ed i n sect i on 541 i n def i ni ng pr oper t y of t he

    est at e. See, e. g. , 11 U. S. C. 548( a) ( al l owi ng a t r ust ee t o avoi d

    any t r ansf er . . . of an i nt er est of t he debt or i n pr oper t y) ; see

    al so Begi er v. I . R. S. , 496 U. S. 53, 5859 ( 1990) ( l ooki ng t o sect i on

    541 s def i ni t i on of pr oper t y of t he est at e i n def i ni ng pr oper t y

    of t he debt or under sect i on 547) . Under t he Tr ust ee s t heor y,

    sect i on 541 s r ef er ence t o wherever l ocat ed and by whomever hel d

    i s t her eby i ndi r ect l y i ncor por at ed i nt o t he Bankrupt cy Code s

    avoi dance and r ecover y pr ovi si ons, i ndi cat i ng t hat Congr ess i nt ended

    t hat t hose pr ovi s i ons appl y ext r at er r i t or i al l y as wel l .

    Though cl ever , t he t heor y i s nei t her l ogi cal nor per suasi ve.

    That sect i on 541 s def i ni t i on of pr oper t y of t he est at e may be

    r el evant t o i nt er pr et i ng pr oper t y of t he debt or does not

    necessari l y i mpl y t hat t r ansf er r ed pr oper t y i s t o be t r eat ed as

    pr oper t y of t he est at e under sect i on 541 pr i or t o r ecover y by t he

    Tr ust ee. As t he Cour t of Appeal s f or t he Second Ci r cui t has

    expl ai ned,

    I n accor dance wi t h 11 U. S. C. 541( a) ( 1) ( 1988) , t hepr oper t y of a bankr upt cy est at e i ncl udes ( wi t h except i onsnot pr esent l y per t i nent ) al l l egal or equi t abl ei nt er est s of t he debt or i n pr oper t y as of t he commencementof t he case; and pur suant t o 11 U. S. C. 541( a) ( 3)( 1988) , t he pr oper t y of a bankr upt cy est at e al so i ncl udes

    [ a] ny i nt er est i n pr oper t y t hat t he t r ust ee r ecover sunder speci f i ed Bankr upt cy Code pr ovi si ons, i ncl udi ng 11U. S. C. 550 ( 1988) . . . . I f pr oper t y t hat has beenf r audul ent l y t r ansf er r ed i s i ncl uded i n t he 541( a) ( 1)def i ni t i on of pr oper t y of t he est at e, t hen 541( a) ( 3) i sr endered meani ngl ess wi t h r espect t o pr oper t y r ecover edpur suant t o f r audul ent t r ansf er act i ons. Fur t her , t hei ncl usi on of pr oper t y r ecover ed by t he t r ust ee pur suantt o hi s avoi dance power s i n a separ at e def i ni t i onal

  • 8/12/2019 Mad Off Extra Territoriality

    12/19

    12

    subpar agr aph cl ear l y r ef l ect s t he congr essi onal i nt entt hat such pr oper t y i s not t o be consi der ed pr oper t y oft he est at e unt i l i t i s r ecover ed.

    I n r e Col oni al Real t y Co. , 980 F. 2d 125, 131 ( 2d Ci r . 1992)

    ( ci t at i on omi t t ed) ( quot i ng I n r e Saunder s, 101 B. R. 303, 305

    ( Bankr . N. D. Fl a. 1989) ) .

    Under t he l ogi c of Col oni al Real t y, whet her pr oper t y of t he

    est at e i ncl udes pr oper t y wher ever l ocat ed i s i r r el evant t o t he

    i nst ant i nqui r y: f r audul ent l y t r ansf er r ed pr oper t y becomes pr oper t y

    of t he est at e onl y af t er i t has been r ecover ed by t he Tr ust ee, so

    sect i on 541 cannot suppl y any ext r at er r i t or i al aut hor i t y t hat t he

    avoi dance and r ecover y pr ovi si ons l ack on t hei r own. See Maxwel l I ,

    186 B. R. at 820 ( Because pr ef er ent i al t r ansf er s do not become

    pr oper t y of t he est at e unt i l r ecover ed, 541 does not i ndi cat e t he

    Congr ess i nt ended 547 t o gover n ext r at er r i t or i al t r ansf er s.

    ( ci t i ng Col oni al Real t y, 980 F. 2d at 131) ) ; Mi dl and, 347 B. R. at 718

    ( f i ndi ng t hat nei t her t he pl ai n l anguage of t he st at ut e nor i t s

    r eadi ng i n conj unct i on wi t h ot her par t s of t he Code est abl i sh[ es]

    congr essi onal i nt ent t o appl y 548 ext r at er r i t or i al l y, i n par t

    because al l egedl y f r audul ent t r ansf er s do not become pr oper t y of

    t he est at e unt i l t hey ar e avoi ded) . 2

    2 The Tr ust ee asks t he Cour t t o adopt t he Four t h Ci r cui t s deci si oni n I n r e Fr ench, 440 F. 3d 145, 152 ( 4t h Ci r . 2006) , whi ch hol ds t hatt he pr esumpt i on agai nst ext r at er r i t or i al i t y does not appl y t oavoi dance and r ecover y act i ons. However , t he l ogi c of Fr ench i si nconsi st ent wi t h t he Second Ci r cui t s deci si on i n Col oni al Real t y,as Fr ench r el i es on a not i on t hat t he f or ei gn pr oper t y woul d havebeen pr oper t y of t he debt or s est at e absent a f r audul ent t r ansf er ,i d. , wher eas Col oni al Real t y i mpl i es t hat sect i on 541 woul d not

  • 8/12/2019 Mad Off Extra Territoriality

    13/19

  • 8/12/2019 Mad Off Extra Territoriality

    14/19

    14

    bankr upt cy l i kewi se l i mi t a SI PA l i qui dat i on. See 15 U. S. C. 78f f f -

    2( c) ( 3) ( empower i ng a SI PA t r ust ee t o r ecover any pr oper t y

    t r ansf er r ed by t he debt or whi ch, except f or such t r ansf er , woul d

    have been cust omer pr oper t y i f and t o t he ext ent t hat such t r ansf er

    i s voi dabl e or voi d under t he pr ovi si ons of Ti t l e 11) . As a mor e

    gener al mat t er , SI PA s pr edomi nant l y domest i c f ocus suggest s a l ack

    of i nt ent by Congr ess t o ext end i t s r each ext r at er r i t or i al l y. Cf .

    Mor r i son, 130 S. Ct . at 2878 ( f i ndi ng t hat t he Exchange Act s f ocus

    i s t he pur chase and sal e of secur i t i es i n t he Uni t ed St at es) . For

    exampl e, SI PA expr essl y excl udes f r om SI PC member shi p br oker s whose

    pr i mar y busi ness i s conduct ed out si de of t he Uni t ed St at es, see 15

    U. S. C. 78ccc( a) ( 2) ( A) ( i ) , and l i kewi se excl udes as a cust omer

    any per son whose cl ai m ar i ses out of t r ansact i ons wi t h a f or ei gn

    subsi di ary of a SI PC member , see 15 U. S. C. 78 lll ( 2) ( C) ( i ) .

    Fur t her mor e, al t hough t he Tr ust ee poi nt s t o SI PA sect i on

    78eee( b) ( 2) ( A) ( i ) , whi ch pr ovi des f or excl usi ve j ur i sdi ct i on of

    such debt or and i t s proper t y wher ever l ocat ed ( i ncl udi ng pr oper t y

    l ocat ed out s i de t he t er r i t or i al l i mi t s of such cour t . . . ) , t he

    ef f ect of t hi s pr ovi s i on i s no di f f er ent f r om t hat of sect i on 841 of

    t he Bankrupt cy Code. See 15 U. S. C. 78eee( b) ( 2) ( A) ( i i i ) ( pr ovi di ng

    a SI PA t r ust ee wi t h t he j ur i sdi ct i on, power s, and dut i es conf er r edupon a cour t of t he Uni t ed St at es havi ng j ur i sdi ct i on over cases

    under Ti t l e 11) . That i s, al t hough sect i on 78eee( b) ( 2) ( A) ( i ) uses

    t he phr ase wher ever l ocat ed, t hi s phr ase r el at es onl y t o pr oper t y

  • 8/12/2019 Mad Off Extra Territoriality

    15/19

    15

    of t he debt or , whi ch, as di scussed above, i ncl udes t r ansf er r ed

    pr oper t y onl y af t er i t has been r ecover ed by t he Tr ust ee. 3

    Fi nal l y, t he Tr ust ee cont ends t hat pol i cy concer ns r equi r e t hat

    sect i on 550( a) of t he Bankr upt cy Code appl y ext r at er r i t or i al l y; t hat

    i s, t he Tr ust ee ar gues t hat a cont r ar y resul t woul d al l ow a U. S.

    debt or t o f r audul ent l y t r ansf er al l of hi s asset s of f shor e and t hen

    r et r ansf er t hose asset s t o avoi d t he r each of U. S. bankr upt cy l aw.

    However , as ot her cour t s have f ound, t he desi r e t o avoi d such

    l oophol es i n t he l aw must be bal anced agai nst t he pr esumpt i on

    agai nst ext r at er r i t or i al i t y, whi ch ser ves t o pr ot ect agai nst

    uni nt ended cl ashes bet ween our l aws and t hose of ot her nat i ons whi ch

    coul d r esul t i n i nt er nat i onal di scor d. Mi dl and, 347 B. R. at 718.

    Assumi ng t hat any such i nt ent i onal f r aud occur r ed, t he Trust ee here

    may be abl e t o ut i l i ze t he l aws of t he count r i es wher e such

    t r ansf er s occur r ed t o avoi d such an evasi on whi l e at t he same t i me

    avoi di ng i nt er nat i onal di scor d. Fur t her mor e, al t hough t he Tr ust ee

    ar gues t hat f i ndi ng no ext r at er r i t or i al appl i cat i on woul d under mi ne

    t he pr i mar y pol i cy obj ect i ve of SI PA t he equi t abl e di st r i but i on of

    cust omer f unds t o cust omer s of t he debt or t he Tr ust ee has l ong

    i nsi st ed t hat i ndi r ect cust omer s of Madof f Secur i t i es, l i ke many of

    3 To t he ext ent t hat t he di st r i ct cour t i n I n r e Bevi l l , Br esl er &Schul man, I nc. , 83 B. R. 880 ( D. N. J . 1988) , f ound t hat SI PA appl i esext r at er r i t or i al l y, t hat case r el i ed on an anal ysi s t hat i s out dat edi n l i ght of t he Supr eme Cour t s deci si on i n Mor r i son. See, e. g. , i d.at 896 ( s t at i ng t hat [ e] xt r at er r i t or i al appl i cat i on of SI PA i s al soconsi st ent wi t h t he ext r at er r i t or i al appl i cat i on of ot her f eder alsecur i t i es l aws, i ncl udi ng sect i on 10( b) ) .

  • 8/12/2019 Mad Off Extra Territoriality

    16/19

    16

    t he def endant s her e, ar e not t hemsel ves cr edi t or s of t he cust omer -

    pr oper t y est at e. See I n r e Ber nar d L. Madof f I nv. Sec. LLC, 708 F. 3d

    422, 427 ( 2d Ci r . 2013) ( adopt i ng t hi s posi t i on) . Ther ef or e, t he

    Tr ust ee s cl ai m t hat t he def endant s her e ar e bei ng t r eat ed somehow

    mor e f avor abl y t han cust omer - benef i ci ar i es of t he SI PA est at e who

    ar e not si mi l ar l y si t uat ed t o t hese non- benef i ci ar i es i s

    di si ngenuous, especi al l y si nce t he def endant s her e st and t o benef i t

    l i t t l e, i f at al l , f r om t he cust omer - pr oper t y est at e t hr ough t hei r

    now- def unct f eeder f unds. I n sum, t he Cour t concl udes t hat t he

    pr esumpt i on agai nst ext r at er r i t or i al appl i cat i on of f eder al st at ut es

    has not been r ebut t ed her e; t he Tr ust ee t heref ore may not use

    sect i on 550( a) t o pur sue r ecover y of pur el y f or ei gn subsequent

    t r ansf er s .

    Whi l e t he f or egoi ng i s di sposi t i ve, t he Cour t f ur t her

    concl udes, i n t he al t er nat i ve, t hat even i f t he pr esumpt i on agai nst

    ext r at er r i t or i al i t y wer e r ebut t ed, t he Tr ust ee s use of sect i on

    550( a) t o r each t hese f or ei gn t r ansf er s woul d be pr ecl uded by

    concer ns of i nt er nat i onal comi t y. Comi t y i s t he r ecogni t i on whi ch

    one nat i on al l ows wi t hi n i t s t er r i t or y t o t he l egi sl at i ve, execut i ve

    or j udi ci al act s of anot her nat i on, havi ng due r egar d bot h t o

    i nt er nat i onal dut y and conveni ence, and t o t he r i ght s of i t s ownci t i zens or of ot her per sons who ar e under t he pr ot ect i on of i t s

    l aws. Maxwel l I I , 93 F. 3d at 1046 ( quot i ng Hi l t on v. Guyot , 159

    U. S. 113, 16364 ( 1895) ) ; see al so i d. at 1047 ( not i ng t hat

    i nt er nat i onal comi t y i s a separ at e not i on f r om t he pr esumpt i on

  • 8/12/2019 Mad Off Extra Territoriality

    17/19

    17

    agai nst ext r at er r i t or i al i t y, and may pr ecl ude t he appl i cat i on of

    an ot her wi se ext r at er r i t or i al st at ut e) . Cour t s conduct i ng a comi t y

    anal ysi s must engage i n a choi ce- of - l aw anal ysi s t o det er mi ne

    whet her t he appl i cat i on of U. S. l aw woul d be r easonabl e under t he

    ci r cumst ances, compar i ng t he i nt er est s of t he Uni t ed St at es and t he

    r el evant f or ei gn st at e. See i d. at 104748.

    The Second Ci r cui t has pr evi ousl y st at ed t hat [ c] omi t y i s

    especi al l y i mpor t ant i n t he cont ext of t he Bankrupt cy Code. I d. at

    1048. The f act s under l yi ng t he i nst ant pr oceedi ng i l l ust r at e why

    t hi s i s so. As i s t he case wi t h Fai r f i el d Sent r y and Har l ey, many of

    t he f eeder f unds ar e cur r ent l y i nvol ved i n t hei r own l i qui dat i on

    pr oceedi ngs i n t hei r home count r i es. These f or ei gn j ur i sdi ct i ons

    have t hei r own r ul es concerni ng on what bases t he r eci pi ent of a

    t r ansf er f r om a debt or shoul d be r equi r ed t o di sgor ge i t . See, e. g. ,

    I n r e Fai r f i el d Sent r y Lt d. Li t i g. , 458 B. R. 665, 672 ( S. D. N. Y.

    2011) ( not i ng t hat t he f or ei gn r epr esent at i ve of Fai r f i el d Sent r y s

    est at e had f i l ed agai nst i t s i nvest or s st at ut or y cl ai ms under BVI

    l aw f or unf ai r pr ef er ences and under val ue t r ansact i ons ) .

    I ndeed, t he BVI cour t s have al r eady det er mi ned t hat Fai r f i el d Sent r y

    coul d not r ecl ai m t r ansf er s made t o i t s cust omer s under cer t ai n

    common- l aw t heor i es a det er mi nat i on i n conf l i ct wi t h what t he Tr ust ee seeks t o accompl i sh her e. See Decl . of Mar co E. Schnabl

    dat ed J ul y 13, 2012, Ex. C. , No. 12 Mi sc. 115, ECF No. 236 ( S. D. N. Y.

    f i l ed J ul y 13, 2012) .

  • 8/12/2019 Mad Off Extra Territoriality

    18/19

    18

    The Tr ust ee i s seeki ng t o use SI PA t o r each ar ound such f or ei gn

    l i qui dat i ons i n or der t o make cl ai ms t o asset s on behal f of t he SI PA

    cust omer - pr oper t y est at e a speci al i zed est at e cr eat ed sol el y by a

    U. S. st at ut e, wi t h whi ch t he def endant s her e have no di r ect

    r el at i onshi p. Wi t hout any agr eement t o t he cont r ar y ( whi ch t he

    Tr ust ee does not suggest exi st s) , i nvest or s i n t hese f or ei gn f unds

    had no r eason t o expect t hat U. S. l aw woul d appl y t o t hei r

    r el at i onshi ps wi t h t he f eeder f unds. Cf . Maxwel l I I , 93 F. 3d at 1051

    ( f i ndi ng t hat , f or pur poses of t he comi t y anal ysi s, Engl and has a

    much cl oser connect i on t o t hese di sput es t han does t he Uni t ed

    St at es wher e t he t r ansf er occur r ed i n Engl and and Engl i sh l aw

    appl i ed t o t he r esol ut i on of di sput es ar i si ng under t he cr edi t

    agr eement s under whi ch t he r el evant t r ansf er s were made) . Gi ven t he

    i ndi r ect r el at i onshi p bet ween Madof f Secur i t i es and t he t r ansf er s at

    i ssue her e, t hese f or ei gn j ur i sdi ct i ons have a gr eat er i nt er est i n

    appl yi ng t hei r own l aws t han does t he Uni t ed St at es. Accor di ngl y, as

    t he Second Ci r cui t f ound i n Maxwel l I I , t he i nt er est s of t he

    af f ect ed f or ums and t he mut ual i nt er est of al l nat i ons i n smoot hl y

    f unct i oni ng i nt er nat i onal l aw counsel agai nst t he appl i cat i on of

    Uni t ed St at es l aw i n t he pr esent case. I d. at 1053.

    I n sum, t he Cour t f i nds t hat sect i on 550( a) does not appl yext r at er r i t or i al l y to al l ow f or t he r ecover y of subsequent t r ansf er s

    r ecei ved abr oad by a f or ei gn t r ansf er ee f r om a f or ei gn t r ansf er or .

    Ther ef or e, t he Tr ust ee s r ecover y cl ai ms ar e di smi ssed t o t he ext ent

  • 8/12/2019 Mad Off Extra Territoriality

    19/19

    t h a t t h e y s e e k t o r e c o v e r p u r e l y f o r e i g n t r a n s f e r s . 4 Excep t t o t h e

    e x t e n t p r o v i d e d i n o t h e r o r d e r s , t h e Cour t d i r e c t s t h a t t h e

    f o l l o w i n g a d v e r s a r y p r o c e e d i n g s be r e t u r n e d t o t h e Bankrup tcy Cour t

    f o r f u r t h e r p r o c e e d i n g s c o n s i s t e n t w i t h t h i s O p i n i o n and Order : 1)

    t h o s e c a s e s l i s t e d i n E x h i b i t A o f i t e m number 167 on t h e docke t o f

    12-mc-115; and 2) t h o s e c a s e s l i s t e d i n t h e s c h e d u l e a t t a c h e d t o

    i t e m number 468 on t h e d o c k e t o f 12-mc-115 t h a t were d e s i g n a t e d a s

    hav ing been added t o t h e e x t r a t e r r i t o r i a l i t y c o n s o l i d a t e d

    b r i e f i n g .

    SO ORDERED

    Dated : New York, YJ u l y _ki 2014

    4 The T r u s t e e a rg u e s t h a t d i s m i s s a l a t t h i s s t a g e i s i n a p p r o p r i a t ebecause a d d i t i o n a l f a c t - g a t h e r i n g i s n e c e s s a r y t o d e t e r m i n e wheret h e t r a n s f e r s t ook p l a c e . However, t i s t h e T r u s t e e ' s o b l i g a t i o n t oa l l e g e f a c t s g i v i n g r i s e t o t h e p l a u s i b l e i n f e r e n c e t h a t t h et r a n s f e r o c c u r r e d w i t h i n t h e U n i t e d S t a t e s . A b s o l u t e A c t i v i s tValue M a s t e r Fund Ltd . v. F i c e t o , 677 F. 3 d 60, 69 2d C i r. 2012) .Here , t o t h e e x t e n t t h a t t h e T r u s t e e ' s c o m p l a i n t s a l l e g e t h a t b o t ht h e t r a n s f e r o r and t h e t r a n s f e r e e r e s i d e o u t s i d e o f t h e U n i t e dS t a t e s , t h e r e i s no p l a u s i b l e i n f e r e n c e t h a t t h e t r a n s f e r o c c u r r e dd o m e s t i c a l l y. T h e r e f o r e , u n l e s s t h e T r u s t e e c a n p u t f o r t h s p e c i f i cf a c t s s u g g e s t i n g a domes t i c t r a n s f e r , h i s r e c o v e r y a c t i o n s s e e k i n gf o r e i g n t r a n s f e r s s h o u l d be d i s m i s s e d .

    19


Top Related