Section 550(a)(2) and a Lesson in the Presumption Against Extraterritorially

Michael Vandermark

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Madoff Securities, the United States District Court for the Southern District of New York recently held that section 550(a)(2) of the Bankruptcy Code does not apply extraterritorially.[1]  There, the SIPA trustee sought to recover both funds transferred from Madoff Securities in New York to several Madoff-related foreign feeder funds[2] and, more specifically, subsequent transfers made by those feeder funds to their foreign investors.[3]  The trustee argued that because the defendants had allegedly received several million dollars in fraudulent subsequent transfers from the feeder funds, he was entitled to reclaim those funds under section 550(a)(2) of the Bankruptcy Code.[4]  In response, Defendants’ argued that section 550(a)(2) does not apply extraterritorially and therefore does not reach those subsequent transfers made from one foreign entity to another.[5] Ultimately, the Madoff Securities court held that section 550(a)(2) cannot be applied against the foreign defendants on an extraterritorial basis.[6]

Under federal law, there is a strong presumption against using Congressional legislation on an extraterritorial basis.[7]  This presumption against extraterritorially guards against unintended and potentially harmful clashes between United States’ laws and the laws of other nations.[8]  To determine whether the presumption applies, a court must determine, first, whether the facts surrounding an action would require an extraterritorial application of the relevant statutory provision.[9]  If so, a court must then determine whether Congress intended for the statute to apply extraterritorially.[10]  If the court answers in the negative, the presumption against extraterritorial application will apply.[11]

In analyzing section 550(a)(2) under the first prong of the test, the Madoff Securities court held that the trustee’s use of the section would require the statute to be used extraterritorially.[12]  In making its determination, the Madoff Securities court, relying on the U.S. Supreme Court’s decision in Morrison v. Nat’l Australia Bank Ltd.,[13] examined the regulatory focus of section 550(a)(2).[14]  In doing so, the Madoff Securities court rejected the trustee’s argument that the focus of the section, as applied in in a Securities Investor Protection Act (“SIPA”) liquidation, was the regulation of the U.S. broker-dealer in question and therefore any application of the Bankruptcy Code, as incorporated by SIPA, would be “inherently domestic.”[15]  The Madoff Securities court reasoned that the trustee’s argument was overly broad and that the connection between the subsequent transferees and the debtor was too attenuated to make the application automatically domestic.[16]  Rather, the Madoff Securities court held that the true focus of the section was on the property transferred and the fact of its transfer to a subsequent transferee, not the relationship of such property to the initial debtor.[17]  The Madoff Securities court subsequently looked to the specific circumstances in which the transfers occurred, as well as the identities of the subsequent transferees, and held that because both were “predominantly foreign”[18] the trustee’s use of section 550(a)(2) would require it to be used extraterritorially.[19]

Turning to the second prong of the extraterritoriality inquiry, the Madoff Securities court found that Congress never intended section 550(a)(2) of the Code to be used extraterritorially.[20] Intent can be ascertained either by express Congressional approval or implied Congressional consent found via any “‘context’”[21] surrounding the provision at issue that would allow the statute to be used extraterritorially.[22]  Such context may include surrounding provisions of the Bankruptcy Code.[23]  Looking first to the text of section 550 itself,[24] the Madoff Securities court found that nothing in the statutory language suggested that Congress expressly intended that the provision to apply to foreign transfers.[25]  In an attempt to rebut the presumption against extraterritoriality, the trustee argued that section 541 of the Bankruptcy Code, which defines property of the estate to include property of the debtor “wherever located and by whomever held,”[26] is indirectly incorporated into section 550; therefore, indicating Congressional authority for section 550’s use extraterritorially.[27]   The trustee attempted to link sections 541 and 550 of the Bankruptcy Code by using the avoidance and recovery provisions use of the phrase “an interest of the debtor in property” to define the transfer that may be avoided, which is repeated in section 541’s definition of “property of the estate.”[28]  The Madoff Securities court, however, rejected that argument, determining that although section 541’s definition of “property of the estate” may be relevant to interpreting the avoidance provisions “property of the debtor,” such property is not considered “property of the estate” under section 541 until the property is first recovered by the trustee.[29]  Thus, the Madoff Securities court concluded that section 541 cannot supply section 550 with “any extraterritorial authority that the avoidance and recovery provisions lack on their own.”[30]

Likewise, the Madoff Securities court also rejected the trustee’s argument that section 78fff–2(c)(3) of SIPA[31] empowered him to use section 550 of the Code extraterritorially.[32]  The Madoff Securities court concluded that because section 78fff–2(c)(3) of SIPA largely incorporated the avoidance and recovery provisions from the Bankruptcy Code, the section would be bound to the Bankruptcy Code’s inherent limitations.[33] Thus, because the trustee could not invoke the power of section 550 extraterritoriality, neither could they use section 78fff–2(c)(3) of SIPA as a back door to avoid the foreign transactions either.[34]  Similarly, the trustee’s attempt to use SIPA section 78eee(b)(2)(A)(i),[35] or the SIPA version of section 541,[36] failed on the grounds that transferred property is considered part of the estate only upon its recovery by the trustee.[37]  Therefore, the Madoff Securities court held that because the trustee failed to rebut the presumption against extraterritorial application of section 550(a)(2), the trustee could not use the section to recover any of the foreign subsequent transfers at issue.[38]

In re Madoff Securities is significant because it limits a trustee’s or debtor in possession’s ability to avoid cross-border transactions between foreign entities under the Bankruptcy Code.  Such a limitation may force a trustee or debtor in possession to commence an ancillary proceeding in a foreign court in order to avoid the transfer under foreign law.[39]  Seeking to avoid transactions in foreign courts may increase the trustee or debtor in possession’s costs in connection with bringing such actions because the trustee or debtor in possession may have to retain local counsel in multiple jurisdictions to bring multiple actions instead of consolidating all of the actions into a single forum.  Additionally, there is a possibility for conflicting decisions if the trustee or debtor in possession is seeking to recover from the subsequent transferees of the same initial transaction in multiple jurisdictions, especially if each jurisdiction applies its own law.  Moreover, there are concerns that a debtor could shield his assets by transferring his assets to a jurisdiction that does not permit a trustee to avoid or makes it difficult to avoid fraudulent transfers, thus allowing a debtor to escape his creditors.



[1] In re Madoff Securities, 513 B.R. 222, 226 (S.D.N.Y. 2014).

[2] Id. at 225 (The two feeder funds in question: Fairfield Sentry Limited and Harley International Limited were based in the British Virgin Islands and the Cayman Islands respectively). 

[3] Id.

[4] Id. at 226.

[5] Id.

[6] Id. at 232.

[7] In re Madoff Securities, 513 B.R. at 232.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id. at 228.

[13] Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010).

[14] In re Madoff Securities, 513 B.R. at 227.

[15] Id.

[16] Id. (Further, the court, as a matter of policy, found that potential serious issues over international comity could arise if they adopted the trustee’s argument). Id.

[17] Id. at 227.

[18] Id.

[19] Id. at 227­–28.

[20] In re Madoff Securities, 513 B.R. at 231.

[21] Id. at 228 (quoting Morrison, 561 U.S. at 265) (emphasis added).

[22] Id.

[23] Id.

[24] 11 U.S.C. § 550(a) (2012) reads that a: “trustee may recover, for the benefit of the estate, the property transferred . . . the value of such property, from—(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee.”

[25] In re Madoff Securities, 513 B.R. at 228.

[26] 11 U.S.C. § 541(a) (2012).

[27] In re Madoff Securities, 513 B.R. at 228–29.

[28] Id. at 229.

[29] Id. (citing Federal Deposit Ins. Corp. v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125, 131 (2d Cir.1992)).

[30] Id.

[31] 15 U.S.C. § 78fff–2(c)(3) (2012) (allowing a SIPA 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 Title 11”). 

[32] In re Madoff Securities, 513 B.R. at 230.

[33] Id.

[34] Id.

[35] 15 U.S.C. § 78eee(b)(2)(A)(i) (2012) (conferring upon a SIPA trustee with “the jurisdiction, powers, and duties conferred upon a court of the United States having jurisdiction over cases under Title 11”).

[36] In re Madoff Securities, 513 B.R. at 230 (holding that 15 U.S.C. § 78eee(b)(2)(A)(i)’s effect is the same as 11 U.S.C. § 541 of the Bankruptcy Code).  

[37] Id. at 230–31.

[38] Id. Also, in dicta, the court noted that even had the trustee been successful in rebutting the presumption against extraterritoriality, their use of section 55(a)(2) would still be precluded by the overriding policy concerns of international comity between the United States and other foreign jurisdictions. Id. at 231–232.

[39] It is still not clear from the opinion however, whether a U.S. court could apply foreign law to decide the case or whether the trustee or debtor in possession would need to go to the foreign court in question. See Condor Ins. Ltd., v. Condor Guaranty, Inc., (In re Condor Ins. Ltd.), 601 F.3d 319 (5th Cir. 2010).