Section 550(a)

Update to Madoff

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Following our post on the district court’s extraterritoriality decision, the bankruptcy court dismissed the actions against several defendants on the grounds that the presumption against extraterritoriality and international comity principles limit the scope of § 550(a)(2) such that the trustee of a domestic debtor cannot use it to recover property that the debtor transferred to a foreign entity that subsequently transferred it to another foreign entity. However, on February 25, 2019, the Second Circuit disagreed with the bankruptcy court’s decision and vacated the judgement and remanded the matter back to the bankruptcy court for further proceedings. More to come.

 

Law360: Rakoff’s Foreign Fund Clawback Ruling Has Limitations

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On July 6, 2014, Jed S. Rakoff, U.S. district judge for the Southern District of New York, declined to extend the reaches of Section 550(a) of the Bankruptcy Code abroad to permit the recovery of funds that were alleged to be fraudulently obtained from Bernard L. Madoff Investment Securities LLC in connection with Bernard Madoff’s Ponzi scheme. Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC (In re Madoff Securities), No. 12-mc-115 (JSR) (SDNY Jul. 6, 2014). 　

The decision involves the attempted extraterritorial application of Section 550(a), which allows a trustee to recover “property transferred … to the extent that a transfer is avoided” under bankruptcy law. In essence, Irving Picard, the trustee, sought to not only seek recovery from feeder funds that invested directly into Madoff funds, but also sought to recover from subsequent transferees. The Madoff decision should give comfort to foreign investors that there is a reduced risk that proceeds of their indirect investments in U.S. companies will be clawed back under bankruptcy law — even if such proceeds were obtained fraudulently. There are, however, important limitations to consider.  Read More.