Earlier this week, the U.S. Court of Appeals for the Second Circuit revived 88 fraudulent transfer cases that were consolidated on appeal. In those actions, the trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC sought to recover billions of dollars in funds transferred out of the U.S. to foreign investors, called feeder funds. In re Picard, 17-2992(L) (2d Cir. Feb. 25, 2019).
The feeder funds then transferred the funds to other foreign investors, resulting in hundreds of appellees. On appeal, the Second Circuit was considering whether “where a trustee seeks to avoid an initial property transfer under § 548(a)(1)(A) [with actual intent], either the presumption against extraterritoriality or international comity principles limit the reach of § 550(a)(2) such that the trustee cannot use it to recover property from a foreign subsequent transferee that received the property from a foreign initial transferee.” Id. 3-4.
During the proceedings in the courts below, the U.S. Bankruptcy Court for the SDNY had dismissed the trustee’s adversary proceedings finding that the Trustee was prevented from recovering this property. The Bankruptcy Court’s decision was following a decision from the U.S. District Court for the SDNY. On appeal, the Second Circuit disagreed with these lower court decisions and held that “neither doctrine bars recovery in these actions.” Id. at 5.
The Second Circuit focused on the initial transfers of the funds by which the feeder funds extracted profits from accounts based in the U.S., rather than the subsequent transfers of the funds that occurred outside the U.S. This decision gives future trustees broader reach to recover property transferred out of the U.S. and it will be interesting to see decisions interpreting this case.