September 22, 2019, New York– Two weeks ago, the overseas investors who gained from Bernie Madoff’s infamous $19 billion Ponzi scheme filed a petition with the Supreme Court to nullify the Madoff Trustee’s efforts to recover the funds transferred to them.
The overseas investors filed their petition after the US Court of Appeals for the Second Circuit overruled the lower courts’ decisions. The Second Circuit ruled that the “domestic” application of the US law and the presumption against extraterritoriality is not implicated in a situation where the Trustee seeks recovery of transfers from one foreign entity to another that took place on the foreign soil, even when such recovery conflicts with international law.
By way of background, Irving Picard, the Trustee for the liquidation of Madoff Securities, had sued several foreign investors under the US Bankruptcy Code to recover billions of dollars in proceeds from international transactions. The foreign investors argued that the recovery would signify an impermissible extraterritorial application of the US law. The district and bankruptcy courts agreed, but the Second Circuit reversed.
According to the overseas investors, the Second Court adopted a de novo standard to review the question of abstention on international comity grounds, rather than the abuse of discretion standard applied by all seven other circuits to address the issue. The petitioners assert that the Second Circuit substituted its judgment for that of the bankruptcy and district courts that were more intimately familiar with the complex factual record critical to the comity analysis. Such a situation fundamentally changes the territorial scope of the US Bankruptcy Code, contravening the precedents of the court, other circuits, and the applicable foreign laws. According to the petitioners, this will create an international discord that the presumption against extraterritoriality seeks to avoid.
“The questions presented in the petition are:
1. Whether applying Bankruptcy Code Section 550(a)(2) to permit recovery of the proceeds of a foreign transaction that occurred abroad between two foreign parties governed by foreign law constitutes a “domestic” application of Section 550(a)(2) for the purpose of an extraterritoriality analysis?
2. Whether a bankruptcy court’s and district court’s abstentions from applying U. S. law on the grounds of international comity should be reviewed for abuse of discretion, as all seven other circuits that reached the issue have held, or de novo, as the court below held.”
The Madoff clawback case arose out of the Bernard L. Madoff Investment Securities LLC Trustee’s attempt to recover more than $4 billion by unwinding foreign transfers from foreign funds governed by international laws to predominantly international parties.
This case is significant not only to the hundreds of defendants around the world who have billions of dollars at stake in litigation arising from the Madoff Securities Ponzi scheme. It is also imperative for future foreign investors that have indirect connections to U. S. debtors and for the foreign countries that have a sovereign interest in administering their insolvency laws.