Madoff Trustee’s Clawback Reach Cut Short

Foreign investors who are concerned about the extraterritorial application of U.S. bankruptcy law can draw some comfort from a recent decision in the liquidation case of Bernard L. Madoff Investment Securities (“BLMIS”). On July 6, 2014, United States District Court Judge Jed S. Rakoff ruled that the BLMIS Trustee could not use the Bankruptcy Code’s avoidance provisions to recover transfers made to foreign investors that had invested in foreign feeder funds, such as the Fairfield Funds. 2014-07-06_BLMIS Decision. Judge Rakoff rejected the Trustee’s contention that he could use section 550(a)(2) of the Bankruptcy Code as a mechanism to claw-back distributions that BLMIS had made to the feeder funds, which then re-distributed the funds to foreigners who were not otherwise subject to the jurisdiction of U.S. courts. The Court reasoned that that would constitute an impermissible extraterritorial application of the statute. The Court noted that although the cash that was ultimately distributed may have originated in the U.S., the subsequent transfers to foreign investors lacked sufficient contact with the U.S. to be considered “domestic.” The Court examined the language of the statute and concluded that Congress did not evidence a clear intention to give the statute extraterritorial application. More on Global Restructuring Watch.