A recent decision by Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York ended the Madoff Trustee’s attempt to recover funds received by foreign entities from foreign feeder funds that had withdrawn or received monies from Madoff’s fictitious accounts. See In re Madoff Securities, Slip. Op., (Docket No. 12-mc-115, July 6, 2014, S.D.N.Y.). The decision was based on two grounds. First, the court found that the section of the Bankruptcy Code that permits the avoidance of transfers does not apply to transactions that occur beyond the borders of the United States. Alternatively, even if the pertinent section of the Bankruptcy Code had extraterritorial reach, the facts of the case bar such application on international comity principles.
Background
Crucial to an understanding of the dispute at issue was the role of the so-called “feeder funds,” foreign investment funds that pooled their own customers’ assets for investment with Bernard L. Madoff Investment Securities (Madoff Securities). As customers of Madoff Securities, the feeder funds withdrew funds from Madoff Securities, and in turn transferred them to their customers and other third parties. When the Madoff fraud was uncovered in late 2008, many of the feeder funds—which had invested all or nearly all of their assets in Madoff Securities—also entered into liquidation proceedings in their respective countries. The trustee (the Trustee) appointed under the Securities Investor Protection Act (SIPA) to oversee the estate of Madoff Securities sought to recover not only the allegedly avoidable transfers made to the funds by Madoff Securities, but also the subsequent transfers of the alleged Madoff Securities property made by the feeder funds to their immediate and mediate transferees. It was the recovery of those subsequent transfers, which were made outside the United States between a foreign transferor and a foreign transferee, that were the subject of Rakoff’s decision.
