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The Madoff case continues to provide fertile ground for testing boundaries of the U.S. Bankruptcy Code (Code). In July 2014, Judge Rakoff issued an important decision regarding the extraterritorial scope of the Code’s avoidance rules. The Trustee for the Madoff Estate, Irving Picard, sought to recover cash withdrawn by “feeder funds.” These funds pooled customer assets, invested them in Bernard L. Madoff Investment Securities (Madoff Securities), withdrew proceeds from the investment prior to Madoff’s SIPA filing, and distributed the proceeds to customers before the funds themselves collapsed. The funds are located abroad: one, Fairfield Sentry, is a British Virgin Islands (BVI) entity; another, Harley International, is a Cayman Islands fund. Both have commenced insolvency proceedings in their relevant jurisdictions.

The proceeds paid by Madoff to the feeder funds were part of a Ponzi scheme and, therefore, presumptively fraudulent transfers. The Trustee first brought suit against the funds as initial transferees under § 550(a)(1). He obtained a default judgment against one (Harley) and settled with the other (Fairfield), but obtained incomplete recoveries overall. So he turned next to the funds’ customers as subsequent transferees under § 550(a)(2).

The case, for the purposes of this Article, starts here. The Trustee was attempting to recover (a) assets located abroad that were (b) transferred to foreign transferee by (c) a foreign transferor. Does § 550 reach such an extraterritorial transfer?


Bankruptcy Law | Law | Securities Law