EXPANDING FOREIGN CREDITORS TOOLKIT: THE PRESUMPTION AGAINST EXTRATERRITORIAL APPLICATION Craig R. Bergmann * I. INTRODUCTION... 84 II. PROCEDURAL HISTORY... 84 III. THE PRESUMPTION AGAINST EXTRATERRITORIAL APPLICATION... 84 IV. FOCUS OF CONGRESSIONAL CONCERN... 85 V. DECIPHERING CONGRESSIONAL INTENT... 86 VI. PUBLIC POLICY COMPELS EXTRATERRITORIAL APPLICATION... 87 VII. COMITY PRECLUDES EXTRATERRITORIAL APPLICATION... 88 VIII. CONCLUSION... 89 * The author is an associate at Fried, Frank, Harris, Shriver & Jacobson, LLP in New York City, New York. Mr. Bergmann focuses his practice on capital markets, corporate law, and corporate governance. The author is a graduate of the Benjamin N. Cardozo School of Law. 83
84 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 2:1 I. INTRODUCTION In the latest saga of the trustee s attempt to administer the estate of Bernard L. Madoff Investment Securities LLC (BLMIS), the trustee, pursuant to 550(a)(2), commenced adversary proceedings against foreign BLMIS investors to recover distributions they received from foreign feeder funds, which invested in BLMIS. 1 The United States District Court for the Southern District of New York (the Court ) held that applying 550(a)(2) in this case would be an extraterritorial application that Congress did not intend, and assuming arguendo that it did, principles of comity preclude extraterritorial application in this case. 2 II. PROCEDURAL HISTORY In October 2011, the trustee commenced adversary proceedings against, among others, CACEIS Bank Luxembourg and CACEIS Bank (collectively, the foreign defendants ), to recover transfers and subsequent transfers of BLMIS property. 3 The foreign defendants moved to withdraw the reference to the Bankruptcy Court for the Southern District of New York, which the Court granted. 4 Additionally, the foreign defendants filed a motion to dismiss the trustee s complaints, alleging that 550(a)(2) does not apply extraterritorially, and thus, the trustee could not recover transfers which occurred predominately in foreign countries among foreign parties. 5 III. THE PRESUMPTION AGAINST EXTRATERRITORIAL APPLICATION The presumption against extraterritorial application embodies the principle that congressional legislation, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the [U.S.] 6 According to the United States Supreme Court, this presumption serves to protect against unintended clashes between our laws and those of other nations which could result in international discord. 7 In order to trigger the presumption, a court must determine whether the facts of a particular case require extraterritorial application and, if so, 1. Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff Sec.), 513 B.R. 222, 225 (S.D.N.Y. 2014). 2. Id. at 226, 232. 3. Id. at 225 26. 4. Id. at 226. 5. Id. 6. Id. (citing Morrison v. Nat l Australia Bank Ltd., 561 U.S. 247, 255 (2010) (quoting EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991))). 7. Arabian Am. Oil Co., 499 U.S. at 248.
2014] EXPANDING FOREIGN CREDITORS TOOLKIT 85 whether Congress intended for such application. 8 In this case, the Court began its analysis by determining that the presumption against extraterritorial application of federal statutes applied and held that the trustee failed to rebut it. 9 IV. FOCUS OF CONGRESSIONAL CONCERN In order to determine whether applying 550(a)(2) in this case would be extraterritorial, the Court first looked to the focus of congressional concern, or... the transactions that [ 550(a)(2)] seeks to regulate. 10 Here, the trustee and the Securities Investor Protection Corporation (SIPC) argued that the Securities Investor Protection Act (SIPA) sought to regulate SIPC-member U.S. broker-dealer[s]. 11 Thus, SIPA s provisions that are incorporated into the Bankruptcy Code are inherently domestic. 12 In other words, any relationship a party has with a domestic debtor being administered under SIPA, no matter how attenuated, transforms every use of the various provisions... into [a] purely domestic application[]. 13 The Court, relying on Second Circuit precedent which established that a mere connection to a U.S. debtor, be it tangential or remote, is insufficient on its own to make every application of the Bankruptcy Code domestic, dismissed both the trustee s and SIPC s arguments. 14 Second, the Court looked at the focus of the Bankruptcy Code s avoidance and recovery provisions, specifically 548 and 550(a). Section 550(a) of the Bankruptcy Code states, in pertinent part, that the trustee may recover... the property transferred from subsequent transferees. 15 Indeed, 550(a) seeks to regulate transfers of property from an initial transferee to subsequent transferees and not the relationship of that property to a perhaps-distant debtor. 16 Accordingly, the Court, after analyzing the locations and components of the transfers at issue, determined that the transfers and transferees in this case are predominantly 8. Id. 9. In re Madoff Sec., 513 B.R. at 231. 10. Id. at 226 (quoting Morrison, 561 U.S. at 266 67) (internal citation omitted)). 11. Id. at 227. See 15 U.S.C. 78ccc(a)(2)(A)(i) (2012) ( SIPC shall be a membership corporation the members of which shall be all persons registered as brokers or dealers... other than (i) persons whose principal business... is conducted outside the United States and its territories and possessions.... ). 12. In re Madoff Sec., 513 B.R. at 227. 13. Id. 14. Id. 15. 11 U.S.C. 550(a) (2012). 16. In re Madoff Sec., 513 B.R. at 227.
86 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 2:1 foreign. 17 Consequently, the Court held that the trustee s use of 550(a)(2) in this case would require extraterritorial application. 18 V. DECIPHERING CONGRESSIONAL INTENT In order for the trustee to apply 550(a)(2) extraterritorially, he must demonstrate that Congress intended for such application. 19 Utilizing canons of statutory interpretation, the Court first looked to the text of 550(a), which did not evidence an intent for its extraterritorial application. 20 Thereafter, the Court looked to context, such as other provisions of the Bankruptcy Code, for evidence of Congress s intent that 550(a)(2) should apply extraterritorially. 21 As evidence of congressional intent, the trustee argued that the definition of property of the estate pursuant to 541(a)(1), which includes all legal or equitable interests of the debtor in property, mirrors language found in 548(a)(1), which allows the trustee to avoid any transfer... of an interest of the debtor in property. 22 Consequently, the definition of property of the estate is incorporated by reference into the avoidance and recovery powers. 23 As support for extraterritorial application, the trustee focused on the preamble in 541(a), which states that property of the estate includes certain property wherever located and by whomever held.... 24 According to the trustee, the reference [in 541] to wherever located and by whomever held is thereby indirectly incorporated into the avoidance and recovery provisions at issue. 25 The Court, labeling the trustee s argument clever, found it neither logical nor persuasive because including fraudulent transfers in the definition of property of the estate pursuant to 541(a)(1) would render 541(a)(3) superfluous. 26 Section 541(a)(3) of the Bankruptcy Code states that [s]uch estate is comprised of all the following property, wherever located and by whomever held... [a]ny interest in property that the trustee recovers under section 329(b), 363(n), 543, 550, 553, or 723 of [title 11 of the United States Code]. 27 The Court identified the operative language in 541(a)(3) and distinguished between property actually recovered (i.e., an 17. Id. at 227 28. 18. Id. at 228. 19. Id. 20. Id. 21. Id. (quoting Morrison, 561 U.S. at 265). 22. Id. at 229 (quoting 11 U.S.C. 541(a) and 548(a) (1988)). 23. Id. at 229 30. 24. 11 U.S.C. 541(a) (2012). 25. In re Madoff Sec., 513 B.R. at 229 (quoting 11 U.S.C. 541(a)). 26. Id. (quoting In re Colonial Realty Co., 980 F.2d 125, 131 (2d Cir. 1992)). 27. 11 U.S.C. 541(a)(3) (emphasis added).
2014] EXPANDING FOREIGN CREDITORS TOOLKIT 87 avoided transfer) and property subject to recovery. 28 This distinction is critical because the avoidance provisions operate independent of 541, and 541 cannot be used to supply the avoidance provisions with extraterritorial application. 29 Thereafter, the Court invoked the maxim of statutory interpretation known as expressio unius est exclusio alterius (the express mention of one thing excludes all others) in holding that Congress s express mention of wherever located and by whomever held in 541 negates the extraterritorial application of all other provisions lacking similar language. 30 The trustee also argued that 78fff-2(c)(3) of SIPA, which allows the trustee to recover customer property through the Bankruptcy Code s avoidance provisions, establishes congressional intent for extraterritorial application. 31 This argument also failed to rebut the presumption because (1) 78fff-2(c)(3) merely incorporates the Bankruptcy Code provisions discussed above, and (2) SIPA has a predominantly domestic focus because SIPC excludes broker-dealer membership whose primary business is conducted outside the U.S. and excludes as a customer any person whose claim arises out of transactions with a foreign subsidiary of a SIPC member. 32 Similar to the trustee s 541 argument, the trustee also argued that SIPA s grant of exclusive jurisdiction of such debtor and its property wherever located provides congressional intent for extraterritorial application. 33 This argument fails for the same reasons discussed above, namely, that transferred property only becomes property of the estate once it is recovered. 34 VI. PUBLIC POLICY COMPELS EXTRATERRITORIAL APPLICATION The trustee also contended that public policy dictates extraterritorial application because debtors will fraudulently transfer assets to foreigners who, in turn, will retransfer those assets to avoid the reach of U.S. bankruptcy law. 35 Invoking a balancing test, the Court found that such loopholes must be weighed against the presumption against extraterritoriality, which serves to protect against unintended clashes between [U.S. laws] and those of other nations which could result in 28. In re Madoff Sec., 513 B.R. at 229 30. 29. Id. 30. Id. See generally Passenger Corp. v. Passengers Assoc., 414 U.S. 453, 458 (1974). See also BLACK S LAW DICTIONARY 701 (10th ed. 2014). 31. In re Madoff Sec., 513 B.R. at 229. 32. Id. at 230. See 15 U.S.C. 78ccc(a)(2)(A)(i), 78lll(2)(C)(i). 33. In re Madoff Sec., 513 B.R. at 230 (citing 15 U.S.C. 78eee(b)(2)(A)(i)). 34. Id. at 230 31. 35. Id. at 231.
88 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 2:1 international discord. 36 Nonetheless, the trustee can attempt to recover from these subsequent transferees in foreign jurisdictions under the laws governing the transfers. 37 Lastly, the trustee argued that failing to allow extraterritorial application in this case frustrates SIPA s purpose of equitable distribution of customer funds to customers of the debtor. 38 Unfortunately, in a prior BLMIS proceeding, the trustee adopted the position that investors in feeder funds were not customers within the meaning of 78lll-2(A) (C), and thus, were not entitled to a distribution from the customer-property estate pursuant to 78lll-4. 39 VII. COMITY PRECLUDES EXTRATERRITORIAL APPLICATION Although the Court held that the trustee did not rebut the presumption against extraterritorial application and, therefore, could not use 550(a) to pursue recovery of purely foreign subsequent transfers, it posited an alternative holding which also denied the relief requested by the trustee. 40 The Court held that international comity precluded the trustee s recovery of these purely foreign transfers. 41 In reaching its conclusion, the Court engaged in a choice of law analysis (interest analysis) to determine which country had a greater interest regarding the recovery of these transfers. 42 First, certain foreign feeder funds were already in liquidation proceedings, and in one case, a foreign court held that a feeder fund could not recover a distribution made to its customer. 43 If the Court allowed the trustee to proceed, it would directly conflict with the foreign court s ruling. Second, the foreign investors did not have any reasonable expectation that U.S. law would apply to their relationships with the feeder funds. 44 Third, a majority of the transfers at issue occurred outside the U.S., and the transferees and subsequent transferees were predominantly foreign. Consequently, foreign jurisdictions would have a greater interest in regulating the transactions. 45 36. Id. (quoting Midland Euro Exch. Inc. v. Swiss Fin. Corp. (In re Midland Euro Exch. Inc.), 347 B.R. 708, 718 (Bankr. C.D. Cal. 2006)). 37. Id. 38. Id. (emphasis added). 39. Id. (citing In re Bernard L. Madoff Inv. Sec. LLC, 708 F.3d 422, 427 (2d Cir. 2013)). 40. Id. 41. Id. 42. Id. at 231 (citing In re Maxwell Commc n Corp., 93 F.3d 1036, 1047 48 (2d Cir. 1996) (hereinafter referred to as Maxwell II)). 43. Id. at 232. 44. Id. (citing Maxwell II, 93 F.3d at 1051). 45. Id.
2014] EXPANDING FOREIGN CREDITORS TOOLKIT 89 VIII. CONCLUSION While the Court dismissed the trustee s claims to recover purely foreign transfers, it remanded the case to the bankruptcy court to afford the trustee the opportunity to factually demonstrate that other transfers at issue were domestic. 46 Foreign investors are now armed with this decision and should take solace that certain purely foreign transfers are immune from avoidance and recovery by a trustee operating in accordance with the Bankruptcy Code. It remains to be seen how this decision will implicate other provisions of the Bankruptcy Code (and SIPA), specifically 524(g) and 1141, which relate to non-debtor releases and discharges. 46. Id. at 232 n.4.