In re Picard

917 F.3d 85

IN RE: Irving H. PICARD, TRUSTEE FOR the LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES LLC

Docket Nos. 17-2992(L)

17-2995

17-2996

17-2999

17-3003

17-3004

17-3005

17-3006

17-3007

17-3008

17-3009

17-3010

17-3011

17-3012

17-3013

17-3014

17-3016

17-3018

17-3019

17-3020

17-3021

17-3023

17-3024

17-3025

17-3026

17-3029

17-3032

17-3033

17-3034

17-3035

17-3038

17-3039

17-3040

17-3041

17-3042

17-3043

17-3044

17-3047

17-3050

17-3054

17-3057

17-3058

17-3059

17-3060

17-3062

17-3064

17-3065

17-3066

17-3067

17-3068

17-3069

17-3070

17-3071

17-3072

17-3073

17-3074

17-3075

17-3076

17-3077

17-3078

17-3080

17-3083

17-3084

17-3086

17-3087

17-3088

17-3091

17-3100

17-3101

17-3102

17-3106

17-3109

17-3112

17-3113

17-3115

17-3117

17-3122

17-3126

17-3129

17-3132

17-3134

17-3136

17-3139

17-3140

17-3141

17-3143

17-3144

17-3862

United States Court of Appeals, Second Circuit.

Argued: November 16, 2018

Decided: February 25, 2019

ROY T. ENGLERT, JR., Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, D.C. (David J. Sheehan, Seanna R. Brown, Torello H. Calvani, Catherine E. Woltering, Baker & Hostetler LLP, New York, NY, for Plaintiff-Appellant Irving H. Picard; Howard L. Simon, Windels Marx Lane & Mittendorf, LLP, New York, NY; Matthew B. Lunn, Young Conaway Stargatt & Taylor, LLP, New York, NY, Special Counsel for the Trustee, on the brief), for Plaintiff-Appellant.

JOSEPHINE WANG, General Counsel (Kevin H. Bell, Senior Associate General Counsel for Dispute Resolution, Nathanael S. Kelley, Associate General Counsel, on the brief), Securities Investor Protection Corporation, Washington, D.C., for Intervenor Securities Investor Protection Corporation.

FRANKLIN B. VELIE, Sullivan & Worcester LLP, New York, NY; THOMAS J. MOLONEY, Cleary Gottlieb Steen & Hamilton LLP, New York, NY (Diarra M. Guthrie, Samuel P. Hershey, Cleary Gottlieb Steen & Hamilton LLP, New York, NY; Timothy P. Harkness, David Y. Livshiz, Jill K. Serpa, Freshfields Bruckhaus Deringer US LLP, New York, NY; Marshall R. King, Gibson, Dunn & Crutcher LLP, New York, NY; Jonathan G. Kortmansky, Mitchell C. Stein, Sullivan & Worcester LLP, New York, NY, on the brief), for Defendants-Appellees HSBC Holdings plc, et al., UBS AG, et al., First Peninsula Trustees Limited, et al., and BA Worldwide Fund Management Limited.

Eugene R. Licker, Ballard Spahr LLP, New York, NY, for Defendants-Appellees Lighthouse Investment Partners, LLC, Lighthouse Supercash Fund Limited, and Lighthouse Diversified Fund Limited.

Dean A. Ziehl (Harry D. Hochman, Alan J. Kornfeld, on the brief), Pachulski Stang Ziehl & Jones LLP, New York, NY, for Amicus Curiae National Association of Bankruptcy Trustees, in support of Plaintiff-Appellant.

Roger P. Sugarman, Kegler, Brown Hill + Ritter, Columbus, OH, for Amici Curiae Professors of Conflict of Laws, in support of Plaintiff-Appellant.

Andrea Dobin (Henry M. Karwowski, on the brief), Trenk, DiPasquale, Della Fera & Sodono, P.C., West Orange, NJ, for Amici Curiae Bankruptcy Law Professors, in support of Appeal and Reversal.

David Molton, Brown Rudnick LLP, New York, NY, for Amicus Curiae Kenneth Krys, as Liquidator and Foreign Representative of Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited, in support of Plaintiff-Appellant and partial reversal.

Daniel M. Sullivan (Matthew Gurgel, Benjamin F. Heidlage, on the brief), Holwell Shuster & Goldberg LLP, New York, NY, for Amici Curiae Brian Child, Christopher Hill, Nilani Perera, Martin Trott, and Andrew Willins, in support of Defendants-Appellees.

George T. Conway III (Emil A. Kleinhaus, Joseph C. Celentino, on the brief), Wachtell, Lipton, Rosen & Katz, New York, NY, for Amicus Curiae Securities Industry and Financial Markets Association, in support of Defendants-Appellees.

Richard A. Kirby, FisherBroyles, LLP, Washington, D.C. (Carole Neville, Dentons, New York, NY; Richard Levy, Pryor Cashman LLP, New York, NY, on the brief), for Amici Curiae Lanx BM Investments, LLC, et al., in support of Defendants-Appellees.

Before: JACOBS, POOLER, AND WESLEY, Circuit Judges.

Wesley, Circuit Judge:

These eighty-eight consolidated appeals arise from the ongoing fallout of Bernard Madoff’s Ponzi scheme. As alleged, Bernard L. Madoff Investment Securities LLC ("Madoff Securities") fraudulently transferred billions of dollars to foreign investors, including the feeder funds at issue here. These feeder funds, the initial transferees of that property, subsequently transferred it to other foreign investors, a group that includes the hundreds of Appellees. Irving H. Picard, the Appellant and Trustee for the Liquidation of Madoff Securities, alleges these transfers are fraudulent, and thus avoidable (meaning "voidable"), under § 548(a)(1)(A) of the Bankruptcy Code. Invoking § 550(a)(2) of the Bankruptcy Code, the Trustee sued the Appellees to recover the property. The question before us is whether, where a trustee seeks to avoid an initial property transfer under § 548(a)(1)(A), either the presumption against extraterritoriality or international comity principles limit the reach of § 550(a)(2) such that the trustee cannot use it to recover property from a foreign subsequent transferee that received the property from a foreign initial transferee.

Following an order of the United States District Court for the Southern District of New York (Rakoff, J .),¹ the United States Bankruptcy Court for the Southern District of New York (Bernstein, J .)² dismissed the Trustee’s actions, holding in each that either the presumption against extraterritoriality or international comity principles prevent the Trustee from using § 550(a)(2) to recover this property. We disagree and hold that neither doctrine bars recovery in these actions. Accordingly, we vacate the judgments below and remand to the bankruptcy court for further proceedings.

BACKGROUND

Bernard Madoff orchestrated the largest Ponzi scheme in history through Madoff Securities, his New York investment firm. He enticed investors to buy into alleged investment funds by promising returns that seemed, and were, too good to be true. Rather than invest the money, Madoff commingled it in a checking account he held with JPMorgan Chase in New York. See, e.g. , In re Bernard L. Madoff Inv. Sec. LLC. , 721 F.3d 54, 59–60 (2d Cir. 2013). When investors wanted to withdraw their funds, Madoff sent them checks from this account. Id. at 73. In effect, Madoff paid his investors using money he received from other investors. In 2008, his fraudulent enterprise collapsed.

On December 15, 2008, the Securities Investment Protection Corporation, acting pursuant to the Securities Investor Protection Act of 1978 ("SIPA"), 15 U.S.C. §§ 78aaa et seq. , petitioned the United States District Court for the Southern District of New York for a protective order placing Madoff Securities into liquidation. See, e.g. , In re Bernard L. Madoff Inv. Sec. LLC , 740 F.3d 81, 84 (2d Cir. 2014). As we previously explained:

SIPA establishes procedures for the expeditious and orderly liquidation of failed broker-dealers, and provides special protections to their customers. A trustee’s primary duty under SIPA is to liquidate the broker-dealer and, in so doing, satisfy claims made by or on behalf of the broker-dealer’s customers for cash balances. In a SIPA liquidation, a fund of "customer property" is established—consisting of cash and securities held by the broker-dealer for the account of a customer, or proceeds therefrom, 15 U.S.C. § 78lll (4) —for priority distribution exclusively among customers, id. § 78fff–2(c)(1). The Trustee allocates the customer property so that customers "share ratably in such customer property ... to the extent of their respective net equities." Id. § 78fff–2(c)(1)(B).

Id. at 85 (alteration in original) (citation omitted). The Southern District court issued the protective order, appointed Picard as Trustee, and referred the case to the United States Bankruptcy Court for the Southern District of New York. Id. at 84–85 (citing Order, SEC v. Bernard L. Madoff and Bernard L. Madoff Inv. Sec. LLC , 08-10791 (LLS) (S.D.N.Y. Dec. 15, 2008), ECF No. 4).

Some debtors, such as Madoff Securities, complicate a SIPA trustee’s task by unlawfully transferring customer property prior to the formation of a liquidation estate. To ensure that these transfers do not prevent a trustee from ratably distributing customer property, SIPA authorizes trustees to "recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of [the Bankruptcy Code]." 15 U.S.C. § 78fff–2(c)(3).

The Bankruptcy Code, in turn, provides various means for trustees to avoid a debtor’s transfers and, to the extent that a transfer is avoided, to recover the transferred property. See 11 U.S.C. §§ 541 et seq. Section 550(a)(1) allows trustees to recover property from the debtor’s initial transferee. And § 550(a)(2) permits a trustee to recover property from any subsequent transferee.

Many of Madoff Securities’ direct investors were "feeder funds." A feeder fund is an entity that pools money from numerous investors and then places it into a "master fund" on their behalf. A master fund—what Madoff Securities advertised its funds to be—pools investments from multiple feeder funds and then invests the money.

Three foreign feeder fund networks that invested with Madoff Securities are relevant to many of these appeals:

• Fairfield Greenwich Group is a network of funds operating in New York whose funds are organized in the British Virgin Islands ("BVI"), where Fairfield is in liquidation. In those proceedings, the bankruptcy court found, liquidators other than Picard have "brought substantially the same claims [that Picard brings here] against substantially the same group of defendants to recover substantially the same transfers [that Picard seeks to recover]." SIPC II , 2016 WL 6900689, at *13.

• The Kingate Funds is a network of funds organized in the BVI. Kingate is

...