17-2992 L - MadoffTrustee...17-2992(L) United States Court of Appeals FORTHESECONDCIRCUIT In Re: IRVINGH. PICARD, TRUSTEEFOR THE LIQUIDATIONOF BERNARDL. MADOFFINVESTMENTSECURITIESLLC

17-2992(L)

United States Court of AppealsFOR THE SECOND CIRCUIT

In Re: IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATION OF

BERNARD L. MADOFF INVESTMENT SECURITIES LLC

ON APPEAL FROM A FINAL JUDGMENT OF THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

REPLY BRIEF FOR APPELLANT

d

17-2995(CON), 17-2996(CON), 17-2999(CON), 17-3003(CON), 17-3004(CON), 17-3005(CON),17-3006(CON), 17-3007(CON), 17-3008(CON), 17-3009(CON), 17-3010(CON), 17-3011(CON),17-3012(CON), 17-3013(CON), 17-3014(CON), 17-3016(CON), 17-3018(CON), 17-3019(CON),17-3020(CON), 17-3021(CON), 17-3023(CON), 17-3024(CON), 17-3025(CON), 17-3026(CON),17-3029(CON), 17-3032(CON), 17-3033(CON), 17-3034(CON), 17-3035(CON), 17-3038(CON),17-3039(CON), 17-3040(CON), 17-3041(CON), 17-3042(CON), 17-3043(CON), 17-3044(CON),17-3047(CON), 17-3050(CON), 17-3054(CON), 17-3057(CON), 17-3058(CON), 17-3059(CON),17-3060(CON), 17-3062(CON), 17-3064(CON), 17-3065(CON), 17-3066(CON), 17-3067(CON),17-3068(CON), 17-3069(CON), 17-3070(CON), 17-3071(CON), 17-3072(CON), 17-3073(CON),17-3074(CON), 17-3075(CON), 17-3076(CON), 17-3077(CON), 17-3078(CON), 17-3080(CON),17-3083(CON), 17-3084(CON), 17-3086(CON), 17-3087(CON), 17-3088(CON), 17-3091(CON),17-3100(CON), 17-3101(CON), 17-3102(CON), 17-3106(CON), 17-3109(CON), 17-3112(CON),17-3113(CON), 17-3115(CON), 17-3117(CON), 17-3122(CON), 17-3126(CON), 17-3129(CON),17-3132(CON), 17-3134(CON), 17-3136(CON), 17-3139(CON), 17-3140(CON), 17-3141(CON),17-3143(CON), 17-3144(CON), 17-3862(CON)

(Counsel continued on inside cover)

DAVID J. SHEEHANSEANNA R. BROWNTORELLO H. CALVANICATHERINE E. WOLTERINGBAKER & HOSTETLER LLP45 Rockefeller PlazaNew York, New York 10111(212) 589-4200

Attorneys for Appellant Irving H. Picard, as Trustee for the Substantively ConsolidatedSIPA Liquidation of Bernard L. MadoffInvestment Securities LLC and the Estate of Bernard L. Madoff

ROY T. ENGLERT, JR.

ROBBINS, RUSSELL, ENGLERT,

ORSECK, UNTEREINER

& SAUBER LLP

1801 K Street, NW, Suite 411L

Washington, D.C. 20006

(202) 775-4500

Special Counsel for Trustee

Case 17-2992, Document 1091, 05/09/2018, 2298823, Page1 of 73

HOWARD L. SIMON

WINDELS MARX LANE

& MITTENDORF, LLP

156 West 56th Street

New York, New York 10019

(212) 237-1000

MATTHEW B. LUNN

YOUNG CONAWAY STARGATT

& TAYLOR, LLP

Rockefeller Center

1270 Avenue of the Americas

Suite 2210

New York, New York 10020

(212) 332-8840

Special Counsel for Trustee


TABLE OF CONTENTS

Page PRELIMINARY STATEMENT .............................................................................. 1

ARGUMENT ............................................................................................................ 2

I. THE PRESUMPTION AGAINST EXTRATERRITORIALITY DOES NOT BAR THE TRUSTEE’S RECOVERY ACTIONS ......... 2

A. The Trustee’s Recovery Actions Involve a Domestic Application of the Bankruptcy Code, Which Has an Extraterritorial Reach ................................................................. 3

1. Domestic Application of the Bankruptcy Code .............. 3

2. The Bankruptcy Code Applies Extraterritorially .......... 10

B. The Trustee’s Actions to Recover “Customer Property” Are a Domestic Application of SIPA and In Any Event, SIPA Has an Extraterritorial Reach ......................................... 15

1. Domestic Application of SIPA ...................................... 15

2. SIPA Has an Extraterritorial Reach ............................... 23

II. COMITY DOES NOT BAR THE TRUSTEE’S RECOVERY ACTIONS ........................................................................................... 26

A. Standard of Review .................................................................. 27

B. The Trustee’s Recovery Actions Do Not Interfere with the Foreign Liquidations .......................................................... 29

1. The BLMIS Liquidation and the Foreign Funds’ Liquidations Are Separate Proceedings ......................... 30

2. There Is No “End Run” and No Special Deference to the Foreign Funds’ Liquidations Is Required ............ 31

3. The Possibility That a Customer Might Have an Action Against Its Own Investors Is No Basis for a Comity Dismissal .......................................................... 33


ii

4. Only Appellees Request Deference ............................... 36

5. Appellees Should Not Be Permitted to Use Comity as a Shield ...................................................................... 39

C. A Comity Dismissal Was Improper Because There Is No True Conflict ............................................................................ 40

1. A True Conflict between U.S. and Foreign Law Is a “Threshold Requirement” for a Prescriptive Comity-Based Dismissal ............................................... 40

2. There Is No True Conflict between U.S. and Foreign Law that Requires a Prescriptive Comity-Based Dismissal ............................................................. 42

3. The Trustee’s Settlement with the Fairfield Liquidators Is Entitled to Respect ................................. 47

4. Appellees Do Not Seriously Attempt to Establish a True Conflict between U.S. and Cayman Law .............. 49

D. The U.S. Interests at Stake and the U.S. Connections to the Trustee’s Recovery Actions Compel the Exercise of U.S. Jurisdiction ....................................................................... 50

1. The Lower Courts Erred as a Matter of Law in Failing to Consider All Relevant Factors under Maxwell .......................................................................... 51

2. The Lower Courts Failed to Consider the U.S. Interests in this SIPA Liquidation ................................. 53

3. The Lower Courts Failed to Consider the U.S. Connections in the Trustee’s Lawsuits .......................... 57

CONCLUSION ....................................................................................................... 58


iii

TABLE OF AUTHORITIES

Page(s)

Cases

Adelphia Recovery Tr. v. Goldman, Sachs & Co., 748 F.3d 110 (2d Cir. 2014) ............................................................................... 15

Animal Sci. Prod., Inc. v. Hebei Welcome Pharm. Co. Ltd. (In re Vitamin C Antitrust Litig.), 837 F.3d 175 (2d Cir. 2016) ......................................................................... 28, 29

Anza v. Ideal Steel Supply Corp., 547 U.S. 451 (2006) ............................................................................................ 11

Banco para el Comercio Exterior de Cuba v. First Nat’l City Bank, 744 F.2d 237 (2d Cir. 1984) ............................................................................... 34

Barclays Capital Inc. v. Giddens (In re Lehman Bros. Inc.), 478 B.R. 570 (S.D.N.Y. 2012) ........................................................................... 25

Bascuñán v. Elsaca, 874 F.3d 806 (2d Cir. 2017) ........................................................................... 9, 57

Begier v. IRS, 496 U.S. 53 (1990) ........................................................................................ 12, 15

Belot v. Burge, 490 F.3d 201 (2d Cir. 2007) ............................................................................... 29

Bigio v. Coca-Cola Co., 448 F.3d 176 (2d Cir. 2006) ............................................................................... 37

In re BLMIS, 654 F.3d 229 (2d Cir. 2011) ............................................................................... 46

Chavez v. Carranza, 559 F.3d 486 (6th Cir. 2009) .............................................................................. 42

Diorinou v. Mezitis, 237 F.3d 133 (2d Cir. 2001) ............................................................................... 28


iv

Dowden v. Cross Cty. Bank (In re Brittenum & Assocs., Inc.), 97 B.R. 503 (E.D. Ark. 1987) ............................................................................. 18

Eastman Kodak Co. v. STWB, Inc., 452 F.3d 215 (2d Cir. 2006) ............................................................................... 49

F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004) ...................................................................................... 28, 51

Fairfield Sentry Ltd. v. Migani, [2014] UKPC 9 (Ct. App. British Virgin Is.) ................................... 43, 44, 45, 52

FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992) ........................................................................passim

Ferris, Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 286 B.R. 109 (Bankr. D. Minn. 2002) ................................................................ 22

Filetech S.A. v. France Telecom S.A., 157 F.3d 922 (2d Cir. 1988) ............................................................................... 41

French v. Liebmann (In re French), 440 F.3d 145 (4th Cir. 2006) .................................................................. 12, 13, 14

In re Griffin Trading Co., 245 B.R. 291 (Bankr. N.D. Ill. 2000), vacated due to settlement, 270 B.R. 882 (N.D. Ill. 2001) ............................................................................. 38

Gross v. German Found. Indus. Initiative, 456 F.3d 363 (3d Cir. 2006) ............................................................................... 42

Gucci Am., Inc. v. Weixing Li, 768 F.3d 122 (2d Cir. 2014) ............................................................................... 30

Hall v. United States, 566 U.S. 506 (2012) .............................................................................................. 4

Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993) ............................................................................................ 41

Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718 (2017) ........................................................................................ 14


v

Hill v. Spencer Sav. & Loan Assoc. (In re Bevill, Bresler & Schulman, Inc.), 83 B.R. 880 (D.N.J. 1988) ...................................................................... 18, 19, 20

Horwitz v. Sheldon (In re Donald Sheldon & Co., Inc.), 148 B.R. 385 (Bankr. S.D.N.Y. 1992) ................................................................ 25

IBP, Inc. v. Alvarez, 546 U.S. 21 (2005) .............................................................................................. 14

Jesner v. Arab Bank, PLC, No. 16-499, slip op. (U.S. Apr. 24, 2018) ........................................................ 1, 2

JPMorgan Chase Bank v. Altos Hornos de Mexico, S.A. de C.V., 412 F.3d 418 (2d Cir. 2005) ............................................................................... 37

Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.), 768 F.3d 239 (2d Cir. 2014) ............................................................................... 38

LaMonica v. CEVA Grp. PLC (In re CIL Ltd.), 582 B.R. 46 (Bankr. S.D.N.Y. 2018) .................................................. 5, 46, 47, 48

Louis Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83 (2d Cir. 2012) ................................................................................... 4

Maxwell Commc’n Corp., plc. v. Société Générale (In re Maxwell Commc’n Corp., plc.), 93 F.3d 1036 (2d Cir. 1996) ........................................................................passim

Menendez v. Saks & Co., 485 F.2d 1355 (2d Cir. 1973), rev’d sub nom. Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682 (1976) .................................... 34

Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018) ...................................................................................passim

Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010) .....................................................................................passim

Official Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahr. Islamic Bank (In re Arcapita Bank B.S.C.(c)), No. 12-11076 (SHL), 2018 WL 718399 (Bankr. S.D.N.Y. Feb. 5, 2018) ..................................................................................................................... 5


vi

In re Lehman Bros. Holdings, Inc., 445 B.R. 143 (Bankr. S.D.N.Y. 2011) ................................................................ 17

In re Petition of Herbert H. Davis, 191 B.R. 577 (Bankr. S.D.N.Y. 1996) ................................................................ 39

Picard v. Bureau of Labor Ins. (In re BLMIS), 480 B.R. 501 (Bankr. S.D.N.Y. 2012) ........................................................ 5, 6, 12

Picard v. Estate (Succession) of Doris Igoin (In re BLMIS), 525 B.R. 871 (Bankr. S.D.N.Y. 2015) ................................................................ 54

Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir. 2014) ............................................................. 21, 22, 34, 36

Picard v. Ida Fishman Revocable Trust (In re BLMIS), 773 F.3d 411 (2d Cir. 2014) ............................................................................... 18

Picard v. JPMorgan Chase & Co. (In re BLMIS), 721 F.3d 54 (2d Cir. 2013) ................................................................................. 26

Picard v. Maxam Absolute Return Fund, L.P. (In re BLMIS), 460 B.R. 106 (Bankr. S.D.N.Y. 2011), aff’d, 474 B.R. 76 (S.D.N.Y. 2012) ...................................................................................... 40, 54, 55

Picard v. Primeo Fund (In Liquidation), 2014(1) CILR 379 (Ct. App. Cayman Is.) .......................................................... 49

RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (2016) .................................................................................passim

Rosenman Family LLC v. Picard, 395 F. App’x 766 (2d Cir. Oct. 7, 2010) ............................................................ 22

In re Schimmelpenninck, 183 F.3d 347 (5th Cir. 1999) .............................................................................. 31

SIPC v. Barbour, 421 U.S. 412 (1975) ............................................................................................ 54

SIPC v. BLMIS (In re BLMIS), No. 08-01789 (SMB), 2016 WL 6900689 (Bankr. S.D.N.Y. Nov. 22, 2016) ......................................................................................................passim


vii

SIPC v. BLMIS (In re Madoff), 531 B.R. 439 (Bankr. S.D.N.Y. 2015) ................................................................ 56

SIPC v. BLMIS (In re Madoff Sec.), 499 B.R. 416 (S.D.N.Y. 2013) ........................................................................... 22

SIPC v. BLMIS (In re Madoff Sec.), 501 B.R. 26 (S.D.N.Y. 2013) ............................................................................... 6

SMP Ltd. v. SunEdison, Inc. (In re SunEdison, Inc.), 577 B.R. 120 (Bankr. S.D.N.Y. 2017) ................................................................ 33

Spizz v. Goldfarb Seligman & Co. (In re Ampal-American Isr. Corp.), 562 B.R. 601 (Bankr. S.D.N.Y. 2017) .............................................................. 5, 7

Trefny v. Bear Stearns Sec. Corp., 243 B.R. 300 (S.D. Tex. 1999) ........................................................................... 21

In re Tremont Sec. Law, State Law, and Ins. Law Litig., 699 F. App’x 8 (2d Cir. June 26, 2017) .............................................................. 55

In re Tribune Co. Fraudulent Convey. Litig., 818 F.3d 98 (2d Cir. 2016) ................................................................................... 6

United Bank Ltd. v. Cosmic Int’l, Inc., 542 F.2d 868 (2d Cir. 1976) ............................................................................... 34

United Int’l Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207 (10th Cir. 2000) .......................................................................... 42

United States v. Epskamp, 832 F.3d 154 (2d Cir. 2016) ..................................................................... 4, 13, 28

U.S. Bank Nat’l Ass’n ex rel. CWCapital Asset Mgmt. LLC v. The Village at Lakeridge, LLC, 138 S. Ct. 960 (2018) .......................................................................................... 29

Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709 (2d Cir. 1987) ............................................................................... 31

Weisfelner v. Blavatnik (In re Lyondell Chem. Co.), 543 B.R. 127 (Bankr. S.D.N.Y. 2016) .................................................................. 5


viii

Statutes

11 U.S.C. § 101 et seq. ......................................................................................passim

11 U.S.C. § 502(d) ..................................................................................................... 4

11 U.S.C. § 541 ...................................................................................... 10, 11, 12, 13

11 U.S.C. § 541(a) ............................................................................................. 13, 14

11 U.S.C. § 541(a)(1) ................................................................................... 11, 13, 14

11 U.S.C. § 541(a)(3) ......................................................................................... 13, 19

11 U.S.C. § 546(e) ..................................................................................................... 4

11 U.S.C. § 547(b) ..................................................................................................... 4

11 U.S.C. § 548 .................................................................................................passim

11 U.S.C. § 548(a)(1) ........................................................................................... 4, 13

11 U.S.C. § 548(a)(1)(A) ......................................................................................... 46

11 U.S.C. § 550 .................................................................................................passim

11 U.S.C. § 550(a) ............................................................................................passim

11 U.S.C. § 550(a)(1) ........................................................................................... 8, 11

11 U.S.C. § 550(a)(2) ................................................................................... 3, 7, 8, 11

11 U.S.C. § 550(b) ..................................................................................................... 5

11 U.S.C. § 550(b)(2)......................................................................................... 46, 56

11 U.S.C. § 550(c) ..................................................................................................... 5

11 U.S.C. § 550(f)(1) ................................................................................................. 5

15 U.S.C. § 78aaa et seq. ..................................................................................passim

15 U.S.C. § 78eee(b)(2)(A) ...................................................................................... 24

15 U.S.C. § 78fff-2(c)(3) ..................................................................................passim


ix

15 U.S.C. § 78lll ....................................................................................................... 22

15 U.S.C. § 78lll(4) ...........................................................................................passim

15 U.S.C. § 78lll(4)(D) ...................................................................................... 17, 22

18 U.S.C. § 1962 ...................................................................................................... 10

28 U.S.C. § 1334(e)(1) ....................................................................................... 14, 24

Rules

17 C.F.R. 15c3-3 ...............................................................................................passim

17 C.F.R. 15c3-3(f) .................................................................................................. 18

Other Authorities

A. Scalia & B. Garner, Reading Law: The Interpretation of Legal Texts 156 (2012) ............................... 8

Black’s Law Dictionary (10th ed. 2014) .................................................................................................... 54

BVI Insolvency Act 2003 .................................................................................. 43, 44

Michael E. Don & Josephine Wang, Stockbroker Liquidations under the Securities Investor Protection Act and Their Impact on Securities Transfers, 12 Cardozo L. Rev. 509 (1990) ........................................................................................................... 21

Michael P. Jamroz, The Customer Protection Rule, 57 Bus. Law. 1069 (2002) ............................... 17

Madoff Victim Fund, http://www.madoffvictimfund.com (last accessed May 6, 2018) ........................................................................................ 56

Restatement (Fourth) of Foreign Relations Law of the United States § 204 (Am. Law Inst. Tentative Draft No. 3, 2017) ..................................... 28, 51


PRELIMINARY STATEMENT

A sovereign who “refuses to cause a reparation to be made of the damage

caused by his subject”—such as Bernard L. Madoff—“renders himself in some

measure an accomplice to the injury, and becomes responsible for it.” 1 E. de

Vattel, The Law of Nations bk. II, § 77, at 145 (1760), quoted in Jesner v. Arab

Bank, PLC, No. 16-499, slip op. at 3 n.3 (U.S. Apr. 24, 2018) (Gorsuch, J.,

concurring in part). Madoff’s New York-based Ponzi scheme caused grievous

harm around the world. Commendably, U.S. statutory law—both the Securities

Investor Protection Act, 15 U.S.C. §§ 78aaa et seq. (“SIPA”), and the Bankruptcy

Code, 11 U.S.C. §§ 101 et seq.—provides a comprehensive scheme of remedies,

which of necessity involve recovering money from around the world.

Yet Appellees would have this Court hold—in direct conflict with the Fourth

Circuit—that the Code does not provide remedies for recovering money that

Bernard L. Madoff Investment Securities (“BLMIS”) sent to foreign feeder funds,

which then sent that money to Appellees. Appellees claim that the “remedial”

nature of these lawsuits renders the U.S. interests unimportant in comparison to

foreign governments’ interest in applying their own remedial schemes to the ripple

effects of Madoff’s fraud. But a recent and major Supreme Court bankruptcy

opinion, which Appellees ignore, points out that Chapter 5’s interrelated


2

substantive and remedial provisions are important “core principles of bankruptcy.”

Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883, 888 (2018).

So inconsequential do Appellees deem the interest of the United States in

providing a coherent system of remedies for Madoff’s fraud that they argue that

these lawsuits should be dismissed at the pleading stage even if Congress intended

the Bankruptcy Code and SIPA to apply to the transfers at issue, all because of a

“discretionary” comity determination.

None of this can possibly be right. And the absence of even one foreign

sovereign appearing as amicus in support of affirmance dramatically illustrates that

these lawsuits, unlike the many others eliciting howls of outrage from our Nation’s

allies (see Jesner, No. 16-499, slip op. at 16 (plurality opinion of Kennedy, J.); id.

at 5 (Alito, J., concurring in part)), further rather than undermine principles of

cooperation and comity among nations. The judgments below should be reversed.

ARGUMENT

I. THE PRESUMPTION AGAINST EXTRATERRITORIALITY DOES NOT BAR THE TRUSTEE’S RECOVERY ACTIONS

The Bankruptcy Code and SIPA address the administration of a bankrupt

broker-dealer’s estate and the protection of its customers. The avoidance of

transfers and recovery of the property transferred are means to accomplish those

goals. The transfers at issue here comprise customer property that, for purposes of

the Trustee’s avoidance and recovery powers, is treated as property of the debtor.


3

The fact that this customer property was subsequently re-transferred overseas is

irrelevant to the issues on appeal.

This Court should determine that the Trustee’s actions are not barred by the

presumption against extraterritoriality because the Trustee’s actions involve a

domestic application of the Bankruptcy Code and SIPA. Alternatively, Congress

intended the Code and SIPA to apply extraterritorially. Either conclusion alone

requires reversal of the lower courts’ extraterritoriality holdings.

A. The Trustee’s Recovery Actions Involve a Domestic Application of the Bankruptcy Code, Which Has an Extraterritorial Reach

1. Domestic Application of the Bankruptcy Code

The focus of the Bankruptcy Code’s avoidance and recovery provisions—

including 11 U.S.C. § 550—is on the initial transfer that depletes the debtor’s

estate. See Trustee Br. 19–24. Appellees concede that, here, the initial transfers

are all domestic. Appellees’ Br. 33 n.16. That concession should end the Court’s

extraterritoriality analysis. See RJR Nabisco, Inc. v. European Cmty., 136 S. Ct.

2090, 2101 (2016) (“if the conduct relevant to the statute’s focus occurred in the

United States, then the case involves a permissible domestic application even if the

other conduct occurred abroad”).

So Appellees change the question. They argue that the relevant question is

the “focus of . . . Section 550(a)(2),” uninformed by the Bankruptcy Code, Chapter

5’s avoidance provisions, or even the rest of Section 550. Appellees’ Br. 45.


4

Changing the question, however, ignores the well settled-law of this Circuit, as

well as basic principles of statutory construction that prohibit courts from reading a

section—or here subsection—in isolation from the context, language, object, and

policy of the entire statute. See Merit, 138 S. Ct. at 894 (citing Hall v. United

States, 566 U.S. 506, 516 (2012)).1

That Section 550(a) provides for the recovery of subsequent as well as initial

transfers does not alter the entire purpose of either the Bankruptcy Code or its

avoidance and recovery provisions. Chapter 5’s references to “transfer” uniformly

refer to the initial transfer that depletes the estate. See, e.g., 11 U.S.C. §§ 502(d),

546(e), 547(b), 548(a)(1) (all referring to initial transfers made by the debtor). As

1 According to Appellees, the Trustee erred by citing case law requiring a court to consider the meaning of a statute as a whole when interpreting one of its provisions. “The Supreme Court,” Appellees say, “has rejected this approach when the question is whether a statute has extraterritorial reach.” Appellees’ Br. 41. Appellees could hardly be more wrong. They cite RJR for their blinkered approach to statutory provisions. Yet in RJR itself the Supreme Court stated that “an express statement of extraterritoriality is not essential” and that “‘context can be consulted as well.’” Id. at 2102 (quoting Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 265 (2010)). Unsurprisingly, shortly after RJR was decided this Court assumed for the sake of argument that the text of a provision was insufficiently plain to overcome the presumption against extraterritoriality but still “look[ed] to the statutory scheme as a whole and plac[ed] the particular provision within the context of that statute.” United States v. Epskamp, 832 F.3d 154, 164 (2d Cir. 2016) (quoting Louis Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83, 108 (2d Cir. 2012)). And the Court proceeded to “conclude that the statutory scheme and the context of the statute overcome the presumption against extraterritoriality.” Id.


5

for Section 550 specifically, the word “transfer” is used multiple times, all of

which unambiguously refer to the initial, avoidable transfer of a debtor’s interest in

property. Read in its entirety, Section 550(a) states the conditions under which

“the transfer avoided” may be recovered and from whom it is recoverable. See id.

§ 550(a), (b), (c); Spizz v. Goldfarb Seligman & Co. (In re Ampal-American Isr.

Corp.), 562 B.R. 601, 613 (Bankr. S.D.N.Y. 2017) (discussing consistency of the

use of “transfer” throughout); Picard v. Bureau of Labor Ins. (In re BLMIS),

480 B.R. 501, 524 (Bankr. S.D.N.Y. 2012) (“BLI”), SPA926–27 (same). Any

notion that the focus of Section 550 is not on the initial transfer is belied by its

title—“Liability of transferee of avoided transfer”—and the fundamental fact that

the statute of limitations is keyed to the avoidance of the initial transfer, not to any

subsequent transfer. 11 U.S.C. § 550 & 550(f)(1).

Except for the decisions below, the unanimous conclusion of every lower-

court decision in this Circuit is that the Code’s avoidance and recovery provisions

focus on the initial transfer that depletes the estate. See LaMonica v. CEVA Grp.

PLC (In re CIL Ltd.), 582 B.R. 46, 93 (Bankr. S.D.N.Y. 2018); Official Comm. of

Unsecured Creditors of Arcapita Bank B.S.C.(c) v. Bahr. Islamic Bank (In re

Arcapita Bank B.S.C.(c)), No. 12-11076 (SHL), 2018 WL 718399, at *2 (Bankr.

S.D.N.Y. Feb. 5, 2018); Ampal-American Isr. Corp., 562 B.R. at 613; Weisfelner v.

Blavatnik (In re Lyondell Chem. Co.), 543 B.R. 127, 151–52 (Bankr. S.D.N.Y.


6

2016); BLI, SPA926–27; see also SIPC v. BLMIS (In re Madoff Sec.), 501 B.R. 26,

29 (S.D.N.Y. 2013).

Contrary to Appellees’ argument, bankruptcy experts do not “agree” that

Section 550 would need to be “revised” to apply to subsequent transfers abroad.

Appellees’ Br. 33 n.16.2 In the report Appellees cite, the American Bankruptcy

Institute Commissioners cited the district court decision below for the proposition

that “[s]ome courts also are uncertain whether a debtor in possession is authorized

to seek to recover property from foreign subsequent transferees under Section

550.” D.J. Baker et al., Final Report and Recommendations, Commission to Study

the Reform of Chapter 11, at 153 (Am. Bankr. Inst. 2014). After considering the

facts of this liquidation and others, the Commissioners “generally agreed” that

foreign transfers should be subject to Chapter 5 if consistent with comity. Id. at

155; see also In re Tribune Co. Fraudulent Convey. Litig., 818 F.3d 98, 124 (2d

Cir. 2016) (“the effect or meaning of legislation is not to be gleaned from isolated

requests for more protective, but possibly redundant, legislation”). In an opinion

issued two months after the decision below, Judge Bernstein agreed, holding that

“[w]hile other doctrines, such as international comity, may limit the reach of

2 Through an amicus brief, prominent bankruptcy professors support the Trustee’s position that the presumption against extraterritoriality does not bar the Trustee’s claims under Section 550. Br. of Amici Curiae Bankr. L. Profs. 7–24. Appellees were unable to find a single bankruptcy scholar to respond.


7

section 550(a), the presumption against extraterritoriality should not.” Ampal-

American Isr. Corp., 562 B.R. at 613.

This is consistent with the nature of the actions at issue. Even though an

action to avoid or recover a fraudulent conveyance is brought against a transferee,

it is undertaken to recover a claim against the debtor. As this Court explained in

Colonial Realty, “[a]bsent a claim against the debtor, there is no independent basis

for the action against the transferee.” FDIC v. Hirsch (In re Colonial Realty Co.),

980 F.2d 125, 132 (2d Cir. 1992) (citations omitted). This is because a fraudulent

transfer claim is focused on the conduct of the debtor, id. at 132, and recovery

under Section 550 seeks to restore the estate depleted by the debtor’s conduct, no

matter from where the property is recovered.

Moreover, Appellees’ position that Section 550(a)(2) is not focused on the

initial transfer is undermined by Merit. 138 S. Ct. 883. There, the Supreme Court

was asked to determine “the relevant transfer” for Section 546(e)’s safe harbor.

The Court relied on the Bankruptcy Code’s language and context to conclude that

“the relevant transfer” was “the transfer the trustee sought to avoid” and not any

“component parts” of that transfer. Id. at 894−95.

Applying the Supreme Court’s analysis to Section 550(a) demonstrates that

the provision operates in tandem with the substantive powers conferred by the

avoidance provisions. Id. at 893–94. Section 550(a)’s first clause refers to the


8

avoidance of a transfer under specified sections of the Code. 11 U.S.C. § 550(a)

(“to the extent that a transfer is avoided under § 544, 545, 547, 548, 549, 553(b), or

724(a)”). Section 550(a)’s second clause—“the trustee may recover . . . the

property transferred, or . . . the value of such property, from”—signals a trustee’s

power to recover an avoidable transfer from any of the parties listed in subsection

(a)(1) or (a)(2). Id. These subsections do not modify what transfer is recoverable,

but rather articulate from whom “the trustee may recover . . . the property

transferred, or . . . the value of such property.” See A. Scalia & B. Garner, Reading

Law: The Interpretation of Legal Texts 156 (2012) (when Congress uses

unindented text followed by indented subparts, it signals that the subordinating,

prefatory language applies to all subparts).

Applying this analysis here proves that “the relevant transfer” for purposes

of recovery is the avoidable, initial transfer. Merit stated that Section 546(e)’s

“focus must remain on the transfer the trustee sought to avoid” because avoidance

and the safe harbors from avoidance were logically “two sides of the same coin.”

138 S. Ct. at 894−95. Avoidance and recovery are similarly “two sides of the same

coin” where the focus must remain on the transfer the trustee seeks to avoid.

Contrary to Appellees’ claim that the Trustee seeks a radical expansion of

U.S. bankruptcy law, Appellees’ Br. 2, courts regularly apply Section 550 to reach

abroad and recover avoidable transfers from foreign transferees, both immediate


9

and mediate. The record illustrates this point. First, Appellees concede that

BLMIS’s initial transfers to foreign feeder funds are avoidable and recoverable.

See Appellees’ Br. 46 & n.24 (“[n]o one has challenged, on extraterritoriality

grounds, the ability of the Trustee to avoid and recover the initial transfers here”).

Second, the bankruptcy court’s decision permits the Trustee to use Section 550 to

reach abroad and recover mediate transfers held by foreign defendants—many of

whom are Appellees—when the initial transfer was made by a domestic feeder

fund. See, e.g., SIPC v. BLMIS (In re BLMIS), No. 08-01789 (SMB), 2016 WL

6900689, at *28-30 (Bankr. S.D.N.Y. Nov. 22, 2016), SPA290−92 (declining to

dismiss the Trustee’s actions seeking to recover avoidable transfers BLMIS made

to Tremont feeder funds, incorporated domestically and abroad, to foreign mediate

transferees based where funds were operated domestically).

Viewing the Trustee’s recovery actions as domestic is consistent with this

Court’s decision in Bascuñán v. Elsaca, 874 F.3d 806, 820–21 (2d Cir. 2017).

There, the Court held that the “injury is domestic if the [] property was located in

the United States when it was stolen or harmed, even if the plaintiff resides

abroad.” Here, the money that was transferred—the initial transfer that depleted

the estate—was stolen from New York, making application of Section 550

domestic. Id.


10

2. The Bankruptcy Code Applies Extraterritorially

If there were any doubt as to whether the lower courts erred in construing

Section 550 as lacking extraterritorial reach, the contortions that Appellees

undertake to parse the Bankruptcy Code to fit that conclusion should erase it.

First, Appellees make up a legal standard: “To determine whether the statute

applies extraterritorially, the court looks to the specific section of the statute at

issue . . . either the section itself or one that it explicitly incorporates must clearly

and unmistakably demonstrate congressional intent that it apply extraterritorially.”

Appellees’ Br. 31 (emphasis added). Therefore, Appellees assert, Sections 541 and

548 may not be considered in determining congressional intent as to Section 550

because “such an approach is foreclosed by RJR.” Id. at 32–33.

RJR in no way stands for that proposition. In the cited analysis, the Supreme

Court determined that subsections 1962(b) and (c) of RICO apply extraterritorially

to the extent that the underlying predicates alleged in the particular case had

extraterritorial effect. RJR, 136 S. Ct. at 2102–03. Rejecting the argument that

RICO did not itself expressly recite an extraterritorial intent, the Court quoted

Morrison to respond that “[a]ssuredly context can be consulted as well,” and held

that “context is dispositive here.” Id. at 2102. The Court examined the relevant

section of RICO, 18 U.S.C. § 1962, and its explicitly incorporated predicates to


11

reach its conclusions, but it did not hold that in a different case a court should not

consider other sections of a statute when analyzing extraterritoriality.3

Here, Section 550 provides for the recovery of property conveyed in a

transfer that is avoided under Section 548. Section 548, in turn, uses the language

of Section 541(a)(1) to define what property may be avoided and recovered.

Appellees concede this, but argue that it is insufficient because Section 550 does

not “explicitly” refer to Section 541 or repeat the specific phrase “wherever

located.” Appellees’ Br. 42. But to accept Appellees’ invitation to read Section

550 in isolation from the rest of the Code would ignore the relevant context here,

in contravention of RJR, Morrison, Second Circuit case law (see Section I.A.1 &

note 1, supra), and common sense.

Appellees go even further and assert that RJR requires not only that Section

550 be considered independently of Sections 548 and 541, but also that Section

550(a)(1) be analyzed separately from Section 550(a)(2): “The Trustee’s improper

attempt to conflate initial transfers and subsequent transfers flies in the face of the

Supreme Court’s holding in RJR.” Appellees’ Br. 46. But Section 550(a) makes

3 The holding that a court must examine the particular predicate at issue in a RICO case does not advance Appellees’ argument. Predicate offenses under RICO are not themselves a single statutory scheme drafted and enacted together; they are each offenses that Congress deemed sufficient to warrant potential RICO prosecution. See Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 479 (2006) (Breyer, concurring in part and dissenting in part).


12

no distinction whatsoever between the recovery of transfers from the “initial

transferee” and “any immediate or mediate transferee” beyond putting them into

separate subsections. They are simply two different categories of transferees from

whom a trustee may recover avoidable transfers. As Merit instructs, there is no

basis in Section 550 (or anywhere else in the Bankruptcy Code) to distinguish

between a transferee of an avoidable transfer—whether initial or subsequent—who

is in the United States and one who is outside the United States.

Finally, Appellees devote significant space to the incorrect premise that

Colonial Realty defeats the argument that the Bankruptcy Code’s avoidance and

recovery provisions apply extraterritorially and renders French, Begier, and BLI

inapposite. Appellees’ Br. 41−44. But nothing in Colonial Realty conflicts with

French, BLI, or Begier. In fact, when read together, each of those decisions shows

that Congress intended the Code’s avoidance and recovery provisions to apply

extraterritorially.

As the Fourth Circuit noted in French, the question of when fraudulently

transferred property becomes property of the estate is not dispositive as to the

extraterritoriality issue. See French v. Liebmann (In re French), 440 F.3d 145, 151

& n.2 (4th Cir. 2006) (Section 548 “plainly allows a trustee to avoid any transfer of

property that would have been ‘property of the estate’ prior to the transfer in

question—as defined by § 541—even if that property is not ‘property of the estate’


13

now.” (emphasis in original)). As Colonial Realty and French both recognize,

Congress deliberately authorized trustees to seek avoidance and recovery of

“property of the debtor.” See id. at 152–53; Colonial Realty, 980 F.2d at 131.

That category is broader than “property of the estate,” as it must be, because

otherwise no transfer could ever be avoided and recovered under Sections 548 and

550. See 11 U.S.C. § 548(a)(1) (the trustee may avoid any transfer of “an interest

of the debtor in property”); id. § 550 (the trustee may recover any avoided transfer

from the initial or any immediate or mediate transferee).

Colonial Realty does not restrict a trustee’s express powers to avoid transfers

and recover property of the debtor that would have been property of the estate but

for the debtor’s fraudulent transfer. 980 F.2d at 131–32. Nor does it provide any

support for the argument that Sections 548 and 550 must be read independently

from Section 541. The inclusion in the definition of “property of the estate” in the

phrase “wherever located and by whomever held” in Section 541(a) applies equally

to transfers recovered by the Trustee under subsection (a)(3) and to property held

at the commencement of the case under subsection (a)(1).

Appellees’ contrary position would render the Bankruptcy Code’s avoidance

provisions nugatory—the only property that could be recovered would be property

that had already been recovered—and is therefore grossly illogical. Cf. Epskamp,

832 F.3d at 164 (rejecting an argument against extraterritoriality because “[t]he


14

nature of [the section being construed] specifically, and the structure of federal

statutory narcotics laws generally, render Epskamp’s preferred reading of the

statute illogical”).

Moreover, Appellees cite no authority for their conclusion that Congress

intended the words “interests of a debtor in property” to have a different meaning

in Section 541(a) than they do in Section 548, much less that Congress meant the

words to have a narrower geographic reach in the section that reaches the broader

category of property. See 11 U.S.C. § 541(a); 28 U.S.C. § 1334(e)(1) (giving the

district court exclusive jurisdiction of “all the property, wherever located, of the

debtor as of the commencement of such case, and of property of the estate”);

Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718, 1723 (2017) (it is the

“usual presumption that ‘identical words used in different parts of the same statute’

carry ‘the same meaning’”) (quoting IBP, Inc. v. Alvarez, 546 U.S. 21, 34 (2005)).

The Fourth Circuit’s decision in French is in harmony with Colonial Realty

and other law in this Circuit. Appellees suggest that French has been “abrogated

to the extent the case suggests a different extraterritoriality analysis” than RJR or

Morrison. Appellees’ Br. 43. But French does not suggest a different

extraterritoriality analysis. Instead, it correctly anticipated the extraterritoriality

analyses later set forth in Morrison and RJR. See Trustee Br. 27–28; Br. of Amicus

Curiae Bankr. L. Profs. 19–20.


15

Finally, nothing about the Fourth Circuit’s reliance on Begier is misplaced

simply because the Supreme Court decided an issue other than the extraterritorial

reach of the Code’s avoidance and recovery provisions. Begier v. IRS, 496 U.S.

53, 58–59 (1990). This Court itself has cited Begier for the proposition that a

trustee’s avoidance powers under the Code’s avoidance provisions “apply to

‘transfers of property of the debtor,’ which include[] ‘all legal or equitable interests

of the debtor in property as of the commencement of the case.’” Adelphia Recovery

Tr. v. Goldman, Sachs & Co., 748 F.3d 110, 115 (2d Cir. 2014) (quoting Begier,

496 U.S. at 58; 11 U.S.C. § 541(a)(1)) (internal citations omitted).

The presumption against extraterritoriality does not bar the Trustee’s

recovery actions under the Bankruptcy Code.

B. The Trustee’s Actions to Recover “Customer Property” Are a Domestic Application of SIPA and In Any Event, SIPA Has an Extraterritorial Reach

Apart from the above analysis, the Trustee’s actions should proceed because

they seek recovery of customer property. SIPA’s customer-property focus makes its

application domestic and (if necessary) demonstrates its extraterritorial reach.

1. Domestic Application of SIPA

Appellees do not dispute that SIPA’s focus is on customer property. If the

property the Trustee seeks to recover is customer property, then there is no

question that this is a domestic application that does not implicate


16

extraterritoriality. See RJR, 136 S. Ct. at 2101 (“if the conduct relevant to the

statute’s focus occurred in the United States, then the case involves a permissible

domestic application even if other conduct occurred abroad”) (emphasis added).

Appellees argue that the property the Trustee seeks to recover in this appeal

is not “customer property” because it is not currently in the possession of the

Trustee. See Appellees’ Br. 53–54 (“not just possession, but post-petition

possession, is required for property of the debtor to be treated as ‘customer

property’”) (emphasis in original); id. at 56 (if property is returned to customers

pre-liquidation, it is no longer “customer property”); id. at 58–59 (“‘customer

property’ does not include unrecovered property”); id. at 54–55 (types of customer

property outlined in subparagraphs (A) through (E) of SIPA § 78lll(4) show that

customer property must be in possession of debtor). Appellees seriously

misunderstand SIPA.

(a) Property becomes Customer Property upon Deposit with the Broker-Dealer

Plain statutory language shows Appellees’ error. The money the Trustee

seeks to recover became “customer property” upon its deposit at BLMIS’s bank

account in New York. Customer property under SIPA is “cash and securities . . .

at any time received, acquired, or held by or for the account of a debtor from or for

the securities accounts of a customer, and the proceeds of any such property

transferred by the debtor, including property unlawfully converted.” SIPA


17

§ 78lll(4) (emphasis added). The customer property definition includes securities

and cash held for customers pursuant to 17 C.F.R. § 240.15c3-3 (“Rule 15c3-3”);4

assets derived from or traceable to customer property; and, under SIPA

§ 78lll(4)(D), other debtor property that a trustee must allocate to the fund of

customer property as necessary to remedy the debtor’s non-compliance with the

segregation requirements of Rule 15c3-3.

When customers invest their cash and securities with a broker, they transfer

possession, but not title, of their money to the broker. The broker never owns that

money, but rather is legally bound to hold that money in reserve for its customers.

See Michael P. Jamroz, The Customer Protection Rule, 57 Bus. Law. 1069, 1071–

72 (2002) (noting that “customer property” in securities industry refers to property

held by broker-dealer but belongs to customers).

When the debtor transfers property it received from the customer, such

property remains “customer property” subject to the special protections of SIPA.

SIPA § 78lll(4) (including in the definition of customer property “the proceeds of

any such property transferred by the debtor, including property unlawfully

4 While in operation, broker-dealers are required to segregate customer property under the Securities and Exchange Commission (“SEC”) “customer protection rules.” Once a broker-dealer goes into liquidation under SIPA, the SIPA designation of customer property is the seamless continuation of Rule 15c3-3, taking effect the moment the broker-dealer fails. In re Lehman Bros. Holdings, Inc., 445 B.R. 143, 191–92 (Bankr. S.D.N.Y. 2011).


18

converted”) (emphasis added); see also Dowden v. Cross Cty. Bank (In re

Brittenum & Assocs., Inc.), 97 B.R. 503, 508 (E.D. Ark. 1987) (a Rule 15c3-3

deposit is not subject to bank’s setoff claim because it is customer property); Rule

15c3-3(f) (Rule 15c3-3 account cannot be subject to bank lien because it consists

of customer property). This broad definition recognizes customers’ rights to the

property they gave to their broker for safekeeping, even if the debtor wrongfully

transferred it to others (who may themselves have also re-transferred it to others, as

is the case here). These provisions are different from the Bankruptcy Code.

If a broker transfers customer property, SIPA authorizes the trustee to

recover it using the Bankruptcy Code. SIPA § 78fff-2(c)(3) (a “trustee may

recover any property transferred by the debtor which, except for such transfer,

would have been customer property”); Picard v. Ida Fishman Revocable Trust (In

re BLMIS), 773 F.3d 411, 414 (2d Cir. 2014) (“Under SIPA, a trustee is

empowered to ‘recover’ (or claw back) money paid out by the debtor, as long as

the money ‘would have been customer property’ had the payment not occurred

and, and the transfers could be avoided under the Bankruptcy Code”). SIPA

§ 78fff-2(c)(3) is designed “to recover securities that would have been part of the

fund of customer property but for a prior transfer to a customer.” Hill v. Spencer

Sav. & Loan Assoc. (In re Bevill, Bresler & Schulman, Inc.), 83 B.R. 880, 893

(D.N.J. 1988). “The inquiry in an avoidance action, therefore, is: if the transfer did


19

not occur, would the securities have been part of the fund of customer property?”

Id. If the answer is yes, then that cash or securities are customer property subject

to recovery by SIPA trustees.

Bevill is the primary case that sets forth the interrelationship between

customer property and the Bankruptcy Code’s avoidance actions. Appellees

downplay its significance by suggesting that it has been overtaken by Morrison

and its progeny as to extraterritoriality. Appellees’ Br. 58 & n.29. But the Trustee

principally cites Bevill to explain the interplay between customer property and the

Code’s avoidance provisions, not for its extraterritoriality analysis. No post-Bevill

case calls its customer property analysis into question in any way.

(b) Customer Property Is Independent of Property of the Estate

In an attempt to avoid having to return customer property that does not

belong to them, Appellees conflate definitions of “property” under the Bankruptcy

Code with “customer property” under SIPA. They argue that the transfers here are

neither customer property nor property of the debtor, because transferred property

does not become “property of the estate” until after the transfers are avoided and

recovered. Regardless of whether moneys transferred by a SIPA-insured broker-

dealer pre-petition are considered “property of the estate” under Section 541(a)(3)

before recovery, they are still at all times customer property under SIPA. One has

nothing to do with the other.


20

Appellees argue that Colonial Realty, by holding that fraudulently transferred

property does not become property of the estate until it is recovered, somehow erases

the clear language of SIPA. Appellees’ Br. 53–54. But Colonial Realty does not

address SIPA or what constitutes customer property. It does not change the Bevill

analysis or the plain language of SIPA § 78fff-2(c)(3), which authorizes a SIPA

trustee to avoid and recover transfers of property that “would have been” customer

property but for the transfer.

Appellees next argue that this very same language in SIPA § 78fff-2(c)(3)

supports their temporal definition of customer property. Appellees claim that

“customer property” is created only once in the possession of the debtor, either in

customer accounts or as other “property of the debtor” and that, “once transferred,

the property is no longer ‘customer property.’” Appellees’ Br. 55–56 (citing the

use of “would have been” as the “unreal conditional” tense). Not so. SIPA

§ 78fff-2(c)(3) does not narrow the broad definition of “customer property” in

SIPA § 78lll(4). It simply ensures that, in addition to recovering interests of the

debtor in property, a trustee may also recover property that “would have been”

customer property. Appellees’ argument rests on a variation of the same logical

fallacy that underlies their analysis of the Code’s avoidance and recovery

provisions: If the only “customer property” in a case were property already in the


21

Trustee’s possession, SIPA trustees would never need to bring an avoidance action

under SIPA § 78fff-2(c)(3).5

Nor does Fairfield Greenwich support Appellees’ definition of customer

property. Appellees’ Br. 58 (citing Picard v. Fairfield Greenwich Ltd., 762 F.3d

199, 212–13 (2d Cir. 2014)). The Trustee’s position is consistent with this Court’s

statement in Fairfield Greenwich that, in a SIPA liquidation, Colonial Realty’s rule

about the relationship between transferred property and property of the estate also

applies. The Fairfield Greenwich court observed—in the context of an injunction

sought by the Trustee to block settlements relating to feeder funds and their

investors—that under Colonial Realty the transfers at issue were not property of

the estate any more than if a non-SIPA trustee had targeted them. But the Court’s

5 Appellees’ overly narrow interpretation would also resurrect the very ills that SIPA and its predecessor (Section 60e of the Chandler Act) were passed to cure. Previously, a broker’s customers could recover only whatever property the debtor was fortuitously holding on the date of the collapse, because a trustee could not avoid transfers. Michael E. Don & Josephine Wang, Stockbroker Liquidations under the Securities Investor Protection Act and Their Impact on Securities Transfers, 12 Cardozo L. Rev. 509, 520–523, 548 (1990) (describing pre-1938 liquidations, and protections of 60e and SIPA). The Chandler Act and SIPA remedied that uneven treatment by allowing a trustee to recover customer property whenever the fund of customer property is insufficient to pay customer claims. Id. at 548 (citing SIPA § 78fff-2(c)(3)); see also Trefny v. Bear Stearns Sec. Corp., 243 B.R. 300, 322 (S.D. Tex. 1999) (the purpose of SIPA § 78fff-2(c)(3) is “to prevent one or more customers from depriving other customers of assets by keeping these assets out of the ‘pool’ available for distribution to customers on a ratable basis”).


22

conclusion about a SIPA trustee’s powers did not address the definition of

“customer property.” 762 F.3d at 212.

(c) The Trustee’s Distribution Motions Have No Bearing on the Definition of Customer Property

Appellees argue that, by filing motions seeking authorization to allocate

money to and distribute money from the fund of customer property, the Trustee is

acknowledging that unrecovered funds are not customer property. Appellees’ Br.

56–57. Appellees misunderstand the purpose of the interim distribution motions.

The Trustee files those motions for court approval of: (i) his proposed

allocation of the property in his possession as between the customer property

estate6 and the general estate, and (ii) his proposed distribution to customers.

As to the allocation aspects of the motion, all customer property becomes

part of the fund of customer property. SIPA § 78lll. If there is a shortfall of

customer property (because the debtor failed to comply with Rule 15c3-3), non-

customer debtor property that would have been part of the general estate is

allocated to the fund of customer property instead. SIPA § 78lll(4)(D); Ferris,

Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 286 B.R. 109, 132

(Bankr. D. Minn. 2002). Here, the Trustee has recovered $12 billion of customer

6 See, e.g., Rosenman Family LLC v. Picard, 395 F. App’x 766, 768 (2d Cir. Oct. 7, 2010); SIPC v. BLMIS (In re Madoff Sec.), 499 B.R. 416, 425 (S.D.N.Y. 2013) (“the customer property estate is a separate and distinct estate from the general bankruptcy estate, not merely a set of priorities”).


23

property (composed of, at least, BLMIS’s JPMorgan account and customer

litigation recoveries) and approximately $700 million of debtor property

(composed of, among other things, proceeds from sale of debtor assets and vendor

litigation recoveries). See Ex. A to Ninth Allocation and Distribution Motion,

SIPC v. BLMIS, No. 08-01789 (SMB) (Bankr. S.D.N.Y. Dec. 18, 2017), ECF No.

17033. Because there remains a shortfall of customer property to satisfy the $19

billion owed to customers in this proceeding, the approximately $700 million of

debtor property recovered by the Trustee was also allocated to the fund of

customer property for distribution to customers in accordance with SIPA § 78lll(4).

As to the distribution aspect of these motions, the Trustee obviously cannot

distribute customer property before it is in his possession. That fact does not

change the character of unrecovered customer property.

2. SIPA Has an Extraterritorial Reach

Appellees argue that SIPA does not apply extraterritorially by trying to make

overly fine distinctions about SIPA. Those distinctions are either wrong or

irrelevant.

First, Appellees argue that, because SIPA § 78fff-2(c)(3) makes reference to

preempting state but not foreign law, Congress must not have intended that it, and

by extension, SIPA trustees’ avoidance powers, apply extraterritorially.

Appellees’ Br. 50–51; SIPA § 78fff-2(c)(3) (“the property so transferred shall be


24

deemed to have been the property of the debtor and, if such transfer was made to a

customer or for his benefit, such customer shall be deemed to have been a creditor,

the laws of any State to the contrary notwithstanding”). But the phrase “the laws

of any State to the contrary notwithstanding” merely ensures that SIPA trustees

will be able to take advantage of both state and federal fraudulent transfer law,

which, without that language, might not consider customer property “property of

the debtor” or consider customers “creditors.” Because SIPA § 78fff-2(c)(3)

works to ensure that SIPA trustees can use all U.S. law to recover customer

property wherever it was transferred, Congress would not and need not ensure that

this legal fiction, see Trustee Br. 31, also allows SIPA trustees to operate within

any foreign fraudulent conveyance laws. Through SIPA, Congress has already

provided the complete mechanism by which to bring back customer property,

wherever held, into the estate for distribution to customers.

By deeming customer property to be “property of the debtor,” SIPA aligns

the recovery of customer property with the broad jurisdictional grant of 28 U.S.C.

§ 1334(e)(1) and SIPA § 78eee(b)(2)(A). Under Section 1334(e)(1), district courts

have exclusive jurisdiction of “all property, wherever located, of the debtor at the

commencement of such case, and of property of the estate.” Likewise, SIPA

§ 78eee(b)(2)(A) gives the court administering the liquidation “exclusive

jurisdiction of such debtor and its property wherever located (including property


25

located outside the territorial limits of such court . . .)”. SIPA gives trustees

expansive authority to marshal assets, wherever located, for the benefit of

customers when assets are missing, such as when property is missing from Rule

15c3-3 custodial accounts.

Because they cannot dispute that SIPA and Rule 15c3-3 explicitly

contemplate that customer property may be held overseas, Appellees say that

“Rule 15c3-3 is not part of SIPA.” Appellees’ Br. 59, 60 n.30. But SIPA

specifically amended the Exchange Act to direct the SEC to promulgate Rule

15c3-3. See Horwitz v. Sheldon (In re Donald Sheldon & Co., Inc.), 148 B.R. 385,

390 (Bankr. S.D.N.Y. 1992) (recognizing that SEC promulgated Rule 15c3-3 as

directed by SIPA). SIPA and Rule 15c3-3 work hand in glove to protect customer

property and expedite its return and can inform the Court’s analysis of SIPA. Id.

(explaining how SIPA and Rule 15c3-3 work together to create the fund of

customer property in a SIPA case); see also Barclays Capital Inc. v. Giddens (In re

Lehman Bros. Inc.), 478 B.R. 570, 595–96 (S.D.N.Y. 2012) (looking at the

provisions of SIPA and Rule 15c3-3 to determine that assets segregated pursuant to

Rule 15c3-3 could not be transferred as part of the sale of assets from Lehman

Brothers Inc. to Barclays Capital Inc.).

Appellees broadly claim that Rule 15c3-3 is never relevant to a SIPA case,

citing this Court’s ruling in Picard v. JPMorgan Chase & Co. (In re BLMIS),


26

721 F.3d 54, 73 (2d Cir. 2013). Appellees’ Br. 59–60. But that is not what this

Court said. That case held that Rule 15c3-3 did not support novel theories of the

Trustee’s powers to sue for common law damages. JPMorgan Chase, 721 F.3d at

73. All that is presented here are straightforward avoidance and recovery actions

to get back customer property.

Lastly, Appellees argue that SIPA’s legislative history shows that SIPA has

a domestic, rather than extraterritorial, focus. Appellees point to specific moments

when Congress refers to this “nation” or this “country,” hardly surprising

references when passing a federal statute involving protection of the Nation’s

capital markets. Appellees’ Br. 51. Appellees make the leap from—“[t]here are in

this country approximately 26 million securities investors”—to the conclusion that

SIPA was intended to protect only domestic investors. Id. But SIPA itself

contains no such limitations. SIPA liquidations, including this one, often involve

foreign customers who receive the same protections as any other customer against

the depredations of the likes of Madoff. SIPC Br. 53–56 (“the objective of SIPA is

to protect customers of the registered U.S. broker-dealer, wherever they may be”).

II. COMITY DOES NOT BAR THE TRUSTEE’S RECOVERY ACTIONS

Madoff appears nowhere in Appellees’ comity analysis. Appellees ignore

how Madoff in New York executed the largest Ponzi scheme in history through

BLMIS, the U.S. broker-dealer and debtor in this SIPA liquidation. Appellees


27

ignore Madoff to shift the focus offshore and frame the Trustee’s recovery actions

as an unprecedented attempt to regulate the offshore feeder funds’ relationships

with their investors. That is not this case. The Trustee here simply seeks to

recover customer property stolen by Madoff in New York and then transferred to

his feeder funds and subsequently transferred again. The proper place for the

Trustee to pursue such an action is in New York, not overseas.

A. Standard of Review

Appellees argue that the standard of review for all comity cases is abuse of

discretion. Appellees’ Br. 27–29. As the Trustee has consistently argued, however,

the lower courts’ comity ruling is not entitled to deference.7

Appellees cite multiple examples from a line of adjudicative comity cases,

where a lower court chooses in its discretion between two capable jurisdictions to

adjudicate an action, with the goal of avoiding multiple proceedings. See

Appellees’ Br. 27–29, 29 nn.13 & 14. Here, the lower courts’ opinions are based

on prescriptive comity—as Appellees agree. Appellees’ Br. 19.

This Circuit has distinguished its review of a court’s discretionary use of

comity to abstain in favor of foreign proceedings (adjudicative comity) from the

use of it “as a canon of construction” to “shorten the reach of a statute”

7 Appellees’ assertion, Appellees’ Br. 27, that the Trustee has conceded that the standard of review is abuse of discretion is false. See Trustee Br. 13–14.


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(prescriptive comity). Diorinou v. Mezitis, 237 F.3d 133, 139 & n.9 (2d Cir. 2001)

(citations omitted); Br. of Amicus Curiae Conflict of Law Profs. 16. Prescriptive

comity turns on principles of statutory interpretation. See F. Hoffmann-La Roche

Ltd. v. Empagran S.A., 542 U.S. 155, 164 (2004); Restatement (Fourth) of Foreign

Relations Law of the United States § 204 cmt. a (Tent. Draft No. 3, 2017)

(“Restatement Fourth”).

Rulings as to statutory construction are reviewed de novo. Epskamp,

832 F.3d at 160; see also Maxwell Commc’n Corp., plc. v. Société Générale (In re

Maxwell Commc’n Corp., plc.), 93 F.3d 1036, 1051 (2d Cir. 1996) (“[b]ecause the

doctrine [of comity] in theory is relevant to construing a statute’s reach, one might

expect that de novo review of the bankruptcy court's decision would have been in

order” but “[w]e need not on this appeal decide . . . which standard applies”).

Thus, as with extraterritoriality, this Court’s review of the lower courts’

prescriptive comity analysis should be de novo. See Trustee Br. 14; Br. of Amicus

Curiae Conflict of Law Profs. 3, 4 n.2, 15.

Appellees also cite Vitamin C in support of abuse-of-discretion review.

Appellees’ Br. 27. Even if that antitrust decision compelled an abuse-of-discretion

standard for prescriptive comity in this bankruptcy case, lower courts abuse their

discretion if their conclusions are based on errors of law. Animal Sci. Prod., Inc. v.

Hebei Welcome Pharm. Co. Ltd. (In re Vitamin C Antitrust Litig.), 837 F.3d 175,


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183 (2d Cir. 2016) (reversing under abuse-of-discretion standard). The Trustee’s

appeal similarly asserts numerous legal errors.

This Court gives no deference to erroneous legal conclusions, whether the

standard is de novo or abuse of discretion. See Belot v. Burge, 490 F.3d 201, 206

(2d Cir. 2007) (The term abuse of discretion “obscures more than it reveals. The

operative review standard in the end will depend on what aspect of the lower

court’s decision is challenged.”).

The lower courts’ decisions represent the first time a court has used comity

to eviscerate a trustee’s statutory powers in a U.S. bankruptcy case because a

different debtor filed for bankruptcy in another jurisdiction. As recently noted by

the Supreme Court, “when applying the law involves developing auxiliary legal

principles of use in other cases—appellate courts should typically review a

decision de novo.” U.S. Bank Nat’l Ass’n ex rel. CWCapital Asset Mgmt. LLC v.

The Village at Lakeridge, LLC, 138 S. Ct. 960, 967 (2018). De novo review will

lead to greater uniformity in applying prescriptive comity and help ensure that the

doctrine is used appropriately where important U.S. interests are at stake.

B. The Trustee’s Recovery Actions Do Not Interfere with the Foreign Liquidations

As Appellees recognize, there is no reason to consider comity unless the

U.S. action interferes with the foreign liquidation proceedings. Appellees’ Br. 64

(citing Gucci Am., Inc. v. Weixing Li, 768 F.3d 122, 139 (2d Cir. 2014)) (a comity


https://1.next.westlaw.com/Link/Document/FullText?findType=Y&serNum=2043943586&pubNum=0000999&originatingDoc=Ia5819f8031d911e8a70fc9d8a0b2aef5&refType=RP&originationContext=document&transitionType=DocumentItem&contextData=(sc.Keycite)https://1.next.westlaw.com/Link/Document/FullText?findType=Y&serNum=2043943586&pubNum=0000999&originatingDoc=Ia5819f8031d911e8a70fc9d8a0b2aef5&refType=RP&originationContext=document&transitionType=DocumentItem&contextData=(sc.Keycite)

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analysis is appropriate “when a court order will infringe on sovereign interests of a

foreign state”). As set forth in the Trustee’s opening brief, the lower courts erred

by invoking comity despite the absence of any such interference. Trustee Br. 45.

Appellees’ current efforts to demonstrate such interference are unpersuasive.

1. The BLMIS Liquidation and the Foreign Funds’ Liquidations Are Separate Proceedings

There is no common debtor between the foreign liquidations and the BLMIS

liquidation. The debtors in the foreign proceedings are the feeder funds. The

debtor here is BLMIS. Appellees cite no precedent that considers comity in the

context of such separate stand-alone bankruptcy proceedings.

As Appellees point out, prescriptive comity is used in bankruptcy to ensure

“the equitable and orderly distribution of a debtor’s property”—not to prefer one

debtor (such as a feeder fund) over another (BLMIS). Appellees’ Br. 63 (citations

omitted and emphasis added). To avoid this fundamental point, Appellees

characterize the Trustee as seeking to regulate the relationship between the

liquidating feeder funds and their investors. Appellees’ Br. 2, 39, 69–71, 76–77.

However, the Trustee’s actions are against Appellees and do not purport to

determine any rights of the liquidators vis-à-vis Appellees.


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2. There Is No “End Run” and No Special Deference to the Foreign Funds’ Liquidations Is Required

Foreign bankruptcy cases are sometimes afforded special deference by U.S.

courts, but the rationale is absent here. The deference given to foreign

bankruptcies protects against use of the U.S. courts by creditors of a foreign debtor

to dismember the foreign debtor’s assets. It addresses what had become an all-too-

typical situation, where a creditor of a foreign debtor would seek to “end run” the

foreign proceeding by filing a U.S. lawsuit against the foreign debtor or its local

assets, thereby creating a second or “parallel” U.S. proceeding involving efforts to

reach that debtor’s assets. See Trustee Br. 45–47. In those cases, the party seeking

deference is the foreign debtor, such as in Victrix S.S. Co., S.A. v. Salen Dry Cargo

A.B., 825 F.2d 709, 713–15 (2d Cir. 1987), where a local creditor brought a U.S.

attachment proceeding directly against the foreign debtor.8

Appellees insist that the Trustee is making a similar “end run” or “reach

around” the funds’ foreign liquidations, stating the Trustee should pursue whatever

rights he has in those liquidations. Appellees assert that, by bringing actions here

instead, the Trustee seeks to “enhance his recoveries at the expense of these Funds’

other creditors” and “leapfrog” over “other creditors” to obtain higher recoveries

8 Appellees cite only one additional “end run” case—In re Schimmelpenninck, 183 F.3d 347 (5th Cir. 1999)—in support of their argument. Appellees’ Br. 81. Schimmelpenninck is consistent with this analysis.


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on his claims. Appellees’ Br. 78 n.40, 81–82. Appellees also assert that the

Trustee’s Fairfield-related recovery actions are “completely unnecessary” because

the Trustee “already has an adequate remedy” from the Fairfield Funds9 and his

right to participate in recoveries made by the Fairfield Liquidators, under the

settlement agreement. Appellees’ Br. 89. Of course the Trustee has recovered

only $70 million out of the $3 billion judgment against Fairfield Sentry; he has not

recovered any amount from his $1 billion default judgment against Harley. The

Trustee’s litigation against the Kingate funds is ongoing.

The Trustee’s actions cannot be an “end run” as the cases have used that

term, for the simple reason that the actions are not against the foreign funds or their

local assets and were not brought in reaction to the foreign liquidations.10 The

Trustee’s actions are against the feeder funds’ shareholders, managers, and service

providers to recover subsequent transfers of money BLMIS fraudulently

transferred. They are an essential part of BLMIS’s own plenary proceeding,

9 The Feeder Funds and Liquidators are defined in the Trustee’s opening brief. Trustee Br. 3–4. 10 The Trustee is not suggesting that parallel proceedings must exist for comity to apply, and the existence of parallel proceedings is not at issue here. But see Appellees’ Br. 93–95. Rather, this part of the analysis demonstrates the lower courts’ erroneous use of this “end run” rationale to justify dismissal under prescriptive comity. Other factors must be analyzed, but—as shown in the Trustee’s opening brief, multiple supporting amicus briefs, and this reply brief—they too provide no support for the lower courts’ conclusions.


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operating under its own set of rules (SIPA and the Bankruptcy Code) for the

benefit of BLMIS’s defrauded customers and its creditors.

Finally, with respect to Fairfield Sentry, Appellees ignore the effect of the

settlement approved by the courts of the British Virgin Islands (“BVI”) and the

United States, which shows there is no interference and “no effort to make an ‘end

run’ around the [foreign liquidations].” SMP Ltd. v. SunEdison, Inc. (In re

SunEdison, Inc.), 577 B.R. 120, 132 (Bankr. S.D.N.Y. 2017).

3. The Possibility That a Customer Might Have an Action Against Its Own Investors Is No Basis for a Comity Dismissal

Appellees assert that dismissal is warranted because they are or “could have

been” sued in the foreign fund liquidations for the same transfers that the Trustee

seeks to unwind.11 The lower courts justified engaging in a comity analysis to

shield Appellees from this theoretical possibility. SPA255–61; Appellees’ Br. 90–

92.

Where a single defendant harms two victims in two different countries,

however, courts do not dismiss one victim’s claims simply because the defendant

also may be liable to the other victim. For example, in Fairfield Greenwich, this

11 The Fairfield Liquidators are currently suing a number of the same Appellees as the Trustee. The Kingate liquidators settled their claims against the Kingate funds’ managers and service providers, the only Appellees they sued. The Harley liquidators never instituted any actions against Appellees, and that liquidation is now closed.


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Court allowed three suits involving Madoff feeder funds and related entities to go

forward towards settlement, even though the Trustee had claims pending against

the same defendants. 762 F.3d at 202–03, 213 (finding no issue with dual claims

against common defendants arising out of the same Ponzi scheme, despite

possibility that defendants would be unable to pay both claims).

Characterizing Appellees’ theoretical liability as arising out of the “same

transfers” does not change the analysis. Neither Appellees nor amici cite a case

where comity warranted dismissal just because both a U.S. and foreign liquidating

trustee (or any U.S. and foreign plaintiffs) were seeking to recover the same

moneys from a defendant.12

This scenario can be and is often dealt with in a practical manner. If a

domestic BLMIS feeder fund were to file for bankruptcy in the United States and

12 Appellees cite Banco para el Comercio Exterior de Cuba v. First Nat’l City Bank, 744 F.2d 237, 241–42 (2d Cir. 1984), and United Bank Ltd. v. Cosmic Int’l, Inc., 542 F.2d 868, 873 (2d Cir. 1976), in support of their argument that “double liability” should be avoided. Appellees’ Br. 90–91. Those cases involved foreign expropriations and presented legal issues far afield from this case. They did not concern comity or involve foreign liquidation proceedings. Each cites another expropriation case, Menendez v. Saks & Co., 485 F.2d 1355, 1365 (2d Cir. 1973), rev’d sub nom. Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682 (1976), which in turn distinguishes two Supreme Court cases involving “situs determination for purposes of enforcing tax or escheat claims,” and in the course of distinguishing those cases uses the word “comity” in passing. This is hardly a basis for saying that any doctrine of comity applicable to this SIPA bankruptcy case is driven by concerns of avoiding double liability.


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institute recovery actions against the Trustee’s subsequent-transferee defendants,

both cases would proceed as to the same transfers. For example, in the Petters

Ponzi scheme liquidation, the trustee for the main entity through which Petters

operated his scheme (in Minnesota) and the trustee for an entity that “fed” money

into the scheme (in Florida) each instituted actions against some of the same

parties for the same tainted funds. The two Petters trustees agreed to a protocol

dividing recoveries from these common defendants. In re Palm Beach Fin.

Partner, L.P., No. 09-36379 (PGH) (Bankr. S.D. Fla. June 13, 2012), ECF No.

1282 & (Aug 2, 2012), ECF No. 1350; In re Petters Co., Inc., No. 08-45257 (GFK)

(Bank. D. Minn. May 20, 2012), ECF. No. 1702 & (June 20, 2012), ECF No. 1720.

This is consistent with the approach championed by Cayman Finance and RISA in

their amicus brief. Br. of Amici Curiae Cayman Finance, et al. 20–24.

Here, contrary to Appellees’ contention, Appellees’ Br. 90, the Trustee and

the Fairfield Liquidators are already cooperating by virtue of the Fairfield

settlement, which has various mechanisms for Appellees to avoid facing “double

liability.” A4678 ¶ 14; Br. of Amicus Curiae Krys 10–12. There is no reason to

believe the Trustee and Kingate liquidators could not also reach a creative

solution—which would engender rather than undermine prescriptive comity.

Trustee Br. 43.


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The Trustee’s and liquidators’ actions seeking potentially the same transfers

do not put U.S. law on a “collision course” with the laws of the foreign

jurisdictions. Appellees’ Br. 26.13 That the Kingate liquidators can tell this Court

they reached a settlement with certain Appellees but cannot provide the terms of

that settlement highlights the absurdity of requiring that the Trustee blindly defer

to such proceedings. Motion for Judicial Notice, In re Irving H. Picard,

No. 17-2992(L) (2d Cir. Apr. 17, 2018), Dkt No. 923.

Even worse, the lower courts’ decisions require deference to the Harley

liquidation even though the liquidator did not file any actions against Appellees

and the proceeding closed. SPA263–65. If there are no duplicative lawsuits, there

is no detriment to anyone including Appellees, yet the courts below dismissed the

Trustee’s cases.

4. Only Appellees Request Deference

The lower courts’ error in finding interference where none existed is

underscored by the fact that only Appellees—and no foreign sovereigns or

liquidators—are requesting any deference. As Appellees point out, prescriptive

comity is “concerned with maintaining amicable working relationships between

13 This Court already has determined that an injunction would be improper in similar circumstances. Fairfield Greenwich, 762 F.3d at 211–14 (refusing to enjoin settlements involving feeder funds and their investors that did not have an immediate adverse consequence to the bankr

Documents

17-2992 L - MadoffTrustee...17-2992(L) United States Court of Appeals FORTHESECONDCIRCUIT In Re: IRVINGH. PICARD, TRUSTEEFOR THE LIQUIDATIONOF BERNARDL. MADOFFINVESTMENTSECURITIESLLC