The Second Circuit correctly decided in the Madoff liquidation that Sections 548 and 550 can be applied extraterritorially to recover fraudulent transfers even if subsequent transfers occurred abroad, the U.S. Solicitor General said in a brief filed with the Supreme Court.
In December, the Court invited the Solicitor General “to file a brief . . . expressing the views of the United States” about the merits of granting certiorari in HSBC Holdings PLC v. Picard, 19-277 (Sup. Ct.). In the brief filed on April 10, the Solicitor General expressed his opinion that the Second Circuit correctly ruled that there is no split of circuits, and that the Court should deny the certiorari petition.
The Solicitor General even said that “the large dollar amounts at issue here provide no sound basis for this Court’s review.”
The question before the Supreme Court amounted to this: Does the U.S. have the primary interest in recovering fraudulent transfers that originated in the U.S., even if subsequent transfers occurred abroad? The Second Circuit and the Solicitor General both believe that an initial transfer from an account in the U.S. enables a trustee to sue subsequent transferees abroad.
The Significance of the Case
The Solicitor General’s opinion means it’s unlikely the Supreme Court will hear the case. Denying the certiorari petition will be a major, positive development for customers who were defrauded by Bernard Madoff’s Ponzi scheme, because allowing the Second Circuit’s opinion to stand will revive almost 90 avoidance actions where the trustee will be seeking perhaps $3 billion, before prejudgment interest.
Additional recoveries in the revivified suits might mean that the Madoff trustee could recover 100% of the net cash that defrauded customers invested with Madoff. The trustee has already recovered $14.3 billion and made distributions representing about 69% of customers’ net equity claims. The trustee is holding $1 billion in cash toward future distributions.
Denying certiorari will allow the Madoff trustee to forge ahead with his lawsuits, where many of the issues have already been decided against the defendants. Some defendants may elect to settle, because prejudgment interest in suits already pending 10 years could roughly double the size of the judgments.
The Path to the Supreme Court
Having withdrawn the reference to the bankruptcy court, District Judge Jed Rakoff ruled in July 2014 that Section 550 does not permit recovering from a subsequent foreign recipient of stolen funds, given comity and the presumption against extraterritorial application of U.S. statutes.
Judge Rakoff sent the case back to the bankruptcy judge, who dutifully dismissed lawsuits where Madoff had paid out stolen funds to offshore feeder funds. The feeder funds in turn distributed the cash to their supposedly foreign investors.
The Second Circuit reversed in February 2019. See In re Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, 917 F.3d 85 (2d Cir. Feb. 25, 2019). To read ABI’s report about the Second Circuit decision, click here.
Picking up on an argument made by the Madoff trustee, the Second Circuit said it was closing a “loophole,” because the district court’s precedent would enable a fraudster to transfer property to a “foreign entity,” thereby rendering the “property recovery-proof.” Id. at 100.
Facing reinstatement of the lawsuits against them, the defendants filed a petition for certiorari in August. The Madoff trustee responded at the end of October, opposing certiorari because there is no circuit split. The justices of the Supreme Court considered the certiorari petition at a conference on December 6 and asked the Solicitor General for the government’s views three days later. Presumably, the justices wanted the government’s opinion because the case deals with comity and a possible effect on international relations.
At the earliest, the justices might consider the certiorari petition and the government’s brief at a conference on May 1, allowing the Court to grant or deny the petition by May 4. Should the Court tackle the case, argument would not be held until the term to begin in October 2020.
To read the Solicitor General’s brief, click here.
The Second Circuit correctly decided in the Madoff liquidation that Sections 548 and 550 can be applied extraterritorially to recover fraudulent transfers even if subsequent transfers occurred abroad, the U.S. Solicitor General said in a brief filed with the Supreme Court.
In December, the Court invited the Solicitor General “to file a brief . . . expressing the views of the United States” about the merits of granting certiorari in HSBC Holdings PLC v. Picard, 19-277 (Sup. Ct.). In the brief filed on April 10, the Solicitor General expressed his opinion that the Second Circuit correctly ruled that there is no split of circuits, and that the Court should deny the certiorari petition.
The Solicitor General even said that “the large dollar amounts at issue here provide no sound basis for this Court’s review.”
The question before the Supreme Court amounted to this: Does the U.S. have the primary interest in recovering fraudulent transfers that originated in the U.S., even if subsequent transfers occurred abroad? The Second Circuit and the Solicitor General both believe that an initial transfer from an account in the U.S. enables a trustee to sue subsequent transferees abroad.