Second Circuit Allows Extraterritorial Application of Sections 548 and 550

In a broadly worded opinion in the Madoff liquidation, the Second Circuit held that Sections 548 and 550 can be applied extraterritorially to recover fraudulent transfers even if subsequent transfers occurred abroad. The appeals court reversed District Judge Rakoff, who had 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. As Circuit Judge Richard C. Wesley was careful to say in his February 25 opinion, the ruling by the appeals court closed a “loophole,” because the district court’s decision would have enabled a fraudster to transfer property to a “foreign entity,” thereby rendering the “property recovery-proof.” The opinion avoided a split of circuits with the Fourth Circuit and lower courts that have given extraterritorial effect to Section 548. The opinion has practical significance for the victims of Bernie Madoff’s Ponzi scheme, who have already received distributions representing about 67% of what they invested. The revival of the trustee’s lawsuits means the victims have a realistic shot at recovering 100%. Reinstatement of the lawsuits may convince some defendants to settle, because they face the possibility of liability for 10 years of prejudgment interest on top of a judgment for the stolen money they received.

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