By Ethan Yaro
Near the end of 2019 the Second Circuit reached a decision in In re Irving H. Picard, Tr. for Liquidation of Bernard L. Madoff Investment Securities (hereinafter “Picard”), holding that a United States bankruptcy court has jurisdiction over international transfers between two international entities.[1] The Picard case stems from the Bernie Madoff Ponzi scheme. Madoff’s business was invested in by international feeder funds which in turn had sourced their funds from other international investors. When those investors withdrew from the Ponzi scheme, the funds would transfer in reverse from Bernard L. Madoff Investment Securities (hereinafter “BLMIS”) to the feeder funds, and on to the individual investors. Picard addresses whether or not a United States bankruptcy court has jurisdiction over the funds that were transferred back to the individual investors.
In reaching this decision, the Second Circuit disregards established precedent. [2] The ruling in Picard subverts the presumption against extraterritoriality of bankruptcy law which governs the ability of Bankruptcy Courts to assert their jurisdiction internationally. [3] Under the presumption against extraterritoriality before Picard, it would have been an unlikely result that a United States Bankruptcy Court would hold that a transfer between two international parties was within the reach of United States law. However, in Picard, the court’s decision essentially gives unlimited reach over transfers to US courts, so long as the initial transfer was made by a US entity, regardless of the distance of the transfer at issue from the initial transfer.
In practice, it seems likely that an international court tasked with recognizing the United States court’s ruling on the funds at issue would be able to avoid enforcing it. The widely adopted UNCITRAL Model Law on Cross-Border Insolvency includes provisions that allow a court to modify or refuse to enforce an order for relief from another nation if they deem it against public policy or improper. [4] Furthermore, under principles of international comity, a jurisdiction could refuse to honor the US court’s ruling, especially where, as in the case of the funds at issue in Picard, there is already a proceeding going on in the jurisdiction to handle the distribution of those funds.[5]
If the Picard ruling is to stand, and indeed it will for now because the Supreme Court denied certiorari, [6] something should be done to give it more legitimacy. One way that the Picard ruling could be more tailored, and therefore made more acceptable to foreign courts, would be by limiting the number of subsequent transfers that are deemed to still represent domestic application of the law. Just as comity is used for the enforcement of laws from foreign jurisdictions, “American courts also use international comity to restrain the reach of domestic law.”[7] Such an invocation of comity could serve to make the doctrine set forth in Picard more reasonable. Indeed, a second or third subsequent transfer is so far removed from the initial domestic transfer as to make any relation to the United States tenuous. Such a change would not accomplish much insofar as the Picard decision is concerned, as the subsequent transfer at issue is only one transfer away from the initial transfer, but a limitation like this would give legitimacy to a perplexing ruling from the Second Circuit. This could allow the perhaps tenuous statutory interpretation of the Picard decision to be more tolerable to foreign courts, create a doctrine more likely to be enforced internationally, and less likely to be viewed as improper overreach of United States courts. For now, however, Picard seems to extend United States bankruptcy courts’ jurisdiction indefinitely through to any subsequent transfer, no matter how far from the original transfer it is.
[1] In re Irving H. Picard Tr. for Liquidation of Bernard L. Madoff Investment Securities LLC, 917 F.3d 85 (2d Cir. 2019).
[2] See Barry Z. Bazian, Parsin Picard: Assessing the Extraterritorial Reach of the Bankruptcy Code’s Avoidance and Recovery Provisions, 29 J. Bankr. L. & Prac. 1, 10–11 (2020) (citing Loginovskaya v. Batratchenko, 764 F.3d 266, 272 (2d Cir. 2014).
[3] Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010); see also William S. Dodge, The New Presumption Against Extraterritoriality, 133 Harv. L. Rev. 1582, 1604–05 (2020).
[4] See UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment, Art. 22.3., U.N. Sales No. E.14.V.2 (2014) (indicating in the notes to Article 22 of the Model Law that “[p]rotection of all interested persons is linked to provisions in national laws on notification requirements . . . general publicity requirements” or local court rules); see also Michael A. Garza, When is Cross-Border Insolvency Recognition Manifestly Contrary to Public Policy?, 38 Fordham Int’l L.J. 1587, 1596–1597 (2015); Didi Hu, Cross-Border Insolvency Regime in China: Finding the Most Pragmatic Interim Solution for Globalized Companies under Localized Practices, 92 Am. Bankr. L.J. 523, 538 (2018).
[5] See Garza, supra note 4, at 1606.
[6] HSBC Holdings PLC, et al., v. Irving H. Picard, et al., 140 S.Ct. 2824 (2020) (June 1, 2020 order denying certiorari); see also HSBC Holdings PLC v. Picard, 140 S.Ct. 643 (2019) (requesting the Solicitor General file a brief in the case expressing the opinion of the United States on Picard).
[7] William S. Dodge, International Comity in American Law, 115 Colum. L. Rev. 2071, 2073 (2015), citing F. Hoffman-La Roche Ltd. V. Empagran S.A., 542 U.S. 155, 169 (2004) (holding that principles of comity can be understood by U.S. courts to limit the reach of U.S. law).