17-2992 L - MadoffTrustee...17-2992(L) United States Court of Appeals FORTHESECONDCIRCUIT In Re:...
Transcript of 17-2992 L - MadoffTrustee...17-2992(L) United States Court of Appeals FORTHESECONDCIRCUIT In Re:...
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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.
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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.
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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.
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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
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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
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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.
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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
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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).
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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’
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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
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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.
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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
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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
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§ 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).
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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
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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.
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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
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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”).
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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”).
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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
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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
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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),
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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
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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
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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