Irving H. Picard, Trustee for the Liquidation of B v. Bureau of Labor Insurance

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK 	FOR PUBLICATION
---------------------------------------------------------X
In re: 	Adv. Pro. No. 08-01789 (BRL)
SECURITIES INVESTOR PROTECTION 	SIPA LIQUIDATION
CORPORATION, 	(Substantively Consolidated)
Plaintiff-Applicant
v.
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant.
---------------------------------------------------------X
In re:
BERNARD L. MADOFF,
Debtor.
---------------------------------------------------------X
IRVING H. PICARD, Trustee for the
Liquidation of BERNARD L. MADOFF
INVESTMENT SECURITIES LLC,
Adv. Pro. No. 11-02732 (BRL)
Plaintiff,
v.
BUREAU OF LABOR INSURANCE,
Defendant.
---------------------------------------------------------X
APPEARANCES:
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
Telephone: 	(212) 589-4200
Facsimile: 	(212) 589-4201
By: 	David J. Sheehan
Thomas L. Long
Mark A. Kornfeld
Regina Griffin
Torello Calvani
Michelle Kaplan
Catherine Woltering
Constantine P. Economides
Attorneys for Irving H. Picard, Esq., Trustee for the Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff
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LOWENSTEIN SANDLER PC
1251 Avenue of the Americas
New York, New York 10022
Telephone: 	(212) 262-6700
Facsimile: 	(212) 262-7402
By: 	Michael B. Himmel
Amiad M. Kushner
Jamie R. Gottlieb
Attorneys for Defendant Bureau of Labor Insurance
Before: Hon. Burton R. Lifland
United States Bankruptcy Judge
MEMORANDUM DECISION AND ORDER DENYING BLI’S MOTION TO DISMISS
THE TRUSTEE’S COMPLAINT
Before the Court is the motion (the “Motion to Dismiss”) of the Taiwanese Bureau of
Labor Insurance (“BLI”) seeking to dismiss the complaint (the “Complaint”) of Irving H. Picard,
Esq. (the “Trustee”), trustee for the substantively consolidated Securities Investor Protection
Act 1 (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and
Bernard L. Madoff (“Madoff”), filed pursuant to SIPA sections 78fff(b), 78fff-1(a) and 78fff-
2(c)(3), sections 105(a), 544, 550(a) and 551 of the Bankruptcy Code (the “Code”) and various
sections of New York Debtor and Creditor Law (the “NYDCL”)2 to recover certain transfers
allegedly received by BLI as a subsequent transferee of funds originating from BLMIS.
BLI moves to dismiss the Complaint on four grounds:3 (i) this Court lacks subject matter
jurisdiction because BLI is immune from liability under the Foreign Sovereign Immunities Act
(the “FSIA”); (ii) this Court lacks personal jurisdiction over BLI; (iii) the Trustee cannot recover
1 15 U.S.C. § 78aaa et seq. Hereinafter “SIPA” shall replace “15 U.S.C.” in reference to SIPA sections.
2 N.Y. Debt. & Cred. Law §§ 273-279 (McKinney 2001).
3 In contravention of Local Bankruptcy Rule 9013-1, BLI failed to specify the statutory provisions upon which its
motion is predicated. 	See Local Bankruptcy Rule 9013-1 (“Each motion shall specify the rules and statutory
provisions upon which it is predicated . . . .”). It appears, however, that BLI is moving to dismiss pursuant to
Federal Rules of Civil Procedure 12(b)(1), (2) and (6).
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from BLI, as subsequent transferee, under section 550 of the Code (“Section 550”) because he
has not avoided the initial transfers from BLMIS to Fairfield Sentry Limited (“Fairfield Sentry”
or the “Fund”) and cannot now do so because the relevant statute of limitations has expired; and
(iv) the Trustee’s claims are barred by the presumption against extraterritoriality, which prohibits
the extraterritorial application of Section 550 against BLI. 	The Trustee argues to the contrary,
contending that the Court has both subject matter and personal jurisdiction, and may use Section
550 to recover subsequent transfers from BLI.
At bottom, the Trustee’s instant suit is based upon BLI’s investment of tens of millions of
dollars in Fairfield Sentry with the specific goal of having funds invested in BLMIS in New
York, with intent to profit therefrom. 	Such investment was not haphazard. 	Rather, BLI
intentionally tossed a seed from abroad to take root and grow as a new tree in the Madoff money
orchard in the United States and reap the benefits therefrom.
For the reasons set forth below and at oral argument, the Motion to Dismiss is DENIED.
BACKGROUND 4
The Trustee’s instant action arises from the commercial relationship between Fairfield
Sentry, the largest BLMIS feeder fund, and defendant BLI, an agency or instrumentality of the
Republic of China (the “ROC”) (commonly known as Taiwan). BLI is a political branch of the
ROC responsible for labor safety policies and handling investments of the Labor Insurance Fund.
See Declaration by Tsai, Chung-Chun in Support of Defendant’s Motion to Dismiss Plaintiff’s
First Amended Complaint (“Tsai Decl.”) (Dkt. No. 9), ¶ 4. BLI is statutorily authorized to invest
“in any [] government-authorized projects, which may inure to the benefit of their Fund,”
id., ¶ 6(e), including “[h]edge funds issued by the foreign fund management institutions,”
4 A comprehensive discussion of the facts underlying this SIPA liquidation and Madoff’s notorious Ponzi scheme is
set forth in this Court’s March 1, 2010 net equity decision. See Sec. Investor Prot. Corp. v. Bernard L. Madoff
Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122, 125–33 (Bankr. S.D.N.Y. 2010).
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id., ¶ 8(c).
Prior to investing in Fairfield Sentry, BLI hired an investment advisor agent, Union
Securities Investment Trust Co. Ltd. (“Union Securities”), to conduct diligence on Fairfield
Sentry. 	As part of this diligence, Fairfield Greenwich Group, the entity controlling Fairfield
Sentry furnished BLI with a private placement memorandum and other general information
about the Fund. 	BLI also received specific information about the Fund’s investment strategy,
along with past results and details of specific trades in the Standard & Poor’s 100 Index (“S&P
100”). 	See, e.g., Declaration of Thomas L. Long in Support of the Trustee’s Memorandum of
Law in Opposition to the Motion to Dismiss of the Bureau of Labor Insurance (“Long Decl.”)
(Dkt. No. 17), Ex. 1, pp. 1–6, 10. Union Securities learned that the Fund’s “strategy is executed
by Bernard L. Madoff Securities,” id. at Ex. 1, p. 2, and that a minimum of 95% of the Fund’s
assets would be held in BLMIS’s custody in New York and invested in U.S. Securities and
Treasuries, id. at Ex. 4 (Private Placement Memorandum of Fairfield Sentry Limited, as of
October 1, 2004) [hereinafter “2004 PPM”], p. 15; Supplemental Declaration of Thomas L. Long
in Support of the Trustee’s Sur-Reply in Opposition to the Motion to Dismiss of the Bureau of
Labor Insurance (“Long Supp. Decl.”) (Dkt. No. 46), Ex. 1 (Private Placement Memorandum of
Fairfield Sentry Limited, as of August 14, 2006) [hereinafter “2006 PPM”], pp. 9-10.
Armed with this knowledge, BLI chose to invest in Fairfield Sentry for the following
reasons:
(I) [T]he history and asset size of [Fairfield Sentry] were in accordance with the
relevant rules of the BLI; (2) [Fairfield Sentry] had a stable and steady annualized
return rate of 11.02% and a Sharpe ratio of 2.81 since its foundation in 1990; (3)
Investing in [Fairfield Sentry] met other requirements of BLI’s policy.
Tsai Decl., ¶ 9. In order to invest with the Fund, BLI either individually or with the aid of Union
Securities appears to have opened one or more accounts with JPMorgan Chase Bank in New
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York. 	See Long Decl., Ex. 3 (Subscription Agreement between BLI and Fairfield Sentry
Limited, 	as 	Executed 	on 	January 	4, 	2007) 	[hereinafter 	“Subscription 	Agreement” 	or
“Agreement”], pp. 1–2, 4, 11.
The Controlling Documents
On January 4, 2007, BLI signed the Subscription Agreement with Fairfield Sentry.
See id. at p. 11. 	In accordance with this Agreement, BLI appointed Union Securities as its
advisor. 	See id. at pp. 3–4. 	BLI acknowledged in the Agreement that it was a “Professional
Investor,” and “warrant[ed] that [it] has such knowledge and expertise in financial matters
sufficient to evaluate the risks involved in an investment in [Fairfield Sentry].” Id. at p. 3, ¶ 5(c).
BLI also indicated that it had “obtained sufficient information from [Fairfield Sentry] or its
authorized representatives to evaluate such risks and ha[d] consulted with [its] own advisors and
is fully informed as to the legal and tax requirements within the Subscriber’s own country
(countries) regarding a purchase of the Shares [of Fairfield Sentry].” Id. at p. 4, ¶ 8.
The Subscription Agreement expressly incorporated the 2004 PPM and, by amendment,
the 2006 PPM (taken together, the “PPMs”). See id. at p. 1, ¶ 1. The PPMs clearly highlighted
the prominent role of New York-based BLMIS’s split strike conversion strategy (the “SSC
Strategy”)5 in Fairfield Sentry’s investments. The 2006 PPM clearly stated:
As a result of the Investment Manager’s selection of Bernard L. Madoff
Investment Securities, LLC (“BLM[IS]”) as execution agent of the split strike
conversion strategy, substantially all of the Fund’s assets will be held in
segregated accounts at BLM[IS], a U.S. registered broker-dealer and qualified
custodian.
2006 PPM, p. 16 (emphasis added). During those times when BLMIS’s SSC strategy was not in
the 	U.S. 	equity 	markets, 	investor 	funds 	were 	used 	to 	purchase 	U.S. 	Treasury 	Bills.
5 The SSC Strategy involved entering the U.S. equity markets six to eight times a year through the purchase of
shares of companies composing the S&P 100 and OEX 100 put options, along with the sale of OEX 100 call
options. See 2006 PPM, pp. 9-10.
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See Compl., ¶ 25. 	In addition, the PPMs set forth that BLMIS would retain custody of at least
95% of the Fund’s assets in the United States and would determine which shares of companies
on the S&P 100 would be purchased, as well as the timing of such purchases. 	See 2006 PPM,
pp. 9-10 (“Investment Policies”); p. 21, ¶ 17 (“When the Fund invests utilizing the ‘split strike
conversion’ strategy . . . it will not have custody of the assets so invested.”); see also 2004 PPM,
p. 15 (“BLM[IS] has approximately 95% of the Fund’s assets under custody.”). The 2006 PPM
further clarified that “[t]he services of BLM[IS] and its personnel are essential to the continued
operation of the Fund, and its profitability, if any.” 	2006 PPM, p. 10. 	Fairfield Sentry’s
investment manager, Fairfield Greenwich (Bermuda) Ltd., had the discretion to invest less than
5% of the fund’s net asset value outside of BLMIS’s SSC strategy, with the rest going to
BLMIS. 	Id. (“The Investment Manager, in its sole and exclusive discretion, may allocate a
portion of the Fund’s assets [] never to exceed, in the aggregate, 5% of the Fund’s Net Asset
Value”).
The Agreement further memorializes the connections between BLI and New York in
several additional ways. First, BLI “agree[d] that any suit, action or proceeding . . . with respect
to this Agreement and [Fairfield Sentry] may be brought in New York” and “irrevocably
submit[ted] to the jurisdiction of the New York courts with respect to any [p]roceeding.”
Subscription Agreement, p. 6, ¶ 19. Second, the Agreement specified that it “shall be governed
and enforced in accordance with the laws of New York, without giving effect to its conflict of
laws provisions.” Id. at p. 5, ¶ 16. Third, the Agreement required that all subscription payments
from BLI to Fairfield Sentry pass through Fairfield Sentry’s New York HSBC bank account.
Id. at pp. 1–2. 	Finally, BLI specified that all redemption payments from Fairfield Sentry
Investments “should be wired only to” to JPMorgan Chase Bank, New York at 270 Park Avenue,
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New York, NY 10017, USA. Id. at p. 11, ¶ 30(g).6
Subscription and Redemption Payments
On January 4, 2007, BLI transferred $10 million in subscription payments to Fairfield
Sentry. See Tsai Decl., ¶ 10. On December 1, 2007, BLI transferred an additional $30 million in
subscription payments to Fairfield Sentry. See id. In accordance with the Agreement, BLI sent
the subscription payments from its JPMorgan account in Taiwan, through its accounts with
JPMorgan Bank in London (the “London JPMorgan Accounts”)7 to a JPMorgan account in New
York (the “New York JPMorgan Account”), to a New York account with HSBC Bank held by
Citco for Fairfield Sentry (the “New York HSBC Account”). 	See Subscription Agreement,
pp. 1–2, 11. 	The funds were then transferred to Fairfield Sentry’s account with Citco Bank
Nederland N.V., Dublin Branch in Ireland (the “Dublin Citco Account”). 	See Long Decl.,
Exs. 5, 6. 	Given that at least 95% of Fairfield Sentry’s funds had to be invested in U.S.
Securities utilizing BLMIS’s SSC Strategy, see 2006 PPM, pp. 9-10, funds deposited in Fairfield
Sentry’s Dublin Citco Account were transferred to the New York HSBC Account and then to
BLMIS’s account at JP Morgan Chase in New York, see Long Supp. Decl., Ex. 5; Compl., ¶ 3.
On July 4, 2008, a BLI representative in Taiwan submitted a redemption request via fax
to 	Fairfield 	Sentry’s 	administrator, 	Citco 	Fund 	Services 	(Europe) 	B.V. 	(“Citco”) 	in 	the
Netherlands, specifying that redeemed funds should be wired to the New York JP Morgan
Account. See Tsai Decl., ¶ 15; Tsai Supp. Decl., ¶ 6, Ex. A.
Shortly before the redemption request, on May 5, 2008, Fairfield Sentry withdrew $80
6 BLI either delivered the subscription documents or sent them by courier to Fairfield Sentry c/o Citco Fund
Services (Europe) B.V., Telestone 8 – Teleport, Naritaweg 165, 1043 BW Amsterdam, The Netherlands.
See Tsai Decl., ¶ 11.
7 One of BLI’s London JPMorgan Accounts was a USD account. See Supplemental Declaration of Tsai, Chung-
Chun (“Tsai Supp. Decl.”) (Dkt. No. 39), ¶ 3.
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million from its BLMIS accounts. 	See Compl., Ex. B. 	On July 10, 2008, Fairfield Sentry
withdrew an additional $20 million, for a total of $100 million. 	See id. 	As alleged by the
Trustee in the Complaint, this $100 million was utilized by Fairfield Sentry to make redemption
payments to its shareholders, including but not limited to, BLI. 	See Compl., ¶¶ 34, 41,
Exs. B, C.
On August 18, 2008, following receipt of funds originating from BLMIS’s JPMorgan
Account, Fairfield Sentry sent $42,123,406, an amount equivalent to the principal BLI invested
with a 5% return, from the Dublin Citco Account to the New York HSBC Account, on to the
New York JPMorgan Account and then to BLI’s JPMorgan account in London. See Long Supp.
Decl., Ex. 2; Tsai Supp. Decl., Ex. A. 	In honoring BLI’s redemption, Fairfield complied with
the wiring instructions BLI had specified in the Agreement and in its redemption request by
sending the redemption payments to the New York JPMorgan Account specified by BLI. 	See
Subscription Agreement, p. 11; Tsai Supp. Decl., Ex. A.
Procedural History
On September 22, 2011, the Trustee filed the Complaint against BLI to recover the
$42,123,406 BLI received as a subsequent transferee from Fairfield Sentry. 	On November 23,
2011, counsel for the Trustee requested that the Clerk of the Court serve process on BLI pursuant
to 28 U.S.C. section 1608(b)(3)(B) by mailing a copy of a summons (the “Summons”) and
Complaint, along with a certified Chinese translation of each, and an order setting the time to
respond (Dkt. No. 6). On December 6, 2011, the Clerk certified that BLI was served via Federal
Express Priority Mail with a copy of the Summons, Complaint, and an order setting the time to
respond (Dkt. No. 7). 	On February 3, 2012, Ettelman & Hochheiser, P.C. filed a motion to
dismiss on BLI’s behalf (Dkt. No. 10). On April 19, 2012, the Trustee filed an opposition to the
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motion to dismiss (Dkt. No. 16). On May 2, 2012, Lowenstein Sandler PC filed a Substitution of
Counsel and Notice of Appearance (Dkt. No. 19), followed by a 35-page reply brief on June 14,
2012 (Dkt. No. 38). 	On July 16, 2012, the Trustee filed a sur-reply brief (Dkt. No. 45). 	A
hearing was held on August 8, 2012.
* * *
For purposes of this Motion to Dismiss, the material facts alleged by the Trustee in the
Complaint are accepted as true. 	All reasonable inferences should be drawn in favor of the
plaintiff. 	See Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995). 	The Court
“may resolve disputed jurisdictional fact issues by reference to evidence outside the pleadings,
such as affidavits,” Reiss v. Societe Centrale du Groupe Des Assurances Nationales, 235 F.3d
738, 748 (2d Cir. 2000) (quotation omitted), and consider “all pertinent documentation submitted
by the parties,” Pilates, Inc. v. Pilates Inst., Inc., 891 F. Supp. 175, 178 n.2 (S.D.N.Y. 1995)
(quotation omitted).
DISCUSSION
The Trustee’s Complaint against BLI cannot be dismissed because (i) this Court has
subject matter jurisdiction under the FSIA, (ii) this Court has personal jurisdiction over BLI, (iii)
the Trustee may pursue recovery from BLI as a subsequent transferee because the initial transfers
from BLMIS to Fairfield Sentry are avoidable, and (iv) the Trustee’s claims are not barred by the
presumption against extraterritoriality. The Court addresses each point in turn.
I. 	THE COURT HAS SUBJECT MATTER JURISDICTION PURSUANT TO THE
FSIA
The FSIA “provides the sole basis for obtaining jurisdiction over a foreign state in the
courts of this country.” Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 443
(1989). 	Under the FSIA, foreign states are “presumptively immune from the jurisdiction of
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United States courts; unless a specified exception applies.” 	Saudi Arabia v. Nelson, 507 U.S.
349, 355 (1993). 	In the absence of such an exception, federal courts lack subject-matter
jurisdiction over claims against foreign states. Id.
In evaluating whether a defendant is entitled to sovereign immunity under the FSIA, the
defendant carries the initial burden of setting forth a prima facie case that it is a foreign state.
See Cargill Int’l S.A. v. M/T Pavel Dybenko, 991 F.2d 1012, 1016 (2d Cir. 1993). 	If this
showing is made, the burden shifts to the plaintiff, who must then produce evidence to
demonstrate that immunity should not be granted under exceptions to the FSIA, “although the
ultimate burden of persuasion remains with the alleged foreign sovereign.” Id.
a. 	BLI IS A “F OREIGN S TATE” U NDER THE FSIA
The initial dispute centers on whether BLI qualifies as a “foreign state” entitled to
immunity under the FSIA. 	The Act defines a “foreign state” as a “political subdivision of a
foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).”
28 U.S.C. § 1603(a). BLI has produced evidence in the form of affidavits that it is an “agency or
instrumentality” of the ROC. 	As averred in the affidavits, BLI (i) is a “political branch of the
ROC in charge of the labor safety policies and handling of investments of the Labor Insurance
Fund,” Tsai Decl., ¶ 4, (ii) was created for a national purpose, namely “to protect Taiwan
workers’ livelihood and promote social security, as well as services related to social insurance,
labor protection, and social welfare allowances,” id. ¶ 2, and (iii) was established in accordance
with Articles 4 and 5 of the Taiwan Labor Insurance Act to handle labor insurance affairs “under
the direct authority of the Council of Labor Affairs of the Taiwan Executive Yuan, the executive
branch of the government of the Republic of China.” 	Id; see also Filler v. Hanvit Bank, 378
F.3d 213, 217 (2d Cir. 2004) (finding the Korean Deposit Insurance Corporation to be a foreign
state because, inter alia, it was a Korean governmental institution formed by statute, performed
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functions traditionally performed by the government and many of its operations were overseen
by the Korean government).
In an attempt to rebut this evidence, the Trustee argues in a footnote that BLI failed to
provide sufficient proof that it is a foreign state. 	See Irving H. Picard, Trustee for the
Liquidation of Bernard L. Madoff Investment Securities LLC’s Memorandum in Response to
Defendant Bureau of Labor Insurance’s Motion to Dismiss (“Tr. Opp.”) (Dkt. No. 16), p. 5, n.2.
Yet, a “plaintiff cannot defeat a claim of immunity under the FSIA by simply arguing that more
proof is required to prove ‘agency or instrumentality’ status.” 	Kao Hwa Shipping Co., S.A. v.
China Steel Corp., 816 F. Supp. 910, 915 (S.D.N.Y. 1993). Rather, the Trustee must specifically
rebut BLI’s persuasive evidence, which the Trustee has failed to do. 	See id. 	Moreover, it
appears that the Trustee conceded at oral argument that BLI is a foreign state. 	See Transcript
dated August 8, 2012 (Dkt. No. 48) (“Transcript”), p. 34, lines 12–13 (“Clearly investment by a
foreign state’s instrumentality, like we’re dealing with in this case . . . .”). In light of the above,
the Court finds that BLI is a foreign state and is thus immune from jurisdiction unless the Trustee
can show that one of the exceptions to the FSIA applies.
b. 	THE THIRD CLAUSE O F THE COMMERCIAL ACTIVITY EXCEPTION APPLIES
The Trustee contends that BLI is not immune from jurisdiction because all three clauses
of the commercial activity exception under the FSIA apply. This exception denies immunity to a
foreign state in any case in which the underlying action is based:
[i] upon a commercial activity carried on in the United States by the foreign state;
or [ii] upon an act performed in the United States in connection with a
commercial activity of the foreign state elsewhere; or [iii] upon an act outside the
territory of the United States in connection with a commercial activity of the
foreign state elsewhere and that act causes a direct effect in the United States.
28 U.S.C. § 1605(a)(2); Republic of Argentina v. Weltover, 504 U.S. 607, 611 (1992).
The Court finds that it has subject matter jurisdiction over the instant action under at least
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the third clause of the commercial activity exception. Under this clause, a foreign state is subject
to suit in the United States where the suit is based upon an act (i) that occurs outside the United
States in connection with a commercial activity of the foreign state outside the United States, and
(ii) causes a direct effect in the United States. 	28 U.S.C. § 1605(a)(2); Weltover, 504 U.S. at
611.
i. 	Commercial Activity And The Act
In evaluating whether this third clause applies, the Court first addresses whether BLI’s
investment activity with Fairfield Sentry constitutes “commercial activity” under the Act.
Congress has left much latitude to courts to determine which state acts constitute commercial
activity under the FSIA. See NML Capital, Ltd. v. The Republic of Argentina, 680 F.3d 254, 258
(2d 	Cir. 	2012) 	(finding 	that 	the 	legislative 	history 	of 	the 	FSIA 	“explicitly 	asserts 	the
congressional intention to leave to the courts . . . a great deal of latitude in determining what is a
commercial activity for purposes of [the FSIA].”) (quotation omitted).
The FSIA defines “commercial activity” as “either a regular course of commercial
conduct or a particular commercial transaction or act.” 28 U.S.C. § 1603(d). The basic inquiry
in determining whether an activity is “commercial” is “whether the activity is of the type an
individual would customarily carry on for profit.” 	De Letelier v. Republic of Chile, 748 F.2d
790, 797 (2d Cir. 1984). 	Therefore, “a state engages in commercial activity . . . where it
exercises only those powers that can also be exercised by private citizens as distinct from those
powers peculiar to sovereigns.” 	Nelson, 507 U.S. at 360 (quotation omitted). 	The Supreme
Court has found, for example, “a foreign government’s issuance of regulations limiting foreign
currency exchange” to be a sovereign activity “because such authoritative control of commerce
cannot be exercised by a private party,” while “a contract to buy army boots or even bullets is a
‘commercial’ activity, because private companies can similarly use sales contracts to acquire
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goods.” Weltover, 504 U.S. at 614–15; see also H.R. Rep. 94-1487 at 6615 (1976) (noting that
“commercial activity” under the FSIA includes a foreign government’s “investment in a security
of an American corporation”).
Here, as BLI’s investment activity, including buying and redeeming shares from Fairfield
Sentry, could have been carried out by a private individual for profit; such activity did not
involve the use of powers peculiar to sovereigns.8 Accordingly, BLI’s investment activity in
Fairfield Sentry constitutes commercial activity under the FSIA.
With respect to the necessary “act” under the statute, BLI’s signing of the Agreement and
sending out the corresponding subscriptions payments, as well as making the redemption request,
constitute acts that transpired outside of the United States in connection with BLI’s commercial
activity. The Court now addresses whether these acts had a direct effect in the United States.
ii. 	Direct Effect in the United States
The Second Circuit has called for courts to liberally construe what constitutes “direct
effect in the United States” to provide access to courts for plaintiffs who have been wronged.
See, e.g., Texas Trading, 647 F.2d at 312 (“Courts construing either [‘direct’ or ‘in the United
States’] should be mindful . . . of Congress’s concern with providing ‘access to the courts’ to
those aggrieved by the commercial acts of a foreign sovereign . . . .”) (citation omitted)
(overruled on other grounds). Courts should inquire whether the United States has an interest in
the action such that “Congress would have wanted an American court to hear the case.”
8 Although never formally argued, BLI presented evidence that it made its redemption request for a national
purpose: “BLI was requested by the Council of Labor Affairs of the executive branch of the ROC to redeem the
overseas investment and return the cash to ROC to stabilize the operation of Labor Insurance Fund.”
Tsai Decl., ¶ 14. Whether a state acts as a private party, however, is a question of behavior rather than motivation.
See Saudi Arabia, 507 U.S. at 360–61. “In other words, the relevant inquiry concerns the power that is exercised,
rather than the motive for its exercise.” NML Capital, Ltd. v. the Republic of Argentina, 680 F.3d 254, 259 (2d
Cir. 2012). Accordingly, an assertion of a governmental motive or national purpose does not change the fact that
BLI engaged in conduct in which a private party could customarily engage for profit. Indeed, “it is irrelevant why
[BLI]” made the investments and requested the redemptions “in the manner of a private actor; it matters only that
it did so.” Weltover, 504 U.S. at 614, 617.
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Id. at 313.
The Supreme Court has found that “an effect is direct if it follows as an immediate
consequence of the defendant's . . . activity.” Weltover, 504 U.S. at 618 (quotation omitted); see
also Martin v. Republic of S. Africa, 836 F.2d 91, 95 (2d Cir. 1987) (“The common sense
interpretation of a ‘direct effect’” within the meaning of section 1605(a)(2) “is one which has no
intervening element, but, rather, flows in a straight line without deviation or interruption.”)
(quotation omitted). To establish a direct effect in the United States, the United States “need not
be the location where the most direct effect is felt, simply a direct effect.” 	Hanil Bank v. P.T.
Bank Negara Indonesia (Persero), 148 F.3d 127, 133 (2d Cir. 1998) (emphasis in original).
Courts tend to refrain from finding a direct effect, however, if such effect in the United States is
merely fortuitous or incidental, playing only a tangential role in the lawsuit. 	See, e.g., Antares
Aircraft, L.P. v. Federal Republic of Nigeria, 999 F.2d 33, 36 (2d Cir. 1993) (finding no direct
effect where “the sole act connected to the United States[,] . . . the drawing of a check on a bank
in New York, was entirely fortuitous and entirely unrelated to the liability of the appellees”);
United World Trade v. Mangyshlakneft Oil Prod. Ass’n, 33 F.3d 1232, 1237 (10th Cir. 1994)
(finding no direct effect where “the defendants’ performance of their contractual obligations had
no connection at all with the United States”).
Here, BLI’s actions caused a direct effect in the United States by causing a two-way flow
of funds to and from New York-based BLMIS: to BLMIS for investment in U.S. Securities and
U.S. Treasuries and from BLMIS in the form of profits from those investments. 	This flow of
funds in the form of subscription and redemption payments into and out of BLMIS in the United
States via Fairfield Sentry was part of a specific investment structure explicitly set forth in the
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Subscription Agreement and the PPMs. 9 These documents stated that: (i) Fairfield Sentry was
required to invest at least 95% of its assets in the Split Strike Conversion Strategy utilized and
controlled by BLMIS in New York; (ii) BLMIS was to act as sub-custodian of these assets,
holding them in segregated accounts in New York; and (iii) BLMIS was to invest these assets in
U.S. Securities and Treasuries.
In light of this structure, upon signing the Subscription Agreement, BLI triggered the
transfer of $40 million in subscription payments from its account in Taiwan to Fairfield Sentry
through New York banks, ultimately to be held and invested by BLMIS. So, too, in making its
redemption request, BLI triggered a transfer of over $42 million (including over $2 million in
profit) from BLMIS’s accounts in New York, through New York banks, finally to BLI abroad.
This movement of money to and from BLMIS in the United States, as contemplated by
the Agreements, was not fortuitous or incidental; instead, it was “the ultimate objective” and the
“raison d’etre” of the Agreement between BLI and Fairfield Sentry. 	Filetech S.A. v. France
Telecom, S.A., 212 F. Supp. 2d 183, 197 (S.D.N.Y. 2011). Indeed, these transfers form the basis
for the Trustee’s entire suit; the Trustee would not have brought this lawsuit but for them. These
transfers, therefore, “bear[] a jurisdictionally relevant relationship to the [instant] cause[] of
action.” Broadfield Fin., Inc. v. Ministry of Fin. of the Slovak Republic, 99 F. Supp. 2d 403, 406
(S.D.N.Y. 2000). In sum, BLI’s acts causing the flow of funds to and from BLMIS in New York
for the purpose of investment and profit are sufficient to satisfy the direct effects test under the
commercial activity exception of the FSIA. 10
9 BLI was aware of this investment structure, not only because it read and executed these Agreements as a self-
proclaimed “Professional Investor,” see Subscription Agreement, p. 3, ¶ 5(c), but also because BLI hired a
consultant, Union Securities, to conduct diligence on Fairfield Sentry and its investment strategies, see Long
Decl., Exs. 1, 2.
10 In addition, BLI’s redemption request directly resulted in a sizeable financial loss for (i) a United States entity,
BLMIS, and (ii) BLMIS customers who will receive less of a distribution from the Trustee’s customer fund if the
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1. 	BLI’s Counterarguments Are Unavailing
BLI advances several arguments against finding that BLI’s commercial activity abroad
had a direct effect in the United States, none of which are persuasive. 	First, BLI contends that
the Trustee has failed to identify any transfer from BLMIS that was a direct effect of BLI’s
redemption request, having submitted only a hefty exhibit to his Complaint without parsing out
the individual transfers. 	Such contention is erroneous, as the Trustee has sufficiently identified
such transfers. In particular, the Trustee showed that on May 5, 2008, Fairfield Sentry withdrew
$80 million from its BLMIS accounts and then withdrew an additional $20 million on July 10,
2008, for a total of $100 million. 	See Compl., Ex. B. 	The Trustee has alleged that Fairfield
Sentry used this $100 million to make redemption payments to its shareholders, including but not
limited to, BLI’s redemption payment on August 18, 2008 in the amount of $42,123,406. 	See
Compl., ¶¶ 34, 41, Exs. B, C. 11
Second, BLI suggests that the transfer of $42,123,406 was not an “immediate” effect of
the redemption request because (i) “45 days elapsed between BLI’s July 4, 2008 redemption
request to Citco in the Netherlands and Fairfield’s August 18, 2008 transfer of $42,123,406 to
BLI,” Reply Memorandum of Law in Further Support of Defendant Bureau of Labor Insurance’s
$42 million were to remain with BLI. 	At oral argument, counsel for BLI cited to Antares Aircraft, L.P. v.
Federal Republic of Nigeria, 999 F.2d 33, 36 (2d Cir. 1993): “[T]he fact that an American individual or firm
suffers some financial loss from a foreign tort cannot, standing alone, suffice to trigger the [direct effect]
exception.” See Transcript, p. 16, line 25; p. 17, lines 1–3. First, as demonstrated above, BLMIS’s financial loss
is not the only direct effect BLI’s actions had in the United States. Second, Antares is distinguishable because
there, the entire tort upon which the lawsuit was based transpired in Nigeria; the only nexus to New York was the
money paid from a New York bank account to Nigeria. Here, in contrast, the Trustee’s lawsuit is based entirely
on the transfers of funds themselves in and out of New York-based BLMIS.
11 BLI then argues that the sequence of these transfers shows that there was no direct effect between BLI’s
redemption request and Fairfield Sentry’s honoring of its request. Yet, as explained supra, BLI’s “acts” taken
together, including signing of the Subscription Agreement, making subscription payments and making a
redemption request, had a direct effect in the United States because, as contemplated by the Agreements, they
caused money to flow (i) from BLI to Fairfield Sentry to BLMIS in the form of subscription payments and (ii)
from BLMIS to Fairfield Sentry to BLI in the form of redemption payments.
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Motion to Dismiss the Complaint (“BLI Reply”) (Dkt. No. 38), p. 18, and (ii) Fairfield Sentry
acted as an intervening factor, id. at pp. 17-18 (“To the extent Citco or Fairfield [Sentry], in
response to BLI’s redemption request, elected to fund the redemption of BLI’s shares by
requesting BLMIS in New York to transfer funds to Fairfield [Sentry], such intervening acts
broke the chain of causation between BLI’s redemption request and any direct effect in the
United States.”) (emphasis in original). 	BLI’s arguments regarding immediacy are incorrect
because there were no intervening acts that broke the chain of causation between BLI’s
redemption request and any direct effect in the United States. 	See Martin, 836 F.2d at 95
(finding a consequence is “immediate” when there is “no intervening element, but, rather, flows
in a straight line without deviation or interruption”) (quotation omitted). 	Here, money flowed
from subscribing shareholders to Fairfield Sentry, and ultimately to BLMIS (95% of the funds),
and then back from BLMIS to Fairfield Sentry, and ultimately to the redeeming shareholders,
which was the exact investment structure to which BLI consented through its execution of the
Agreement and the PPMs. 	As such, despite a 45-day delay, the redemption request was
“immediate.” In addition, to explain this time lag, the Trustee pointed out at oral argument that
in accordance with the Agreements, redemption requests were made by the 15 th day of the
month, shares were valued as of the end of the month, and payment took place 15 days later. See
Transcript, p. 40; lines 15-20.
Finally, BLI posits that the Trustee has not satisfied the direct effect requirement because
he has failed to point to a “legally significant act” in the United States that had a direct effect in
the United States. To that end, BLI cites cases for the proposition that legally significant aspects
of the lawsuit must occur within the United States. 	See, e.g., Hanil, 148 F.3d at 133; Antares,
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999 F.2d at 36. The Second Circuit has recently clarified,12 however, that it is not necessary for
the legally significant acts to have transpired in the United States. 	Giurlando, 602 F.3d at 76
(“[W]e do not interpret the ‘legally significant act’ test as one requiring that the foreign state
have ‘performed’ an act ‘in the United States.’”). 	Rather, courts now hold that the legally
significant acts test “requires that the conduct having a direct effect in the United States be
legally significant conduct in order for the commercial activity exception to apply.” 	Id. at 77
(emphasis in original) (internal quotation omitted). 	BLI’s acts outside of the United States,
including signing the Subscription Agreement, making subscription payments, and making its
redemption request, constitute legally significant acts that form the basis for the Trustee’s instant
action.
At bottom, this is not a situation where “the ripples caused by an overseas transaction
manage eventually to reach the shores of the United States.” Virtual Countries, Inc. v. Republic
of S. Africa, 300 F.3d 230, 236 (2d Cir. 2002). 	Rather, BLI intended to profit from BLMIS in
New York through investments in Fairfield Sentry. As a result, the United States clearly has an
interest in this action such that Congress would have wanted an American court to hear the case.
For the reasons explained above, BLI’s Motion to Dismiss for lack of subject matter
jurisdiction is DENIED.
II. 	THE COURT HAS PERSONAL JURISDICTION OVER BLI
While the Second Circuit recently confirmed that foreign states are not “persons” that can
“avail themselves of the fundamental safeguards of the Due Process Clause,” Frontera Res.
Azerbaijan Corp. v. State Oil Co. of the Azerbaijan Republic, 582 F.3d 393, 399–400 (2d Cir.
12 Indeed, cases decided before and shortly after Weltover caused confusion because a requirement of performance
of a legally significant act “in” the United States “would conflate the provisions of the third clause with those of
the second clause” of section 1605(a)(2). Giurlando v. T.C. Ziraat Bankasi A.S., 602 F.3d 69, 76 (2d Cir. 2010).
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2009) (quotation omitted), it remains unclear, however, whether agencies and instrumentalities
of foreign states enjoy due process protections. See id. at 400 (“[H]olding that a sovereign state
does not enjoy due process protections does not decide the precise question in this case, because
SOCAR is not a sovereign state, but rather an instrumentality or agency of one.”). 	This Court
need not resolve the exact status of BLI, however, because “in any event . . . the due process
requirements have been met here.” 	Hanil Bank v. PT. Bank Negara Indonesia (Persero), 148
F.3d 127, 134 (2d Cir. 1998).
In order to be subjected to personal jurisdiction in the United States, due process requires
that a defendant have sufficient minimum contacts with the forum in which defendant is sued
“such that the maintenance of the suit does not offend ‘traditional notions of fair play and
substantial justice.’”13 Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (quoting Miliken
v. Meyer, 311 U.S. 457, 463 (1940)); see also Shapiro v. Republic of Bolivia, 930 F.2d 1013,
1020 (2d Cir. 1991). These minimum contacts must represent some “act by which the defendant
purposefully avails itself of the privilege of conducting activities within the forum State, thus
invoking the benefits and protections of its laws.” 	Burger King Corp. v. Rudzewicz, 471 U.S.
462, 475 (1985); Parex Bank, 116 F. Supp. 2d at 422; see also Picard v. Cohmad Sec. Corp. (In
re BLMIS), 418 B.R. 75, 80 (Bankr. S.D.N.Y. 2009) (finding that for the exercise of specific
jurisdiction, minimum contacts exist “where a foreign defendant purposefully direct[s] his
activities at residents of the forum and the underlying cause of action arise[s] out of or relate[s]
to those activities”) (alteration in original) (quotation omitted). 	“The defendant’s activity need
not have taken place within the forum, and a single transaction with the forum will suffice.”
Picard v. Maxam Absolute Return Fund, L.P. (In re BLMIS), 460 B.R. 106, 117 (Bankr.
13 There are two types of personal jurisdiction; general and specific. Under the facts, it is clear that there is no
general jurisdiction because BLI did not have “continuous and systematic” contact with the U.S. Accordingly,
the Court conducts an analysis only as to whether it has specific jurisdiction over BLI.
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S.D.N.Y. 2011) (citations omitted). While a choice of law clause is not always dispositive as to
personal jurisdiction, see Zibiz Corp. v. FCN Tech. Solutions, 777 F. Supp. 2d 408, 421
(E.D.N.Y. 2011), it “is a significant factor in a personal jurisdiction analysis because the parties,
by so choosing, invoke the benefits and protections of New York law,” Sunward Elecs., Inc. v.
McDonald, 362 F.3d 17, 23 (2d Cir. 2004).
BLI argues that its due process rights would be violated if it were subjected to this
Court’s personal jurisdiction due to its “isolated contacts with the United States.” Memorandum
of Law in Support of Defendant’s Motion to Dismiss (“BLI Mem. Law”) (Dkt. No. 10), p. 8.14
“Indeed, it would be unfair to force BLI to defend itself in the United States for simply having
funds which it invested in an entity outside of the United States and ultimately ended up in an
account located at BLMIS.” Id. at 11.
BLI’s argument is disingenuous because BLI’s investments in Fairfield Sentry did not
merely “end up” in an account at BLMIS as a result of happenstance or coincidence. 	Rather,
BLI purposefully availed itself of the benefits and protections of New York laws by knowing,
intending and contemplating that the substantial majority of funds invested in Fairfield Sentry
would be transferred to BLMIS in New York to be invested in the New York securities market.
BLI not only was a self-proclaimed “Professional Investor,” but also hired Union Securities to
conduct diligence on Fairfield Sentry and its investment strategies. 	See Long Decl., Exs. 1, 2.
14 To support this point, BLI emphasizes that various isolated banking arrangements, standing alone, are insufficient
to establish personal jurisdiction under the FSIA. See, e.g., Licci v. Am. Exp. Bank. Ltd., 704 F. Supp. 2d 403,
407 (S.D.N.Y. 2010) (holding that a foreign defendant must have more of a connection to the forum state than
“mere maintenance” of a correspondent or intermediary bank account there to suffice for personal jurisdiction);
Canadian Grp. Underwriters Ins. Co. v. M/V “Arctic Trader”, No. 96-9242, 1998 WL 730334, at *3 (S.D.N.Y.
Oct. 19, 1998) (“Standing alone, the existence of a bank account is insufficient to exercise jurisdiction over a
foreign defendant in New York, especially where the function of the account is only to wire funds to an overseas
bank.”) (emphasis added). 	As detailed above, the New York accounts through which the subscription and
redemption payments passed were not merely maintained by BLI, nor is personal jurisdiction over BLI rooted in
the mere existence of these accounts. 	Instead, as the Trustee’s allegations make clear, BLI directed its
investment towards the forum State, thereby purposefully availing itself of the benefits and protections of New
York laws.
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As part of this diligence, BLI was furnished with a private placement memorandum and other
information about Fairfield Sentry, including specifics about the Fund’s investment strategy and
past results and trades in the S & P 100. See Long Decl., Ex. 1, pp. 1–6, 10. On BLI’s behalf,
Union Securities learned that the Fund’s “strategy is executed by [BLMIS],” id. at 2, and the
PPM highlighted BLMIS’s central role in Fairfield Sentry’s investment strategy, see id. at Ex. 4,
p. 15. It explicitly stated that (i) Fairfield Sentry was required to invest at least 95% of its assets
in the SSC utilized and controlled by BLMIS in New York; (ii) BLMIS was to act as custodian
of these assets, holding them in segregated accounts in New York; and (iii) BLMIS was to invest
these assets in U.S. Securities and Treasuries. Id.; 2006 PPM, p. 21; see Compl., ¶ 3;
Subscription Agreement, p. 1, ¶ 3, Ex. 6.15 Armed with the fruits of this diligence, BLI signed
the Subscription Agreement, which incorporated the PPMs.
In a nutshell, BLI invested tens of millions of dollars in Fairfield Sentry with the specific
purpose of having funds invested in BLMIS in New York, and intended to profit from this U.S.-
based investment. As such, BLI cannot claim a violation of its due process rights from having to
appear in a New York court to defend itself in a suit arising from activities with a clear New
York nexus. 	See In re BLMIS, 460 B.R. at 119 (finding no serious burden “where [the
defendant’s] counsel is in New York and there is a U.S. nexus to its economic activities, and
given that ‘the conveniences of modern communication and transportation’ also militate against
finding hardship based on lack of proximity”) (quoting Bank Brussels Lambert v. Fiddler
Gonzalez & Rodriguez, 305 F.3d 120, 129 (2d Cir. 2002)). Accordingly, this Court has personal
15 Further evidencing the strong nexus with New York, the Agreement contains a New York choice of law clause
and a New York forum selection clause. See Subscription Agreement, pp. 5, 6 (indicating the Agreement “shall
be governed and enforced in accordance with the laws of New York, without giving effect to its conflict of laws
provisions” and requiring BLI to “irrevocably submit[] to the jurisdiction of the New York courts”).
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jurisdiction over BLI.
As a final jurisdictional argument, BLI asserts that this Court lacks both subject matter
and personal jurisdiction because BLI invested only in Fairfield Sentry, never directed its funds
to BLMIS, and, in fact, had no contact with BLMIS. 	In support of its point, BLI cites to In re
Aozora Bank Ltd., 11-CIV-5683, 2012 WL 28468 (S.D.N.Y. Jan. 4, 2012), contending that when
it purchased ownership interests in Fairfield Sentry, (i) the investment became the sole property
of Fairfield Sentry, which exercised exclusive control over the investment and directed the
money to BLMIS, and (ii) the investors had no direct control over the funds and did not directly
invest the money in BLMIS.
BLI’s argument is erroneous because it conflates the concept of jurisdiction with the
notion of a “customer” under SIPA, two entirely different standards requiring completely
different analyses.16 That BLI intended to purposefully avail itself of the forum warrants a
finding of personal jurisdiction over BLI, but does not necessarily warrant any finding regarding
customer status under SIPA. See SIPC v. BLMIS (In re Bernard L. Madoff), 454 B.R. 285, 301
n.22 (Bankr. S.D.N.Y. 2011) (holding that “in light of the nature of the . . . investments in the
Feeder Funds,” intent to invest ultimately with BLMIS is “of no consequence” to this Court’s
finding regarding customer status).
* * *
Having addressed jurisdiction, the Court now turns to two issues of first impression;
(i) whether the Trustee, as a matter of law, may recover from BLI as a subsequent transferee
(“Avoidance Issue”), and (ii) whether the Trustee’s claims are barred by the presumption against
16 Indeed, the Aozora court never addressed jurisdiction; it analyzed only which parties are entitled to SIPA
customer claims. See 2012 WL 28468, at *3.
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extraterritoriality 	(“Extraterritoriality 	Issue”).17 Before 	delving 	into 	the 	merits, 	a 	brief
background is appropriate.
On May 18, 2009, the Trustee filed a complaint against the initial transferee, Fairfield
Sentry, seeking, inter alia, the avoidance of all transfers from BLMIS to Fairfield Sentry during
the six year period prior to the Filing Date totaling $3,054,000,000. See Adv. Pro. No. 09-1239,
Dkt. No. 1. Shortly thereafter, the Eastern Caribbean Supreme Court in the High Court of Justice
of the Virgin Islands (the “BVI Court”) entered an order initiating the wind up of Fairfield
Sentry. 	On May 9, 2011, the Trustee and the Fairfield Sentry Joint Liquidators at that time
entered into a written settlement (the “Settlement” or “Settlement Agreement”)18 wherein
Fairfield Sentry (i) agreed to pay $70 million to the Trustee, (ii) reduced its customer claim by
nearly $730 million and (iii) entered into a consent judgment against it in favor of the Trustee for
the entire amount of the initial transfers sought to be avoided by the Trustee (totaling
$3,054,000,000). 	The Settlement Agreement stated that “the Judgments may be used by the
Trustee to prosecute a Subsequent Transferee Claim, and then for the purpose of establishing the
avoidance of the Withdrawals.” Settlement Agreement, ¶ 24.
On June 10, 2011, following a hearing on the Trustee’s Bankruptcy Rule 9019 Motion19 ,
17 Judge Rakoff of the United States District Court, Southern District of New York, has withdrawn the reference in
certain adversary proceedings to adjudicate these issues. The Extraterritoriality Issue has been fully briefed and
oral argument was held on September 21, 2012. The Avoidance Issue is in the process of being briefed and oral
argument is scheduled for November 30, 2012. See 12-MC-00115 (JSR) (Dkt. Nos. 167, 314). As BLI never
moved to withdraw the reference and is not a party to the aforementioned adversary proceedings, these issues
remain before this Court. 	In a recent order, Judge Rakoff noted that “to the extent that the issues overlap,
whichever court reaches its issue first can provide guidance for the other.” 	See Order, 12-MC-00115 (JSR)
(Dkt. No. 214). In the instant decision, this Court addresses only those arguments presented before it.
18 See Form of Agreement Between the Trustee and Kenneth Krys and Joanna Lau, Solely in Their Respective
Capacities as the Foreign Representatives for and Joint Liquidators of Fairfield Sentry Limited, Fairfield Sigma
Limited and Fairfield Lambda Limited [hereinafter “Settlement” or “Settlement Agreement], Adv. Pro. No. 09-
1239, Dkt. No. 69, Att. 2 (Ex. A).
19 Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002(a)(3) and 9019(a)
of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and Between the Trustee and
Kenneth Krys and Joanna Lau, Solely in Their Respective Capacities as the Foreign Representatives for and
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this Court approved the Settlement conditioned upon its approval by the BVI Court. On June 24,
2011, the BVI Court approved the Settlement and on July 13, 2011, this Court entered the
consent judgment against Fairfield Sentry. BLI incorrectly asserts that the consent judgment was
the product of improper collusion and “collaboration among liquidation trustees with one
common goal, settle the current dispute and go after secondary transferees.” 	BLI Mem. Law,
p. 14. 	Instead, the Settlement was the result of a court-approved settlement process that (i)
recognized the limited funds available to recover from an insolvent entity, and (ii) avoided the
gratuitous costs and delays involved in adjudicating to judgment the Trustee’s claims against
Fairfield Sentry. 	See Bench Memorandum and Order Granting Trustee’s Motion for Entry of
Order Approving Agreement (Adv. Pro. No. 09-1239, Dkt. No. 92), p. 3. 	In approving the
Settlement, this Court acknowledged that part of the value of the settlement was the consent
judgment, which allowed the Trustee to seek recovery of funds against other parties in the future.
See id. at p. 4 (“[T]he Trustee’s and the Foreign Representatives’ proposed joint litigation
strategies provide for the assignment of claims, and allocation of recoveries, to the BLMIS
estate, enhancing the Trustee’s ability to achieve the substantially greater sums from third parties
for ultimate distribution to creditors and customers of the BLMIS estate.”). 	As set forth infra,
the Court also recognized and preserved the rights of subsequent transferees to raise defenses and
contest the avoidability of the initial transfers. 	See Order Pursuant to Section 105(a) of the
Bankruptcy Code and Rules 2002 and 9019(a) of the Federal Rules of Bankruptcy Procedure
Approving an Agreement By and Among the Trustee and Kenneth Krys and Joanna Lau, Solely
in Their Respective Capacities as the Foreign Representatives for and Joint Liquidators of
Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited, p. 3.
Joint Liquidators of Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited
[hereinafter “Bankruptcy Rule 9019 Motion”] (Adv. Pro. No. 09-1239, Dkt. No. 69).
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With respect to the Avoidance Issue and the Extraterritoriality Issue, BLI seemingly
moves to dismiss under Rule 12(b)(6), which allows a party to move to dismiss a cause of action
for “failure to state a claim upon which relief can be granted.” FED. R. CIV. P. 12(b)(6); FED. R.
BANKR. P. 7012(b). 	When considering a motion to dismiss under Rule 12(b)(6), a court must
accept all factual allegations in the complaint as true and draw all reasonable inferences in the
plaintiff’s favor. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555–56 (2007); EEOC v. Staten Island Sav. Bank, 207 F.3d 144, 148 (2d Cir. 2000).
The Court now turns to the merits of these issues.
III. 	THE TRUSTEE MAY PURSUE RECOVERY FROM BLI AS SUBSEQUENT
TRANSFEREE UNDER SECTION 550 OF THE CODE BECAUSE THE INITIAL
TRANSFERS FROM BLMIS TO FAIRFIELD SENTRY ARE AVOIDABLE
The issue before the Court is whether Section 550 requires a trustee to formally avoid an
initial transfer to permit recovery against a subsequent transferee or if the mere avoidability of
such transfer is sufficient.
Section 550 provides:
[T]o the extent that a transfer is avoided under [an avoidance provision in the Code], the
trustee may recover, for the benefit of the estate, the property transferred, or, if the court
so orders, the value of such property, from . . . (2) any immediate or mediate transferee of
such initial transferee.
11 U.S.C. § 550(a). BLI argues that the Trustee is barred from seeking recovery from BLI as a
subsequent transferee because the Trustee, having entered into a settlement agreement, did not
obtain a full and final judgment of avoidance against the initial transferee, Fairfield Sentry. The
Court disagrees. 	Under these circumstances, the Trustee may recover from BLI under Section
550 because the Trustee timely filed a complaint against Fairfield Sentry alleging that the initial
transfers from BLMIS to Fairfield Sentry are “avoidable” under section 548 of the Code. 	See
Official Comm. of Unsecured Creditors of M. Fabrikant & Sons, Inc. v. J.P. Morgan Chase
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Bank, N.A. (In re M. Fabrikant & Sons, Inc.), 394 B.R. 721, 741 (Bankr. S.D.N.Y. 2008)
(“Avoidable . . . describes a transaction that can be voided . . . but that is valid until annulled.”)
(quotations and citations omitted). 	Indeed, the majority of courts have found that Section 550
requires a transfer be avoidable; it does not require a trustee to litigate a final judgment of
avoidance against initial transferees before seeking recovery from subsequent transferees.
5 COLLIER ON BANKRUPTCY , ¶ 550.02[1] at 550-6 (16th Ed. 2011) (“The better view, adopted by
the majority of courts is that . . . a recovery may be had from a subsequent transferee without
suing the initial transferee.”); see, e.g., IBT Int’l, Inc. v. Northern (In re Int’l Admin. Servs., Inc.),
408 F.3d 689, 708 (11th Cir. 2005) (“Section 550(a) does not mandate a plaintiff to first pursue
recovery against the initial transferee and successfully avoid all prior transfers against a mediate
transferee.”); Kendall v. Sorani (In re Richmond Produce Co.), 195 B.R. 455, 463 (N.D. Cal.
1996) (“[O]nce the trustee proves that a transfer is avoidable under section 548, he may seek to
recover against any transferee, initial or immediate, or an entity for whose benefit the transfer is
made.”) (emphasis added); Woods & Erickson LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721,
735 (B.A.P. 9th Cir. 2008) (“[A] trustee is not required to avoid the initial transfer from the
initial transferee before seeking recovery from subsequent transferees under § 550(a)(2).”); In re
M. Fabrikant & Sons, Inc., 394 B.R. at 745–46 (“The plaintiff can proceed directly against the
[subsequent transferees] and “avoid” the initial transfer as to them.”). Further, there is nothing in
Section 550 suggesting “that recovery from immediate transferees is in any way dependent upon
a prior action or recovery against the initial transferee . . . . 	On the contrary, avoidability is an
attribute of the transfer rather than that of the creditor.” In re Richmond Produce Co., 195 B.R.
at 463 (quotation omitted).
Only one district court case in the Second Circuit has addressed this issue. 	See Enron
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Creditors Recovery Corp. v. Int’l Fin. Corp. (In re Enron Creditors Recovery Corp.), 388 B.R.
489 (S.D.N.Y. 2008). 	In Enron, the bankruptcy court was confronted with a situation where it
was impossible and impractical for the trustee to obtain a judgment of avoidance against the
initial transferee, CLO Holdings, “because there was no CLO Holdings and there was no CLO
trustee. The special purpose entity [CLO] . . . had been collapsed.” See In re Enron Creditors
Recovery Corp., Hearing Transcript (“Enron Transcript”), No. 07-6597, Dkt. No. 32, Apr. 16,
2008, at p. 17, lines 21–24. 	As such, while the district court agreed with the bankruptcy court
that Section 550 usually requires a formal avoidance of a transfer before permitting recovery
from a subsequent transferee, it emphasized that it was “necessary to leave open the possibility
of an exception where[,] for legal or practical reasons[,] it is impossible or impractical to satisfy
the precondition of an avoidance.” See Enron Transcript at p. 37, lines 15–25; p. 38, lines 1–10
(emphasis added).
In essence, the district court found that Section 550 must be construed flexibly to avoid
harsh and inequitable results. 	Specifically, it noted that “two [sic] ready an application of the
requirement of the condition precedent can amount to forfeiture. And in this application it would
bar the trustee from seeking recovery of assets that arguably should be recovered for the
bankrupt . . . and the creditors thereof.” Id. at p. 38, lines 11-15; see also id. at p. 38, lines 16-21
(“[W]e are involved with statutory extensions of laws of equity and I think we should inform the
way that the bankruptcy code and rules are interpreted not in the feasance of literal terms, but,
certainly, where there is sufficient ambiguity to allow such we can satisfy both literal rule and
equity . . . .”) (emphasis added).
The AVI court echoed the district court’s sentiments that Section 550 “should be
interpreted to provide flexibility.” In re AVI, Inc., 389 B.R. at 735. In the context of settlements
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in particular, it relied on such flexibility to “avoid [the] absurd result” of precluding a trustee
from “pursuing subsequent transferees after settling with an initial transferee who does not admit
liability.” 	Id. (emphasis added). 	The court emphasized that “Congress could not have
contemplated this outcome in enacting § 550” because it would lead to trustees having “little
incentive to partially settle avoidance actions, thereby running up the costs of litigation and
causing further delay.” Id.
Under the present circumstances where a settlement is at play, rigidly construing Section
550 to require a formal avoidance against Fairfield Sentry before permitting recovery from BLI
makes little sense. 	It was “impractical” for the Trustee to obtain such a judgment against
Fairfield Sentry because it would have entailed protracted, expensive litigation with an insolvent
entity in the midst of a liquidation proceeding with little chance of meaningful recovery.20 See
Affidavit of Irving H. Picard,21 (Adv. Pro. No. 09-1239) (Dkt. No. 71), Attachment 5, Ex. D ,
¶¶ 4, 7 (Trustee attesting that, using his business judgment, he believed it preferable to settle with
Fairfield Sentry rather than engage in an exercise of futility to litigate to a full and final judgment
of avoidance). 	In addition, such a requirement would lead to the “absurd result” of forcing the
Trustee to choose between engaging in such burdensome litigation with the insolvent initial
transferee on the one hand, or forever forfeiting the right to recover from all subsequent
transferees on the other. 	To avoid such an impractical result, the Court construes Section 550
flexibly to require only avoidability to pursue recovery from BLI.
The above notwithstanding, the Trustee will still be required to prove that the transfers
20 As a result of the Settlement, the Trustee is entitled to recover only $70 million, a mere two percent of the
approximately $3 billion consent judgment against Fairfield Sentry. See Settlement Agreement, ¶¶ 1-2.
21 Affidavit of Irving H. Picard, Trustee, In Support of Motion for Entry of Order Pursuant to Section 105(a) of the
Bankruptcy Code and Rules 2002(a)(3) and 9019(a) of the Federal Rules of Bankruptcy Procedure Approving
Agreements Between the Trustee and Greenwich Sentry, L.P., and Greenwich Sentry Partners LP.
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from BLMIS to Fairfield were fraudulent and improper in connection with its suit against BLI as
subsequent transferee because the Trustee’s Settlement with Fairfield Sentry did not involve any
determination on the merits as to the initial transfers.22 So, too, BLI will be afforded its due
process rights to contest the avoidability of these initial transfers. 	See Dye v. Sachs (In re
Flashcom, Inc.), 361 B.R. 519, 525 (Bankr. C.D. Cal. 2007) (“[A] stipulated or default judgment
entered in an avoidance action does not preclude the defendants in a recovery action from
disputing the avoidability.”); Thompson v. Jonovich (In re Food & Fibre Protection, Ltd.), 168
B.R. 408, 416 (Bankr. D. Ariz. 1994) (finding that a default judgment did not preclude
defendants from asserting their due process rights to dispute avoidability of the initial transfer
and raise whatever defenses were available to the initial transferee); Morris v. Emprise Bank (In
re Jones Storage and Moving, Inc.), No. 00-14862, 2005 WL 2590385 (Bankr. D. Kan. Apr. 14,
2005). That BLI should be afforded this right to dispute is a notion the Trustee does not contest.
See Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities
LLC’s Memorandum in Response to Defendant Bureau of Labor Insurance’s Motion to Dismiss
(Dkt. No. 16), p. 29 (“[T]hese cases merely hold that subsequent transferees’ rights to due
process afford them the opportunity to contest the avoidability of initial transfers, to the extent
that issue was not fully adjudicated in a prior proceeding—a proposition that the Trustee does
not contest.”).
BLI further argues that since the Settlement did not constitute a true avoidance, it failed
to 	trigger 	the 	one-year 	statute 	of 	limitations 	under 	section 	550(f) 	of 	the 	Code.
See 11 U.S.C. § 550(f) (stating the trustee must initiate recovery actions against subsequent
transferees within “one year after the avoidance of the transfer”). To avoid the absurd result of
22 In fact, there was an express denial of liability with regard to the initial transfers. See Settlement Agreement, ¶ 24
(“This Agreement . . . will not be deemed to be a presumption, concession or admission by any Party of any
fault, liability or wrongdoing whatsoever.”).
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section 550(f) of the Code never starting to run, BLI asserts that “the Court should apply the two-
year statute of limitations contained in 11 U.S.C. § 546(a) to the Trustee’s claims against BLI.”
See BLI Reply, p. 27; 11 U.S.C. § 546(a)(1)(A) (stating the trustee must initiate an avoidance
proceeding within two years after entry of the bankruptcy petition). BLI contends that since the
Trustee’s Complaint against BLI was filed over two years after the bankruptcy petition, the suit
is time-barred. BLI’s arguments in this regard are erroneous. Although the Settlement does not
constitute a formal avoidance of the initial transfer from BLMIS to Fairfield, it presents the
Court with finality with respect to Fairfield Sentry. 	This finality triggers the relevant one-year
statute of limitations under section 550(f) of the Code. Without such a trigger, the Trustee would
be permitted to bring suit against a subsequent transferee for an indefinite amount of time, a
highly inequitable result. See ASARCO LLC v. Shore Terminals LLC, No. C 11-01384, 2012 WL
2050253, at *5 (N.D. Ca. June 6, 2012) (finding that a judicially approved settlement triggered
the statute of limitations because any other result “would undermine the certainty that statutes of
limitations are designated to further,” and because otherwise “the statute of limitations would be
indefinite because a triggering event might never occur”). 	Whether the Court looks at the date
that (i) the Trustee’s Bankruptcy Rule 9019 Motion was granted (June 7, 2011), (ii) a final order
from this Court approving the Settlement was entered (June 10, 2011), (iii) a final order from the
BVI court approving the Settlement was entered (June 24, 2011), or (iv) a consent judgment was
entered against Fairfield Sentry by this Court (July 13, 2011), the Trustee’s suit against BLI,
commenced on September 22, 2011, was well within the one-year statute of limitations and is
therefore deemed timely.
In light of the above, the Motion to Dismiss on these grounds is DENIED.
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IV. 	THE TRUSTEE’S CLAIMS ARE NOT BARRED BY THE PRESUMPTION
AGAINST EXTRATERRITORIALITY
The final issue before the Court is whether the Trustee’s claims against BLI under
Section 550 are barred by the presumption against extraterritoriality.
The Supreme Court recently reaffirmed the presumption against extraterritoriality, which
assumes that, unless Congress indicates otherwise, its legislation applies only within the
territorial jurisdiction of the United States. See Morrison v. Nat. Australia Bank Ltd., 130 S. Ct.
2869, 2877 (2010) [“Morrison”]. 	This principle “represents a canon of construction, or a
presumption about a statute’s meaning, rather than a limit upon Congress’s power to legislate”
and “rests on the perception that Congress ordinarily legislates with respect to domestic, not
foreign matters.” Id. As such, “unless there is the affirmative intention of the Congress clearly
expressed to give a statute extraterritorial effect, we must presume it is primarily concerned with
domestic conditions.” Id. (quotations omitted).
In light of this presumption, BLI argues that the Trustee improperly seeks to apply
Section 550 extraterritorially to transfers that BLI received from Fairfield Sentry overseas. BLI
is 	incorrect, 	however, 	because 	(i) 	the 	Trustee 	is 	not 	seeking 	to 	apply 	Section 	550
extraterritorially, making this presumption inapplicable, and (ii) even if the Trustee were seeking
to apply this section extraterritorially, Congress expressed clear intent to permit such an
application. 	Accordingly, the Trustee’s claims against BLI pursuant to Section 550 are not
barred by the presumption against extraterritoriality.
A. The 	Presumption 	Against 	Extraterritoriality 	Does 	Not 	Apply 	Under 	These
Circumstances
As demonstrated below, in light of the “focus” test annunciated in Morrison, in
conjunction with pragmatic considerations, the Court finds that the Trustee is not seeking to
apply Section 550 extraterritorially and, therefore, the presumption against extraterritoriality is
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not implicated in the instant Motion to Dismiss.
a. 	The “Focus” Test Under Morrison
In determining whether a statute is being applied domestically or extraterritorially, the
Supreme Court in Morrison annunciated a transactional test centered on the “focus” of a statute,
namely, the “objects of the statute’s solicitude,” and what the statute “seeks to regulate.” 130 S.
Ct. at 2883–84. 	If the acts or objects upon which the statute focuses are located in the United
States, application of the statute is domestic and the presumption against extraterritoriality is not
implicated, even if other activities or parties are located outside the United States. 	See id. at
2884–85; SEC v. Gruss, No. 11-Civ-2420, 2012 WL 1659142, at **8–10 	(S.D.N.Y. May 09,
2012) (finding no extraterritorial application where focus of Investment Advisor Act was on
investment advisers and fraud was perpetuated by domestic investment advisor against foreign
clients); see also Lapiner v. Camtek, Ltd., No. C 08–01327, 2011 WL 445849, at *2 (N.D. Cal.
Feb. 2, 2011) (denying motion to dismiss on extraterritorial grounds because focus of act was
domestic even though “the conduct on which [the] plaintiff’s claims are based took place outside
of the United States, specifically in Israel, and that the majority of [the] stock is, purportedly,
held in Israel”).
As demonstrated by the text and structure of the avoidance and recovery sections of the
Code, their focus is on the improper depletion of the bankruptcy estate’s assets. 	French v.
Liebmann (In re French), 440 F.3d 145, 154 (4th Cir. 2006) (“[T]he Code’s avoidance
provisions protect creditors by preserving the bankruptcy estate against illegitimate depletions.”).
These avoidance and recovery provisions work in tandem to further the Code’s policy of
maximizing the value of the bankruptcy estate by permitting a trustee to avoid certain transfers
that deplete the estate and recover the payments for the benefit of creditors. 	See Lassman v.
Patts (In re Patts), 470 B.R. 234, 243 (Bankr. D. Mass. 2012) (“These sections of the
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Bankruptcy Code must be read in conjunction when assessing a trustee’s avoidance and recovery
action, the purpose of which is to restore the estate to the financial condition it would have
enjoyed if the transfer had not occurred.”); see also 5 COLLIER ON B ANKRUPTCY ¶ 548.01[1][a]
(16th ed. 2010) (“[S]ection 548 serves the goal of increased creditor dividends by allowing the
estate representative to avoid offending transactions, and bring the property back into the
debtors’ estate for distributions to creditors.”).
Specifically, the focus of the avoidance and recovery sections is on the initial transfers
that deplete the bankruptcy estate and not on the recipient of the transfers or the subsequent
transfers. 	For example, the avoidance sections focus on the transfers themselves, including the
timing of the transfers, see, e.g., 11 U.S.C. §§ 547(b)(4), 548(a)(1),(b), their purpose, see, e.g.,
11 U.S.C. § 548(a)(1)(A), and their effect on the transferor, see, e.g., § 548(a)(1)(B). 	Further,
the recovery section that governs the Trustee’s claims against BLI, Section 550, is titled
“Liability 	of 	transferee 	of 	avoided 	transfer.” 	11 	U.S.C. 	§ 	550; 	see 	Gruss,
2012 WL 1659142, at *9 (“[A] title of a statute or section can aid in resolving any ambiguity in
the legislation's text.”) (quotation omitted). It makes no mention of the transfer from the initial
transferee to the subsequent transferee; indeed, recovery from a subsequent transferee is
grounded solely on the basis of it possessing a fraudulent transfer. 	See 11 U.S.C. § 550.
Moreover, as “a court’s recovery power is generally coextensive with its avoidance power,” it is
logical that the relevant transfer for purposes of the presumption against extraterritoriality is only
the transfer that is to be avoided, namely the initial transfer. 	See Diaz-Barba v. Kismet
Acquisition, LLC, No. 08-CV-1446, 2010 WL 2079738, at *8 (S.D. Cal. May 20, 2010).
Looking at the instant facts, the Trustee’s application of Section 550 is domestic because
the depletion of the BLMIS estate occurred in the United States. The BLMIS Ponzi scheme was
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operated in the United States and the funds used to operate the scheme were received and
disbursed to investors in the United States. 	Specifically, the transfers at issue originated from
BLMIS’s New York JPMorgan Account and went to Fairfield Sentry’s New York HSBC
Account. 	These acts, which occurred domestically, are the “objects of the statute’s solicitude,”
and what the statute “seeks to regulate,” Morrison, 130 S. Ct. at 2884. As the focus of Section
550 occurred domestically, the fact that BLI received BLMIS’s fraudulently transferred property
in a foreign country does not make the Trustee’s application of this section extraterritorial. See
id. at 2884–85; Gruss, 2012 WL 1659142, at **8–10; Lapiner, 2011 WL 445849, at *2.
b. 	Pragmatic Considerations
In addition, finding that the Trustee could not recover assets fraudulently transferred
abroad, as BLI argues, would, from a practical standpoint, render hollow the avoidance and
recovery provisions of the Code, an outcome clearly unintended by Congress. 	In particular, if
the avoidance and recovery provisions ceased to be effective at the borders of the United States,
a debtor could end run the Code by “simply arrang[ing] to have the transfer made overseas,”
thereby shielding them from United States law and recovery by creditors. 	In re Maxwell
Communication Corp., 186 B.R. at 816. 	Congress did not intend for this absurd result of
according “an invariable exemption from the Code's operation to those who leave our borders to
engage in fraud.” 	French, 440 F.3d at 155 (Wilkinson, J., concurring). 	This is especially so
given the prevalence of special purpose offshore entities engaging in financial and commercial
activities in the United States. Moreover, “nothing is better settled[] than” the responsibility of
courts to assure that statutes receive “a sensible construction, such as will effectuate the
legislative intention, and, if possible, so as to avoid an unjust or an absurd conclusion.” Johnson
v. U.S., 529 U.S. 694, 707 n.9 (2000) (quoting In re Chapman, 166 U.S. 661, 667 (1897); see
also Gruss, 2012 WL 1659142, at *10 (finding congressional silence did not implicate the
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presumption against extraterritorially because “[n]ot every silence is pregnant . . . . An inference
drawn from congressional silence certainly cannot be credited when it is contrary to all other
textual and contextual evidence of congressional intent”) (quoting Burns v. U.S., 501 U.S. 129,
136 (1991)).23 Accordingly, the Court declines to adopt BLI’s position in this regard.
c. 	Maxwell is Distinguishable From The Instant Facts
Although BLI relies heavily on Maxwell Communication Corp. plc v. Barclays Bank (In
re Maxwell Communication Corp. plc), 170 B.R. 800 (Bankr. S.D.N.Y.1994), where the court
found Section 547 of the Code could not be applied extraterritorially, aff'd sub nom. Societe
General plc v. Maxwell Communication Corp. plc (In re Maxwell Communication Corp. plc),
186 B.R. 807 (S.D.N.Y. 1995), aff'd on other grounds, 93 F.3d 1036 (2d Cir. 1996), Maxwell is
distinguishable on its facts.
First, application of Section 547 was extraterritorial in Maxwell because the focus of the
statute, depletion of the debtor’s estate, occurred abroad; preferential transfers were made by a
United Kingdom corporation from its accounts located abroad to recipients also located abroad.
See id. at 809. 	Indeed, the Maxwell court expressly limited its holding to instances where the
Debtor was not a United States entity and the transfers occurred abroad to other foreign entities.
See id. at 814 (“To be clear, I do not hold today that no debtor may pursue a transfer overseas.
What I do hold is that where a foreign debtor makes a preferential transfer to a foreign transferee
and the center of gravity of that transfer is overseas, the presumption against extraterritoriality
23 The analysis above applies equally to subsequent transferees. If foreign subsequent transferees were insulated
from recovery actions, the avoidance and recovery provisions of the Code would likewise be rendered
ineffective. A debtor could engineer transfers to end up in the possession of foreign parties, thus preventing
recovery by a trustee. Indeed, “[t]he cornerstone of the bankruptcy courts has always been the doing of equity,
and in situations such as this, where money is spread throughout the globe, fraudulent transferors should not be
allowed to use § 550 as both a shield and a sword. Not only would subsequent transferees avoid incurring
liability, but they would also defeat recovery and further diminish the assets of the estate.” In re Int’l Admin.
Servs., Inc., 408 F.3d 689, 707 (11th Cir. 2005) (quotation and citation omitted).
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prevents utilization of section 547 to avoid the transfer.”); id. at 808, n.13 (“Much as I would
relish the opportunity to address whether a debtor which is a U.S. entity could use section 547 to
recover a preference made to a foreign creditor, I think it is best to refrain from such dicta.”). In
contrast, application of Section 550 here is domestic because, as discussed supra, the depletion
of the BLMIS estate occurred in the United States.
Second, 	the 	Second 	Circuit 	declined 	to 	reach 	whether 	the 	presumption 	against
extraterritoriality barred application of Section 547 abroad and ultimately affirmed the lower
courts on comity grounds. 	Maxwell, 93 F.3d at 1054–1055 (electing not to “decide whether,
setting aside considerations of comity, the ‘presumption against extraterritoriality’ would compel
a conclusion that the Bankruptcy Code does not reach the pre-petition transfers at issue”).
Employing a comity analysis, the Second Circuit held that as Maxwell involved a debtor subject
to joint insolvency proceedings in the United States and the United Kingdom, “the doctrine of
international comity precludes application of the American avoidance law to transfers in which
England's interest has primacy.” 	Id. at 1055. 	This reasoning has no applicability to the instant
case, where BLMIS is not subject to parallel liquidation proceedings in another court.24
In light of the above, the Trustee’s application of Section 550 is purely domestic and is
therefore not barred by the presumption against extraterritoriality.
B. Congress Expressed Clear Intent For Extraterritorial Application of Section 550
Even if the application of Section 550 were extraterritorial under these facts, which it is
not, Congress expressed clear intent for such an application and the presumption against
24 In addition, comity is an affirmative defense that BLI has the burden of proving. See Allstate Life Ins. Co. v.
Linter Group Ltd., 994 F.2d 996, 999 (2d Cir. 1996). As BLI has not argued that comity concerns prevent the
application of Section 550 to its receipt of fraudulent transfers from BLMIS, the Court need not address the
issue.
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extraterritoriality “must give way when Congress exercises its undeniable ‘authority to enforce
its laws beyond the territorial boundaries of the United States.’” 	French, 440 F.3d at 151
(quoting EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991)). A statute need not include a
clear statement declaring “this law applies abroad” to rebut the presumption, and statutory
context may be consulted “in searching for a clear indication of statutory meaning.” 	U.S. v.
Weingarten, 632 F.3d 60, 65 (2d Cir. 2011) (citing Morrison, 130 S. Ct. at 2883). 	Moreover,
“reference 	to 	nontextual 	sources 	is 	permissible” 	and 	“all 	available 	evidence” 	should 	be
considered in determining congressional intent. 	Id. (quotations omitted); see also French, 440
F.3d at 151 (“To determine whether Congress has expressed such an affirmative intention, courts
may look to . . . the text of the statute, the overall statutory scheme, and legislative history.”).
However, broad boilerplate terms in statutes are insufficient to overcome the presumption
against extraterritoriality. Morrison, 130 U.S. at 2882.
Congress demonstrated its clear intent for the extraterritorial application of Section 550
through 	interweaving 	terminology 	and 	cross-references 	to 	relevant 	Code 	provisions.
Specifically, (i) “property of the estate,” under Section 541, includes all property worldwide; (ii)
the avoidance provisions of Sections 544(b), 547, and 548 (the “Avoidance Provisions”),
incorporate the language of Section 541 – “an interest of debtor in property” – to delineate the
extent to which transfers can be avoided, i.e., that which would have been property of the estate
but for the improper transfer can be avoided; and (iii) Section 550 explicitly authorizes the
recovery of all transfers that have been avoided, which necessarily includes overseas property.
With respect to Section 541, it defines “property of the estate” as, inter alia, all “interests
of the debtor in property as of the commencement of the case,” 11 U.S.C § 541(a)(1), “wherever
located and by whomever held.” 11 U.S.C § 541(a). In accord with the broad language of this
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section, courts have universally held that property of the estate extends to any property located
worldwide. See, e.g., Hong Kong & Shanghai Banking Corp. v. Simon (In re Simon), 153 F.3d
991, 996 (9th Cir. 1998) (explaining that property of the estate “includes property outside the
territorial jurisdiction of the United States”); Nakash v. Zur (In re Nakash), 190 B.R. 763, 768
(Bankr. S.D.N.Y. 1996) (noting that “wherever located” is broadly construed “to include
property located in and outside of the U.S.”).
The Avoidance Provisions grant a trustee the power to avoid certain prepetition transfers
“of an interest of a debtor in property.” 	See 11 U.S.C. § 544(b), 547, 548. 	These sections’
reference to the “interest of the debtor in property”—the same term used in Section 541—is not
coincidental. Rather, as discussed by the Supreme Court in the context of preferential transfers
under section 547 of the Code, property subject to avoidance is defined by “property of the
estate” in Section 541. As explained by the Court, section 541 “delineates the scope of ‘property
of the estate’ and serves as the postpetition analog to § 547(b)’s ‘property of the debtor.” Begier
v. I.R.S., 496 U.S. 53, 58–59 (1990). This is because (i) “‘property of the debtor’ subject to the
preferential transfer provision is best understood as that property that would have been part of
the estate had it not been transferred before the commencement of the bankruptcy proceedings”
and (ii) “the purpose of the avoidance provision is to preserve the property includable within the
bankruptcy estate.” Id. at 58.
In circumstances similar to the instant proceeding, the Fourth Circuit concluded that the
Avoidance Provisions’ reference to Section 541 also incorporates that section to permit the
avoidance of overseas transfers.
By incorporating the language of § 541 to define what property a trustee may
recover under his avoidance powers, § 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
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the estate” now. 	Through this incorporation, Congress made manifest its intent
that § 548 apply to all property that, absent a prepetition transfer, would have
been property of the estate, wherever that property is located.
French, 440 F.3d at 151–52 (4th Cir. 2006) (citations omitted) (emphasis altered). Section 548’s
incorporation of “property of the estate” as defined in Section 541 “is not merely broad,
boilerplate language that arguably contemplates application beyond the territorial jurisdiction of
the United States.” 	Kollias v. D & G Marine Maint., 29 F.3d 67, 74 (2d Cir. 1994). 	That is,
Congress explicitly incorporated the language of Section 541 to allow a trustee to maximize
recoveries for the bankruptcy estate by permitting the avoidance of any transfer that would have
been property of the estate, which necessarily includes assets fraudulently transferred outside the
United States. 	See French, 440 F.3d at 152 (“Congress thus demonstrated an affirmative
intention to allow avoidance of transfers of foreign property that, but for a fraudulent transfer,
would have been property of the debtor’s estate.”).
Section 550, in turn, allows a trustee to recover any transfer to the extent it has been
avoided. See 11 U.S.C. § 550. This section’s use of the term “transfer” specifically refers to all
transfers “avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title.” Id. As
such, by incorporating the avoidance provisions by reference, Section 550 expresses the same
congressional intent regarding extraterritorial application. Thus, Congress expressed intent for
the application of Section 550 to fraudulently transferred assets located outside the United States
and the presumption against extraterritoriality does not apply.
BLI argues that the definition of property of the estate in Section 541 cannot form the
basis for the extraterritorial application of the avoidance and recovery sections in the Code
because under Second Circuit precedent, fraudulently transferred assets are not property of the
estate until they are actually recovered. 	See BLI Reply, p. 32 (citing FDIC v. Hirsch (In re
Colonial Reality Co.), 980 F.2d 125, 131 (2d Cir 1992)). BLI therefore urges this Court to adopt
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the view of Barclay v. Swiss Fin. Corp. (In re Midland Euro Exchange, Inc.), 347 B.R. 708
(C.D. Cal. 2006), which criticized the holding of French for the same reason. 	Id. at 717–18.
Both BLI and the court in Midland Euro Exchange, however, misunderstand French’s holding.
In 	French, 	extraterritorial 	application 	of 	Section 	548 	was 	not 	premised 	on 	fraudulently
transferred assets constituting actual property of the estate prior to recovery. 	See French, 440
F.3d at 151 n.2 (“Because we hold that § 548 applies to the transfer in this case even assuming
that § 541's definition of ‘property of the estate’ does not by itself extend to the [fraudulently
transferred property], we need not join this dispute [on whether fraudulently transfers are
property of the estate prior to recovery].”). Rather, as explained above, Section 548’s reference
to Section 541 expressed congressional intent to grant the Trustee authority to avoid and recover
all transfers that, but for a fraudulent transfer, would have been property of the estate, even if not
currently property of the estate. 	This grant of authority includes assets fraudulently transferred
overseas because but for the fraudulent transfer, assets located overseas would undeniably be
property of the estate.
In light of the above, the Motion to Dismiss on these grounds is DENIED.
CONCLUSION
For the reasons set forth herein, BLI’s Motion to Dismiss is hereby DENIED.25
IT IS SO ORDERED.
Dated: New York, New York 	/s/ Burton R. Lifland
October 11, 2012 	United States Bankruptcy Judge
25 The Court notes that notwithstanding the approach of the Trustee seeking to recover all $42 million from BLI in
the instant suit, in light of potential “value” defenses available under the Code, it is conceivable that BLI would
be liable only for its net winnings.
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