Banco Bilbao Seeks Dismissal of Madoff Trustee's Clawback Suit Citing Extraterritoriality Concerns

A Spanish banking institution sought the dismissal of a "clawback" lawsuit filed by the trustee for Bernard Madoff's failed Ponzi scheme, claiming that United States bankruptcy law is silent as to its extraterritorial reach and thus ineffective in Picard's quest to recover funds for the benefit of Madoff's defrauded investors.  Banco Bilbao Vizcaya Argentaria ("BBVA"), a multinational Spanish banking group, was sued by Irving Picard, the court-appointed trustee, in December in which Picard sought the return of approximately $45 million withdrawn through BBVA's investment with Madoff "feeder fund" Fairfield Sentry Limited.  In addition to the claim that the Bankruptcy Code was silent on its extraterritoriality, BBVA also claimed that Picard's Complaint should be dismissed because (1) the Complaint failed to state a claim upon which relief could be granted, and (2) Picard's failure to avoid the initial transfer between Madoff and Fairfield Sentry precluded any avoidance between Madoff and BBVA as a subsequent transferee.

Contrary to Picard's assertion that BBVA should return the $45 million it received from Madoff through "public information, as well as considerable non-public information, which raised red flags of possible fraudulent activities at BLMIS," BBVA claimed that it had in fact been another of Madoff's victims.  In fact, claimed BBVA, it had "invested $311 million in Fairfield Sentry, and, as of December 2008, still had more than $774 million invested in all feeder funds." This entire amount was lost due to the deception of the "feeder funds," claimed BBVA, which maintained it remained without knowledge as to any indication of Madoff's fraud.  

BBVA raises several interesting novel issues that have largely remained unaddressed in Picard's bevy of ongoing litigation.  The first is the contention that, without the avoidance of the initial transfer between Madoff and Fairfield Sentry, the avoidance of any subsequent transfer is precluded by both the statutory language of section 550 of the Bankruptcy Code and legislative history.  According to BBVA, Section 550(a) permits the Trustee to recover property or its value from a subsequent transferee only “to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title.”  BBVA recognizes that Picard will likely raise the issue of his previous settlement with Fairfield Sentry "and argue that the initial transfers are as good as avoided."  Yet, in weighing the language of Picard's settlement and accompanying declarations, BBVA posits that the transfers from Madoff to Fairfield not only remained unavoided, but were never avoidable. 

Next, BBVA claims that the presumption against extraterritorial application of United States laws bars the Trustee's claim to recover transfers made to BBVA.  Elaborating, BBVA claims that

[g]iven the foreign based nature of both the initial investment and the redemption, the Trustee cannot state a cause of action against BBVA unless he can make an affirmative showing that Section 550(a) has extraterritorial effect. He cannot do so. The language of Section 550(a) gives no clear indication of an extraterritorial application, and, therefore, the statute has none.    

In support of this, BBVA invokes the recent Supreme Court decision in Morrison v. National Australia Bank130 S. Ct. 2869 (2010).  In Morrison, the Court rejected years of caselaw concerning the extraterritorial application of US securities fraud legislation, stating that "[w]hen a statute gives no clear indication of an extraterritorial  application, it has none."  While Morrison dealt with the Securities and Exchange Act of 1934, the Court made it clear that a presumption against extraterritoriality applies in all cases.  BBVA analyzed Section 550 of the Bankruptcy Code under this analysis, concluding that Congress, except for very limited circumstances, did not intend for Section 550 to apply extraterritorially.

Under Federal Rules of Civil Procedure, Picard now has twenty-one days to respond to the motion.

A Copy of the Complaint filed by the Trustee is here.
A Copy of BBVA's Motion to Dismiss is here