REGIONAL COMMITTEES: UCC
In re Fairfield Sentry Ltd.: Extraterritorial Application the US Bankruptcy Code’ s Securities Safe Harbor from Constructive Fraudulent Transfer Claims
By Timothy Graulich, Joshua Sturm and Jonathan He
Introduction
United States courts have long grappled with application of various US Bankruptcy Code provisions to non-US parties through the lens of a chapter 15 proceeding. In August 2025, the US Court of Appeals for the Second Circuit( the“ Second Circuit”) resolved a split of lower court decisions, ruling that the Bankruptcy Code’ s securities safe harbor under section 546( e) shields transfers between non-US entities from constructive fraudulent transfer and related claims pursued through chapter 15 proceedings. 1 Background The debtors in In re Fairfield Sentry Ltd.( collectively 40, the“ Debtors” and each, a“ Debtor”) were investment funds based in the British Virgin Islands(“ BVI”) that invested heavily in Bernard L. Madoff Investment Securities(“ BLMIS”). As Madoff’ s Ponzi scheme unraveled, the Debtors were forced into liquidation and initiated insolvency proceedings in the BVI in 2009. In July 2010, the Bankruptcy Court for the Southern District of New York( the“ Bankruptcy Court”) granted US chapter 15 recognition of the BVI proceedings as a foreign main proceeding.
Before the collapse of Madoff’ s Ponzi scheme, some investors redeemed their shares in the Debtor funds at overstated redemption prices reflecting inflated fund valuations based on BLMIS’ s fictitious account statements. The
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In re Fairfield Sentry Ltd., No. 22-2101-BK, 2025 WL 2218836( 2d Cir. Aug. 5, 2025). liquidators appointed for the Debtors brought suits in the BVI seeking to claw back these redemption payments from certain of the non-US investors that redeemed shares before the collapse( the“ Defendants”) so those Defendants would not benefit from a windfall at the expense of investors whose shares suffered substantial losses following disclosure of BLMIS’ s fraud. 2 Those proceedings ultimately came before the Privy Council in London, which upheld the finality of the Defendants’ redemption.
The liquidators then moved for leave to amend the complaint in the US chapter 15 proceeding. The Defendants moved to dismiss the liquidators’ claims for lack of personal jurisdiction, failure to state a claim, and the safe harbor for securities transactions of section 546( e) of the Bankruptcy Code. The three central issues first considered by the Bankruptcy Court were:( i) whether the forum selection clause in the Debtor fund subscription agreements established personal jurisdiction over the investors who were non-US Defendants,( ii) whether the securities safe harbor of section 546( e) of the Bankruptcy Code applies extraterritorially to bar the liquidators’ fraudulent transfer claims and( iii) whether section 546( e)’ s safe harbor applies to common-law claims based on non-US legal theories. The Second Circuit addressed each of these questions on appeal.
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The liquidators also filed about 300 separate actions in the United States to claw back over $ 6 billion in allegedly inflated redemption payments, asserting a number of claims directly under US law, including unjust enrichment, constructive trust, among others. The US chapter 15 proceeding consolidated and stayed all these US actions pending the outcome of the BVI proceedings.
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