Fairfield Sentry continued from page 41 securities safe harbors upon transfers initiated by a foreign debtor to domestic recipients with the goal of preventing financial contagion stemming from foreign debtors’ bankruptcies. 5 The Court reasoned that Congress, when legislating section 561( d) in the wake of LTCM’ s collapse, could not have“ intended to hobble investors by leaving them exposed to the risk of avoidance litigation brought by the bankruptcy estates of failed foreign companies, especially when the Bankruptcy Code bars domestic trustees from bringing the exact [ same ] claims.” 6
Because it found that Congress clearly intended extraterritorial application, the Second Circuit did not need to consider the second Nabisco element. The Scope of Section 546( e)’ s Powers After determining that the securities safe harbor applies extraterritorially, the Second Circuit proceeded to hold that section 546( e) bars all of the liquidators’ claims, including the constructive trust claims based on BVI common law. First, the Court held that the liquidators’ claims did not meet section 546( e)’ s carve-out for intentional fraudulent transfer claims under section 548( a)( 1)( A)( transfers made“ with actual intent to hinder, delay, or defraud” a creditor) because( i) the liquidators failed to establish the requisite intent on the part of Citco Fund Services( Europe) B. V.(“ Citco”), the fund administration service provider that calculated and certified the funds’ net asset values to the fund administrators based on fictitious account statements provided by BLMIS and( ii) even if Citco had fraudulent intent, the liquidators
5
See President’ s Working Group, Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management( Apr. 1999).
6
Brief of the Securities Industry and Financial Markets Association as Amicus Curiae Supporting Appellees, Fairfield Sentry Ltd.( In Liquidation) by & through Krys v. Citibank, N. A. London, 630 F. Supp. 3d 463( S. D. N. Y. 2022), 14. failed to plausibly allege that such intent was attributable to the Debtors who authorized the transfers. 7
The Court next held that, based on a natural reading of the text of section 546( e), section 546( e)’ s safe harbor covers state common-law and foreign common-law claims that seek to avoid covered transactions through alternative means. As the Court noted,“ the focus of § 546( e) is the transaction, not the specific legal authority that a domestic trustee would use to avoid that transaction.” The Court also rejected the argument that the liquidators’ constructive trust claims bypassed section 546( e) altogether because they were based on a different legal theory than a traditional avoidance claim. Ultimately, all of the liquidators’ claims against the Defendants fell under section 546( e)’ s safe harbor and were dismissed. Conclusion In recent years, multiple US court decisions have addressed the extraterritorial application of trustees’ recovery powers, including the extent to which they reach property that was subject of an overseas transaction. 8 In Fairfield, the Second Circuit extended extraterritorial application of the US securities safe harbor, shielding these transactions between non-US parties from some of the most potent types of US fraudulent transfer liability.
The Fairfield decision also broadens section 546( e) to cover common-law claims based on non-US legal theories. This reflects the continued expansion of the reach of section 546( e) within the Second Circuit, whose rulings are binding authority on the Bankruptcy Court for the Southern District of New York where many non-US debtors file chapter 15 petitions for recognition of non-US proceedings.
7
11 U. S. C. § 548( a)( 1)( A).
8
See e. g. Inv’ r Prot Corp v. Bernard L Madoff Inv Sec LLC, 480 BR 501( Bankr. S. D. N. Y. 2012); Sec Inv’ r Prot Corp v. Bernard L Madoff Inv Sec LLC, 513 BR 222( S. D. N. Y. 2014); In re Picard, 917 F3d 85( 2d Cir. 2019).
53