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Breaking New Ground: Second Circuit Rules that Bankruptcy Code's Securities Transactions Safe Harbor Bars Foreign Common-Law Claims in Chapter 15 Case

U.S. Bankruptcy and appellate courts have long wrangled over whether the provisions of the Bankruptcy Code apply extraterritorially to permit, for example, enforcement of the automatic stay to creditor collection efforts against a debtor or property of its bankruptcy estate outside of the United States, or avoidance and recovery of voidable pre-bankruptcy transfers from non-U.S. creditors by a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP"). 

Whether various provisions of the Bankruptcy Code may be applied extraterritorially to non-U.S. parties or asset transfers has also been debated in cross-border bankruptcy cases under chapter 15 of the Bankruptcy Code. The U.S. Court of Appeals for the Second Circuit recently addressed this question in a groundbreaking ruling. In In re Fairfield Sentry Ltd., 2025 WL 2218836 (2d Cir. Aug. 5, 2025), the court of appeals reversed a lower court judgment in a chapter 15 case denying dismissal of common-law constructive trust claims asserted by the liquidators of a British Virgin Islands ("BVI") company against various non-U.S. recipients of more than $6 billion in redemption payments made as part of the Madoff Ponzi scheme. 

According to the Second Circuit: (i) the constructive trust claims arising under BVI law were barred by the Bankruptcy Code's safe harbor (section 546(e)) insulating certain securities contract payments from avoidance in the absence of actual fraud; and (ii) by expressly providing in the Bankruptcy Code that section 546(e) applies in chapter 15 cases, U.S. lawmakers intended that section 546(e) apply extraterritorially, thereby overcoming the presumption against extraterritoriality of U.S. laws. 

Procedures, Recognition, and Relief Under Chapter 15 

Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency, which has been enacted in some form by nearly 60 nations or territories. 

Under section 1515 of the Bankruptcy Code, the "foreign representative" of a foreign "debtor" may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." 

Section 101(24) defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding." 

"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as: 

[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation. 

11 U.S.C. § 101(23). More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the United States of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. §§ 1502(4) and 1517(b)(1))—and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. §§ 1502(5) and 1517(b)(2)). A debtor's COMI is presumed to be the location of the debtor's registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c). An "establishment" is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity." 

Upon recognition of a foreign "main" proceeding, section 1520(a) of the Bankruptcy Code provides that certain provisions of the Bankruptcy Code automatically come into force, including: (i) the automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets (section 362, subject to certain enumerated exceptions); (ii) the right of any entity asserting an interest in the debtor's U.S. assets to "adequate protection" of that interest (section 361); and (iii) restrictions on use, sale, lease, transfer, or encumbrance of the debtor's U.S. assets (sections 363, 549, and 552). 

Following recognition of a foreign main or nonmain proceeding, section 1521(a) provides that, to the extent not already in effect, and "where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors," the bankruptcy court may grant "any appropriate relief." Such relief can include, among other things, an order "granting any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a)." These provisions authorize a bankruptcy trustee, among other things, to avoid and recover transfers that are fraudulent under the Bankruptcy Code and/or, under certain circumstances, "applicable" law (generally state law).  

However, these avoidance powers are expressly conferred upon a foreign representative if the debtor files for protection under another chapter of the Bankruptcy Code. Section 1523 authorizes the bankruptcy court to order relief necessary to avoid acts that are "detrimental to creditors," providing that upon recognition of a foreign proceeding, a foreign representative has "standing in a case concerning the debtor under another chapter of this title to initiate actions under sections 522, 544, 545, 547, 548, 550, 553, and 724(a)." 

Certain provisions in other chapters of the Bankruptcy Code apply in chapter 15 cases pursuant to section 103(a) of the Bankruptcy Code, which provides that "[chapter 1], sections 307, 362(o), 555 through 557, and 559 through 562 apply in a case under chapter 15."  

The Section 546(e) Safe Harbor 

Section 546 of the Bankruptcy Code imposes a number of limitations on a bankruptcy trustee's avoidance powers, which include the power to avoid certain preferential and fraudulent transfers. Section 546(e) provides that the trustee may not avoid, among other things, a pre-bankruptcy transfer that is a settlement payment "made by or to (or for the benefit of) a … financial institution [or a] financial participant …, or that is a transfer made by or to (or for the benefit of)" any such entity "in connection with a securities contract," except under section 548(a)(1)(A) of the Bankruptcy Code. Thus, the section 546(e) "safe harbor" bars avoidance claims challenging a qualifying transfer unless the transfer was made with actual intent to hinder, delay, or defraud creditors under section 548(a)(1)(A), as distinguished from constructively fraudulent transfers under section 548(A)(1)(B) where the debtor is insolvent at the time of the transfer (or becomes insolvent as a consequence) and receives less than reasonably equivalent value in exchange.

According to the legislative history of section 546(e), the purpose of the safe harbor is to prevent "the insolvency of one commodity or security firm from spreading to other firms and possibly threatening the collapse of the affected market." H.R. Rep. No. 97-420, at 1 (1982). The provision was "intended to minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries." Id. 

Section 546(e) does not on its face apply in cases under chapter 15, nor is it one of the provisions made applicable in chapter 15 cases by section 103(a) of the Bankruptcy Code. 

However, section 561(d) of the Bankruptcy Code, which was added to the Bankruptcy Code when chapter 15 was enacted in 2005, makes section 546(e) (and the other Bankruptcy Code provisions relating to securities contracts and other similar financial agreements) applicable in chapter 15 cases. Section 561(d) provides as follows: 

Any provisions of [the Bankruptcy Code] relating to securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements, or master netting agreements shall apply in a case under chapter 15, so that enforcement of contractual provisions of such contracts and agreements in accordance with their terms will not be stayed or otherwise limited by operation of any provision of this title or by order of a court in any case under [the Bankruptcy Code], and to limit avoidance powers to the same extent as in a proceeding under chapter 7 or 11 of [the Bankruptcy Code] (such enforcement not to be limited based on the presence or absence of assets of the debtor in the United States). 

11 U.S.C. § 561(d) (emphasis added). 

Many notable court rulings have addressed: (i) whether section 546(e) preempts fraudulent transfer claims that can be asserted by or on behalf of creditors by a bankruptcy trustee under state law; (ii) whether the section 546(e) safe harbor insulates from avoidance only transactions involving publicly traded securities; and (iii) whether a "financial institution" must be the transferor or ultimate transferee, as distinguished from an intermediary or conduit, for a transaction to be insulated from avoidance under the safe harbor.  

See, e.g., Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 583 U.S. 366 (2018) (holding that section 546(e) did not protect a transfer made as part of a non-public stock sale transaction through a "financial institution," regardless of whether the financial institution had a beneficial interest in the transferred property and noting that the relevant inquiry is whether the transferor or the transferee in the transaction sought to be avoided overall is itself a financial institution; acknowledging, however, that the Bankruptcy Code defines "financial institution" broadly to include not only entities traditionally viewed as financial institutions, but also the "customers" of those entities, which could include a debtor-transferor); Petr v. BMO Harris Bank N.A., 95 F.4th 1090 (7th Cir. 2024) (affirming a district court ruling broadly construing the section 546(e) safe harbor to bar a chapter 7 trustee from suing under state law and section 544 of the Bankruptcy Code to avoid an alleged constructively fraudulent transfer made by the debtor shortly after it had been acquired in an LBO, and agreeing with the district court that: (i) the safe harbor is not limited to transfers involving publicly traded securities; and (ii) section 546(e) preempted the trustee's claim to recover the value of the transfer under section 544 and state law); In re Nine W. LBO Sec. Litig., 87 F.4th 130 (2d Cir. 2023), reh'g denied, Nos. 20-3257-cv (L) et al. (2d Cir. Jan. 3, 2024) (adopting a "transfer-by-transfer" rather than a "contract-by-contract" approach to the safe harbor in affirming in part and reversing in part a district court ruling that section 546(e) preempted a litigation trustee's fraudulent transfer and unjust enrichment claims seeking avoidance of payments made to public and non-public shareholders as part of an LBO because only the public shareholder payments involved a "financial institution."); In re Tribune Co. Fraudulent Conveyance Litig., 946 F.3d 66 (2d Cir. 2019), dismissing cert. in part, 141 S. Ct. 728 (2020), cert. denied, 141 S. Ct. 2552 (2021) (explaining that, under Merit, shareholder payments as part of an LBO were shielded from avoidance under section 546(e) only if either the debtor transferor or the shareholders who received them were "covered entities," and concluding that the debtor was a "financial institution" and "therefore a covered entity"); Deutsche Bank Trust Co. Ams. v. Large Private Beneficial Owners (In re Tribune Co. Fraudulent Conveyance Litig.), 818 F.3d 98 (2d Cir. 2016) (affirming court decisions dismissing creditors' state law constructive fraudulent transfer claims arising from an LBO and holding that, even though section 546(e) expressly provides that "the trustee" may not avoid certain payments under securities contracts unless such payments were made with the actual intent to defraud, section 546(e)'s language, its history, its purposes, and the policies embedded in the securities laws and elsewhere lead to the conclusion that the safe harbor was intended to preempt constructive fraudulent transfer claims asserted by creditors under state law). 

The Presumption Against Extraterritoriality 

"It is a longstanding principle of American law 'that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.'" EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991) (quoting Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949)). This "presumption against extraterritoriality" is a judicially developed rule of statutory construction whereby federal law is presumed not to apply to conduct or property outside the United States "unless a contrary intent appears." Morrison v. National Australia Bank Ltd., 561 U.S. 247, 255 (2010). Contrary intent is shown through "clear evidence," in either the statutory text or the "legislative purpose underlying it." Smith v. United States, 507 U.S. 197, 204 (1993). However, a law need not explicitly state that "this law applies abroad" to have extraterritorial effect, and context is relevant to infer the statute's meaning. Morrison, 561 U.S. at 255.  

In Morrison and RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (2016), the Supreme Court outlined a two-step approach to determine whether the presumption against extraterritoriality forecloses a claim. First, a court examines "whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially." Nabisco, 136 S. Ct. at 2101; accord Morrison, 561 U.S. at 255. If the conclusion is that the presumption has been rebutted, the inquiry ends. 

If the presumption has not been rebutted, the court must determine whether the case involves a domestic application of the statute by examining its "focus." If the conduct relevant to the statute's focus occurred in the United States, "the case involves a permissible domestic application even if other conduct occurred abroad." Nabisco, 136 S. Ct. at 2101; accord Morrison, 561 U.S. at 266–67. However, if the conduct relevant to the focus of the statute did not occur in the United States, "the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory." Id.; accord Société Générale plc v. Maxwell Commc'n Corp. plc (In re Maxwell Commc'n Corp. plc), 186 B.R. 807, 816 (S.D.N.Y. 1995), aff'd on other grounds, 93 F.3d 1036 (2d Cir. 1996). 

Most courts have adopted a flexible approach in determining whether a transaction occurred in the United States or was extraterritorial for this purpose. Many apply a "center of gravity" test, whereby the court examines the facts of the case to ascertain whether they have a center of gravity outside the United States. See, e.g., French v. Liebmann (In re French), 440 F.3d 145, 149 (4th Cir. 2006), cert. denied, 549 U.S. 815 (2006); In re Florsheim Group Inc., 336 B.R. 126, 130 (Bankr. N.D. Ill. 2005). This analysis may involve consideration of "all component events of the transfer[]," Maxwell, 186 B.R. at 816, such as "whether the participants, acts, targets, and effects involved in the transaction at issue are primarily foreign or primarily domestic." French, 440 F.3d at 150. 

Extraterritorial Operation of U.S. Bankruptcy Law 

In certain respects, U.S. bankruptcy law has explicitly applied extraterritorially for more than 70 years. In 1952, due to confusion about the scope of a debtor's property to be administered by a bankruptcy trustee under the Bankruptcy Act of 1898, Congress inserted the phrase "wherever located" into section 70a of the act "to make clear that a trustee in bankruptcy is vested with the title of the bankrupt in property which is located without, as well as within, the United States." H.R. Rep. No. 82-2320, at 15 (1952), reprinted in 1952 U.S.C.C.A.N. 1960, 1976; see also Pub. L. No. 82-456, 66 Stat. 420 (July 7, 1952). This language was preserved in section 541(a) of the Bankruptcy Code (enacted in 1978), which states that the bankruptcy estate includes the debtor's property "wherever located and by whomever held." Section 541(a) provides further that such property includes various "interests" of the debtor in property. Similarly, 28 U.S.C. § 1334(e) gives federal district courts—and, by referral pursuant to 28 U.S.C. § 157(a), bankruptcy courts within each district—exclusive jurisdiction of all property of the debtor and its estate, "wherever located." 

Many courts have concluded that, because the automatic stay imposed by section 362(a) of the Bankruptcy Code expressly prohibits, among other things, acts to obtain possession of "property of the estate," the stay bars creditor collection efforts with respect to estate property located both within and outside the United States. See, e.g., Milbank v. Philips Lighting Elecs. N. Am. (In re Elcoteq, Inc.), 521 B.R. 189 (Bankr. N.D. Tex. 2014); In re Nakash, 190 B.R. 763 (Bankr. S.D.N.Y. 1996). 

However, the provisions of the Bankruptcy Code permitting avoidance and recovery of preferential or fraudulent transfers—i.e., sections 544, 547, 548, and 550—do not expressly refer to "property of the estate" as that term is defined in section 541 or even to section 541 itself. Instead, section 544(a) permits the trustee to avoid certain transfers of "property of the debtor"; sections 544(b)(1), 547(b), and 548(a)(1) provide for the avoidance of "an interest of the debtor in property"; and section 550 permits the trustee to recover "the property transferred" or its value from the transferee.  

Some courts have concluded that the Bankruptcy Code's avoidance provisions do not apply extraterritorially. See, e.g., Maxwell, 186 B.R. at 816 (Congress did not clearly express its intention, in statutory language or elsewhere, for section 547 to empower a trustee to avoid foreign preferential transfers); In re CIL Limited, 582 B.R. 46 (Bankr. S.D.N.Y. 2018) (the Bankruptcy Code's avoidance provisions do not apply extraterritorially because "[n]othing in the language of sections 544, 548, and 550 of the Bankruptcy Code suggests that Congress intended those provisions to apply to foreign transfers"), amended on reconsideration, 2018 WL 3031094 (Bankr. S.D.N.Y. June 15, 2018); Spizz v. Goldfarb Seligman & Co. (In re Ampal-Am. Israel Corp.), 562 B.R. 601 (Bankr. S.D.N.Y. 2017) (the avoidance provisions of the Bankruptcy Code, including section 547(b), do not apply extraterritorially: "Property transferred to a third party prior to bankruptcy … is neither property of the estate nor property of the debtor at the time the bankruptcy case is commenced, the only two categories of property mentioned in Bankruptcy Code § 541(a)(1)."); Barclay v. Swiss Fin. Corp. Ltd. (In re Bankr. Estate of Midland Euro Exch. Inc.), 347 B.R. 708, 719 (Bankr. C.D. Cal. 2006) (noting that the court could "find no basis for holding that Congress intended the trustee's avoiding powers to apply extraterritorially"). 

Other courts have reached the opposite conclusion. See, e.g., French, 440 F.3d at 149 ("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"); In re FAH Liquidating Corp., 572 B.R. 117 (Bankr. D. Del. 2017) (ruling that the presumption against extraterritoriality with respect to section 548 was overcome because Congress intended the provision to reach foreign transfers), leave to appeal denied, 2018 WL 2793944 (D. Del. June 11, 2018); Weisfelner v. Blavatnik (In re Lyondell), 543 B.R. 127 (Bankr. S.D.N.Y. 2016) (Congress could not have intended to exclude extraterritorial transfers from avoidance under section 548 while explicitly defining "property of the bankruptcy estate" under section 541 to include all of the debtor's property "wherever located and by whomever held"); see also In Official Comm. of Unsecured Creditors of Arcapita Bank B.S.C.(C) v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(C)), 575 B.R. 229, 250–51 (Bankr. S.D.N.Y. 2017) (the automatic stay in section 362 of the Bankruptcy Code and section 542(b), which requires parties in possession of estate property to turn that property over to trustee, were intended by Congress to apply to estate property, wherever located, and could be applied extraterritorially to require foreign entities to turn over property to a chapter 11 debtor). 

Finally, some courts, finding that a challenged transfer was domestic rather than foreign, have declined to address (other than in dicta) whether the Bankruptcy Code's avoidance and recovery provisions apply extraterritorially. For example, in In re Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, 917 F.3d 85 (2d Cir. 2019), cert. denied, 140 S. Ct. 2824 (2020), the Second Circuit vacated a bankruptcy court order dismissing a trustee's litigation against various non-U.S. defendants to recover payments by a U.S. debtor that were allegedly avoidable as intentionally fraudulent transfers. The bankruptcy court had ruled that the claims against these subsequent foreign transferees must be dismissed because section 550(a)(2) of the Bankruptcy Code, which provides for the recovery of avoided fraudulent transfers from subsequent transferees, does not apply extraterritorially, and because principles of international comity limited the provision's scope. 

In vacating the dismissal, the Second Circuit held that neither the "presumption against extraterritoriality" nor the doctrine of comity barred recovery because: (i) section 550(a)(2) works in tandem with section 548, which "focuses on the debtor's initial transfer of property"; (ii) the initial transfer occurred within the United States, meaning that the case involved domestic, rather than foreign, application of section 550(a); and (iii) comity did not warrant dismissal of the recovery actions because the interest of the United States in applying the Bankruptcy Code's avoidance and recovery provisions "outweighs the interest of any foreign state." 

Notably, however, because the Second Circuit found that the case involved a domestic application of section 550(a), it "express[ed] no opinion on whether § 550(a) clearly indicates its extraterritorial application." Id. at 98 n.7; see also Picard v. Bureau of Labor Ins. (In re Bernard L. Madoff Inv. Sec. LLC), 480 B.R. 501, 527 (Bankr. S.D.N.Y. 2012) (holding that, because the initial transfers of the debtor's assets occurred in the United States, the trustee was not seeking extraterritorial application of section 550, but noting in dicta that "Congress demonstrated its clear intent for the extraterritorial application of Section 550 through interweaving terminology and cross-references to relevant Code provisions").

Fairfield Sentry 

Fairfield Sentry Limited and two affiliates (collectively, "Fairfield") were organized under the laws of the British Virgin Islands ("BVI") in 1990 as "feeder funds" for Bernard L. Madoff Investment Securities LLC ("BLMIS"). 

On July 21, 2009, after the Madoff Ponzi scheme collapsed, the High Court of Justice of the Eastern Caribbean Supreme Court (the "BVI Court") entered an order commencing liquidation proceedings for Fairfield under the BVI Insolvency Act of 2003. Shortly thereafter, the BVI Court-appointed joint liquidators (the "liquidators") for Fairfield commenced litigation in the BVI (the "BVI litigation") against a number of Fairfield's member (or subsequent transferees) that redeemed some or all of their shares before the collapse of the Ponzi scheme (collectively, the "redeemers") seeking to recover the redemption payments so that the funds could be distributed equitably among members. In the lawsuits, the liquidators argued that the redemption payments were mistakenly calculated based on inflated net asset values ("NAVs"), such that the redeemers received much more than what the redeemed shares were actually worth. The liquidators did not allege that any of the redeemers had acted in bad faith because they received the redemption payments with knowledge of the Ponzi scheme. Rather, they alleged that he redemption payments were "mistaken" based on inaccurate NAVs.  

In addition to the BVI litigation, Fairfield's liquidators commenced approximately 300 lawsuits in the United States (the "U.S. litigation") to recover more than $6 billion in allegedly inflated redemption payments. The defendants in the BVI and U.S. litigation overlapped, but the claims asserted in the U.S. litigation involved different redemptions made at different times. In the U.S. litigation, the liquidators asserted causes of action for, among other things, unjust enrichment, mistaken payment, constructive trust under BVI common law, and preferential transfers and undervalue transactions under BVI law (the "BVI avoidance claims"). 

On June 14, 2010, the liquidators, as Fairfield's foreign representative, filed a petition in the U.S. Bankruptcy Court for the Southern District of New York (the "U.S. bankruptcy court") seeking recognition of the BVI liquidation as a foreign "main proceeding" under chapter 15. The U.S. bankruptcy court granted the liquidators' chapter 15 petition, and on July 22, 2010, recognized the BVI liquidation as a foreign main proceeding. 

Upon recognition of Fairfield's BVI liquidation, the U.S. bankruptcy court stayed the U.S. litigation pending resolution of the BVI litigation.  

In 2011, the BVI Court ruled that the redeemers had "paid good consideration for the Redemption Payments by surrendering their shares with the Funds, and, consequently, the Liquidators were barred from recovering those payments." After the Eastern Caribbean Court of Appeal affirmed the BVI Court's ruling, a further appeal was taken up by the Judicial Committee of the Privy Council in London—the highest court for the BVI and other British Overseas Territories—which also affirmed the BVI Court's ruling. See Fairfield Sentry Ltd. (In Liquidation) v. Migani [2014] UKPC 9, 2014 WL 1219748 (PC Apr. 16, 2014)). The Privy Council did not consider whether the redeemers acted in bad faith. 

After the Privy Council issued its ruling in 2014, the U.S. bankruptcy court lifted the stay of the U.S. litigation, whereupon the liquidators sought to amend their complaints to add allegations of bad faith on the part of one of the redeemers. The defendants then moved to dismiss, arguing that the courts presiding over the U.S. litigation lacked personal jurisdiction, the complaints failed to state a claim, and the section 546(e) safe harbor barred any recovery. 

In a series of rulings entered from 2018 and 2020, the U.S. bankruptcy court decided that: (i) the foreign selection clauses in the subscription agreements between Fairfield and more than 200 redeemers were insufficient to establish personal jurisdiction over those defendants in the United States (see In re Fairfield Sentry Ltd., 2018 WL 3756343 (Bankr. S.D.N.Y. Aug. 6, 2018); (ii) the claims in the complaints should be dismissed, except for the BVI avoidance claims and the common-law constructive trust claims asserted against defendants alleged to have known that the redemption payments were inflated, because, among other things, the redemption payments were within the scope of the section 546(e) safe harbor, which applies extraterritorially in chapter 15 by means of section 561(d) of the Bankruptcy Code (see In re Fairfield Sentry Ltd., 596 B.R. 275 (Bankr. S.D.N.Y. 2018)); and (iii) the safe harbor barred the liquidators' claims based on BVI statutory law, but the BVI common-law claims were not barred because section 546(e) did not impliedly preempt foreign law claims absent express statutory language to that effect (see In re Fairfield Sentry Ltd., 2020 WL 7345988 (Bankr. S.D.N.Y. Dec. 14, 2020). 

The U.S. bankruptcy court denied the defendants' motion for reconsideration of its decision that the common-law claims survived the safe harbor. A district court affirmed the ruling on appeal. See In re Fairfield Sentry Ltd., 2021 WL 771677 (Bankr. S.D.N.Y. 2021), aff'd, 630 F. Supp. 3d 463 (S.D.N.Y. 2022). 

Both the liquidators and the redeemers appealed from the district court's 2022 decision. In the first, the liquidators argued that the district court should have reversed the U.S. bankruptcy court's dismissal of all of the non-common-law claims. In the second, the redeemers argued that the district court should have reversed the U.S. bankruptcy court's ruling that the constrictive trust claims survived the section 546(e) safe harbor. 

The appeals were consolidated before the Second Circuit. 

The Second Circuit's Ruling

A three-judge panel of the Second Circuit reversed the district court's judgment permitting the common-law claims to proceed, but otherwise affirmed.

Writing for the panel, U.S. Circuit Court Judge Steven Menashi first determined that the forum selection clauses in the defendants' subscription agreements with Fairfield established personal jurisdiction over them. 

Next, turning to the merits of the liquidators' claims, the Second Circuit concluded that the section 546(e) safe harbor barred the common-law constructive trust claims. 

Extraterritoriality of the Section 546(e) Safe Harbor. Judge Menashi agreed with the district court's conclusion that the presumption against extraterritoriality did not bar application of the safe harbor to the liquidators' claims under BVI law because U.S. lawmakers expressed a clear intent to apply the safe harbor extraterritorially under section 561(d) of the Bankruptcy Code. Based upon that determination, the Second Circuit found it unnecessary to address whether the district court's alternative basis for affirming the U.S. bankruptcy court's decision—namely, that even in the absence such clear congressional intent, the application of the safe harbor in this case was domestic, rather than extraterritorial. Fairfield, 2025 WL 22118836, at *10. 

Judge Menashi explained that, although section 546(e) does not by its own terms apply in a foreign proceeding under chapter 15, "the only plausible reading of section 561(d) … manifests an unmistakable congressional intent to apply [the provision] extraterritorially." Id. (citation and internal quotation marks omitted). According to Judge Menashi, "[s]ection 561(d) must apply extraterritorially if it is to have any effect at all" because, by means of section 561(d), the safe harbor restricts a foreign representative's avoidance powers, "[a]nd the only avoidance powers a foreign representative has in a case under Chapter 15 [by virtue of section 1521(a)(7)] are those that it possess under foreign law." Id. 

The Second Circuit noted that, in addition to the text of section 561(d), chapter 15's purpose—to permit filing by foreign rather than domestic debtors—indicates that the provision applies extraterritorially. Judge Menashi explained that, when lawmakers provided in section 561(d) that the provision applies "in a case under chapter 15," they "did so with respect to the prototypical Chapter 15 case and the prototypical type of transfer that would be challenged in a Chapter 15 proceeding"—namely, a transfer made by a foreign debtor in a foreign jurisdiction, even if the transferee is a U.S. entity—rather than in "an exceptional or rare circumstance." Id. at *12. Moreover, he emphasized, the context from which section 561(d) was enacted—the collapse of Cayman Islands hedge fund that, without injunctive relief in its Cayman liquidation proceeding, would have triggered the liquidation of U.S. collateral pledged by the hedge fund to counterparties—"required an extraterritorial application." Id. at *13.  

According to the Second Circuit, the liquidators' attempt to "have it both ways" by "benefitting from the domestic forum Chapter 15 has created for foreign law claims as a matter of comity while trying to avoid the limitations that Chapter 15 imposes on their power to bring those claims" is unsupportable. Judge Menashi explained that it would "seem only to increase the possibility of international friction" and could give plaintiffs suing to redress extraterritorial wrongdoing an advantage that they would not have if the defendant's conduct occurred in the United States. In addition, he noted, it is implausible that lawmakers intended to permit a foreign debtor "to take advantage of U.S. bankruptcy law to bring avoidance actions unconstrained by the safe harbor that applies in avoidance actions of a domestic trustee or debtor-in-possession." Id. 

Application of the Safe Harbor to Preclude Foreign Common Law Claims. Next, the Second Circuit panel held that the section 546(e) safe harbor barred the liquidators' common-law constructive trust claims.

The parties agreed that the redemption payments were "settlement payment[s]" made to "financial institution[s] … in connection with a securities contract," as specified in section 546(e). However, the liquidators argued that: (i) the BVI avoidance claims were outside the scope of the safe harbor because they are intentional fraud transfer claims; (ii) because section 546(e) uses the term "avoid," the safe harbor apples only to statutory avoidance claims under the Bankruptcy Code or foreign bankruptcy law, and not to domestic or foreign common-law claims; and (iii) the common-law constructive trust claims did not resemble traditional avoidance claims because they were predicated on the defendants' knowledge rather than the insolvency of the debtor. 

The Second Circuit panel rejected each of these arguments. 

First, the court agreed with the liquidators that claims under foreign law need not include fraud as an element to fall within the safe harbor's carve-out for intentional fraudulent transfer claims, provided the allegations in support of the claims include actual intent to hinder, delay, or defraud creditors. However, the Second Circuit panel concluded that the liquidators did not allege such intent in this case, but merely what may have amounted to negligence or recklessness, and they never plausibly alleged that whatever intent the redeemers had could be attributed to Fairfield, a necessary element of avoidance under section 548(a)(1)(A) of the Bankruptcy Code and BVI law. Id. at **15–17. 

Second, the Second Circuit panel rejected the liquidators' argument that section 561(d), which makes the safe harbor applicable in chapter 15 cases, applies only to foreign statutory avoidance claims that are analogous to a bankruptcy trustee's statutory avoidance claims, and not to foreign common-law claims. According to Judge Menashi, that argument contradicts the text of section 546(e), and a trustee's "avoiding powers" are not limited to the statutory avoiding powers under the Bankruptcy Code (e.g., sections 547 and 548). He further noted that courts have applied the safe harbor to bar state common-law claims as well as statutory avoidance claims. 

The Second Circuit accordingly concluded that the safe harbor applies to domestic common-law claims regardless of principles of implied preemption, because they seek the same remedy as statutory avoidance claims. In addition, because, by operation of section 561(d), the safe harbor applies in chapter 15 to the same extent as in a chapter 7 or 11 case, foreign common-law claims are also within the scope of the safe harbor. Id. at **18–20. Judge Menashi wrote that "the focus of § 546(e) is the transaction, not the specific legal authority that a domestic trustee would use to avoid that transaction." Id. at *21.  

Third, the Second Circuit panel concluded that "a common-law claim that seeks to avoid a covered transaction does not escape the safe harbor based on its legal theory or required proof." The court acknowledged that a constructive trust claim does not require a showing of insolvency, but does require a showing of the defendants' bad faith. However, it concluded that the liquidators' constructive trust claims were not premised on a different legal theory than a traditional avoidance claim. Id. at **21–22.  

Accordingly, the Second Circuit ruled that the district court erred by allowing the liquidators' common-law constructive trust claims to escape the scope of the section 546(e) safe harbor.  

Outlook 

The Second Circuit's ruling in Fairfield Sentry is a notable development in the two decades of chapter 15 jurisprudence. First, the Second Circuit held as an apparent matter of first impression among the federal circuits that the section 546(e) safe harbor applies extraterritorially by means of section 561(d) to bar foreign common-law claims asserted by the foreign representative of a debtor in a recognized chapter 15 case seeking avoidance of a qualifying transfer (or equivalent relief). As the Second Circuit emphasized in its opinion, "[i]t cannot be that Congress," in adding the safe harbor to the Bankruptcy Code, "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." Id. at *13. 

The bankruptcy and appellate courts in Fairfield are not the only courts that have considered the impact of the section 546(e) safe harbor in chapter 15 cases. For example, in In re Bankr. Est. of Norske Skogindustrier ASA, 629 B.R. 717, 763 (Bankr. S.D.N.Y. 2021) (Glenn, J.), another Second Circuit bankruptcy court held that sections 546(e) and 561(d) did not bar foreign law avoidance claims, even if the claims do not, like section 548(A)(1)(A), require demonstration of intentional fraud:  

Barring foreign law avoidance claims or imposing an impossibly high standard for the exception to the safe harbor to apply in chapter 15 cases would mean that there is effectively no exception to the safe harbor in such cases, contrary to the language of section 561(d), which makes section 546(e) applicable "to limit avoidance powers to the same extent as" (not to a broader extent than) "in a proceeding under chapter 7 or 11." 11 U.S.C. § 561(d). Accordingly, the Court declines to adopt a rigid rule barring foreign law avoidance claims or requiring the foreign statute to use language virtually identical to section 548(a)(1)(A) to except the challenged transaction from the section 546(e) safe harbor. 

Id. at 763 (footnote omitted). The bankruptcy court explained that a contrary view would "risk the U.S. not just providing a safe harbor for qualifying transactions involving qualifying participants, but providing a safe haven for looters and fraudsters of foreign company assets that are transferred to the U.S. and who use banks or brokers to help carry out their schemes." Id. at 763 n.38. 

In addition, in In re IIG Glob. Trade Fin. Fund Ltd., 666 B.R. 38, 60–61 (Bankr. S.D.N.Y. 2024) (Wiles, J.), a different Second Circuit bankruptcy court held that the safe harbor did not preclude claims asserted in a chapter 15 case by the liquidators of Cayman Islands investment funds alleging that transfers made by the debtors to acquire "participation interests" in loans were fraudulent transfers under New York law because, among other things, the transferees and the transaction did not satisfy the strictures of section 546(e). 

In In re Hellas Telecommunications (Luxembourg) II SCA, 526 B.R. 499, 509–10 (Bankr. S.D.N.Y. 2015) (Glenn, J.), a Second Circuit bankruptcy court in a chapter 15 case refused to dismiss an unjust enrichment claim asserted by the liquidators of a UK company, ruling that the safe harbor did not bar the claim, which was premised on allegations that raised factual issues not appropriately resolved on a motion to dismiss, and where it was unclear whether the safe harbor applied extraterritorially to the underlying transfers, and the unjust enrichment claim raised choice-of-law issues that could not be resolved upon a motion to dismiss. 

The Second Circuit's ruling in Fairfield would appear to have dispelled any lingering doubts among lower courts in the Second Circuit as to the extraterritorial application of the section 546(e) safe harbor by means of section 561(d). It should also quash debate concerning the application of the safe harbor in a chapter 15 case to bar claims under foreign common law seeking avoidance or equivalent relief, even if the claims do not involve actual fraudulent intent. 

Finally, taken together with the Seventh Circuit's 2024 ruling in BMO Harris that the safe harbor is not limited to transfers involving publicly traded securities, the last two years have seen significant developments concerning the section 546(e) safe harbor, which has been broadly construed to bar a wide range of challenges under both foreign and domestic law to securities contract transfers.

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