In Re: Bernard L. Madoff Investment Securities LLC

Background

Irving H. Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS), sued Abu Dhabi Investment Authority (ADIA) to recover funds that ADIA allegedly received from Fairfield Sentry Limited, a BLMIS feeder fund. The complaint alleged that ADIA received two transfers totaling $300 million: $200 million on April 4, 2005, and $100 million on March 30, 2006.

ADIA invested in Fairfield Sentry rather than directly in BLMIS. It made subscription payments to Fairfield Sentry and later exercised redemption rights. The record included a March 3, 2005 redemption request directing payment to an ADIA account at JPMorgan Chase Bank in Tampa, Florida. The parties agreed that ADIA received $300 million between March 2005 and March 2006, but the record did not include an executed redemption request for the alleged March 2006 redemption or establish where the $100 million payment was received.

ADIA moved to dismiss, arguing in part that it was immune from suit under the Foreign Sovereign Immunities Act (FSIA). The bankruptcy court rejected that defense, applying the FSIA’s commercial-activity exception, which can allow a lawsuit against a foreign state when conduct connected to commercial activity outside the United States causes a direct effect in the United States. ADIA appealed that ruling.

Legal standard

The district court had jurisdiction to hear the appeal under the collateral-order doctrine. It reviewed the bankruptcy court’s legal conclusions about sovereign immunity independently and reviewed factual findings for clear error.

Under the FSIA, a foreign state is generally immune from the jurisdiction of United States courts unless an exception applies. The commercial-activity exception at issue covers an action based on an act outside the United States, connected to the foreign state’s commercial activity elsewhere, that causes a direct effect in the United States.

To identify the conduct on which the action is based, the court examined the foundation and overall substance of the lawsuit rather than analyzing every claim element separately. An effect is “direct” when it follows as an immediate consequence of the defendant’s activity.

Court’s analysis

The district court held that the bankruptcy court had incorrectly treated the parties as agreeing that the lawsuit was based on ADIA’s receipt of funds resulting from its original investment in Fairfield Sentry. The district court concluded that ADIA’s redemption requests and receipt of funds were acts on which the lawsuit was based. ADIA’s original subscription into Fairfield Sentry, which occurred decades before the redemptions at issue, was not a qualifying act for purposes of the FSIA exception on these facts.

For the March 2005 redemption, the court found that the direct-effect requirement was satisfied. ADIA directed Fairfield Sentry to wire the redeemed funds to a bank account in Tampa, Florida, the payment was made to that account, and the trustee’s claim arose from that transaction. The court therefore affirmed the bankruptcy court’s denial of dismissal as to that transfer.

For the alleged March 2006 redemption and $100 million payment, the court found the record inadequate. Neither party had produced the relevant executed redemption request or identified the precise date of the request. Transfers from BLMIS to Fairfield Sentry three days before the alleged payment might have been connected to ADIA’s redemption, but the evidence did not establish that those transfers were an immediate consequence of ADIA’s conduct. The court therefore held that the trustee had not yet met the burden of showing that an FSIA exception applied to that transfer, while recognizing that further discovery might reveal supporting facts.

Disposition

The court AFFIRMED in part and REVERSED in part the bankruptcy court’s denial of ADIA’s motion to dismiss and REMANDED the case to the Bankruptcy Court for further proceedings consistent with the opinion and order.