Irving H. Picard v. Saul B. Katz et al

Filing 47

MEMORANDUM OF LAW in Support re: 45 MOTION TO DIRECT ENTRY OF FINAL JUDGMENT UNDER FEDERAL RULE OF CIVIL PROCEDURE 54(b) AND FOR CERTIFICATION UNDER 28 U.S.C. § 1292(b) re: 40 Memorandum & Opinion, Set Hearings,,,,,,.. Document filed by Irving H. Picard. (Sheehan, David)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re:

Adv. Pro. No. 08-01789 (BRL)

BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Debtor,

SIPA LIQUIDATION
(Substantively Consolidated)

IRVING H. PICARD, Trustee for the Liquidation of Adv. Pro. No. 10-05287 (BRL)
Bernard L. Madoff Investment Securities LLC,
Plaintiff,
v.

11 Civ. 03605 (JSR) (HBP)

SAUL B. KATZ, et al.,
Defendants.

TRUSTEE’S MEMORANDUM OF LAW IN SUPPORT OF MOTION TO DIRECT
ENTRY OF FINAL JUDGMENT UNDER FEDERAL RULE OF CIVIL PROCEDURE
54(b) AND FOR CERTIFICATION UNDER 28 U.S.C. § 1292(b)
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
Telephone: [phone]
Facsimile: [phone]
Attorneys for Irving H. Picard, Trustee for the
Substantively Consolidated SIPA Liquidation of
Bernard L. Madoff Investment Securities LLC
and Bernard L. Madoff

TABLE OF CONTENTS
Page
Preliminary Statement .................................................................................................................... 1
Statement of Facts .......................................................................................................................... 3
A.

The Amended Complaint, Motion to Dismiss & Order............................. 3

B.

The Instant Motion..................................................................................... 5

Argument ....................................................................................................................................... 6
I.

The Court should direct entry of final judgment under Rule 54(b) as to
Counts Two through Ten of the Amended Complaint........................................... 6
A.

B.
II.

The Court finally determined nine counts of an eleven-count
Amended Complaint on grounds independent of the remaining
claims. ........................................................................................................ 6
No just reason for delay exists in entering final judgment and
injustice would result if the Court does not do so...................................... 7

Alternatively, certification for interlocutory review under § 1292(b) is
warranted................................................................................................................ 9
A.

The disputed rulings involve controlling questions of law that will
materially affect the outcome of the litigation. ........................................ 10

B.

The Court’s Order presents controlling issues of law as to which
substantial grounds for difference of opinion exist.................................. 10
1.

2.

III.

The Court’s application of § 546(e) to bar all recoveries
from subsequent transferees is an issue of first impression. ........ 16

3.
C.

The Court’s conclusion that § 546(e) applies to transfers
made in furtherance of Madoff’s Ponzi scheme conflicts
with Second Circuit and other authority. ..................................... 11

This Court’s holding that § 502(d) is overridden by SIPA
§ 78fff-2(c)(3) is a matter of first impression in this Circuit. ...... 17

An immediate appeal from the Court’s Order is warranted given its
unusual significance to more than 900 other actions. .............................. 20

Interlocutory appeal is warranted to resolve the conflict arising from this
Court’s ruling that imposes a heightened subjective standard of “willful
blindness” to Defendants’ good faith defense. .................................................... 21

Conclusion ................................................................................................................................... 24

-i-

TABLE OF AUTHORITIES
Page(s)
CASES
Advanced Magnetics, Inc. v. Bayfront Partners, Inc.,
106 F.3d 11 (2d Cir. 1997).........................................................................................................8
In re Air Crash at Belle Harbor, N.Y. on Nov. 12, 2001,
490 F.3d 99 (2d Cir. 2007).........................................................................................................6
Barron Partners LP v. Lab123, Inc.,
No. 07 Civ. 11135, 2008 WL 2902187 (S.D.N.Y. July 25, 2008) ..........................................23
In re Bernard L. Madoff Inv. Sec.,
--- F.3d ---, 2011 WL 3568936 (2d Cir. Aug. 16, 2011) ................................................. passim
In re Bernard L. Madoff Inv. Sec.,
424 B.R. 122 (Bankr. S.D.N.Y. 2010) .......................................................................................2
Bilello v. JPMorgan Chase Retirement Plan,
603 F. Supp. 2d 590 (S.D.N.Y. 2009)......................................................................................10
Brown v. Bullock,
294 F.2d 415 (2d Cir. 1961).....................................................................................................20
Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (In re Bayou
Group LLC),
439 B.R. 284 (S.D.N.Y. 2010)...........................................................................................22, 24
Consol. Edison, Inc. v. Northeast Util.,
318 F. Supp. 2d 181 (S.D.N.Y. 2004)................................................................................20, 24
Consub Delaware LLC. v. Schahin Engenharia Limitada,
476 F. Supp. 2d 305 (S.D.N.Y. 2007)......................................................................................11
In re Contemporary Indus. Corp.,
312 B.R. 898 (D. Neb. 2004) ...................................................................................................10
Crigger v. Fahnestock & Co. Inc.,
443 F.3d 230 (2d Cir. 2006).....................................................................................................23
Cullen v. Margiotta,
811 F.2d 698 (2d Cir. 1987)...................................................................................................6, 7
Curtiss-Wright Corp. v. Gen. Elec. Co.,
446 U.S. 1 (1980) ...................................................................................................................6, 7

-ii-

TABLE OF AUTHORITIES
(continued)
Page(s)
Dodds v. Cigna Sec., Inc.,
12 F.3d 346 (2d Cir. 1993).......................................................................................................23
Enron Corp. v. JPMorgan Sec., Inc. (In re Enron Corp.),
No. M-47, 2008 WL 281972, at *5 (S.D.N.Y. Jan. 25, 2008) .................................................14
In re Enron Creditors Recovery Corp.,
2009 WL 3349471 (S.D.N.Y. Oct. 16, 2009) ......................................................................9, 20
In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V.,
--- F.3d ---, 2011 WL 2536101 (2d Cir. June 28, 2011) ....................................................12, 15
In re Fosamax Prod. Liab. Litig.,
No. 06 MD 01789, 2011 WL 2566074 (S.D.N.Y. June 29, 2011) ..........................................21
Ginett v. Computer Task Group,
962 F.2d 1085 (2d Cir. 1992).................................................................................................7, 9
Gowan v. The Patriot Grp. LLC (In re Dreier),
452 B.R. 391 (Bankr. S.D.N.Y. 2011) .....................................................................................24
Hersch v. Gersten (In re Centennial Textiles, Inc.),
220 B.R. 177 (Bankr. S.D.N.Y. 1998) .......................................................................................9
Hill v. Spencer S&L Ass’n (In re Bevill, Bresler & Schulman, Inc.),
94 B.R. 817 (D.N.J. 1989) .......................................................................................................19
Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.),
263 B.R. 406 (S.D.N.Y. 2001).................................................................................................14
Jobin v. McKay (In re M&L Bus. Mach. Co., Inc.),
84 F.3d 1330 (10th Cir. 1996) .................................................................................................22
Johnson v. Neilson (In re Slatkin),
525 F.3d 805 (9th Cir. 2008) ...................................................................................................14
Klinghoffer v. S.N.C. Achille Lauro,
921 F.2d 21 (2d Cir. 1990).................................................................................................10, 17
Kramer v. Lockwood Pension Services, Inc.,
653 F. Supp. 2d 354 (S.D.N.Y. 2009)......................................................................................20
In re Lloyd’s Am. Trust Funds Litig.,
No. 96 Civ. 01262, 1997 WL 458739 (S.D.N.Y. Aug. 12, 1997) ...........................................11

-iii-

TABLE OF AUTHORITIES
(continued)
Page(s)
In re Manhattan Inv. Fund Ltd.,
397 B.R. 1 (S.D.N.Y. 2007).....................................................................................................22
In re Manville Forest Prod. Corp.,
31 B.R. 991 (S.D.N.Y. 1983)...................................................................................................20
Matter of Bevill, Bresler & Schulman, Inc.,
83 B.R. 880 (D.N.J. 1988) .......................................................................................................19
In re Methyl Tertiary Butyl Ether Prod. Liab. Litig.,
No. 04 Civ. 03417, 2010 WL 1328249 (S.D.N.Y. Apr. 5, 2010) ..............................................9
In re Mid. Atl. Fund, Inc.,
60 B.R. 604 (Bankr. S.D.N.Y. 1986) .......................................................................................19
Mishkin v. Ensminger (In re Adler Coleman Clearing Corp.),
247 B.R. 51 (Bankr. S.D.N.Y. 1999) ................................................................................14, 15
Picard v. Katz (In re Bernard L. Madoff Inv. Sec. LLC),
No. 11 Civ. 03605, 2011 WL 4448638 (S.D.N.Y. Sept. 27, 2011) ................................. passim
Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC),
440 B.R. 243 (Bankr. S.D.N.Y. 2010) ...................................................................12, 13, 14, 15
Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC),
No. 00 MC 00012, 2011 WL 3897970 (S.D.N.Y. Aug. 31, 2011) ........................10, 13, 22, 24
Picard v. Peter B. Madoff (In re Bernard L. Madoff Inv. Sec. LLC),
--- F.3d ---, 2011 WL 4434632 (Bankr. S.D.N.Y. Sept. 22, 2011).................................. passim
Romea v. Heiberger & Assoc.,
988 F. Supp. 715 (S.D.N.Y. 1998) ..........................................................................................20
Ross v. Thomas,
09 Civ. 05631, 2010 WL 3952903 (S.D.N.Y. Oct. 7, 2010) .....................................................7
Sears, Roebuck & Co. v. Mackey,
351 U.S. 427 (1956) ...................................................................................................................7
Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC,
No. M-47, 2010 WL 185102 (S.D.N.Y. Jan. 11, 2010)...........................................................22
Smith v. Local 819 I.B.T. Pension Plan,
291 F.3d 236 (2d Cir. 2002).......................................................................................................7

-iv-

TABLE OF AUTHORITIES
(continued)
Page(s)
Trugman-Nash, Inc. v. N.Z. Dairy Bd.,
954 F. Supp. 2d 733 (S.D.N.Y. 1997)........................................................................................8
United States v. Rodriguez,
983 F.2d 455 (2d Cir. 1993).....................................................................................................24
Wider v. Wootton,
907 F.2d 570 (5th Cir. 1990) ...................................................................................................14
In re WorldCom, Inc.,
No. M-47, 2003 WL 21498904 (S.D.N.Y. June 30, 2003)......................................................22
In re WorldCom, Inc. Sec. Litig.,
No. 02 Civ. 03288, 2003 WL 22953644 (S.D.N.Y. Dec. 16, 2003) ........................................19
STATUTES & RULES
11 U.S.C. § 101 et seq......................................................................................................................3
11 U.S.C. § 502(d) ................................................................................................................. passim
11 U.S.C. § 546 ........................................................................................................................10, 16
11 U.S.C. § 546(e) ................................................................................................................. passim
11 U.S.C. § 548 ........................................................................................................................10, 16
11 U.S.C. § 548(a)(1)(A) .....................................................................................................5, 16, 17
11 U.S.C. § 548(c) ...........................................................................................................4, 5, 21, 22
11 U.S.C. § 550 ......................................................................................................................4, 5, 16
11 U.S.C. § 550(a) ...................................................................................................................16, 17
15 U.S.C. § 78aaa et seq. .................................................................................................................1
15 U.S.C. § 78fff-2(c)(3) ....................................................................................................... passim
28 U.S.C. § 1291 ..............................................................................................................................6
28 U.S.C. § 1292(b) ............................................................................................................... passim
N.Y. Debt. & Cred. Law §§ 270 et seq. .............................................................................3, 4, 8, 24
Fed. R. Civ. P. 12(b)(6)....................................................................................................................3

-v-

TABLE OF AUTHORITIES
(continued)
Page(s)
Fed. R. Civ. P. 54(b) .............................................................................................................. passim
OTHER AUTHORITIES
6 Collier on Bankruptcy (16th ed. 2011) ..................................................................................18, 19

-vi-

Irving H. Picard (the “Trustee”), trustee for the substantively consolidated liquidation of
the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L.
Madoff (“Madoff”), under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. § 78aaa et
seq., by and through his undersigned counsel, respectfully submits this memorandum of law in
support of his motion (“Motion”) requesting the Court to direct entry of final judgment under
Federal Rule of Civil Procedure 54(b) (“54(b)”) on Counts Two through Ten of the Amended
Complaint and to certify to the United States Court of Appeals for the Second Circuit under 28
U.S.C. § 1292(b) (“1292(b)”) an interlocutory appeal of the Court’s rulings concerning “willful
blindness” with respect to the Trustee’s remaining claims, set forth in its opinion and order of
September 27, 2011 (the “Order”) partially granting the Sterling Defendants’ (the “Defendants”)
Motion to Dismiss the Amended Complaint, or in the Alternative, for Summary Judgment (the
“Motion to Dismiss”); or, alternatively, to certify an interlocutory appeal under 28 U.S.C.
§ 1292(b) of the Order, both as to the bases for the Court’s dismissal of Counts Two through
Ten, as well as on its “willful blindness” ruling on the remaining claims.
Preliminary Statement
Nothing makes plain the relationship between the Second Circuit’s “net equity” decision
and the Trustee’s avoidance powers more than the Court’s Order here. Deeming it “absurd” to
“give legal effect to Madoff’s machinations,” the Second Circuit held that it would have been
“legal error” for the Trustee to discharge claims for securities under SIPA “upon the false
premise that customers’ securities positions are what the account statements purport them to be.”
In re Bernard L. Madoff Inv. Sec., --- F.3d ---, 2011 WL 3568936, at *4, *11 (2d Cir. Aug. 16,
2011). Yet under this Court’s Order, those machinations are given legal effect for the purposes
of invoking the “safe harbor” provision of the Bankruptcy Code relating to securities
transactions. This ruling arbitrarily provides one class of customers—those with avoidance

liability—the benefit of the fictitious trades that all customers were previously denied. In direct
contravention of the Circuit’s ruling, this result places “some claims unfairly ahead of others.”
Id. at *12 n.10.
The Circuit ruled that the “whim of the defrauder” should not control the process of
unwinding the fraud. Id. at *11. Instead, the Trustee’s task is to equalize the harm to all
defrauded investors of BLMIS by putting the “greatest number of investors closest to their
positions prior to Madoff’s scheme in an effort to make them whole.” In re Bernard L. Madoff
Inv. Sec., 424 B.R. 122, 142 (Bankr. S.D.N.Y. 2010).

His duties have two interlocking

components: (1) recovering customer property through avoidance and other actions; and (2)
distributing customer property.
Under the Second Circuit’s decision, the relative position of each BLMIS customer
account must be calculated based on “unmanipulated withdrawals and deposits” from its opening
date to December 2008. In re Bernard L. Madoff Inv. Sec., 2011 WL 3568936, at *8. If an
account has a positive cash balance, that accountholder is owed money from the estate. If an
account has a negative cash balance, the accountholder owes money to the estate. Both the
recovery and distribution of customer property in this case are centered on the principle that the
Trustee cannot credit “impossible transactions.”

If he did, then “those who had already

withdrawn cash deriving from imaginary profits in excess of their initial investment would
derive additional benefit at the expense of those customers who had not withdrawn funds before
the fraud was exposed.” Id.
In order to put all customers on equal footing, the Circuit ruled that no customer was
entitled to the benefit of those impossible transactions. Yet, this Court credits the fraudulent
transactions—only for customers subject to avoidance—by applying the § 546(e) safe harbor.

2

This ruling results in an unequal application of law because the Second Circuit precluded any
corresponding credit for those same transactions to customers owed money by the estate. The
Order requires a procedure wholly irreconcilable with the standard espoused by the Second
Circuit and questions the very basis on which the Trustee has unwound the fraud.
This Court’s ruling, therefore, implicates far more than the claims against Defendants or
similarly-situated net winners. It touches upon the interests of thousands of other creditors of
BLMIS and allows net winners to avoid liability to the estate. Net losers, of course, bear the cost
of that decision. As applied to this case alone or applied to any of the other more than 900
avoidance actions currently pending, the Court’s Order upsets the pro rata scheme mandated by
the Bankruptcy Code and SIPA, and derails the fair allocation of available resources to victims
as mandated by the Second Circuit. On this issue alone, the Court should permit appellate
review of its Order now. But as discussed more fully herein, immediate appellate review is
appropriate for a host of reasons, not the least of which is that it will clarify the state of the law
prior to commencement of hundreds of trials on claims that mirror those asserted against
Defendants here.
Statement of Facts
A.

The Amended Complaint, Motion to Dismiss & Order

The Trustee’s Amended Complaint asserted fraudulent conveyance claims against
Defendants under the Bankruptcy Code (the “Code”), 11 U.S.C. § 101 et seq., analogous
provisions of McKinney’s New York Debtor and Creditor Law (“NYDCL”), §§ 270 et seq., and
SIPA. On September 27, 2011, the Court granted Defendants’ Motion to Dismiss the Amended
Complaint under Federal Rule of Civil Procedure 12(b)(6) with respect to Counts Two through
Ten. It denied the Motion to Dismiss with respect to Counts One and Eleven. The Court’s key
holdings can be summarized as follows.
3

First, the Court dismissed Counts Two through Nine on the ground that the “safe harbor”
affirmative defense set forth in Bankruptcy Code § 546(e) is a bar—at the pleading stage—to
those claims. Accordingly, the Court dismissed the Trustee’s claims based on constructive fraud
under the Bankruptcy Code, actual and constructive fraud under the NYDCL, and for recovery of
subsequent transfers pursuant to § 550 of the Code, reducing the Trustee’s claims against
Defendants from approximately $1 billion to less than $400 million.
In connection with the Trustee’s fraudulent conveyance claims, this Court’s Order
articulated a new heightened standard to be applied to Defendants’ affirmative defense of good
faith under Bankruptcy Code § 548(c). The Court rejected the objective standard of “inquiry
notice” applicable to the good faith defense in “ordinary bankruptcies,” concluding that in the
“context of a SIPA trusteeship, where bankruptcy law is informed by federal securities law,” a
transferee’s good faith defense “implies a lack of fraudulent intent” on the part of Defendants.
Holding as a matter of law that securities investors have no inherent duty to inquire about their
stockbrokers, the Court defined a heightened subjective standard of “willful blindness” that
appears to be akin to a “conscious avoidance” standard derived from the criminal law context.
In addition to the nine transfer-related counts, the Trustee also asserted Counts Ten and
Eleven that, respectively, seek to temporarily disallow Defendants’ customer claims under
Bankruptcy Code § 502(d) until the litigation against Defendants is resolved, and to equitably
subordinate those customer claims for purposes of distribution based upon Defendants’
inequitable conduct. In dismissing Count Ten, the Court held as a matter of law that § 502(d) is
“overridden” in a SIPA proceeding by SIPA §78fff-2(c)(3). The Court sustained the Trustee’s
equitable subordination claim in Count Eleven, but held that the Trustee is required to make the
same showing that is required for actual fraudulent transfers under § 548(a)(1)(A).

4

B.

The Instant Motion

Because the Court dismissed Counts Two through Ten, the Trustee requests that the
Court direct entry of final judgment as to those counts under Rule 54(b). If the Court declines to
do so, the Trustee requests that the Court certify the Order under § 1292(b) for interlocutory
appellate review the following controlling issues of law encompassed within the dismissal of
those claims: (1) whether, as a matter of law and from the face of the pleadings, fraudulent
transfers made by BLMIS to Defendants in furtherance of a Ponzi scheme without any actual
securities trades taking place constitute “settlement payments” and/or “transfers” by a
“stockbroker” “in connection with a securities contract” for the purposes of the safe harbor of
§ 546(e); (2) whether, as a matter of law, the safe harbor provision of § 546(e) bars recovery
from immediate or mediate transferees pursuant to § 550 of transfers that are avoidable as
against the initial transferee pursuant to § 548(a)(1)(A); and (3) whether, as a matter of law,
§ 502(d) of the Code is “overridden in the context of a SIPA trusteeship by Section § 78fff2(c)(3) of SIPA.”
A further controlling question of law that remains pending in the case that the Trustee
requests to be certified under § 1292(b) is whether, in the context of a SIPA liquidation, a
transferee’s affirmative defense of good faith pursuant to §548(c) of the Code is governed by an
objective inquiry notice standard applicable in “ordinary bankruptcies” or by a heightened
standard of subjective willful blindness.
Argument
I.

The Court should direct entry of final judgment under Rule 54(b) as to Counts Two
through Ten of the Amended Complaint.
Rule 54(b) of the Federal Rules of Civil Procedure provides, in pertinent part, that

“[w]hen an action presents more than one claim for relief . . . or when multiple parties are

5

involved, the court may direct entry of a final judgment as to one or more, but fewer than all,
claims or parties only if the court expressly determines that there is no just reason for delay.”
Fed. R. Civ. P. 54(b).
To permit entry of final judgment under this Rule, there must be (1) multiple claims or
multiple parties; (2) at least one claim finally decided within the meaning of 28 U.S.C. § 1291;
and (3) an express determination by the district court that there is no just reason for delay. See
generally In re Air Crash at Belle Harbor, N.Y. on Nov. 12, 2001, 490 F.3d 99, 108-09 (2d Cir.
2007). Certification under Rule 54(b) may be granted where there are interests of “sound
judicial administration” and efficiencies to be served, Curtiss-Wright Corp. v. Gen. Elec. Co.,
446 U.S. 1, 8 (1980), or where there exists “some danger of hardship or injustice through delay
which would be alleviated by immediate appeal.” Cullen v. Margiotta, 811 F.2d 698, 711 (2d
Cir. 1987) (overruled on other grounds). Under this standard, entry and certification of a final
judgment as to Counts Two through Ten of the Trustee’s Amended Complaint is appropriate
now.
A.

The Court finally determined nine counts of an eleven-count
Amended Complaint on grounds independent of the remaining
claims.

The first element of the Rule 54(b) test is met because the Amended Complaint involves
multiple claims and multiple parties; the Trustee asserted 11 claims against 98 defendants. The
second element is also met because Counts Two through Ten were finally decided. A judgment
is final for the purposes of Rule 54(b) if it is an ultimate disposition on a cognizable claim for
relief. Curtiss-Wright, 446 U.S. at 7. Here, the Order “ends the litigation of the [dismissed]
claim[s] on the merits and leaves nothing for the court to do but execute the judgment.” Ginett v.
Computer Task Group, 962 F.2d 1085, 1094 (2d Cir. 1992).

6

“[A] district court should only enter final judgment if the claims are separable.” See
Cullen, 811 F.2d at 711; Ross v. Thomas, 09 Civ. 05631, 2010 WL 3952903, at *4 (S.D.N.Y.
Oct. 7, 2010).

Claims are separable for purposes of Rule 54(b) if they “can be decided

independently of each other.” Ginett, 962 F.2d at 1097 (quoting Sears, Roebuck & Co. v.
Mackey, 351 U.S. 427, 436 (1956)). Such is the case here. The Court held that Counts Two
through Nine were barred by the application of § 546(e) and that Count Ten was barred because
§ 502(d) does not apply in a SIPA proceeding; these are legal determinations independent of and
unrelated to the remaining claims.
B.

No just reason for delay exists in entering final judgment and injustice
would result if the Court does not do so.

To enter final judgment under Rule 54(b), a district court must expressly find that there is
no just reason for delay. Ginett, 962 F.2d at 1092. “[C]ourts do not simply evaluate whether
there is a just reason for delay, but generally apply a balancing test that weighs multiple factors
to determine whether directing entry of a final judgment is in the interest of sound judicial
administration.” Ross, 2010 WL 3952903, at *4. A district court therefore should consider the
efficiency interests of both the district and appellate courts, as well as the balance of equities as
to the parties. See Smith v. Local 819 I.B.T. Pension Plan, 291 F.3d 236, 240 (2d Cir. 2002);
Curtiss-Wright, 446 U.S. at 8; Ginett, 962 F.2d at 1095.
Judicial efficiencies warrant the immediate entry of final judgment on the nine dismissed
claims.

Avoiding duplicative trials before the district court is a compelling efficiency

consideration warranting entry of final judgment under Rule 54(b).

See, e.g., Advanced

Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 16 (2d Cir. 1997) (entering final
judgment on certain claims under Rule 54(b), thus potentially avoiding “an expensive and
duplicative trial”); Trugman-Nash, Inc. v. N.Z. Dairy Bd., 954 F. Supp. 2d 733, 738 (S.D.N.Y.

7

1997) (granting Rule 54(b) judgment will allow immediate appeal to determine if certain “claims
form a proper part of this case, [since] a single trial of all claims is preferable”). Absent an
immediate appeal, the parties will proceed to trial in this Court on the remaining claims, and if
the dismissals of the other claims for relief turn out to be in error, a second trial before this Court
regarding fraudulent transfer liability under other provisions of the Code and the NYDCL will be
required. This would be unnecessary if the Second Circuit had the opportunity to weigh in on
those issues now.
As addressed more fully below, many of the Court’s rulings on these issues are either
matters of first impression or conflict with decisions of other courts within the Circuit.
Obtaining appellate review before the first trial is essential to bringing precedential force to the
value of the Trustee’s claims and conclusively determining the relevant body of law to be
applied to those claims. Preventing appellate review will likely result in lawsuits, based on a
common nucleus of facts and for the same causes of action, being determined in opposite ways
depending on the forum in which the particular adversary proceeding is heard. As this Court has
expressed, consistency is needed for the 900-plus avoidance actions that have been brought by
the Trustee. See Transcript of Withdrawal of Reference Hearing in Picard v. Kelman Partners
LP, No. 11 Civ. 05513 (S.D.N.Y.) (JSR), pp. 19-20.
Whether the Order is affirmed or reversed, only appellate review can prevent a
multiplication of errors in the numerous adversary proceedings that are pending before this Court
and the bankruptcy court. A failure to provide appellate review immediately would work an
injustice on all parties to the larger liquidation proceeding, of which this particular case is only
one piece. See In re Methyl Tertiary Butyl Ether Prod. Liab. Litig., No. 04 Civ. 03417, 2010 WL

8

1328249, at *4 (S.D.N.Y. Apr. 5, 2010) (holding that failure to provide appellate review in first
case of multi-district litigation would work an injustice on all parties to MDL).
Permitting an appeal now will also be efficient for the Second Circuit. The appellate
panel reviewing the claims certified pursuant to Rule 54(b) will be presented with legal issues
that do not overlap with the merits of the claims remaining before this Court. 1 Nor will the trial
court’s disposition of the remaining claims render this appeal moot. See, e.g., Ginett, 962 F.2d at
1095; Hersch v. Gersten (In re Centennial Textiles, Inc.), 220 B.R. 177, 181 (Bankr. S.D.N.Y.
1998). For these reasons, the Trustee respectfully requests that the Court direct entry of final
judgment as to Counts Two through Ten of the Amended Complaint under Rule 54(b).
II.

Alternatively, certification for interlocutory review under § 1292(b) is warranted.
Pursuant to § 1292(b), a court may certify an order for interlocutory appeal when: (1) the

disputed ruling involves a controlling question of law; (2) substantial grounds for difference of
opinion exist; and (3) an immediate appeal may materially advance the ultimate termination of
the litigation. See 28 U.S.C. § 1292(b); see also In re Enron Creditors Recovery Corp., 2009
WL 3349471, at *5 (S.D.N.Y. Oct. 16, 2009).
In the event that the Court does not view the claims as appropriate for entry of final
judgment under Rule 54(b), the controlling issues of law encompassed within those claims

1

The Trustee is requesting by way of this Motion that the Court certify for interlocutory appeal
the issue of the “willful blindness” standard for recovery of actual fraudulent transfers, discussed
more fully herein. This is the only issue that remains pending before this Court of which the
Trustee has requested certification.

9

render the Order appropriate for interlocutory appeal pursuant to § 1292(b), as set forth above on
Preliminary Section B and as discussed more fully herein.
A.

The disputed rulings involve controlling questions of law that will
materially affect the outcome of the litigation.

A disputed ruling involves a controlling question of law if the issue to be appealed is a
“question of the meaning of a statutory or constitutional provision, regulation, or common law
doctrine.” In re Contemporary Indus. Corp., 312 B.R. 898, 901 (D. Neb. 2004); see also Bilello
v. JPMorgan Chase Retirement Plan, 603 F. Supp. 2d 590, 593 (S.D.N.Y. 2009) (finding
controlling question of law when interpretation of statute was required). In addition, a question
of law is “controlling” if reversal on that ground would terminate the action or would materially
affect the litigation’s outcome. Klinghoffer v. S.N.C. Achille Lauro, 921 F.2d 21, 24 (2d Cir.
1990).
The issues presented by the claims finally dismissed under the Order require the
interpretation of §§ 502(d), 546(e), and 550 of the Bankruptcy Code, and SIPA § 78fff-2(c)(3).
Because the Order dismissed claims as a matter of law on the face of the pleadings, they are
classic controlling questions of law.

Moreover, reversal on any of these grounds would

materially affect the litigation’s outcome, as discussed more fully below in Section II.C.
B.

The Court’s Order presents controlling issues of law as to which
substantial grounds for difference of opinion exist.

For purposes of an interlocutory appeal, substantial grounds for difference of opinion as
to controlling questions of law arise out of uncertainty as to whether the district court applied the
correct legal standard in its order. Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC),
No. 00 MC 00012, 2011 WL 3897970, at *10 (S.D.N.Y. Aug. 31, 2011). This factor “may be
met when (1) there is conflicting authority on the issue, or (2) the issue is particularly difficult
and of first impression for the Second Circuit.” Consub Delaware LLC. v. Schahin Engenharia
10

Limitada, 476 F. Supp. 2d 305, 309 (S.D.N.Y. 2007) (citing In re Lloyd’s Am. Trust Funds Litig.,
No. 96 Civ. 01262, 1997 WL 458739, at *5 (S.D.N.Y. Aug. 12, 1997)).
1.

The Court’s conclusion that § 546(e) applies to transfers made in
furtherance of Madoff’s Ponzi scheme conflicts with Second Circuit
and other authority.

This Court recognized in its Order that “Madoff and Madoff Securities were, at all times
here relevant, engaged in a Ponzi scheme, by which customers of Madoff Securities, who were
led to believe that their monies were being invested in profitable securities transactions, were
paid their profits from new monies received from customers, without any actual securities trades
taking place.” Picard v. Katz (In re Bernard L. Madoff Inv. Sec. LLC), No. 11 Civ. 03605, 2011
WL 4448638, at *4 (S.D.N.Y. Sept. 27, 2011) (emphasis added). But despite finding that the
transfers to Defendants were made in furtherance of a Ponzi scheme, and that no securities
transactions occurred, this Court held, as a matter of law, that: (i) “all payments made by Madoff
Securities to its customers” were “clearly” “settlement payments” within the meaning of
§ 546(e); and (ii) “any payment by Madoff Securities to its customers that somehow does not
qualify as a ‘settlement payment’ qualifies as a ‘transfer’ made ‘in connection with a securities
contract.’” Id. at *2.
First, the Court’s rulings on the application of the concepts of “settlement payment” and
“securities contracts” as defined within § 546(e) are at odds with numerous authorities within the
Second Circuit and beyond, including decisions rendered in this liquidation proceeding by the
bankruptcy court. For example, because the transfers made by BLMIS to Defendants were not
made in connection with the completion of any transactions in securities, this Court’s decision
concluding that all payments made by BLMIS to its customers were clearly “settlement
payments” conflicts with the Second Circuit’s decision in Enron. See In re Enron Creditors
Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329, 2011 WL 2536101, at *7 (2d Cir. June 28,
11

2011) (“We, like our sister circuits, agree that in the context of the securities industry a
‘settlement’ refers to ‘the completion of a securities transaction’”) (internal citation and
quotation omitted).
Likewise, the Court’s ruling that any transfer not deemed a “settlement payment”
qualifies as a “transfer” made by a “stockbroker” “in connection with a securities contract”
conflicts with the decisions of Judge Lifland in other adversary proceedings in this action.
Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC), 440 B.R. 243, 266-67 (Bankr.
S.D.N.Y. 2010), and Picard v. Peter B. Madoff (In re Bernard L. Madoff Inv. Sec. LLC)
(“Madoff Family”), --- F.3d ---, 2011 WL 4434632, at *15-*16 (Bankr. S.D.N.Y. Sept. 22,
2011).
In both Merkin and Madoff Family, the bankruptcy court held that it could not, as a
matter of law, determine at the pleading stage either that Madoff was a “stockbroker . . . engaged
in the business of effecting transactions in securities” or that the BLMIS customer account
agreements relied on by defendants in those cases constituted “securities contracts” within the
meaning of § 546(e). Because Madoff was not alleged to have purchased any securities for
customer accounts, Judge Lifland found “dubious” the proposition that Madoff was a
“stockbroker” under § 546(e), as courts have held that Ponzi scheme operators do not
affirmatively “make securities transactions happen.” Merkin, 440 B.R. at 267; Madoff Family,
2011 WL 4434632, at *15. Even if BLMIS was a “stockbroker” within the meaning of § 546(e),
the court was unable, as a matter of law, to conclude that a “securities contract” ever existed
within the meaning of the statute, finding that none of the agreements relied on by the defendants
in those cases, by their terms, effected “the purchase sale or loan of a security.” Rather, Judge
Lifland concluded, “at most they merely authorize” Madoff to act on the defendants’ behalf to

12

conduct trades in the future. Merkin, 440 B.R. at 267; Madoff Family, 2011 WL 4434632, at
*16.
Judge Lifland applied established precedent in reaching these conclusions. Judge Wood
of this District, in considering a request for interlocutory appeal in Merkin, found that there were
no “substantial grounds for difference of opinion as to the correctness of the standards relied on
by the Bankruptcy Court in its refusal—at the pleading stage—to dismiss on the grounds of [the
defendants’] § 546(e) affirmative defense.” Merkin, 2011 WL 3897970, at *12 (denying motion
for interlocutory review of Merkin order).
In doing so, Judge Wood noted that the Merkin defendants cited “no decision in which a
Ponzi scheme operator, who allegedly did not execute any trades, was deemed at the pleading
stage to be a ‘stockbroker’ for purposes of § 546(e).” Id. at *12. Nor, Judge Wood noted, had
the defendants cited to any “decision in which an agreement was deemed to be a ‘securities
contract’ within the meaning of the Bankruptcy Code, where that agreement (a) merely
authorized one party to conduct future trades on behalf of another party, and (b) did not, by its
terms, effect the purchase, sale, or loan of a security between the parties.” Id. at *25.
Accordingly, this Court’s conclusion as a matter of law that “the kind of contract Madoff
Securities had with its customers” constitutes a “securities contract” for purposes of § 546(e)—a
determination that this Court made without having any of the ostensible securities contracts
before it—conflicts with Judge Lifland’s conclusions in Madoff Family and Merkin, as well as
Judge Wood’s determination that no substantial grounds for disagreement existed as to the
correctness of Judge Lifland’s holdings regarding those “contracts.”
The Court’s refusal to consider the plain language of § 546(e) in the context of the
“overall structure and operation” of SIPA and the Bankruptcy Code also conflicts with the

13

Second Circuit’s mandate that the “preferred meaning of a statutory provision is one that is
consonant with the rest of the statute.” In re Bernard L. Madoff Inv. Sec., 2011 WL 3568936, at
*7. Judges Marrero, Garrity, and Lifland have all considered the purpose underlying the safe
harbor provision of § 546(e) within the context of the statutory structure and determined that it
cannot plausibly be read to apply to transfers that were made in connection with bogus securities
schemes—the precise circumstances here, as this Court itself acknowledges. As stated by Judge
Lifland, “to extend safe harbor protection in the context of a fraudulent securities scheme would
be to ‘undermine, not protect or promote investor confidence . . . [by] endorsing a scheme to
defraud SIPC,’ and therefore contradict the goals of the provision.” Madoff Family, 2011 WL
4434632, at *16 (internal citation and quotations omitted); see also Merkin, 440 B.R. at 267;
Mishkin v. Ensminger (In re Adler, Coleman Clearing Corp.), 247 B.R. 51, 105 (Bankr.
S.D.N.Y. 1999) (Garrity, J.); Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.), 263
B.R. 406, 482-85 (S.D.N.Y. 2001) (Marrero, J.) (refusing to apply § 546(e) safe harbor to
fraudulent scheme, as effect will diminish assets “available for equitable distribution to all other
similarly situated creditors”); see also Enron Corp. v. JPMorgan Sec., Inc. (In re Enron Corp.),
No. M-47, 2008 WL 281972, at *5 (S.D.N.Y. Jan. 25, 2008) (Daniels, J.).
Indeed, every other court to consider the matter, including circuit courts of appeal, has
refused to apply § 546(e) to shield transfers made in furtherance of a pure fiction. See, e.g.,
Wider v. Wootton, 907 F.2d 570, 573 (5th Cir. 1990) (finding application would “lend judicial
support to ‘Ponzi’ schemes”); Johnson v. Neilson (In re Slatkin), 525 F.3d 805, 809, 816-19 (9th
Cir. 2008) (holding Ponzi scheme operator is not “engaged in the business of effecting
transactions in securities” for purposes of statute). While the Second Circuit has not yet spoken
on this issue, it notably quoted Judge Marrero’s opinion in Adler, in which he refused to apply

14

§ 546(e) to a fraudulent scheme, when noting that the Trustee’s net equity method “avoid[s]
placing some claims unfairly ahead of others.” In re Bernard L. Madoff Inv. Sec., 2011 WL
3568936, at *12 n.10.
That there is a substantial difference of opinion is made most plain by the differing
articulations of the policy goals underlying the statutes at issue here. Judge Lifland held that
applying the safe harbor to shield transfers Madoff made in connection with his fraud “would
negate [SIPA’s] remedial purpose by eliminating most avoidance powers granted to a trustee
under SIPA.” Madoff Family, 2011 WL 4434632, at *16; Merkin, 440 B.R. at 265-66. Yet this
Court held that a Trustee’s avoidance powers must be restricted to effectuate the policies of
bankruptcy and securities law, both of which include SIPA. Katz, 2011 WL 4448638, at *2
(quoting In re Enron Creditors Recovery Corp., 2011 WL 2536101, at *5) (“By restricting a
bankruptcy trustee’s power to recover payments that otherwise avoidable under the Bankruptcy
Code, the safe harbor stands ‘at the intersection of two important national legislative policies on
a collision course—the policies of bankruptcy and securities law.’”). This conflict must be
resolved.
Finally, the Court’s ruling is inconsistent with the fundamental principles of statutory
construction that a statute should be enforced according to its “plain language” unless such
disposition would lead to an absurd result. In re Enron Creditors Recovery Corp., 2011 WL
2536101, at *9.

Applying § 546(e) to shield from recovery fraudulent transfers made in

furtherance of Madoff’s Ponzi scheme “would have the absurd effect of treating fictitious and
arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations,”
thus allowing “the whim of the defrauder” to control the “process that is supposed to unwind the
fraud.” In re Bernard L. Madoff Inv. Sec., 2011 WL 3568936, at *5.

15

The Court’s ruling, which is based on the plain language of the statute and extends to “all
payments” made to BLMIS customers, would have the result of allowing anyone with a BLMIS
account to invoke the § 546(e) safe harbor, including Madoff’s own family members or investors
who were willfully blind to or had actual knowledge of the fraud. Compare Madoff Family,
2011 WL 4434632, at *16 (“[I]t defies credulity that the [Madoff family member defendants],
who are insiders based on the facts alleged, were ever contemplated to be the parties eligible to
invoke the safe harbor provision of § 546(e)”). The Order thus permits untenable results.
Because a substantial difference of opinion exists as to the correct legal standards governing the
§ 546(e) safe harbor, this Court should certify it now for interlocutory review.
2.

The Court’s application of § 546(e) to bar all recoveries from
subsequent transferees is an issue of first impression.

The application of § 546(e) to bar the Trustee’s recovery of all subsequent transfers in a
Ponzi scheme pursuant to § 550 is an issue of first impression in the Second Circuit. In fact, the
Trustee has located no reported decisions that come to the same conclusion as this Court.
Under the exceptions set forth in § 546(e), the Court limited the Trustee’s avoidance
powers to intentional fraudulent transfers under § 548(a)(1)(A).

The Court further held,

however, that these otherwise avoidable transfers could not be recovered from subsequent
transferees by the Trustee. The Trustee respectfully submits that this conclusion misapprehends
the interplay between §§ 546 and 550(a) of the Code.
Section 546 limits a trustee’s avoidance powers. Section 550(a), on the other hand, deals
with a trustee’s ability to recover transfers, whether initial or subsequent, “to the extent that a
transfer is avoided under section . . . 548 . . . of this title.” Because the Court sustained the
Trustee’s § 548(a)(1)(A) avoidance count, the plain language of § 550(a) permits the Trustee to
seek to recover these transfers from subsequent transferee defendants. In other words, as a pure

16

question of law, the Court has held that the Trustee may avoid initial fraudulent transfers
pursuant to § 548(a)(1)(A) under the enumerated exception to avoidance in § 546(e), but may not
recover these very same transfers from subsequent transferees, effectively reading § 550(a) out
of the Bankruptcy Code, notwithstanding the plain language of the statutes. Certification of this
issue for immediate appeal is particularly appropriate because the Court’s Order not only has the
potential effect of stymying the Trustee’s ability to recover hundreds of millions of dollars of
avoidable transfers in this case as well as in hundreds of other cases arising out of Madoff’s
Ponzi scheme, but moreover, could potentially be argued to immunize from suit all subsequent
transferees in future SIPA liquidation proceedings.
Resolution of this fundamental matter is ripe for interlocutory appeal because it is an
issue of first impression in this Circuit. Klinghoffer, 921 F.2d at 24-25 (granting petition for
permission to appeal and acknowledging “controlling question of law” when issues are of first
impression).
3.

This Court’s holding that § 502(d) is overridden by SIPA § 78fff2(c)(3) is a matter of first impression in this Circuit.

Similarly, this Court’s ruling that § 502(d) is overridden by SIPA § 78fff-2(c)(3) is a
matter of first impression in this Circuit and elsewhere. The Court found that SIPA § 78fff2(c)(3) provides “that securities customers who have received avoidable transfers may still seek
to pursue those transfers as creditors of the SIPA estate.” Katz, 2011 WL 4448638, at *6.
Nothing in SIPA §78fff-2(c)(3) provides customers with an affirmative right to “seek to pursue”
a claim for fraudulent or preferential transfers of customer property they received. Nor is such a
claim provided for by other sections of SIPA or the Bankruptcy Code.
By its plain language, SIPA section 78fff-2(c)(3) empowers a trustee to recover transfers
of customer property wrongfully transferred and “[f]or the purposes of such recovery . . . if such

17

transfer was made to a customer for his benefit, such customer shall be deemed to be a
creditor[.]” SIPA § 78fff-2(c)(3) (emphasis added). As Collier’s on Bankruptcy explains, the
purpose of Section 78fff-2(c)(3) was to expand, not limit, a trustee’s avoidance powers by
deeming “customer property” to have been property of the debtor:
A customer receiving a voidable transfer is deemed to be a creditor
for purposes of avoidance, and the property so transferred is
deemed to have been property of the debtor. The customer is not
an actual creditor, and, under virtually all state and federal
securities laws, the property does not belong to the debtor prior to
transfer. The purpose of this legal fiction is to enable the trustee to
fit the transfer into the provisions of the avoidance sections of the
[Bankruptcy] Code. The legal fiction prevents a customer from
using a technical reading of the avoidance provisions of the
[Bankruptcy] Code to retain securities that would otherwise be
recoverable by the trustee. The overall purpose of . . . 15 U.S.C.
§ 78fff-2(c)(3) is to prevent one or more customers from depriving
other customers of assets by keeping these assets out of the pool
available for distribution to customers on a ratable basis.
6 Collier on Bankruptcy ¶ 749.02[1] (16th ed. 2011).

Thus, under SIPA § 78fff-2(c)(3),

customers are deemed creditors solely for the purpose of allowing the Trustee to recover
transfers of customer property to the extent such transfers are voidable or void under the
provisions of title 11.
This Court’s interpretation of § 78fff-2(c)(3) is a matter of first impression in this Circuit,
and stands in contrast with existing authority within this District which recognizes that § 502(d)
is available to a trustee in a SIPA proceeding. See, e.g., Madoff Family, 2011 WL 4434632, at
*19 (holding that Trustee adequately pled his claim to disallow defendants’ SIPA claims under
§ 502(d); noting that the purpose of the section is to “preclude entities that have received
voidable transfers from sharing in the distribution of assets unless and until the voidable transfer
has been returned to the estate.”) (quoting In re Mid. Atl. Fund, Inc., 60 B.R. 604, 609 (Bankr.
S.D.N.Y. 1986).

18

The Court’s Order, which created for the first time a claim by customers for the
fraudulent transfers they received, is expressly contrary to the overall purpose of the statute,
which “is to prevent one or more customers from depriving other customers of assets by keeping
these assets out of the pool available for distribution to customers on a ratable basis.” 6 Collier
on Bankruptcy ¶ 749.02[1] (16th ed. 2011). 2 The Court’s ruling with regard to SIPA § 78fff2(c)(3) and § 502(d) of the Code is therefore also contrary to the Second Circuit’s “net equity”
decision, wherein the Court interpreted the net equity provision of SIPA in a manner that was
harmonious with the Trustee’s avoidance powers and avoided “placing some claims unfairly
ahead of others.” In re Bernard L. Madoff Inv. Sec., 2011 WL 3568936, at *12 n.10.
As such, the Court’s Order presents important issues in this Circuit that have far reaching
consequences for the efficient functioning of SIPA proceedings and, therefore, requires
immediate appellate review. See also In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 03288, 2003
WL 22953644, at *5 (S.D.N.Y. Dec. 16, 2003) (finding that issue was one of first impression
where no court of appeals directly examined it).

2

See also Hill v. Spencer S&L Ass’n (In re Bevill, Bresler & Schulman, Inc.), 94 B.R. 817, 826827 (D.N.J. 1989) (noting that “[a]bsent these fictions, virtually all securities transactions would
be immune from the trustee’s avoidance power, frustrating SIPA’s purpose of equitable
distribution.”) (citing Matter of Bevill, Bresler & Schulman, Inc., 83 B.R. 880, 893-894 (D.N.J.
1988) (“To promote equality of distribution to similarly situated claimants, the trustee is
permitted, under 15 U.S.C. § 78fff-2(c)(3), to recover securities that would have been part of the
fund of customer property but for a prior transfer to a customer.”)).

19

C.

An immediate appeal from the Court’s Order is warranted given its
unusual significance to more than 900 other actions.

The “institutional efficiency of the federal court system is a chief concern underlying
1292(b),” and its application is warranted in exceptional cases to avoid “protracted and
expensive litigation.”

Consol. Edison, Inc. v. Northeast Util., 318 F. Supp. 2d 181, 196

(S.D.N.Y. 2004) (citation omitted). Where “an appeal would facilitate the expeditious resolution
of the case,” applications for leave to appeal “should be liberally granted.”

In re Enron

Creditors Recovery Corp., 2009 WL 3349471, at *7 (citing In re Manville Forest Prod. Corp.,
31 B.R. 991, 995 n.5 (S.D.N.Y. 1983)). Even where an immediate appeal will not “advance the
time for trial or shorten the time required for trial” for one lawsuit, providing “certainty as to [the
claims] will help streamline the litigation for trial and on appeal.” Consol. Edison, Inc., 318 F.
Supp. 2d at 197.
Certification for immediate appeal is particularly appropriate where a court’s ruling is of
unusual significance, including instances where other pending cases will require resolution of
similar issues. Kramer v. Lockwood Pension Services, Inc., 653 F. Supp. 2d 354, 397-98
(S.D.N.Y. 2009) (noting interlocutory appeals should be granted for “consideration [of a] case . .
. of unusual significance, one in which a ruling is of practical importance going well beyond runof-the-mill concerns of parties before the Court”); Brown v. Bullock, 294 F.2d 415, 417 (2d Cir.
1961) (Friendly, J.) (explaining that interlocutory appeal was granted because “such a
determination was likely to have precedential value for a large number of other suits . . . now
pending in the Southern District [of New York]); Romea v. Heiberger & Assoc., 988 F. Supp.
715, 717 (S.D.N.Y. 1998) (concluding that interlocutory review was appropriate where questions
presented were of broad applicability to significant volume of litigation in New York).

20

Here, certification of the Court’s Order is warranted because until the Second Circuit
provides guidance, the rulings will affect the Trustee’s 900-plus avoidance actions arising out of
Madoff’s fraud. Defendants in the Trustee’s other adversary proceedings have already attempted
to invoke the Court’s Order as a defense to the Trustee’s claims. Many if not all of the 900-plus
cases will be impacted by the uncertainty created by the conflict between this Court’s rulings and
the decisions of other courts within this district. There is little likelihood that the lawsuits will
settle under these circumstances; in fact, it is a virtual certainty that the parties will continue to
challenge rulings on these issues in every court until the Second Circuit renders a final
determination on them. An immediate appeal will provide needed certainty to the parties, avoid
unnecessary litigation, and expedite the ultimate resolution of these cases. See In re Fosamax
Prod. Liab. Litig., No. 06 MD 01789, 2011 WL 2566074, at *10 (S.D.N.Y. June 29, 2011)
(holding that “extraordinary circumstances warranting interlocutory appellate review” exist
where such review would prevent additional trials and materially advance the progress of 100
related litigations).
III.

Interlocutory appeal is warranted to resolve the conflict arising from this Court’s
ruling that imposes a heightened subjective standard of “willful blindness” to
Defendants’ good faith defense.
Independent of the grounds for entry of final judgment as to the dismissed claims under

Rule 54(b) or certification of the issues implicated by those claims under § 1292(b), the Trustee
also seeks certification pursuant to § 1292(b) on an issue that remains pending before the Court.
Contrary to numerous authorities, the Court held for the first time that a heightened subjective
standard of willful blindness governs the Code’s § 548(c) affirmative defense of good faith in the
context of a SIPA liquidation. Katz, 2011 WL 4448638, at *5-*6. This disputed ruling satisfies
all of the factors for certification, and the Trustee respectfully requests that the Court certify this
determination for interlocutory appeal.
21

First, the appropriate legal standard governing the good faith defense available under
§ 548(c) to investors in a SIPA liquidation is a controlling question of law because it is a “pure
question of law that the reviewing court could decide quickly and cleanly without having to
study the record” and “would materially affect the litigation’s outcome.” See Sec. Investor Prot.
Corp. v. Bernard L. Madoff Inv. Sec., LLC, No. M-47, 2010 WL 185102, at *1 (S.D.N.Y. Jan.
11, 2010) (quoting In re WorldCom, Inc., No. M-47, 2003 WL 21498904, at *10 (S.D.N.Y. June
30, 2003)).
As to the second prong, a substantial ground for difference of opinion exists with respect
to this Court’s imposition of a heightened standard because there is a substantial conflict of
authority with respect to this issue. See Merkin, 2011 WL 3897970, at *10 (noting that a genuine
doubt as to whether court applied correct legal standard demonstrates substantial ground for
difference of opinion). All courts in this District—with the exception of this Court—and all of
the circuit courts of appeal to date that have addressed this issue have applied an objective,
“reasonably prudent” standard of inquiry notice and diligent investigation to a transferee’s good
faith defense under § 548(c). See, e.g., Christian Bros. High Sch. Endowment v. Bayou No
Leverage Fund, LLC (In re Bayou Group LLC), 439 B.R. 284, 310-13 (S.D.N.Y. 2010)
(reviewing dozens of cases in which an objective standard was applied); In re Manhattan Inv.
Fund Ltd., 397 B.R. 1, 23 (S.D.N.Y. 2007); Jobin v. McKay (In re M&L Bus. Mach. Co., Inc.),
84 F.3d 1330, 1334, 1335-38 (10th Cir. 1996). The Court’s further conclusion, that different
standards govern a transferee’s good faith affirmative defense depending on whether a SIPA or
“ordinary bankruptcy” trustee brings the avoidance action, is also matter of first impression.
Katz, 2011 WL 4448638, at *5.

22

In the SIPA context, the Court rejected application of the objective “inquiry notice”
standard to a transferee-defendants’ good faith defense, finding that, as a matter of law, a
securities investor has no “inherent duty to inquire about his stockbroker” even “when
confronted with suspicious circumstances.” Id. There is, however, substantial conflicting and
controlling authority within this Circuit on that issue, including decisions of the Second Circuit
itself, which have held that, as a matter of law, investors do have a duty to inquire when
confronted with suspicious circumstances, and that the diligence of the investors’ inquiry is
measured by an objective, not a subjective, test. See, e.g., Dodds v. Cigna Sec., Inc., 12 F.3d
346, 350 (2d Cir. 1993) (holding inquiry notice standard is objective in securities fraud context);
Crigger v. Fahnestock & Co. Inc., 443 F.3d 230, 236 (2d Cir. 2006); Barron Partners LP v.
Lab123, Inc., No. 07 Civ. 11135, 2008 WL 2902187, at *5 n.3 (S.D.N.Y. July 25, 2008) (Rakoff,
J.) (in securities fraud case, this Court noted that “[r]easonable reliance entails a duty to
investigate the legitimacy of an investment opportunity where plaintiff was placed on guard or
practically faced with the facts”) (internal citation omitted).
The Court’s heightened standard of “willful blindness” also creates another conflict with
authorities within this Circuit by effectively imposing an additional element of proof to
fraudulent conveyance claims, requiring the Trustee to prove the Defendants’ “scienter,”
meaning that in order for the Trustee to recover the Defendants’ principal the Defendants must
have been willfully blind to BLMIS’ fraud and/or had an intent to defraud. Katz, 2011 WL
4448638, at *5. The heightened standard of “willful blindness” set by the Court’s Order appears
to rise to a level akin to the criminal standard for “conscious avoidance,” a means commonly
used to prove criminal defendants’ actual knowledge of facts where such actual knowledge is a

23

statutory element of a crime. Id. (citing United States v. Rodriguez, 983 F.2d 455 (2d Cir. 1993)
(criminal narcotics case)).
By effectively requiring the Trustee to prove as part of his fraudulent conveyance claims
that the Defendants were willfully blind to BLMIS’ fraud or had the intent to defraud, the
Court’s Order is in direct conflict with other decisions in this District, which have expressly held
that a transferee’s intent to defraud is not an element of fraudulent conveyance claims under the
Bankruptcy Code or the NYDCL. See, e.g., In re Bayou Group LLC, 439 B.R. at 304; Merkin,
2011 WL 3897970, at *4-*6; Gowan v. The Patriot Grp. LLC (In re Dreier), 452 B.R. 391, 43233 (Bankr. S.D.N.Y. 2011).
Finally, an immediate appeal will provide certainty as to the claims and “will help
streamline the litigation for trial and on appeal.” Consol. Edison, Inc., 318 F. Supp. 2d at 197.
The standard governing the affirmative defense of good faith to the Trustee’s fraudulent
conveyance claims is at issue in dozens of other cases involving hundreds of additional
defendants. An expedited appeal from this issue will provide much needed clarity and will
promote judicial economy for these and other related litigations.
Conclusion
For the reasons stated above, the Trustee respectfully requests that this Court (i) direct
entry of judgment as to Counts Two through Ten of the Amended Complaint under Fed. R. Civ.
P. 54(b), and certify the Court’s September 27, 2011 Order for interlocutory appeal under 28
U.S.C. § 1292(b) as to the controlling question of law concerning the applicable standard
governing a transferee’s affirmative good faith defense under 11 U.S.C. § 548(c) in a SIPA
liquidation proceeding; (ii) alternatively, certify the entirety of the Court’s September 27, 2011
Order for interlocutory appeal under 28 U.S.C. § 1292(b); and (iii) grant such other relief as the
Court may deem just and proper.
24

Date: October 7, 2011
New York, New York

By: /s/ David J. Sheehan
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
Telephone: [phone]
Facsimile: [phone]
David J. Sheehan
Email: [e-mail]
Fernando A. Bohorquez, Jr.
Email: [e-mail]
Regina L. Griffin
Email: [e-mail]
Seanna R. Brown
Email: [e-mail]
Attorneys for Irving H. Picard, Trustee for the
Substantively Consolidated SIPA Liquidation
of Bernard L. Madoff Investment Securities
LLC and Bernard L. Madoff

300181946

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