In Re: Bernard L. Madoff Investment Securities LLC
Filing
10
OPINION AND ORDER: Accordingly, for the foregoing reasons, the Court denied each of Defendants-Appellants' motions seeking interlocutory appeal. That decision is hereby reaffirmed, and the Clerk is directed to close each of the above-captioned cases. SO ORDERED. (Signed by Judge Jed S. Rakoff on 11/3/2022) (kv) Transmission to Orders and Judgments Clerk for processing.
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 1 of 25
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
Irving Picard, Trustee for
the Liquidation of Bernard L.
Madoff Investment Securities
LLC and the Chapter 7 Estate
of Bernard L. Madoff
22-cv-06502
Plaintiff-Appellee,
22-cv-07173
-v-
22-cv-07189
22-cv-06512
Multi-Strategy Fund Limited,
22-cv-07195
Banque Syz & Co. SA,
22-cv-07372
Lloyds TSB Bank PLC,
22-cv-07788
Banque Cantonale Vaudoise,
(JSR)
Bordier & Cie,
OPINION AND ORDER
Barclays Bank (Suisse) S.A.,
and Delta National Bank and
Trust Company,
Defendants-Appellants.
JED S. RAKOFF, U.S.D.J.:
In the latest salvo in the decade-plus litigation surrounding the
liquidation
of
Bernard
L.
Madoff
Investment
Securities
(“Madoff
Securities”), 1 several funds and financial institutions move for an
0F
interlocutory appeal of the Bankruptcy Court’s order denying their
All capitalized terms here used refer to the definitions set
forth in this order, unless otherwise specified. Also, all internal
quotation marks, alterations, omissions, emphases, and citations
have been omitted from all cited sources.
1
1
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 2 of 25
motions to dismiss adversary proceedings against them. The funds in
question each invested in Fairfield Sentry Limited (“Fairfield”), one
of the largest Madoff “feeder funds” that pooled together other
investors’ money and invested it in Madoff’s Ponzi scheme, and which
is alleged to have known about Madoff’s fraud. Irving H. Picard, the
trustee
charged
with
the
liquidation
of
Madoff
Securities
(the
“Trustee”), seeks to demonstrate the avoidability of transfers made
by Madoff Securities to Fairfield and then recover subsequent transfers
made by Fairfield to its investors. The Trustee has not alleged that
any of the Defendants-Appellants now before the Court, all of which
were subsequent transferees of Fairfield, knew about Madoff’s fraud.
Putting to one side the demanding showing Defendants-Appellants
would need to make to show an interlocutory appeal is justified, the
actual legal determination of which they seek review is relatively
narrow: can they defeat the Trustee’s litigation at the outset because,
they contend, the initial transfers from Madoff Securities to Fairfield
are protected from avoidance by the so-called “securities safe harbor”
set out in 11 U.S.C. § 546(e)? Based on the allegations pleaded by the
Trustee, the Bankruptcy Court answered that question in the negative
at the pleading stage. Notably, that does not mean that the Trustee
will necessarily recover from Defendants-Appellants. The Trustee will
still have to prove (and not just allege) that the initial transfers
to Fairfield fell outside the securities safe harbor and are therefore
avoidable, and Defendants-Appellants, as subsequent transferees, will
2
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 3 of 25
even then be able to raise a number of defenses to recovery, including
a good faith defense available to them under 11 U.S.C. § 550(b).
On October 31, 2022, the Court, by bottom-line order, the Court
denied
Defendants-Appellants’
respective
motions
requesting
an
interlocutory appeal. This Opinion and Order explains the Court’s
reasoning.
I.
Procedural history and the role of the securities safe
harbor in this litigation
Defendants-Appellants
argue
that
the
initial
transfers
the
Trustee seeks to avoid -- between Madoff Securities and Fairfield -are not avoidable because they fall under the “securities safe harbor”
set forth in 11 U.S.C. § 546(e). Whether or not transfers from Madoff
Securities to its customers qualify for that safe harbor has already
been the subject of intense dispute in this litigation, and so some
background as to both the Section 546(e) safe harbor and its role in
this litigation is in order.
The
Bankruptcy
Code
authorizes
liquidating
trustees
“to
invalidate a limited category of transfers by the debtor” so as “[t]o
maximize
the
funds
available
for,
and
ensure
equity
in,
the
distribution to creditors in a bankruptcy proceeding. . . .” Merit
Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883, 887-88 (2018);
see generally 11 U.S.C. §§ 544-553. Showing that an initial transfer
is avoidable is a prerequisite to recovery by a trustee of related
subsequent transfers, but even once that showing is made, a trustee
may only recover the proceeds of the avoidable transfer from any
3
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 4 of 25
subsequent
transferee
under
certain
circumstances
and
subject
to
various defenses. See 11 U.S.C. § 550 (defining and limiting the
liability of transferees of avoided transfers); Picard v. Citibank,
N.A. (In re BLMIS), 12 F. 4th 171, 181 (2d Cir. 2021) (“Avoidance and
recovery are related but distinct concepts.”).
Even as to the avoidability of the initial transfer, a trustee’s
power comes subject to various limitations, including the so-called
“securities safe harbor” or “Section 546(e) safe harbor.” A version
of this was first enacted in 1978 in direct response to a decision by
a court in this district that allowed a bankruptcy trustee to seek to
avoid $12 million in margin payments made by a commodity broker to a
clearing
association
shortly
before
the
broker’s
bankruptcy,
notwithstanding the clearing association’s defense that it was “mere
‘conduit’ for the transmission of the margin payments.” Merit Mgmt.,
138 S. Ct. at 889-90. To prevent the potential financial disruption
that might be caused by this kind of after-the-fact unraveling of
multi-party securities transactions, Congress enacted the securities
safe harbor and repeatedly expanded it over subsequent decades. Id.
It now shields from avoidability any “transfer that is a margin payment
. . . or settlement payment . . . made by or to (or for the benefit
of)
a
commodity
broker,
forward
contract
merchant,
stockbroker,
financial institution, financial participant or securities clearing
agency, or that is a transfer made by or to (or for the benefit of)”
the same types of entities. 11 U.S.C. § 546(e); see also Merit Mgmt.,
138 S. Ct. at 891; Enron Creditors Recovery Corp. v. Alfa, S.A.B. de
4
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 5 of 25
C.V., 651 F.3d 329, 334 (2d Cir. 2011) (explaining that the safe harbor
aims to “minimize[e] the displacement caused in the commodities and
securities markets in the event of a major bankruptcy affecting those
industries . . . by prohibiting the avoidance of ‘settlement payments’
[or other similar payments] made by, to, or on behalf of a number of
participants in the financial markets.”).
Over 10 years ago in this litigation, this Court decided that
“[b]ecause Madoff Securities was a registered stockbrokerage firm, the
liabilities of customers . . . are subject to the ‘safe harbor’ set
forth in section 546(e) of the Bankruptcy Code,” as Madoff Securities’
payments to customers were “settlement payments” made by or to a
stockbroker, or, alternately, “transfer[s] made in connection with a
securities contract.” Picard v. Katz, 462 B.R. 447, 451 (S.D.N.Y.
2011); see also Secs. Inv. Prot. Corp. v. BLMIS (“Greiff”), 476 B.R.
715,
720-21
(S.D.N.Y.
2012).
As
such,
this
Court
dismissed
the
Trustee’s claims against Madoff Securities clients except those that
fell into some exception to the securities safe harbor, 2 and this
1F
Most notably, the Section 546(e) safe harbor does not apply to
transfers that can be avoided under “under section 548(a)(1)(A) of
this title.” 11 U.S.C. § 546(e). Section 548(a)(1)(A) permits the
trustee to avoid transfers made within two years of the filing of
the bankruptcy petition if those transfers were made with the
“actual intent to hinder, delay, or defraud any entity to which the
debtor was or became” indebted. 11 U.S.C. § 548(a)(1)(A). Of course,
because Madoff Securities’ investment arm was engaged exclusively in
a Ponzi scheme, “it is patent that all of Madoff Securities'
transfers during the two-year period were made with actual intent to
defraud present and future creditors, i.e., those left holding the
bag when the scheme was uncovered.” Katz, 462 B.R. at 453. As such,
this Court’s decisions in Katz and Greiff allowed the Trustee to
seek to recover a broad range of transfers made by Madoff Securities
2
5
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 6 of 25
decision was affirmed by the Second Circuit. Picard v. Ida Fishman
Revocable Trust (In re BLMIS), 773 F.3d 411 (2d Cir. 2014); Katz, 462
B.R. at 451; Greiff, 476 B.R. at 720-21.
However, while this Court determined that the Section 546(e) safe
harbor applied by its terms to most transfers from Madoff Securities
to its customers, the Court also concluded that it did not apply to
transfers from Madoff Securities to customers that were in on the
fraud. See Secs. Inv. Prot. Corp. v. BLMIS (“Cohmad”), No. 12-mc-115,
2013 WL 1609154, at *3-4 (S.D.N.Y. Apr. 15, 2013). This was because
if investors “knew that Madoff Securities was a Ponzi scheme, then
they must have known that the transfers they received directly or
indirectly from Madoff Securities were not ‘settlement payments’ . .
. [or] transactions for the ‘purchase, sale, or loan of a security,’”
and were therefore not transfers “made in connection with an actual
‘securities contract.’” Id. at *3. The Court noted this was not because
Section 546(e) contained any explicit good faith requirement -- it
does not -- but rather because a transfer from Madoff Securities to a
customer with actual knowledge of the fraud would not fall under
Section 546(e)’s express terms, as such a customer would have known
in the two years prior to its bankruptcy, although, as explained in
those opinions, because Section 548(c) protects transferees who
received even fraudulent transfers in good faith and in exchange for
value, the Trustee could recover under Section 548(a)(1)(A) only
from the profits but not the principal of good faith investors. Id.
6
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 7 of 25
that the transfer was not a settlement payment or made in connection
with a securities contract. 3 Id. at *4.
2F
Cohmad’s holding in this respect concerned Madoff Securities’
“initial transferees.” Id. at *5-6. As to the transferees of those
transferees
(referred
to
in
Cohmad
and
herein
as
“subsequent
transferees”), the Court further held that the Section 546(e) defense
or any other defense to the avoidability of the initial transfer
remained available, whether or not the initial transferee had in fact
raised it. Id. at *7; see also SIPC v. BLMIS (“550(a) Decision”), 501
B.R. 26, 29 (S.D.N.Y. 2013) (A “subsequent transferee . . . may raise
any defenses to avoidance available to the initial transferee, as well
as any defenses to recovery it may have.”). But the Court never
suggested that the substance of the Section 546(e) defense to the
This also explains why the Trustee is required to
affirmatively allege knowledge by a transferee to defeat application
of the Section 546(e) safe harbor in order to overcome a motion to
dismiss at the pleading stage. In general, as the Second Circuit has
recently made clear, the Trustee, like any plaintiff, must only
plausibly allege its prima facie case, with the burden to plead
affirmative defenses falling on defendants. Citibank, 12 F. 4th at
199-200. And Section 546(e) is generally considered an affirmative
defense as to which defendants “bear the burden of proof.” In re
Fairfield Sentry Ltd., 596 B.R. 275, 307 (Bankr. S.D.N.Y. 2018)
(collecting cases for this proposition). But “a complaint can be
dismissed for failure to state a claim pursuant to a Rule 12(b)(6)
motion raising an affirmative defense if the defense appears on the
face of the complaint.” Official Comm. of Unsecured Creditors of
Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147, 158 (2d
Cir. 2003). As a result where, as in Cohmad, the Trustee’s complaint
demonstrated on its face that the Section 546(e) appeared to apply,
it also fell to the Trustee to plead additional circumstances
demonstrating why the facially applicable defense did not in fact
preclude his suit. Cohmad, 2013 WL 1609154, at *4-5.
3
7
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 8 of 25
avoidance of an initial transfer would vary based on the identity of
the person asserting it, except in one specific circumstance: “to the
extent that an innocent customer transferred funds to a subsequent
transferee who had actual knowledge of Madoff Securities’ fraud, that
subsequent transferee cannot prevail on a motion to dismiss on the
basis of Section 546(e)'s safe harbor.” Cohmad, 2013 WL 1609154, at
*7. This “follow[ed] from the general principle[] [that a] defendant
cannot be permitted to in effect launder what he or she knows to be
fraudulently transferred funds through a nominal third party and still
obtain the protections of Section 546(e).” Id.
Cohmad had one further holding, relating to the protection Section
546(e) provides for “transfer[s] made by or to (or for the benefit of)
a . . . financial institution [or] financial participant . . . in
connection with a securities contract. . . .” 11 U.S.C. § 546(e). 4
3F
The bankruptcy code defines a “securities contract”
capaciously to include, among other things, “a contract for the
purchase, sale, or loan of a security, a certificate of deposit, a
mortgage loan, any interest in a mortgage loan, a group or index of
securities, certificates of deposit, or mortgage loans or interests
therein (including an interest therein or based on the value
thereof), or option on any of the foregoing,” as well “a master
agreement that provides for an agreement or transaction” related to
these categories of securities. 11 U.S.C. § 741(7)(A). The code also
defines “financial institution” to include any “Federal reserve
bank, or an entity that is a commercial or savings bank,” or, “in
connection with a securities contract . . . an investment company
registered under the Investment Company Act of 1940.” Id. § 101(22).
It defines “financial participant” to mean, inter alia, “an entity
that, at the time it enters into a securities contract. . . has
gross mark-to-market positions of not less than $100,000,000
(aggregated across counterparties) in one or more such agreements or
transactions with the debtor or any other entity. . . .” Id. §
101(23).
4
8
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 9 of 25
This Court reasoned that the language “in connection with a securities
contract” was not limited to securities contracts to which the debtor
(here, Madoff Securities) was a party. Id. at *9. The lack of any such
explicit textual limitation stood “in contrast to other provisions of
the Bankruptcy Code. . . . [that] explicitly focus on the intent of
the debtor.” Id. As such, Section 546(e)’s reference to transfers made
by
or
to
connection
financial
with
a
institutions
securities
or
financial
contract”
could
participants
therefore
apply
“in
to
transfers from Madoff Securities that were made “in connection with”
contracts to which Madoff Securities was not ever a party. Id.
Of course, because the securities contract in question must still
somehow
“relate[]
to
.
.
.
the
initial
transfer
from
Madoff
Securities,” Section 546(e) would only apply where, for instance, “a
withdrawal by a Madoff Securities customer [was] caused by that party's
payment obligations to a subsequent transferee under a securities
contract,” but not where “a withdrawal [from Madoff Securities] . . .
just happens to be used in relation to a securities contract a few
levels removed from that initial transfer.” Id. The Court therefore
instructed the bankruptcy court to “adjudicate . . . in the first
instance consistent with” its opinion such instances where “a defendant
claims protection under Section 546(e) under a separate securities
contract as a financial participant or financial institution.” Id. at
*10.
As described above, Defendants-Appellants in these cases are each
recipients of transfers from Fairfield, one of Madoff Securities’
9
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 10 of 25
largest feeder funds. In a separate proceeding, the Trustee alleged
that Fairfield knew about Madoff’s fraud, such that it could not avail
itself of the Section 546(e) safe harbor under Cohmad because it knew
the payments it received from Madoff Securities were neither settlement
payments nor payments in connection with a securities contract. Picard
v. Fairfield Inv. Fund Ltd., Adv. Pro. No. 09-01239 (CGM), 2021 WL
3477479, at *4 (Bankr. S.D.N.Y. Aug. 6, 2021). Although Fairfield
could therefore not prevail at the pleading stage on a Section 546(e)
defense,
Defendants-Appellants
--
each
subsequent
transferees
of
Fairfield -- moved to dismiss the Trustee’s complaints against them,
arguing that because the Trustee had failed to allege that they knew
about the fraud, they could invoke the Section 546(e) defense to the
avoidability of Madoff Securities’ initial transfers to Fairfield.
Certain Defendants-Appellants (specifically, Lloyds Bank PLC, Bordier
& Cie, Barclays Bank Suisse S.A., and Delta National Bank and Trust
Company) also argue that Section 546(e) precludes some or all of the
Trustee’s claims against them because Madoff Securities’ transfers to
Fairfield were made “in connection with” securities contracts between
Fairfield and them. The Bankruptcy Court denied their motions to
dismiss, ruling that, on the pleadings, the Section 546(e) defense was
not applicable. Defendants-Appellants now seek immediate appeal of
that interlocutory ruling.
II.
Legal Standard
Congress vested district courts with discretion to grant parties
leave to appeal interlocutory orders of bankruptcy judges. See 28
10
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 11 of 25
U.S.C. § 158(a)(3). In contrast to 28 U.S.C. § 1292(b), which sets
forth explicit statutory criteria for district courts to weigh before
certifying
their
own
interlocutory
orders
for
immediate
appeal,
“[n]either the Bankruptcy Code nor the Rules of [Bankruptcy] Procedure
provide standards for guiding that discretion.” In re LATAM Airlines
Grp. S.A., No. 22-cv-2556, 2022 WL 1471125, at *5 (S.D.N.Y. May 10,
2022). However, “[i]n the absence of such standards, the majority of
district courts in the Second Circuit have applied the analogous
standard for certifying an interlocutory appeal set forth in 28 U.S.C.
§ 1292(b).” Id. Here, no party has argued that anything other than the
§ 1292(b) standard governs, and so the Court assumes it does. 5
4F
For the purposes of deciding when the Courts of Appeals may
hear appeals from “final” decisions in bankruptcy cases, the Second
Circuit has emphasized that “the concept of ‘finality’ is more
flexible in the bankruptcy context than in ordinary civil
litigation,” and that “[i]mmediate appeal is allowed of orders in
bankruptcy matters that finally dispose of discrete disputes within
the larger case.” In re Flor, 79 F.3d 281, 283 (2d Cir. 1996). This
is because “bankruptcy proceedings often continue for long periods
of time, and discrete claims are often resolved at various times
over the course of the proceedings,” meaning that there may be
greater reason than in ordinary civil litigation to seek final
resolution of discrete legal questions even while other aspects of
the litigation are ongoing. In re Prudential Lines, Inc., 59 F.3d
327, 331 (2d Cir. 1995). Given these differences between the
bankruptcy context and ordinary civil litigation, coupled with the
fact that, unlike 28 § 1292(b), 28 U.S.C. § 158(a)(3) places no
explicit constraints on district courts’ authority to hear appeals
from interlocutory bankruptcy court orders, it is not obvious that
district courts should adopt quite as strong a presumption against
appeals from interlocutory bankruptcy orders under Section 158(a)(3)
as they have against certifying their own interlocutory orders for
appeal under Section 1292(b). Cf. Hermès Int’l v. Rothschild, No.
22-cv-384, 2022 WL 16545644, at *1 (S.D.N.Y. Sept. 30, 2022)
(stating that, in the § 1292(b) context, “few presumptions are as
integral to judicial efficiency in the federal courts as the one
against granting interlocutory review.”). However, as stated above,
5
11
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 12 of 25
Under
§
1292(b),
parties
seeking
interlocutory
review
must
demonstrate, at least, that the non-final order “involves a controlling
question of law as to which there is substantial ground for difference
of opinion and that an immediate appeal from the order may materially
advance the ultimate termination of the litigation.” 28 U.S.C. §
1292(b). “Interlocutory appeals are designed to be rare and reserved
for
exceptional
disposition
of
circumstances,
lawsuits
in
lest
their
due
they
disrupt
course.”
the
Hermès
orderly
Int’l
v.
Rothschild, No. 22-cv-384, 2022 WL 16545644, at *2 (S.D.N.Y. Sept. 30,
2022).
III. Analysis
Here, Defendants-Appellants contend that a full reversal of the
Bankruptcy Judge’s order as to the application of the Section 546(e)
safe harbor would immediately lead to the full dismissal of up to
seventeen adversary proceedings against subsequent transferees of
Fairfield, involving claims of over $700 million, and further to the
dismissal
of
up
to
$1.1
billion
worth
of
claims
in
41
other
proceedings. See, e.g., Def. Multi-Strategy Fund Ltd. Mot. Appeal at
4, No. 22-cv-06502 (Dkt. 4). Moreover, Defendants-Appellants argue
that the precise issues they raise regarding the application of the
Section 546(e) safe harbor are pure questions of law.
no party has argued for any standard other than the § 1292(b)
standard here, and the Court’s decision to deny DefendantsAppellants’ motions to appeal would stand even if a different
standard applied.
12
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 13 of 25
But even assuming arguendo that Defendants-Appellants may in
these respects satisfy several of Section 1292(b)’s requirements for
immediate appeal, they do not satisfy the most important requirement:
that there be reasonable grounds for disagreement as to the Bankruptcy
Judge’s order.
A. Whether the trustee must allege a subsequent transferee’s
knowledge of the fraud.
Defendants-Appellants’ primary argument -- that the Trustee’s
failure to allege their knowledge of Madoff Securities’ fraud somehow
brought his claims against them within the scope of Section 546(e) -is easily dispensed with. As Judge Morris put it below: “[b]y its
terms, the [Section 546(e)] safe harbor is a defense to the avoidance
of the initial transfer.” See Memorandum Decision Denying Defendant’s
Motion to Dismiss at 16, Picard v. Multi-Strategy Ltd., No. 12-01205
(Bankr. S.D.N.Y. June 13, 2022), Dkt. 122 (emphasis in original).
Defendants-Appellants claim they do not dispute this -- that they only
seek to raise a defense to the initial transfer -- but that only
renders
their
avoidability
of
argument
the
more
initial
bizarre.
transfer
Under
from
this
Madoff
theory,
Securities
the
to
Fairfield would turn not on any facts specific to that transfer, but
rather
on
the
subjective
mental
knowledge
of
whomever
Faifield
subsequently passed the money it had received onto. That position
makes little sense and finds no support in Cohmad or Section 546(e).
To the contrary, this Court made clear in Cohmad that subsequent
transferees
could
raise
the
same
13
Section
546(e)
defense
to
the
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 14 of 25
avoidance of the initial transfer as could have been raised by the
initial transferee. Cohmad, 2013 WL 1609154, at *7. Other decisions
of this Court have likewise made that clear. 550(a) Decision, 501 B.R.
at 29 (“[T]he subsequent transferee in possession of that transfer may
raise any defenses to avoidance available to the initial transferee.
.
.
.”).
But
Defendants-Appellants
cite
no
authority
for
the
counterintuitive proposition that they may assert a defense to the
avoidance of the initial transfer that would have been unavailable to
the initial transferee. See In re Enron Corp., 333 B.R. 205, 223-24
(Bankr. S.D.N.Y. 2005) (“There is no basis to find or infer that
transferees should enjoy greater rights than the transferor. . . .
[U]nless there is clear legislative intent in the Bankruptcy Code
itself not to allow the transferees to stand in the shoes of the
transferors,
the
transferees'
position
does
not
change
by
the
transfer.”).
This is not, of course, to say that Defendants-Appellants’ lack
of knowledge of Madoff Securities’ fraud is irrelevant to these
proceedings. If the Trustee succeeds in demonstrating the avoidability
of the initial transfer from Madoff Securities to Fairfield, he must
then overcome several additional hurdles in order to actually recover
against any of the defendants. As to these additional defenses, the
subjective knowledge of Fairfield’s subsequent transferees becomes
relevant, as the Trustee may not recover from any transferee of
Fairfield “that [took the transfer] for value. . . [and] in good faith,
and without knowledge of the voidability of the transfer avoided.” 11
14
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 15 of 25
U.S.C. § 550(b)(1). 6 But their lack of knowledge of Madoff’s fraud
5F
cannot render unavoidable the otherwise avoidable initial transfer
from Madoff Securities to Fairfield.
Defendants-Appellants
raise
two
arguments
against
this
straightforward conclusion. First, they note that, in Cohmad, this
Court held that a subsequent transferee’s knowledge could be relevant
to its ability to assert a successful Section 546(e) defense in one
circumstance: “to the extent that an innocent customer transferred
funds to a subsequent transferee who had actual knowledge of Madoff
Securities' fraud, that subsequent transferee cannot prevail on a
motion to dismiss on the basis of Section 546(e)'s safe harbor.”
Cohmad, 2013 WL 1609154, at *7. This “one caveat” from Cohmad served
to ensure that “[a] defendant [could not] . . . in effect launder what
he or she knows to be fraudulently transferred funds through a nominal
third party and still obtain the protections of Section 546(e).” Id.
The exception followed straightforwardly from the logic of Cohmad and
Section 546(e), because, as a matter of both text and purpose, Section
546(e) could not be read to protect payments received by persons or
This Court has previously interpreted the “for value” language
as meaning that the Trustee may not recover from good faith
transferees the principal of their investments -- as any transfers
received up to the amount of an investor’s principal were in
satisfaction of its value -- although the Trustee may recover
fictitious profits. Katz, 462 B.R. at 453-54. Notably, once there
have been multiple layers of subsequent transfers -- once there is a
subsequent transferee of a subsequent transferee -- the Bankruptcy
Code provides for even greater protection, and prohibits recovery of
any transfers received in good faith, whether or not they were
received for value. 11 U.S.C. § 550(b)(2).
6
15
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 16 of 25
entities who knew they were not “settlement payments” or transfers
made in connection with a securities contract. Id. at *3.
Defendants-Appellants propose expanding this “one caveat” beyond
any recognizable limit. Under their proposed rule, any otherwise
avoidable transfer from Madoff Securities to a knowing participant in
the fraud should somehow retroactively be rendered protected based on
the subjective knowledge of persons or entities who receive some
portion of the transferred funds at some point down the line. That
inference finds no support in Cohmad or, more importantly, in Section
546(e)’s text or purpose, and would make a mess out of Congress’s
carefully tailored scheme that, among other things, already offers
subsequent transferees defenses to recovery, including based on their
good faith. See 11 U.S.C. § 550(b).
Defendant-Appellants’ second argument -- articulated at oral
argument, if not explicitly in their briefs -- would treat Cohmad as
essentially having announced an equitable exception to Section 546(e)
that would allow the avoidance of transfers protected by the transfer’s
text. Under this theory, Section 546(e) plainly protects from avoidance
all the initial transfers here at issue, no matter the knowledge of
Fairfield or its subsequent transferees, but Fairfield specifically,
along with any subsequent transferees who also is alleged to have
known of the fraud, is precluded from asserting this plainly applicable
defense
due
to
some
(not
quite
defined)
estoppel.
16
principle
of
equity
or
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 17 of 25
This argument once again misreads Cohmad. Cohmad did not carve
out any atextual but equitable exception to an otherwise applicable
Section
546(e)
defense;
rather,
it
simply
concluded
that,
in
circumstances in which a transferee was complicit in Madoff Securities’
fraud, Section 546(e) did not apply as a matter of its express terms.
Id. at *3. This because any transferee who knew the transfers it
received from Madoff Securities contained only stolen proceeds also
knew those transfers were neither settlement payments or transfers in
connection with a security agreement, meaning that Section 546(e)
could not apply. Id. And, as explained above, if Section 546(e) did
not embrace the initial transfer, the subjective knowledge of a
subsequent transferee cannot retroactively render it applicable.
For the reasons described above, the Court concludes there is
no fair ground for disagreement as to Defendants-Appellants’ primary
argument: that the Trustee’s failure to allege their knowledge of the
fraud is fatal to his claims at the pleading stage.
B. Whether the transfers from Madoff Securities to Fairfield were
made “in connection” with third-party securities contracts
between Fairfield and Defendants-Appellants.
Several
Defendants-Appellants
claim
that
there
is
another
argument that provides at least fair ground for disagreement, to wit:
that Section 546(e) applies and precludes the Trustee’s action because
Madoff Securities’ transfers to Fairfield were made “by or to (or for
the
benefit
of)
a
.
.
.
financial
institution
[or]
financial
participant . . . in connection with a securities contract” by virtue
not of Fairfield’s contracts with Madoff Securities -- per Cohmad, and
17
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 18 of 25
as described above, if Fairfield knew that these were not bona fide
securities contracts, then Section 546(e) does not apply to them -but
rather
by
virtue
of
Fairfield’s
contracts
with
Defendants-
Appellants. See 11 U.S.C. § 546(e).
This Court discussed this possibility extensively in Cohmad.
There, it concluded that the Section 546(e) safe harbor for transfers
to, by, or for financial institutions or financial participants made
“in connection with a securities contract” did not, by its plain terms,
include any requirement that the securities contract in question be
between the debtor and its immediate transferee.
Cohmad, 2013 WL
1609154, at *9. “Rather, th[is] Court conclude[d] that Section 546(e)'s
requirement that a transfer be made ‘in connection with a securities
contract’ means that the transfer must be ‘related to’ that securities
contract.” Id.; see also Fishman, 773 F.3d at 422 (“Section 546(e)
sets a low bar for the required relationship between the securities
contract and the transfer sought to be avoided.”).
This Court gave as an example of the sort of situation where
Section 546(e) might apply to a transfer made “in connection with a
securities contract” between third parties not including the debtor
“a
hypothetical
situation
in
which
the
Trustee
alleges
that
a
withdrawal of funds by an investment fund from its Madoff Securities
customer account occurred because an investor in that fund sought
redemption
of
its
investment
under
the
terms
of
its
investment
contract.” Cohmad, 2013 WL 1609154, at *9. Under such circumstances,
at least “[a]ssuming that either the investment fund or the investor
18
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 19 of 25
qualifies as a financial institution or financial participant,” the
initial transfer between Madoff Securities and the investment fund
(here, Fairfield) might fall under Section 546(e)’s safe harbor because
it
was
made
“in
connection
with”
a
securities
contract
between
Fairfield and a third party, even though Madoff Securities was not a
party to that contract. Id. But while “a withdrawal by a Madoff
Securities customer caused by that party's payment obligations to a
subsequent transferee under a securities contract could qualify as
‘related to’ that later transaction under the securities contract . .
. a withdrawal that just happens to be used in relation to a securities
contract a few levels removed from that initial transfer might not
suffice.” Id. 7
6F
Here,
several
Defendants-Appellants
contend
that,
even
if
Fairfield’s alleged knowledge of Madoff’s fraud means that Madoff
Securities’
transfers
to
Fairfield
do
not
qualify
as
settlement
payments or as transfers made in connection with a securities contract
between Madoff Securities and Fairfield, the Section 546(e) safe harbor
nevertheless applies by virtue of their securities contracts with
Cohmad did not explicitly address how, if at all, the initial
transferee’s knowledge of Madoff’s fraud affects the availability of
a Section 546(e) defense under this theory. However, since the
defendants remaining in Cohmad were “primarily those whom the
Trustee alleges did not act in ‘good faith,’” and because the entire
point of this theory relates to the bona fide securities contract
between the initial transferee and a subsequent transferee, it is
hard to see why the initial transferee’s knowledge of Madoff’s fraud
would render a Section 546(e) defense based on a securities contract
between the initial and subsequent transferee unavailable. Cohmad,
2013 WL 1609154, at *3, 9-10.
7
19
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 20 of 25
Fairfield. The Bankruptcy Judge does not appear to have addressed this
argument
in
any
of
her
decisions
denying
Defendants-Appellants’
motions to dismiss (quite possibly because it was not articulated in
any clear fashion).
Here, however, where the argument has been raised, the Trustee
offers a response, arguing that “[t]he hypothetical question posed in
Cohmad of whether a contract between Fairfield and [a] Defendant could
serve as the ‘securities contract’ for purposes of Section 546(e)
became academic once the Second Circuit determined in Fishman that the
customer agreement between [Madoff Securities] and Sentry did so.”
Trustee’s Opp. to Def. Lloyds TSB Bank PLC’s Mot. For Leave to Appeal
at 22, Picard v. Lloyds Bank, No. 22-cv-07173 (Dkt. 11).
This is not entirely convincing. In Fishman, the Second Circuit
affirmed this Court’s determination that, in many of the Trustee’s
avoidance actions, Section 546(e) applied because Madoff Securities’
transfers to its customers qualified as payments made “in connection
with” securities contracts between it and them. Fishman, 773 F.3d at
422. That particular theory is not available here under Cohmad, because
of
Fairfield’s
alleged
knowledge
that
its
contracts
with
Madoff
Securities were not, in fact, securities contracts. Cohmad, 2013 WL
1609154, at *3. But Cohmad’s reasoning as to how a securities contract
between third parties might offer a basis for the application of the
Section 546(e) safe harbor to transfers between Madoff Securities and
its customers offered an independent rationale as to how the safe
harbor might apply. The fact that Fishman affirmed an alternative
20
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 21 of 25
application of the safe harbor based on the securities contracts
between Madoff Securities and its customers does not render this aspect
of Cohmad irrelevant. If anything, Fishman’s language and reasoning
supports this holding of Cohmad, as Fishman explicitly stated that
“Section 546(e) sets a low bar for the required relationship between
the securities contract and the transfer sought to be avoided.”
Fishman, 773 F.3d at 422. As such, Fishman reinforces, rather than
undermines,
this
Court’s
determination
in
Cohmad
that
securities
contracts between Madoff Securities’ initial transferees and their
clients might provide an independent basis for applying the Section
546(e) safe harbor.
Nevertheless, this Court cannot conclude that the issue justifies
an interlocutory appeal, for at least two related reasons. First, and
most importantly, whether particular transfers from Madoff Securities
to Fairfield were undertaken “in connection with” securities contracts
between Fairfield and clients qualifying as financial institutions or
financial participants in the relevant sense does not turn on a pure
question of controlling law. Assuming that it may appear from the face
of the Trustee’s complaints that some Defendants-Appellants meet the
statutory
requirements
to
qualify
as
“financial
institutions”
or
“financial participants,” the standard this Court laid out in Cohmad
for when transfers made “in connection with” securities contracts not
involving Madoff Securities -- as here relevant, between Fairfield and
Defendants-Appellants -- was fact-intensive. It would be one thing,
for
instance,
to
say
that
a
transfer
21
from
Madoff
Securities
to
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 22 of 25
Fairfield was made “in connection with” a securities contract between
Fairfield
and
one
of
Defendants-Appellants
if
the
transfer
was
immediately precipitated by a specific withdrawal request made by a
specific Fairfield client in connection with its securities agreement
with Fairfield. But it would be harder to say the initial transfer
between Madoff Securities and Fairfield was made “in connection with”
a securities agreement between Fairfield and a third party if, for
example, that initial transfer came as part of a regularly scheduled
distribution
from
Madoff
Securities
to
Fairfield
that
occurred
irrespective of any specific agreements between Fairfield and its
clients, or in the event that Fairfield solicited the transfer without
distributions to any specific client in mind, so as to ensure a
generally adequate cash pool with which to cover whichever client
redemption requests came in.
In other words, these questions regarding the application of the
Section 546(e) safe harbor under the theory that Madoff Securities’
transfers
to
Fairfield
were
made
in
connection
with
Fairfield’s
contracts with Defendants-Appellants do not appear answerable on the
pleadings. For instance, while Defendants-Appellants point to specific
allegations in the Trustee’s complaint against Fairfield suggesting
that some of its withdrawals from its Madoff Securities’ account were
made in connection with specific investors’ redemption requests under
their agreements with Faifield, those allegations do not pertain to
withdrawals by any of the Defendants-Appellants at issue here. Amended
Complaint ¶¶ 53, 58, 63, 67, 71, 76, 80, 85, 100, 104, 109, 114, Picard
22
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 23 of 25
v. Fairfield Sentry Ltd., Adv. Pro. No. 09-01239 (Bankr. S.D.N.Y. July
20, 2010), Dkt. No. 23. And the Trustee’s complaints against the
Defendants-Appellants
at
issue
here
allege
too
little
about
the
circumstances of Defendants-Appellants’ withdrawals from Fairfield to
know whether such withdrawals, even if undertaken in connection with
a securities agreement between Fairfield and Defendants-Appellants,
were sufficiently related to Fairfield’s earlier withdrawals from
Madoff Securities to implicate the Section 546(e) safe harbor. See,
e.g., Complaint ¶ 6, Picard v. Delta Nat’l Bank and Tr. Co., No. 0801789, (Bankr. S.D.N.Y. Aug. 25, 2011) (“A portion of the Faifield
Sentry Initial Transfers was subsequently transferred either directly
or indirectly to, or for the benefit of, Defendant Delta Bank . . .
.”).
“Questions that turn on factual allegations that have not yet
been subject to any discovery or summary judgment motion practice but
simply have to be taken most favorably to the plaintiff in their
current state are better addressed after discovery is complete because,
experience shows, reviewing courts with a complete record in hand are
able to resolve disputes between litigants in a more accurate and
efficacious
manner.”
Hermès,
2022
WL
16545644,
at
*3.
This
is
especially the case with respect to issues about the application of
Section 546(e), which is, after all, an affirmative defense which
falls to defendants to plead and prove. See Citibank, 12 F. 4th at
199-200; Fairfield, 596 B.R. at 307.
23
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 24 of 25
Second, because, under the standard described above, some but not
all of the transfers at issue here may qualify for the Section 546(e)
safe harbor, it seems quite clear that an interlocutory appeal would
not hasten the termination of this (decade-plus) litigation and would
instead cause further delay. Even if the question of whether any
particular transfer from Madoff Securities to Fairfield would qualify
for the Section 546(e) safe harbor by virtue of Fairfield’s securities
contract with a third party could be resolved in some instances on the
pleadings (which, as described, above, appears impossible as to most
or all transfers here at issue), and even if this Court undertook to
make these fact-specific determinations as to each transfer in each
case, the result might be piecemeal decisions, with some claims
dismissed but many claims allowed to go forward. And were this Court
to undertake that task, the litigation below would either be placed
on
hold,
or
would
proceed
under
a
shadow
that
might
frustrate
settlement discussions and otherwise complicate the proceedings.
As explained above, Defendants-Appellants may be right that the
Section 546(e) safe harbor might apply to some of the transfers from
Madoff Securities to Fairfield if those transfers were made “in
connection with,” meaning they were clearly related to, securities
contracts between Fairfield and its financial institution or financial
participant clients. Cohmad, 2013 WL 1609154, at *9. The Trustee is
therefore wrong to argue that this aspect of Cohmad has been rendered
moot, and the Bankruptcy Judge may need, at some point, to address
this argument. But it is the Bankruptcy Judge, not this Court, that
24
Case 1:22-cv-07189-JSR Document 10 Filed 11/03/22 Page 25 of 25
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