20 cv. 3836
S.D.N.Y.2021Background
- Trustee Irving H. Picard (SIPA trustee for BLMIS) sued the Lisa Beth Nissenbaum Trust and its trustee Neal Kurn to recover $625,551 in withdrawals that occurred within two years before BLMIS’s collapse, alleging those sums were fictitious profits.
- BLMIS’s investment-advisory (IA) business fabricated trades and statements; customer funds were commingled in JPMorgan accounts (notably the “703” and “509” accounts) and used to pay redemptions; the IA business did not execute legitimate equity/options trades or hold T‑Bills on customers’ behalf.
- The Nissenbaum Account opened in 2005 with an inter-account transfer and had zero principal; withdrawals from 11/6/2007–9/24/2008 totaled $625,551, which Trustee’s expert Greenblatt calculated as fictitious profits using the Inter-Account Method.
- The Trustee moved for summary judgment to avoid and recover transfers under SIPA and the Bankruptcy Code (11 U.S.C. § 548); defendants cross‑moved to dismiss.
- The Court admitted expert reports, BLMIS books and records, and relevant plea allocutions/testimony for summary judgment purposes; it granted Trustee’s motion, denied defendants’, entered judgment for $625,551, and awarded prejudgment interest at 4% from Nov. 12, 2010.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Admissibility of evidence (experts, BLMIS records, allocutions/testimony) | Experts and business records are admissible for summary judgment; allocutions and criminal testimony are admissible under residual exceptions | BLMIS records are untrustworthy (permeated with fraud); hearsay allocutions/testimony inadmissible | Court considered expert reports and BLMIS records (Rule 803(6) admissibility weighed toward probative value) and admitted allocutions/testimony under Rule 807 for summary judgment purposes |
| Standing / ownership of accounts and IA business | IA business and JPMorgan accounts were transferred to and part of BLMIS LLC per Amended Form BD; Trustee has standing to recover transfers | Accounts belonged to Madoff personally; Trustee lacks Article III standing to recover transfers | No genuine dispute; Amended Form BD and record show assets/liabilities (including accounts) transferred to LLC; Trustee has standing |
| Fraudulent-transfer intent (Ponzi presumption / badges of fraud) | BLMIS was a Ponzi scheme; transfers within two years are presumptively made with actual intent to defraud | Portions of BLMIS were legitimate (proprietary trading, T‑bill purchases, profitability) so presumption inapplicable | Madoff’s admissions, expert analyses and corroborating testimony establish Ponzi scheme; presumption applies; badges of fraud independently show intent |
| "For value" defense under 11 U.S.C. § 548(c) | Transfers were not for value because amounts in excess of principal are fictitious profits; defendants did not give value | Withdrawals were settlement payments under securities contracts or satisfaction of contractual/tort claims | Following Second Circuit precedent (Gettinger), payments in excess of principal are not "for value"; defendants did not satisfy §548(c) |
| Statute-of-repose / timing of recovery under §548(a) | Trustee may recover fictitious profits from two-year window; Inter-Account/Net Investment Methods properly compute recoverable fictitious profits | §548 is a statute of repose that precludes recovery of obligations arising more than two years earlier; account statements preclude recovery | Court rejects repose argument; Gettinger/Net Equity decisions permit Trustee’s methods; no pre-existing enforceable right to fictitious profits, so recovery permitted for transfers within two years |
| Calculation of losses & prejudgment interest | Trustee used Inter-Account Transfer Method to net principal and compute fictitious profits; seeks prejudgment interest from complaint date | Defendants contest computation and rate of interest | Trustee proved $625,551 fictitious profits via Inter-Account Method; judgment for that amount plus prejudgment interest at 4% from Nov. 12, 2010 |
Key Cases Cited
- Securities Investor Protection Corp. v. Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411 (2d Cir. 2014) (discusses securities entitlements and limits on Trustee recovery)
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (Net Equity Decision establishing customer-priority/net-equity framework in SIPA liquidations)
- In re Bernard L. Madoff Inv. Sec. LLC, 976 F.3d 184 (2d Cir. 2020) (Gettinger) (rejecting "for value" defense for transfers in excess of principal and approving Trustee recovery methods)
- Wickham Contracting Co., Inc. v. Local Union No. 3, Int'l Broth. of Elec. Workers, AFL-CIO, 955 F.2d 831 (2d Cir. 1992) (factors for awarding prejudgment interest)
- Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574 (2d Cir. 1983) (badges of fraud recognized for fraudulent-transfer intent analysis)
- Lujan v. Defenders of Wildlife, 504 U.S. 555 (U.S. 1992) (Article III standing principles)