976 F.3d 184
2d Cir.2020Background
- Bernard L. Madoff Investment Securities (BLMIS) operated a Ponzi scheme: customers received fabricated account statements and some withdrew "profits" that were actually other customers' investments; Madoff was arrested in December 2008 and SIPA liquidation followed.
- SIPC appointed Irving H. Picard as trustee; under SIPA the trustee may recover transfers that would have been customer property and add them to a customer property fund to distribute pro rata to customers with net equity.
- Picard sued four customers who had withdrawn fictitious profits, seeking recovery under Bankruptcy Code §§ 548(a)(1)(A) (actual fraud) and (B) (constructive fraud); defendants conceded good faith but argued transfers were "for value" under § 548(c) and that recovery was time-barred by § 548(a)(1)'s two-year reach-back.
- The district court (following Greiff) held transfers were settlement payments under § 546(e) so constructive-fraud claims failed, but that transfers were not "for value" under § 548(c) because treating them as satisfaction of claims would conflict with SIPA's customer-priority scheme; summary judgment was entered for the trustee.
- Defendants appealed, pressing two main issues: (1) whether the transfers were "for value" (via securities entitlements or contract-based claims), and (2) whether the trustee's recovery and netting methodology are barred by § 548(a)(1)'s two-year limit.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Appellants) | Held |
|---|---|---|---|
| Whether transfers were "for value" because account statements created enforceable securities entitlements/property rights to fictitious profits | Account statements do not create property rights in nonexistent profits; NYUCC entitlements, even if they exist, attach only to actual financial assets and do not make fictitious profits "property" of the recipient | Account statements (and NYUCC principles) created enforceable securities entitlements or property rights that were satisfied by the transfers, so transfers were "for value" | Rejected. Court held NYUCC entitlements do not confer rights to fictitious profits; transfers were not "for value." |
| Whether transfers were "for value" because they discharged contract/claim rights (including choice under Exchange Act §29(b)) | Allowing satisfaction-of-claim theory would upset SIPA's priority scheme by letting non-net-equity recipients keep customer property; §548(c) must be applied consistent with SIPA | Innocent transferees can elect to enforce contracts procured by fraud and thereby have antecedent claims satisfied; satisfaction of such claims is "value" under §548(c) | Rejected. Court held recognizing such claims as "value" would conflict with SIPA's customer-priority regime; §548(c) cannot be applied to let defendants retain fictitious profits in SIPA liquidation. |
| Whether §548(a)(1)'s two-year reach-back bars trustee's recovery or limits trustee's netting computation | Trustee may net all deposits and withdrawals to identify net fictitious profits but may avoid only those transfers actually made within two years; netting methodology is lawful and CalPERS is inapplicable | Two-year limitation bars recovery of transfers tied to obligations arising earlier, and trustee's computation improperly "reaches back" beyond two years | Rejected. Court held (1) no antecedent right to fictitious profits arose before the two-year window; (2) §548(a)(1) limits which transfers may be avoided but does not forbid netting across time to calculate how much of a transferee's receipts within the two-year window constitute recoverable fictitious profits. |
Key Cases Cited
- Picard v. Ida Fishman Revocable Trust, 773 F.3d 411 (2d Cir. 2014) (affirming that BLMIS account agreements are securities contracts and transfers can be "settlement payments" under §546(e))
- Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) (broad definition of "settlement payment")
- Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) (adopted two-step netting approach to identify recoverable Ponzi profits)
- Sharp Int’l Corp. v. State St. Bank & Trust Co., 403 F.3d 43 (2d Cir. 2005) (discussing "for value" in ordinary bankruptcy, distinguishing SIPA's different priority scheme)
- Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970) (§29(b) of Exchange Act permits innocent parties to elect to void or enforce securities contracts)
- California Pub. Employees’ Ret. Sys. v. ANZ Securities, Inc., 137 S. Ct. 2042 (2017) (statute-of-repose vs. limitations discussion; court found it inapplicable to SIPA §548 reach-back issue)