12 F.4th 171
2d Cir.2021Background
- Bernard Madoff operated BLMIS as a Ponzi scheme; customer funds were commingled and transfers to customers were, in effect, funds taken from other customers.
- SIPA liquidation: Irving H. Picard was appointed trustee to recover customer property and may avoid and recover transfers under Bankruptcy Code §§ 548 and 550 to replenish the customer property fund.
- Picard sued subsequent transferees (Citi, Khronos) and an initial transferee (Legacy) to claw back roughly $563 million in transfers, alleging defendants received transfers while on notice of likely fraud.
- The district court (Rakoff, J.) held that in a SIPA liquidation lack of good faith requires willful blindness (not inquiry notice) and that the SIPA trustee must plead transferees’ lack of good faith; the bankruptcy court dismissed Picard’s claims for failure to plead willful blindness.
- The Second Circuit vacated and remanded, holding (1) the Bankruptcy Code’s inquiry-notice standard—not a willful-blindness standard—governs lack of good faith in SIPA liquidations, and (2) good faith is an affirmative defense that the defendant must plead and prove.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper standard for “good faith” in a SIPA liquidation | Picard: apply Bankruptcy Code standard (inquiry notice) to determine lack of good faith | Citi/Legacy/Khronos: SIPA is part of securities laws so willful blindness (heightened scienter) should apply | Court: apply inquiry-notice standard under §§ 548/550; securities-law arguments do not override Bankruptcy Code standard |
| Who bears pleading burden for good faith / lack of good faith | Picard: trustee need not plead defendants’ lack of good faith; defendants must plead good faith as an affirmative defense | Defendants/district court: SIPA’s policy goals require trustee to plead lack of good faith | Court: good faith is an affirmative defense; defendants bear burden to plead and prove it under Rule 8(c) and statutory structure |
Key Cases Cited
- Glob.-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (2011) (willful blindness defined as deliberate actions to avoid confirming high probability of wrongdoing)
- Merck & Co. v. Reynolds, 559 U.S. 633 (2010) (discusses inquiry notice concept and circumstances requiring investigation)
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (background on BLMIS and SIPA liquidation principles)
- HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) (good faith under UFCA requires inquiry when transferee had information sufficient to alert her)
- In re Nieves, 648 F.3d 232 (4th Cir. 2011) (§ 550(b)(1) good-faith inquiry-note standard: actual knowledge that places transferee on inquiry notice defeats good faith)
- In re Sharp Int’l Corp., 403 F.3d 43 (2d Cir. 2005) (distinguishing fraudulent-transfer contexts from preferential-transfer contexts)
- S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) (scienter in securities law can be met by reckless disregard; cited on scienter distinctions)
- In re M & L Bus. Mach. Co., Inc., 84 F.3d 1330 (10th Cir. 1996) (applies inquiry-notice standard for transferee good faith under § 550)