634 B.R. 39
Bankr. S.D.N.Y.2021Background
- Gerald and Barbara Keller created the Gerald and Barbara Keller Family Trust (a California trust) in 1998; Gerald Keller opened a BLMIS account in 1997 that was later titled in his name as Trustee of the Family Trust.
- The Family Trust’s BLMIS account received principal deposits (including $1,000,000 initial; additional deposits totaling $1,898,852) and, during the two years before the SIPA petition (Dec. 11, 2006–Dec. 11, 2008), had withdrawals of $2,125,000, i.e., $1,896,148 in fictitious profits over principal.
- Withdrawals originated from BLMIS-related JP Morgan Chase accounts (703 → 509); checks were issued to “Gerald E Keller Tstee,” endorsed and deposited into Keller International Publishing entities.
- SIPA Trustee Picard sued to avoid and recover fictitious profits under 11 U.S.C. § 548(a)(1)(A) (two‑year fraudulent-transfer) and § 550(a) (recovery from transferees); defendants moved for summary judgment and raised defenses including that the Family Trust was a mere conduit and that Madoff—not BLMIS—ran the IA business.
- The Court dismissed the Family Trust as a defendant for lack of capacity (trusts cannot be sued), held that BLMIS/customer‑property principles applied (IA business funds were customer property), found the Family Trust (via Gerald Keller as trustee) was the initial transferee (not a mere conduit), and granted summary judgment to the SIPA Trustee.
- The Court awarded prejudgment interest at 4% (non‑compounded) from December 1, 2010 (the adversary filing date) to judgment; Barbara Keller’s death did not require dismissal because the trustees remain proper parties.
Issues
| Issue | Plaintiff's Argument (Picard) | Defendant's Argument (Keller) | Held |
|---|---|---|---|
| Whether transfers were transfers of the debtor’s (BLMIS) customer property | Funds routed through BLMIS/509 account are customer property; IA business was part of BLMIS during the Two‑Year Period | IA business was run by Madoff personally (not BLMIS); some forms list "Bernard L. Madoff" | Court: IA business was part of BLMIS by the Two‑Year Period; funds used to pay customers were customer property under SIPA |
| Whether transfers were made within the two‑year fraudulent‑transfer window | Withdrawal records show $1,896,148 of fictitious profits withdrawn within Dec. 11, 2006–Dec. 11, 2008 | Not disputed as to timing | Court: Transfers occurred within the two‑year period; element satisfied |
| Whether transfers were made with actual intent to defraud creditors | Madoff/BLMIS operated a Ponzi scheme; intent is established by Ponzi presumption | No effective rebuttal of Ponzi presumption | Court: Intent established as matter of law under Ponzi presumption |
| Whether the Family Trust (and trustees) were proper defendants / initial transferees | Trustee sued trustees and the trust; seeks recovery from initial transferee (Family Trust) and subsequent transferees | Argued Family Trust was a mere conduit and Keller Publishing was the true transferee; also argued capacity/notice issues re: Barbara Keller | Court: Family Trust dismissed for lack of capacity (trusts cannot be sued); trustees (Gerald and Barbara Keller) remain defendants in trustee capacities; Gerald (as trustee) had dominion and control—Family Trust was initial transferee, not mere conduit |
| Whether alleged oral loan/contract to Keller Publishing made Family Trust a mere conduit | No enforceable written agreement; Keller (as trustee) had discretion and control; withdrawals were trustee decisions | Claimed an oral agreement/loans to Keller Publishing that made it the real transferee | Court: Defendants failed to show offer, acceptance, consideration, or mutual assent; evidence contradicted and inconsistent—mere‑conduit defense fails |
| Prejudgment interest: whether to award and rate | Requests prejudgment interest at 4% from adversary filing to judgment to make creditors whole | Defendants opposed | Court: Awarded 4% simple interest from Dec. 1, 2010 through judgment to compensate net‑losers |
Key Cases Cited
- Picard v. Gettinger, 976 F.3d 184 (2d Cir.) (SIPA Trustee may invoke Bankruptcy Code fraudulent‑transfer provisions)
- Picard v. Avellino, 557 B.R. 89 (Bankr. S.D.N.Y. 2016) (analysis of when IA business became part of BLMIS; limits on recovering pre‑2001 Madoff transfers)
- Picard v. Nelson, 610 B.R. 197 (Bankr. S.D.N.Y. 2019) (findings of fact summarizing BLMIS Ponzi scheme background)
- Focht v. Heebner (In re Old Naples Sec., Inc.), 223 F.3d 1296 (11th Cir.) (whether claimant deposited cash with debtor depends on actual receipt/acquisition by brokerage)
- Christy v. Alexander & Alexander (In re Finley, Kumble, Wagner, Heine, Underberg, Manly, Myerson & Casey), 130 F.3d 52 (2d Cir.) (initial transferee has dominion and control; mere conduit concept)
- Miller v. Porush, 234 B.R. 293 (Bankr. S.D.N.Y. 1999) (illustration of dominion/control standard for initial transferee)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (summary judgment standard on materiality and genuine dispute)
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment burdens and movant’s initial burden)
- Brown v. Henderson, 257 F.3d 246 (2d Cir.) (affidavit contradictions to prior deposition do not create genuine issues for trial)
- Wickham Contracting Co. v. Local Union No. 3, 955 F.2d 831 (2d Cir.) (factors governing prejudgment interest)