458 B.R. 87
Bankr. S.D.N.Y.2011Background
- The SIPA liquidation of BLMIS involves insider relatives—Peter B. Madoff and his sons Mark and Andrew Madoff, plus Shana D. Madoff—as named defendants alleged to have profited from the Ponzi scheme.
- The Trustee seeks to avoid and recover over $198 million in transfers to the Defendants under the Bankruptcy Code and NYDCL, plus disallowance/equitable subordination of their SIPA claims and various common law claims.
- The Complaint asserts actual and constructive fraud theories, including transfers within the two-year and six-year lookbacks, and seeks damages for breach of fiduciary duty, negligence, unjust enrichment, constructive trust, and accounting.
- Certain pleading deficiencies are identified, notably lack of particularity under Rule 9(b) for many transfers, but several transfers are pled with sufficient particularity.
- The court denies in part and grants in part the Defendants’ Rule 12(b)(6) motions, allowing amendable claims with instructions to cure deficiencies within 45 days.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Pleading sufficiency for actual and constructive fraudulent transfers | Trustee pleads transfers and intent under Ponzi presumption to satisfy 548/544 and NYDCL 276. | Transfers lack Rule 9(b) specificity and some value/intent elements; many transfers are aggregated without detail. | Actual fraud claims dismissed for lack of Rule 9(b) specificity; constructive fraud claims largely survive with Rule 8 adequacy, with leave to amend. |
| Application of discovery rule and standing to avoid transfers six years prior | Trustee may invoke discovery rule under 544(b) to reach pre-six-year transfers relevant to defrauded customers. | Discovery rule inapplicable to routine NYDCL six-year lookback or to standing concerns. | Trustee has standing under 544(b) to invoke discovery rule for transfers more than six years old. |
| Constructive fraud: value received and Rule 8 adequacy | Withdrawals of fictitious profits and wages constitute transfers lacking reasonably equivalent value; alleged breaches of fiduciary duties support lack of value. | Salaries and services may constitute value; defenses under 548(c) and good faith may apply. | Constructive fraud claims largely viable; but certain aggregations and undated/longer-aggregation transfers must be amended for clarity. |
| Section 546(e) safe harbor applicability | Safe harbor does not apply to SIPA insider transfers tied to Ponzi scheme; transactions are not settled securities trades. | Payments may be settlement payments by a stockbroker under 546(e) and thus insulated. | 546(e) defense rejected as to these constructive transfers at pleading stage; safe harbor not clearly applicable. |
| Common law claims and Martin Act preemption | Trustee may bring breach of fiduciary duty, negligence, unjust enrichment, accounting, and constructive trust claims on behalf of BLMIS estate; Martin Act does not preempt private common law claims. | Martin Act preempts private non-fraud claims in securities context; Wagoner/in pari delicto may bar claims against insiders. | Trustee has standing; Martin Act does not preempt; common law claims survive Rule 12(b)(6) with some dismissals/leave to amend. |
Key Cases Cited
- In re Dreier LLP, 452 B.R. 391 (Bankr.S.D.N.Y. 2011) (Ponzi presumption can establish actual intent to defraud for transfers.)
- In re Manhattan Inv. Fund Ltd., 397 B.R. 1 (S.D.N.Y. 2007) (Constructive fraud and value concepts; influence on 'value' discussion.)
- Cohmad Sec. Corp., 454 B.R. 330 (Bankr.S.D.N.Y. 2011) (Transfers and Rule 9(b) standards in actual fraud context; trustee pleading standards.)