557 B.R. 89
Bankr. S.D.N.Y.2016Background
- This adversary proceeding arises from the Madoff Ponzi scheme and trustee Irving Picard’s effort to avoid and recover transfers from numerous individuals and entities associated with Avellino & Bienes (A&B) and related post‑1992 entities. BLMIS commenced as an LLC on January 1, 2001; prior operations were Madoff's sole proprietorship.
- Plaintiff alleges that A&B and related entities operated feeder‑fund relationships with Madoff, received guaranteed returns and "schupt" (side) payments credited via fictitious option trades, and made large withdrawals including fictitious profits.
- Trustee’s Amended Complaint asserts avoidance (federal and state fraudulent transfer), preference, subsequent transferee recovery, equitable disallowance/subordination, and general‑partner liability claims against many defendants (initial transferees, subsequent transferees, and related trusts/partnerships).
- Defendants moved to dismiss principally arguing (1) many transfers predate BLMIS (pre‑2001) and thus are not recoverable by the SIPA trustee; (2) §546(e) safe harbor and §548(c) good‑faith defenses protect transfers unless transferees had actual knowledge or willful blindness; and (3) knowledge of individuals cannot be imputed to entities or trusts in the manner alleged.
- Court finds allegations plausibly plead willful blindness and, as to Frank Avellino, actual knowledge (at least regarding the "schupt" process). The Court denies dismissal of avoidance, subsequent transferee, and equitable disallowance/subordination claims insofar as they relate to transfers by BLMIS on or after Jan. 1, 2001 and to defendants whose knowledge is imputable; it dismisses claims to the extent they seek to recover transfers made prior to Jan. 1, 2001.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Trustee has standing to avoid pre‑2001 transfers (transfers by Madoff sole proprietorship) | Trustee treats pre‑2001 activity as relevant and relies on substantive consolidation and prior rulings to reach pre‑2001 transfers | Defendants: SIPA trustee equals BLMIS (LLC) only; sole proprietorship transfers are not recoverable by SIPA trustee | Dismissed: transfers made prior to Jan 1, 2001 by Madoff sole proprietorship cannot be avoided by SIPA trustee; claims limited to transfers by BLMIS (post‑2000) |
| §546(e) safe harbor / actual knowledge requirement | Trustee: safe harbor does not protect transfers where transferee had actual knowledge or willful blindness (esp. re: Schupt process) | Defendants: complaint fails to plead actual knowledge or willful blindness; safe harbor bars many claims | Denied in part: Court finds plausible allegations that Avellino had actual knowledge (Schupt) and that defendants were willfully blind; safe harbor does not bar claims where knowledge is pleaded; otherwise safe harbor applies |
| Imputation of individual knowledge to entities / partners / trusts | Trustee: Avellino’s knowledge is imputable to Post‑1992 partnerships and to entities for which he acted as agent; general‑partner liability and partnership law support imputation | Defendants: individual knowledge cannot be imputed to entities or used to show subjective scienter; trusts and non‑individuals require independent proof | Granted in part/Denied in part: Court imputes Avellino’s knowledge to the Post‑1992 partnerships and certain entities where agency/control alleged; declines to resolve complex trust‑piercing issues now (denies dismissal without prejudice) |
| Recovery from subsequent transferees under §550 | Trustee: may recover from subsequent transferees (post‑2000) when they lacked good faith or were willfully blind | Defendants: subsequent transferees lack alleged knowledge; many subsequent transfers predate 2001 so cannot be recovered | Denied as to Post‑2000 subsequent transferees (alleged willful blindness/good‑faith lack pleaded); dismissed for subsequent transferees who received transfers prior to 2001 |
Key Cases Cited
- Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir.) (SIPA trustee may avoid transfers where transferee had actual knowledge of lack of real securities trading)
- Picard v. Ida Fishman Revocable Trust (In re BLMIS), 773 F.3d 411 (2d Cir.) (limitations on trustee avoidance power and interplay with §546(e))
- Picard v. Merkin (In re BLMIS), 515 B.R. 117 (Bankr. S.D.N.Y.) (standard for willful blindness and §548(c) good‑faith defense)
- SIPC v. BLMIS (Good Faith Decision), 516 B.R. 18 (S.D.N.Y.) (subjective good‑faith test for §550(b)(1) and relation to §548(c))
- Picard v. Chais (In re BLMIS), 445 B.R. 206 (Bankr. S.D.N.Y.) (SIPA trustee standing and recoverability of customer property)
- Inter‑Account Transfer Decision (In re BLMIS), 522 B.R. 41 (Bankr. S.D.N.Y.) (treatment of pre‑2001 account activity for net‑equity calculations; formation date of BLMIS)
- In re BLMIS, 531 B.R. 439 (Bankr. S.D.N.Y.) (SIPA trustee powers and related issues)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard — plausibility)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading standard)
- Global‑Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (2011) (definition of willful blindness)