515 B.R. 117
Bankr. S.D.N.Y.2014Background
- This is a SIPA liquidation proceeding where Irving H. Picard, as trustee for BLMIS, seeks to avoid fraudulent transfers and disallow/subordinate claims against defendant feeder funds and related managers.
- Madoff operated a Ponzi scheme through BLMIS, with approximately $65 billion in fictitious funds; no securities were actually purchased for customer accounts.
- The defendants include J. Ezra Merkin and entities he controlled (Gabriel Capital Corporation, Gabriel Capital, L.P., Ariel Fund Ltd., Ascot Partners, L.P., Ascot Fund Ltd.).
- The Trustee asserts thirteen counts in the Third Amended Complaint seeking avoidance and equitable relief; motions to dismiss were filed by the Merkin Defendants and the Defendant Funds.
- Merkin had a close personal and business relationship with Madoff and allegedly knew or suspected fraud, concealed Madoff’s involvement, and engaged in misrepresentations to investors.
- Under the Ponzi-scheme presumption, certain transfers may be avoided, but the safe harbor of § 546(e) and factual pleading requirements govern (including knowledge, willful blindness, and imputation).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Merkin had actual knowledge of the fraud | Trustee alleges Merkin openly admitted potential fraud and possessed red flags indicating a Ponzi scheme. | Merkin's statements show suspicion but not certainty; the TAC fails to plead actual knowledge plausibly. | Actual knowledge not plausibly pled; Counts One and Three through Eight dismissed. |
| Whether Merkin's knowledge can be imputed to Remaining Funds | Agency and vicarious liability principles imput the knowledge to the funds; adverse-interest exception may apply only if agent acted for sole benefit of himself. | Merkin acted outside the scope or for his own benefit; adverse-interest exception defeats imputation. | Imputation via willful blindness can apply; Counts for Remaining Funds survive regarding Count Two; adverse-interest exception not satisfied for imputation of actual knowledge, but willful blindness is imputable to Remaining Funds. |
| Whether the subsequent transfer claims (Count Nine) are adequately pled and timely | Exhibit C shows numerous inter-fund transfers linked to initial transfers; tracing may be difficult but plausible at pleading stage. | Tracing to BLMIS is complex and may be difficult; some transfers may be too remote to recover. | Count Nine adequately pleads subsequent transfers; some transfers may be recoverable; timing limitations discussed. |
| Whether equitable disallowance (Counts Eleven and Twelve) is proper | Defendant Funds’ actual knowledge or strong suspicion of fraud warrants disallowance under SIPA § 502(b)(1) and related authority. | Equitable disallowance is inappropriate under SIPA and would conflict with statutory structure and equities; or not supported by authority. | Count Eleven dismissed; Count Twelve dismissed; equitable disallowance is not permissible here. |
| Whether equitable subordination (Count Thirteen) may proceed | Inequitable conduct injuring the estate or conferring unfair advantage warrants subordination under § 510(c). | Equitable subordination should be limited and may not be appropriate where claims are otherwise disallowable or other remedies exist. | Count Thirteen denied dismissal; equitable subordination remains available to the Trustee. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility pleading standard)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading requires plausible claims)
- Katz v. Gerant, 462 B.R. 447 (S.D.N.Y. 2011) (securities fraud pleading standards; red flags)
- Beacon Assocs. Litig., 745 F. Supp. 2d 386 (S.D.N.Y. 2010) (red flags and scienter in feeder-fund context)
- Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010) (red flags, fees, and fraud indicators in Madoff cases)
- In re J. Ezra Merkin and BDO Seidman Secs. Litig., 817 F. Supp. 2d 346 (S.D.N.Y. 2011) (context on scienter and red flags in Merkin-related actions)
- In re Dreier LLP, 452 B.R. 451 (Bankr. S.D.N.Y. 2011) (imputation and red flags in complex fraud)
- SEC v. Packer, Wilbur & Co., 498 F.2d 978 (2d Cir. 1974) (SIPA insurance context and customer protection)
- LightSquared, 504 B.R. 321 (Bankr. S.D.N.Y. 2013) (equitable disallowance vs. equitable subordination analysis)
- Law v. Siegel, 134 S. Ct. 1188 (U.S. 2014) (Bankruptcy Court lacks power to surcharge exempt property; limits on equity)
- Picard v. Cohmad Secs. Corp., 2013 WL 1609154 (S.D.N.Y. 2013) (context on willful blindness and equitable relief in Madoff matters)
- Kirschner v. KPMG LLP, 912 N.Y.S.2d 508 (N.Y. 2010) (agency imputation/adverse-interest exceptions in NY law)