Picard v. Katz
462 B.R. 447
S.D.N.Y.2011Background
- Picard, the SIPA Trustee for Madoff Securities, moves to dismiss the Amended Complaint under Rule 7012(b) and 12(b)(6).
- The Amended Complaint seeks over a billion dollars from Katz et al. on theories including actual fraud, constructive fraud, and preferences under bankruptcy and New York law.
- The Court dismisses all claims except actual fraud under 548(a)(1)(A) and equitable subordination, and narrows the recovery standards for those remaining claims.
- SIPA’s safe harbor under § 546(e) precludes avoidance of many transfers by a SIPA trustee with respect to settlements in connection with securities contracts, except for actual fraud.
- Madoff Securities operated a Ponzi scheme; section 546(e) applies broadly to settlement payments and transfers to customers, limiting recovery unless actual fraud is proven.
- Count 1 (actual fraud) remains viable for net profits; principal repayments may be recoverable only if defendants are shown to have willfully blinded themselves to the fraud.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does 546(e) bar preferred/constructive-fraud claims? | Trustee argues 546(e) does not bar all claims against customers. | Katz et al. contend 546(e) precludes avoidance of transfers under preference/constructive fraud theories. | Counts 2–9 dismissed; 546(e) bars those claims. |
| Can the Trustee recover under actual fraud 548(a)(1)(A) during the two-year lookback? | Trustee may avoid transfers within two years if made with actual intent to defraud. | Defendants may have defenses based on value and good faith. | Yes for net profits; principal recovery requires lack of good faith (willful blindness). |
| What effect does 548(c) good-faith defense have on recovery? | Value defense applies to profits only if not proven in good faith. | Good faith can defeat recovery of profits to the extent transfers were for value. | Profits may be recovered only if value is not shown; principal may be recovered if no willful blindness. |
| Should inquiry notice replace willful blindness as the standard of lack of good faith? | Failure to investigate constitutes lack of good faith under inquiry notice. | Inquiry notice is less applicable in SIPA, securities-law context. | Inquiry notice is rejected; lack of good faith requires willful blindness. |
| What is the status of disallowance and equitable subordination of the defendants' own claims? | Disallowance is possible; or alternatively, equitable subordination may apply. | SIPA structure favors treating such claims differently; disallowance not warranted. | Count 10 dismissed; Count 11 may be subordinated under equitable principles. |
Key Cases Cited
- In re Enron Creditors Recovery Corp., 651 F.3d 329 (2d Cir. 2011) (safe harbor at intersection of bankruptcy and securities law; §546(e) applies broadly)
- In re Manhattan Inv. Fund Ltd., 310 B.R. 500 (Bankr.S.D.N.Y. 2002) (discusses the 546(e) safe harbor scope and policy considerations)
- In re Sharp Int'l Corp., 403 F.3d 43 (2d Cir. 2005) (addressed transfers to satisfy antecedent debts and limitations on fraud findings)
- Conn. Nat’l Bank v. Germain, 503 U.S. 249 (Supreme Court 1992) (statutory interpretation and business law deference principles)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (Supreme Court 1976) (requires scienter in securities fraud claims (beyond mere negligence))