548 B.R. 13
Bankr. S.D.N.Y.2016Background
- This is a SIPA liquidation adversary proceeding where the Trustee seeks to avoid and recover ~$213M in initial transfers to Legacy Capital Ltd. and ~$6.6M in subsequent transfers to Khronos LLC as proceeds of BLMIS’s Ponzi scheme. The Amended Complaint pleads detailed market ‘‘red flags’’ and reliance on a 2003 Renaissance Report and related emails.
- Legacy was a single-purpose BVI vehicle investing solely with BLMIS; Rafael Mayer controlled Legacy. Khronos, run by Rafael and David Mayer, provided valuation/accounting services to Legacy and other related funds.
- Renaissance produced a 2003 report questioning the plausibility of Madoff’s trading (options volume, trade timing, VWAP patterns), and Meritage committee emails expressed concern; Legacy then retained Khronos to perform historical valuation and ongoing accounting of Legacy’s BLMIS activity.
- Trustee alleges the Initial Transfers included $86.5M of fictitious profits (all within two years of filing) and $126.7M principal; Subsequent Transfers to Khronos were fees totaling ~$6.6M (including $319K from Legacy).
- Legal claims: Counts I–VII seek avoidance of transfers (federal §548 and state-law fraudulent transfer claims), Count VIII seeks recovery from Khronos as a subsequent transferee under §550. Defendants moved to dismiss primarily invoking the §546(e) safe-harbor, good-faith/value defenses, and pleading deficiencies as to subsequent transfers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §546(e) safe-harbor bars avoidance of Initial Transfers beyond fictitious profits | Trustee: §546(e) doesn't protect transfers where transferee had actual knowledge that BLMIS was not trading; pleads red flags and willful blindness | Legacy: safe-harbor protects most transfers; any principal returned provided value under §548(e) | Court: Safe-harbor bars most claims; only intentional fraudulent transfers of fictitious profits within two years survive (Count I limited to fictitious profits) |
| Whether the Amended Complaint plausibly alleges Legacy’s actual knowledge or willful blindness | Trustee: Renaissance Report, committee emails, and Khronos’ analysis show actual knowledge or willful blindness | Legacy: those materials raise suspicion but not actual knowledge; Legacy hired Khronos and conducted diligence (no deliberate avoidance) | Court: Allegations show suspicion but not actual knowledge; willful blindness not pleaded (Legacy did not deliberately avoid); Counts II–VII dismissed; Count I survives only for fictitious profits |
| Whether Trustee sufficiently pleads subsequent-transferee liability against Khronos under §550 | Trustee: Khronos received funds traceable to BLMIS (fees from Legacy/Montpellier) and performed services; knowledge imputed | Khronos: complaint fails to tie Montpellier payments to BLMIS; pleads insufficient facts on origin, value, and lack of good faith/knowledge of avoidability | Court: Payments from Montpellier not plausibly traced to BLMIS; Legacy payments plausibly originated from BLMIS but Trustee fails to plead Khronos lacked good faith or knew funds were avoidable; Count VIII dismissed in full |
| Whether Trustee adequately alleged lack of good faith / willful blindness for later-transfer defenses (§548(c) / §550(b)(1)) | Trustee: Khronos’ and Legacy’s alleged red-flag awareness and limited conduct show willful blindness/no good faith | Defendants: either acted in good faith and provided value (accounting services) or the defense is apparent from the complaint | Court: Trustee failed to plead subjective willful blindness or absence of good faith by Legacy or Khronos; defenses defeat avoidance/recovery except for fictitious-profit theory against Legacy |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard for plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading requirement and plausibility/Twombly standard)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (context-specific assessment of plausible inference)
- Picard v. Ida Fishman Revocable Trust (In re BLMIS), 773 F.3d 411 (2d Cir.) (scope of §546(e) safe-harbor in BLMIS litigation)
- Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (willful blindness definition/standard)
- Picard v. Merkin (In re BLMIS), 515 B.R. 117 (Bankr. S.D.N.Y.) (discussion of willful blindness and good-faith defense in BLMIS context)