Picard v. Merkin (In Re Bernard L. Madoff Investment Securities LLC)
440 B.R. 243
Bankr. S.D.N.Y.2010Background
- Madoff operated a massive Ponzi scheme through BLMIS, with SIPC recognizing the instability of assets and introducing the SIPA liquidation; the Trustee Picard seeks to recover transfers totaling over $490 million from Merkin, Gabriel, Ariel Fund Limited, Ascot Partners, and related entities.
- BLMIS paid returns funded by new investments rather than profits from securities trades; the scheme had about 90,000 fictitious profit disbursements totaling $18.5 billion.
- Merkin and GCC dominated the Fund Defendants, with Merkin as sole general partner of Gabriel and Ascot and sole investment manager for Ariel, creating potential alter ego and agency liability.
- The Trustee alleges eleven Initial Transfers totaling $494.6 million to the Defendants within six years before filing, plus Subsequent Transfers to Merkin/GCc as fees, with alleged red flags raising knowledge or willful blindness to fraud.
- The Court grants in part and denies in part the Motions to Dismiss: Counts Three through Twelve survive (actual, constructive fraud and related relief), while Counts One and Two (turnover and a preferred transfer claim) are dismissed.
- Ascot is insolvent and Merkin’s personal liability as Ascot’s general partner is addressed under Delaware partnership law; the SIPA-related turnover aspect is limited by 78fff-2(c)(3).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Trustee adequately pleads actual fraudulent transfers under Code and NYDCL | Picard adequately pleaded transfers with particularity and Ponzi presumption. | Merkin/GCC contend lack of pleaded good faith defense under 548(c). | Counts Three (Code) and Five (NYDCL) adequately pled; 548(c) defense not fatal at pleading stage. |
| Whether the Trustee adequately pleads constructive fraudulent transfers under Code and NYDCL | Trustee pleads lack of fair consideration/good faith and value deficiency. | Funds argue fair consideration or value due to return of principal; misinterpretation of value. | Counts Four (Code) and Six-Eight (NYDCL) adequately pled; safe harbor issues reserved for later. |
| Whether 546(e) safe harbor bars Trustee’s constructive fraud claims | If not a stockbroker/contract, safe harbor does not apply. | 546(e) shields transfers as to stockbrokers/contracts. | 546(e) defense rejected at this stage; not clear on applicability to these facts. |
| Whether Merkin can be held personally liable as Ascot’s general partner | Delaware partnership law imposes personal liability on general partners for partnership obligations. | Section 550 precludes personal liability absent initial transferee claim. | Yes; Merkin properly pled personally liable under state partnership law and as a subsequent transferee. |
| Whether turnover/accounting under 542 is proper in SIPA/Code hybrid | SIPA 78fff-2(c)(3) permits one-step turnover of funds avoidable or void. | Turnover requires separate avoidance and recovery steps; no clear plain language basis. | Count One (turnover) dismissed; the one-step turnover theory not supported by current law. |
Key Cases Cited
- In re Saba Enters., Inc., 421 B.R. 626 (Bankr.S.D.N.Y. 2009) (applies Rule 9(b) to fraud in bankruptcy context; liberality in pleading)
- Sharp Int'l Corp. v. State St. Bank & Trust Co., 403 F.3d 43 (2d Cir. 2005) (lack of lack of fair consideration requires showing participation in fraud)
- In re Manhattan Inv. Fund Ltd., 310 B.R. 500 (Bankr.S.D.N.Y. 2002) (constructive fraud; lack of fair consideration; alter ego/agency considerations)
- In re Actrade Fin. Techs. Ltd., 337 B.R. 791 (Bankr.S.D.N.Y. 2005) (constructive fraud standards; lack of value under NYDCL)
- Mishkin v. Ensminger (In re Adler, Coleman Clearing Corp.), 218 B.R. 689 (Bankr.S.D.N.Y. 1998) (SIPA/Code interplay and avoidance powers; safe harbor considerations)