596 B.R. 451
S.D. Ill.2019Background
- Bernard L. Madoff operated BLMIS as a Ponzi scheme: customer deposits were used to pay other customers, and account statements were fictitious; scheme collapsed in 2008.
- Irving H. Picard was appointed SIPA Trustee for BLMIS and, using bankruptcy avoidance powers, sued to claw back fictitious profits paid to certain BLMIS customers who withdrew more than they invested.
- Defendants are innocent (no‑knowledge) BLMIS customers who received withdrawals in excess of principal; they stipulated BLMIS acted with actual intent to defraud creditors.
- Trustee invoked 11 U.S.C. § 548(a)(1)(A) to avoid transfers made within two years of the petition; defendants asserted the § 548(c) defense that they “took for value and in good faith.”
- Prior District and bankruptcy decisions in the BLMIS litigation (notably Greiff and Antecedent Debt Decision) held that, in a SIPA liquidation, only the investor’s principal investment constitutes “value” for § 548(c); fictitious profits are avoidable.
- The Bankruptcy Court recommended judgment for the Trustee; on de novo review the District Court adopted the Report, granted Trustee summary judgment, denied defendants’ cross‑motion, and entered judgments for specified amounts.
Issues
| Issue | Plaintiff's Argument (Picard) | Defendant's Argument | Held |
|---|---|---|---|
| Whether transfers of fictitious profits are avoidable under § 548(a)(1)(A) | Transfers were made with actual intent to hinder, delay, or defraud and thus avoidable | Agree transfers were fraudulent but claim a § 548(c) defense | Avoidable; Trustee established prima facie case and entitlement to judgment |
| Whether recipients gave "value" under § 548(c) so as to defeat avoidance | Only actual principal investments count as value in SIPA; antecedent claims against the general estate do not give value against customer property | Recipients had antecedent contractual and tort claims (including rights under NY UCC and § 29(b) of the ’34 Act) that were valid and were discharged by the payments, thus constituting value | Rejected: satisfactions of claims against BLMIS general estate do not constitute value against the separate SIPA customer property estate; Antecedent Debt Decision is law of the case |
| Proper method to calculate recoverable amount given § 548(a)(1) two‑year reach‑back | Use Net Investment Method: net all transfers vs. investments and recover net profits transferred within two years | Net Investment Method improperly counts pre‑reach‑back transfers to increase liability; § 548(a)(1) limits recovery to two‑year window | Adopted Net Investment Method; reach‑back limits which transfers are recoverable, but prior withdrawals (outside two years) are used to compute net profit exposure |
| Whether later BLMIS decisions (e.g., Ida Fishman, Fairfield) or CalPERS require revisiting Antecedent Debt Decision | Ida Fishman and others do not disturb Antecedent Debt Decision; SIPA context controls | Defendants contend those authorities undermine Antecedent Debt Decision and support their defenses | Rejected: Ida Fishman and Fairfield are distinguishable; CalPERS does not alter Antecedent Debt Decision’s reasoning in this SIPA avoidance context |
Key Cases Cited
- Picard v. Ida Fishman Revocable Trust (In re BLMIS), 773 F.3d 411 (2d Cir. 2014) (interpreting § 546(e) safe harbor in BLMIS SIPA litigation)
- Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Secs., LLC (In re BLMIS), 654 F.3d 229 (2d Cir. 2011) (Net equity principles in BLMIS SIPA liquidation)
- Picard v. Greiff, 476 B.R. 715 (S.D.N.Y. 2012) (transfers of Ponzi profits are not "for value" under § 548(c))
- SIPC v. BLMIS (Antecedent Debt Decision), 499 B.R. 416 (S.D.N.Y. 2013) (satisfaction of antecedent claims does not provide value against SIPA customer property; adopts Net Investment Method)
- Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) (Net Investment Method endorsed for Ponzi clawback calculations)
- Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995) (profits from Ponzi schemes are not for value)
- In re Hedged-Invs. Assocs., 84 F.3d 1286 (10th Cir. 1996) (same principle regarding Ponzi scheme payouts)
- Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir. 2014) (trustee’s equitable powers and limits in BLMIS litigation)
- California Pub. Emps.' Ret. Sys. v. ANZ Securities, 137 S. Ct. 2042 (2017) (statute of repose vs. limitations analysis; not controlling here)