Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC (In re Madoff Securities)
501 B.R. 26
S.D.N.Y.2013Background
- Bernard L. Madoff Investment Securities collapsed after operating a Ponzi scheme; customer funds were routed through large "feeder funds" (notably Fairfield Sentry Ltd. and Kingate Global Fund Ltd.) which then made payments to investors and others.
- Trustee Irving Picard (SIPA trustee) sued to avoid and recover transfers from Madoff Securities to the feeder funds and to recover subsequent transfers from feeder-fund recipients under 11 U.S.C. §§ 550(a), 551 and related state law.
- The Trustee settled with Fairfield; the settlement included a consent judgment in July 2011 but did not result in a litigated judgment expressly avoiding the initial transfers from Madoff to Fairfield.
- Various subsequent-transferee defendants moved to dismiss recovery claims, arguing § 550(a)’s phrase "to the extent that a transfer is avoided" requires a prior, adjudicated avoidance of the initial transfer (or that avoidance be alleged/timely asserted as to the recovery defendant under § 546(a)).
- The district court consolidated and resolved the threshold questions: whether the Trustee must obtain a prior judgment of avoidance against the initial transferee (or the particular subsequent transferee) before pursuing recovery under § 550(a), and whether failure to plead avoidance against the subsequent transferee within § 546(a)’s period bars recovery.
Issues
| Issue | Plaintiff's Argument (Picard) | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 550(a) requires a prior, litigated judgment of avoidance against the initial transferee before suing a subsequent transferee | § 550(a) limits recovery to the portion of the transfer that is avoidable; the Trustee need only prove avoidability in the recovery action, not obtain prior adjudication against the initial transferee | § 550(a)’s "is avoided" language requires avoidance be obtained first against the initial transferee; without that judgment recovery claims fail | Court: No prior litigated judgment is required; Trustee may prove avoidability in the recovery action and subsequent transferees may raise defenses to avoidance |
| Whether the Trustee must have pleaded/obtained a judgment avoiding the initial transfer against the specific subsequent transferee within § 546(a)’s limitations period | Avoidance and recovery are distinct; Trustee need not plead a separate avoidance claim against each subsequent transferee within § 546(a) as long as the initial transfer was timely challenged and avoidability is proved | Trustee had to assert avoidance as to each recovery defendant within § 546(a); otherwise due-process/limitations bar recovery | Court: Rejected defendants’ view; Trustee need not have separately pleaded avoidance against every subsequent transferee within § 546(a), but a defendant can assert a limitations defense if no timely avoidance action was filed at all |
| Whether allowing recovery without prior avoidance undermines § 550(f) (recovery SOL) | § 550(f) is preserved: recovery SOL runs from avoidance (or settlement disposition) and trustees can pursue avoidance and recovery together or sequentially | If prior avoidance not required, § 550(f) would never start and be gutted | Court: No conflict — § 550(f) operates; settlement/avoidance disposition can trigger the one-year recovery period and the Trustee’s recovery suits here were timely |
| Whether equitable concerns (Trustee’s Fairfield settlement preserving Fairfield’s good-faith claims) preclude Trustee from recovering from subsequent transferees | Even if Trustee settled without litigating avoidance, statutory text governs; single recovery limit (§ 550(d)) prevents double recovery; motives irrelevant on motion to dismiss | Allowing recovery is inequitable because Trustee negotiated settlement to preserve Fairfield’s claims and now sues subsequent transferees asserting Fairfield’s alleged bad faith | Court: Equity argument fails at dismissal stage; statutory framework and § 550(d) address double recovery concerns |
Key Cases Cited
- Picard v. Greiff, 476 B.R. 715 (S.D.N.Y. 2012) (discusses avoidability of initial transfers and application of § 550(a))
- In re AVI, Inc., 389 B.R. 721 (9th Cir. BAP 2008) (trustee need not first avoid transfer against initial transferee to sue subsequent transferees)
- Int’l Admin. Servs., Inc. v. Ahn, 408 F.3d 689 (11th Cir. 2005) (rejects requirement of prior avoidance against initial transferee; notes practical problems of strict rule)
- In re Sufolla, Inc., 2 F.3d 977 (9th Cir. 1993) ("to the extent" language limits recoverable amount to avoidable portion)
- Picard v. Bureau of Labor Ins., 480 B.R. 501 (Bankr. S.D.N.Y. 2012) (treats Fairfield settlement as finality triggering § 550(f) one-year recovery period)