516 B.R. 18
S.D.N.Y.2014Background
- Trustee Picard investigates transfers from Madoff Securities under SIPA; transfers in 2 years before filing may be avoided if debtor acted with intent to defraud.
- Defendants, ranging from direct customers to subsequent transferees, move to dismiss for lack of good faith under 548(c) and 550(b).
- Court previously held good faith in SIPA requires lack of fraudulent intent, adopting a willful blindness standard over inquiry notice.
- SIPA securities-law context informs the interpretation of good faith, limiting duties to investigate by investors and market participants.
- Court analyzes who bears pleading burden and whether to remand to Bankruptcy Court for case-by-case application.
- Court denies interlocutory appeal certification and remits matters to Bankruptcy Court for further proceedings consistent with the opinion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| What standard of good faith applies? | Trustee argues inquiry notice standard applies under SIPA. | Defendants contend subjective willful blindness suffices as in Katz/Avellino. | Good faith = no actual knowledge and no willful blindness. |
| Who bears pleading burden to show lack of good faith? | Trustee pleads lack of good faith against defendants. | Defendants argue failure to plead lack of good faith should dismiss. | Defendants may dismiss if complaint plausibly fails to allege lack of good faith; burden lies on Trustee to plead plausibly. |
| Does SIPA affect who may appeal an interlocutory ruling on good faith? | SIPC/Trustee seek interlocutory appeal on standard ruling. | Defendants oppose interlocutory appeal as premature and inefficient. | Interlocutory appeal certification denied. |
| Should cases be remanded to Bankruptcy Court for application of the standard? | Uniform application required by Trustee’s pleadings. | Issues can be resolved on the pleadings without remand. | Remand to Bankruptcy Court for case-by-case determination is warranted. |
Key Cases Cited
- Picard v. Katz, 462 B.R. 447 (S.D.N.Y.2011) (sets standard that ‘good faith’ requires lack of willful blindness to red flags)
- Picard v. Avellino, 469 B.R. 408 (S.D.N.Y.2012) (confirms no duty to inquire in SIPA value; good faith requires lack of fraud)
- In re Manhattan Inv. Fund Ltd., 397 B.R. 1 (S.D.N.Y.2007) (inquiry notice standard discussed in ordinary bankruptcy context)
- In re Dreier, 452 B.R. 391 (Bankr.S.D.N.Y.2011) (conscious avoidance standard cited for good faith analysis)
- In re Schick, 223 B.R. 661 (Bankr.S.D.N.Y.1998) (subsequent transferees’ liability interplay with initial transferees)
- Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1987) (securities law macro principle; disclosure vs caveat emptor)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (lack of good faith implies culpable mental state beyond negligence)
- Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67 (2d Cir.1998) (pleading standard for affirmative defense under 548(c))