531 B.R. 439
Bankr. S.D.N.Y.2015Background
- The Trustee (Irving H. Picard), as SIPA trustee for BLMIS and B. L. Madoff's estate, sued defendants in 233 adversary proceedings to recover fictitious profits (net winnings) withdrawn from BLMIS accounts; many defendants moved to dismiss.
- The Trustee concedes defendants lacked knowledge of the fraud; his remaining avoidance claims are intentional fraudulent transfers within two years of the SIPA filing date (per 11 U.S.C. §§ 546(e) and 548(a)(1)(A)) following Ida Fishman.
- SIPA creates a separate customer property estate and, by statutory fiction (SIPA § 78fff‑2(c)(3)), permits the SIPA trustee to treat certain recovered property as customer property and to exercise avoidance powers analogous to a bankruptcy trustee.
- Key contested defenses: Article III and statutory standing; whether SIPA authorizes recovery when customer property may be sufficient; constitutional limits on bankruptcy-judge final adjudication (Stern); whether fictitious profits can be “value”/satisfy antecedent debts; pleading sufficiency for subsequent-transferee and obligation-avoidance claims; applicability of various non-bankruptcy protections (trust exemptions, RFRA, state public‑policy).
- The Court denied many dismissal grounds and granted others: overall the omnibus Motions were granted in part and denied in part, with specific dismissals for inadequately pleaded subsequent-transferee and fraudulent‑obligation claims in identified complaints and otherwise directed parties to settle orders consistent with the opinion.
Issues
| Issue | Plaintiff's Argument (Picard) | Defendant's Argument | Held |
|---|---|---|---|
| Article III standing | SIPA trustee has prudential/statutory and Article III standing because SIPA treats recoverable customer property as debtor property and the customer estate is injured | Trustee lacks Article III standing because customer property never belonged to BLMIS; in pari delicto/Wagoner doctrines bar claims | Court: Trustee has Article III standing under SIPA’s statutory fiction; in pari delicto/Wagoner inapplicable to SIPA-created claims |
| Scope of SIPA §78fff‑2(c)(3) (when to test sufficiency of customer property) | Trustee: insufficiency properly pleaded now; Bevill and Flinn support using filing date or otherwise not deciding now | Defendants: “Whenever” means sufficiency must be tested at recovery time; MVF funds make customer estate sufficient | Court: declines to decide definitively; finds Trustee adequately pleaded current insufficiency and rejects MVF inclusion; motions based on lack of SIPA authority denied |
| Bankruptcy‑court authority (Stern) | Trustee: jurisdiction exists via §§1334/157 and SIPA; §502(d) allows final judgments when disallowance implicated; parties may consent to bankruptcy‑court final adjudication | Defendants: Stern v. Marshall bars bankruptcy judge final judgments for these claims | Court: Stern limits final judgments unless §502(d) disallowance applies or defendant consents; Wellness allows consent; jurisdictional dismissal premature without examining consent/claims status |
| Value/antecedent‑debt defense (§548(c)) | Trustee: fictitious profits are not "value"; allowing retention would deplete customer property and conflict with SIPA priorities | Defendants: payments satisfied antecedent contractual/state‑law claims (e.g., securities, rescission); cite Fitness Holdings, Krys, Ida Fishman | Court: Payments of fictitious profits did not provide value; follows Greiff/Antecedent Debt Decision and controlling Ponzi‑scheme precedent; SIPA priorities counsel against allowing such defenses |
| Pleading of subsequent‑transferee claims (§550) | Trustee: complaints allege transfers and subsequent transfers | Defendants: complaints lack "who, when, how much" for subsequent transfers | Court: dismissed subsequent‑transferee counts where allegations are conclusory or lack vital statistics; trustee must plead adequate factual details |
| Avoidance of obligations (fraudulent obligations) | Trustee: has powers under §§544/548 and SIPA to avoid obligations incurred in furtherance of fraud | Defendants: SIPA §78fff‑2(c)(3) covers transfers only; trustee lacks power to avoid obligations; pleading deficient | Court: Trustee has authority to avoid obligations via bankruptcy powers, but many obligation‑avoidance claims were dismissed for failure to plead specific obligations with required particularity |
| Ponzi presumption / intent to defraud | Trustee: Madoff’s allocution and record pleadings establish BLMIS was a Ponzi scheme; presumption applies to show actual intent | Defendants: BLMIS had legitimate trading activity, many employees, and the presumption shouldn’t apply to these transfers | Court: Ponzi‑scheme presumption applies; Madoff’s allocution suffices at pleading stage; motions on intent denied |
| Special defenses (trust exemptions, RFRA, RLCDPA, public‑policy) | Defendants: CPLR §5205, RFRA, RLCDPA, New York public‑policy and finality protect transfers or bar suits | Trustee: statutory avoidance and SIPA priorities displace these defenses | Court: rejected these defenses—fraudulent transfers not exempt under CPLR; RFRA/RLCDPA inapplicable; public‑policy/finality arguments unavailing |
Key Cases Cited
- SIPC v. BLMIS (In re BLMIS), 773 F.3d 411 (2d Cir. 2014) (addressing Trustee’s avoidance powers and limitations under SIPA and the Bankruptcy Code)
- Picard v. JPMorgan Chase & Co., 721 F.3d 54 (2d Cir. 2013) (trustee’s standing and limits on asserting creditors’ common‑law claims)
- Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) (Net Investment Method for clawback exposure calculation)
- Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995) (profits from a Ponzi scheme are not "value")
- Janvey v. Brown, 767 F.3d 430 (5th Cir. 2014) (Ponzi‑scheme payments cannot satisfy antecedent debts; receiver’s avoidance under state fraudulent‑transfer law)
- Hill v. Spencer Sav. & Loan Ass’n (In re Bevill, Bresler & Schulman, Inc.), 83 B.R. 880 (D.N.J. 1988) (customer‑fund valuation as of SIPA filing date)