568 B.R. 481
Bankr. S.D.N.Y.2017Background
- The Lustig Defendants (David Lustig and the Lustig Family 1990 Trust) withdrew approximately $7 million in fictitious profits from their Bernard L. Madoff Investment Securities LLC (BLMIS) accounts between 2007–2008.
- They assert they reinvested those withdrawn sums indirectly (via Lakeview and other feeder funds) back into BLMIS, and those reinvested amounts were lost in the Ponzi scheme.
- Irving Picard, SIPA Trustee for BLMIS, sued to avoid and recover the fictitious profits as intentional fraudulent transfers under 11 U.S.C. § 548(a)(1)(A); Trustee concedes Lustig were good-faith transferees under § 546(e).
- Lustig asserted affirmative defenses seeking equitable relief or credits (equitable credit under §105(a), single-satisfaction under §550(d), recoupment, setoff) based on the Funds’ subsequent deposits into BLMIS.
- The parties agreed to treat the Trustee’s motion to strike those defenses as a motion for partial summary judgment; the court assumed, for purposes of the motion, that the transfers and reinvestments occurred as defendants claim.
- The court struck the Eighth through Eleventh Affirmative Defenses (equitable dismissal/credit, single-satisfaction, recoupment) and noted the Twelfth (setoff) was withdrawn.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Lustig) | Held |
|---|---|---|---|
| Whether §105(a) permits an equitable credit/dismissal to offset Trustee's §548/§550 recovery | §105(a) cannot create substantive rights or override Bankruptcy Code; credits belong to the Funds under §548(c) and SIPA; equitable credit would double-count deposits | §105(a) empowers court to fashion equitable credit so defendants aren’t unjustly liable where they reinvested and lost the funds | Court: No — §105(a) cannot be used to grant the requested equitable credit; such credit would conflict with Bankruptcy Code and SIPA and would double-count deposits already credited to the Funds |
| Whether §550(d) single-satisfaction rule bars Trustee from recovering from Lustig when Funds also were sued/credited | §550(d) limits total recovery to value of the initial transfer but does not bar recovery from separate initial transfers to different transferees; Trustee sued Funds as initial transferees and Lustig as separate initial transferees | Lustig contends single-satisfaction prevents double recovery when the same funds ultimately were deposited by Funds into BLMIS | Court: No — §550(d) does not bar recovery here because the Trustee sued separate initial transferees; the rule limits aggregate recovery but does not create a defense when transfers to different transferees occurred |
| Whether recoupment applies to offset Trustee’s avoidance/recovery claims | Trustee: recoupment is narrow and applies only where claims arise from the same transaction; here transactions differ | Lustig: their loss from reinvestment should be offset via recoupment because reinvested funds trace back to their withdrawals | Court: No — recoupment requires same-transaction reciprocity; the withdrawal and the later reinvestment are distinct transactions, so recoupment does not apply |
| Whether analogies to Cybridge/Sawran support an equitable credit here | Trustee: those cases are distinguishable — there the transferees had returned value to the debtor/estate pre-petition or post-petition and thereby cured diminution; here Lustig retained and chose to reinvest withdrawn funds; Funds, not Lustig, received credits/settlements | Lustig: relies on Cybridge and Sawran to justify an equitable credit where subsequent transfers or returned funds reduce unjust recovery | Court: Distinguished — Cybridge/Sawran involved transferees who returned funds that made the estate whole; here Lustig did not restore the estate and Funds already received credit and settlements |
Key Cases Cited
- SIPC v. BLMIS (In re BLMIS), 424 B.R. 122 (Bankr. S.D.N.Y. 2010) (background and Net Investment Method framework for customer claims)
- In re BLMIS, 654 F.3d 229 (2d Cir. 2011) (affirming Net Investment Method and treatment of customer claims)
- Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988) (§105(a) equitable powers limited by Bankruptcy Code)
- Law v. Siegel, 134 S. Ct. 1188 (2014) (bankruptcy court equity powers constrained by statute)
- Dobin v. Presidential Fin. Corp. (In re Cybridge Corp.), 312 B.R. 262 (D.N.J. 2004) (equitable credit where transferee returned value and cured diminution)
- New York State Elec. & Gas Corp. v. McMahon (In re McMahon), 129 F.3d 93 (2d Cir. 1997) (recoupment doctrine is narrow in bankruptcy)