OPINION AND ORDER
Undеr section 548(a)(1) of the Bankruptcy Code, the trustee of a bankruptcy estate is empowered to, inter alia, “avoid any transfer ... of an interest of the debtor in property ... that was made ... on or within 2 years before the date of the filing of the petition, if the debtor ... made such transfer ... with actual intent to hinder, delay, or defraud any entity to which the debtor was or became ... indebted.” 11 U.S.C. § 548(a)(1)(A). However, this authority is limited by subsection (c) of the same statute, which provides that
In this proceeding, various defendants in actions brought against them by Irving Picard (the “Trustee”) — the trustee appointed under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. §§ 78aaa-78III, to administer the estate of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) — have moved to dismiss the Trustee’s avoidance and recovery actions against them. These defendants argue that the Trustee has failed to plead their lack of good faith such that they are entitled to retain the transfers they have received from Madoff Securities (or some portion thereof). Defendants previously moved to withdraw the reference of their actions to the Bankruptcy Court, which the Court granted with respect to the following issue: “whether SIPA and other securities laws alter the standard the Trustee must meet in order to show that a defendant did not receive transfers in ‘good faith’ under either 11 U.S.C. § 548(c) or 11 U.S.C. § 550(b).” Order at 3, No.
In ruling, the Court assumes familiarity with the underlying facts of the Madoff Securities fraud and ensuing bankruptcy and recounts only those facts that are rеlevant to the instant proceeding. It is undisputed that Madoff Securities, a registered securities broker-dealer, engaged in a decades-long Ponzi scheme in which it accepted investments from various customers and then issued false monthly statements to those customers indicating consistent, favorable returns on securities transactions purportedly conducted by Ma-doff Securities on their behalf. In aсtuality, Madoff Securities undertook few, if any, securities transactions, and simply used other customers’ investment funds to satisfy any customers’ withdrawals of funds. Some withdrawing customers were individuals, and others were investment funds that in turn transferred the withdrawn funds to their customers. Additionally, some of these funds transferred some
Underlying the complaints here in issue is the Trustee’s central contention that all these defendants were sophisticated market participants who, even though they lacked actual knowledge of Madoff Securities’ fraud, failed to act in good faith because they were aware of suspicious circumstances that should have led them to investigate the possibility of such fraud. Previously, however, in Picard v. Katz,
is not without some precedent in ordinary bаnkruptcies, it has much less applicability ... in a context of a SIPA trusteeship, where bankruptcy law is informed by federal securities law. Just as fraud, in the context of federal securities law, demands proof of scienter, so too “good faith” in this context implies a lack of fraudulent intent. A securities investor has no inherent duty to inquire about his stockbroker, and SIPA creates no such duty. If an investor, nonetheless, intentionally chooses to blind himself to the “red flags” that suggest a high probability of fraud, his “willful blindness” to the truth is tantamount to a lack of good faith. But if, simply confronted with suspicious circumstances, he fails to launch an investigation of his broker’s internal practices— and how could he do so anyway? — his lack of due diligence cannot be equated with a lack of good faith, at least so far as section 548(c) is concerned as applied in the context of a SIPA trusteeship.
Id. (citations omitted); see also Picard v. Avellino,
Nonetheless, in a fashion that the Court has learned is typical of the Trustee’s litigation strategy, the Trustee here seeks to litigate once again the issue of whether “good faith” should be judged by a subjective standard of willful blindness or by an objective standard of inquiry notice. But nothing in the intervening time has changed the analysis and conclusion that the Court reached in Katz and reiterated in Avellino.
It is well established that “good faith” in the securities context “implies a lack of fraudulent intent.” See Katz,
The Trustee’s approach would impose a burden of investigation on investors totally at оdds with the investor confidence and securities market stability that SIPA is designed to enhance. This does not mean that an investor may purposely close her eyes to what is plainly to be seen. As stated in Katz, “[i]f an investor ... intentionally chooses to blind himself to the ‘red flags’ that suggest a high probability of fraud, his ‘willful blindness’ to the truth is tantamount to a lack of good faith.”
Although the subsequent transferees involved in these proceedings — including not only indirect investors but also individuals and entities who received fees for services provided to investment funds that were customers of Madoff Securities — were not themselves investors with Madoff Securities itself, the same standard applies to
The Court turns next to the related question of which party bears the burden of pleading a defendant’s good faith or lack thereof. If one looks at the question simply in terms of the Bankruptcy Code, without reference to SIPA or other considerations, “good faith” appears to be an affirmative defense that must in the first instance be pleaded by defendants. Accordingly, section 548(a)(1)(A) of the Bankruptcy Code permits a trustee to “avoid any transfer” made within two years of the debtor’s filing of a bankruptcy petition, if the debtor (here, Madoff Securities) “made such transfer ... with actual intent to ... defraud any entity to which the debtor was ... indebted.” 11 U.S.C. § 548(a)(1)(A) (emphasis supplied), while section 548(c) allows a transferee to retain “any interest transferred” to the extent he received value for the transfer and if he can show that he took the transfer in good faith, 11 U.S.C. § 548(c). The structure of this language suggests that section 548(c) provides an affirmative defense to recovery of an otherwise avoided transfer under section 548(a)(1)(A). See, e.g., In re Actrade Fin. Techs. Ltd.,
Although section 550’s language differs to some degree, the structure of the relevant provisions is largely analogous to section 548. Section 550(a) provides that “[e]xcept as otherwise provided in this section, to the extent that a transfer is avoided ..., the trustee may recover, for the benefit of the estate, the property transferred” from either an initial transferee or “any immediate or mediate transferee of suсh initial transferee.” 11 U.S.C. § 550(a). However, under section 550(b), “[t]he trustee may not recover” from a subsequent transferee who “takes for val
But, just as SIPA affects the meaning of “good faith” when a SIPA proceeding is involved, so too it affects the burden of pleading good faith or its absence. It would totally undercut SIPA’s twin goаls of maintaining marketplace stability and encouraging investor confidence if a trustee could seek to recover the investors’ investments while alleging no more than that they withdrew proceeds from their facially innocent securities accounts. Put differently, this would not accord with the Supreme Court’s requirement that, on a motion to dismiss for failure to state a claim, a court must assess whether the complaint “contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal,
Because this determination must be made on the basis of the specific allegations in the Trustee’s various complaints, the Court, having set out the general framework, hereby leaves it to the Bankruptcy Court to determine in any given instance whether the foregoing standards have been met. Accordingly, the Court directs that the following adversary proceedings be returned to the Bankruptcy Court fоr further proceedings consistent with this Opinion and Order: (1) those cases listed in Exhibit A of item number 197 on the docket of
SO ORDERED.
MEMORANDUM ORDER
On April 27, 2014, this Court issued an Opinion and Order regarding the “good faith” standard and pleading burden to be applied by the Bankruptcy Court in a SIPA proceeding invoking sections 548(c) and 550(b) of the Bankruptcy Code. See Opinion and Order,
This is just the latest attempt by one party or another in these complicated proceedings to seek interlocutory appeal of some ruling adverse to that particular party. As the Court has consistently noted in denying such motions, the “final judgment rule” is a critical component of the federal system of justice, adding immensely to its efficiency. While district courts therefore retаin “ ‘unfettered discretion to deny certification’ of an order for interlocutory appeal even when a party has demonstrated that the criteria of 28 U.S.C. § 1292(b) are met,” Gulino v. Bd. of Educ.,
The criteria for certification for interlocutory appeal under § 1292(b) are that the district judge “be of the opinion” (i) that the “order involves a controlling question of law as to which there is substantial ground for difference of oрinion,” and (ii) “that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” 28 U.S.C. § 1292(b). The Second Circuit has cautioned that in applying these criteria, “it continues to be true that only ‘exceptional circumstances will justify a departure from the basic policy of postponing appellate review until after the entry of judgment.’ ” Klinghoffer v. S.N.C. Achille Lauro,
Here, in the cases аffected by the Opinion and Order, there are innumerable factual aspects that require resolution in the first instance by the Bankruptcy Court, and an appeal of the narrow legal question here at issue — essentially, a question of who has the initial burden of pleading good faith or the lack thereof — will delay rather than hasten the termination of the litigation. See 28 U.S.C. 1292(b). Moreover, as a practical matter, experience in the Madoff Trustee’s own cases shows that when the Trustee has even a modest basis for claiming that a transferee took a transfer without good faith, he is fully capable of so pleading. See, e.g., Proposed Third Amended Complaint, Picard v. Estate of Mark D. Madoff, Adv. Pro. No. 09-1503, ECF No. 185 (Bankr. S.D.N.Y. filed July 15, 2014). Conversely, if any complaint were to be dismissed by the Bankruptcy Code for failure to adequately plead a lack of good faith, that would ordinarily result in a final judgment that the Trustee could then appeal. Thus, the real controversy is over whether, in
Accordingly, for the foregoing reasons, the motion to certify the April 27, 2014 Opinion and Order for interlocutory appeal is hereby denied. The Clerk is directed to close item number 544 on the docket.
SO ORDERED.
Notes
. For purposes of this Opinion and Order, it is assumed that the transfers at issue were made "for value.”
. The Court is mindful that a comment in a footnote in a recent Sеcond Circuit opinion might be read to suggest that good faith should be judged under the inquiry notice standard. See In re Bernard L. Madoff Inv. Sec. LLC,
. The Court is unpersuaded by the Trustee’s suggestion that the third phrase in section 550(b)(1) — "without knowledge of the voida-bility of the transfer” — implies that “good faith” in this context should be an objective test. In light of the legislative history, the most plausible reading is that this third requirement is merely one specific type of subjective knowledge required and does not preclude a subjective standard for good faith.
. As with the willful-blindness standard set forth above, the same rule applies to subsequent transferees who received transfers from customers and thus are entitled to the same presumptions arising from securities transactions.
. The Trustee has extensive discovery powers under Rule 2004 of the Federal Rules of Bankruptcy Procedure through which he may gather information before he ever files a complaint. See In re Lehman Bros. Inc., No. 08-01420,