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stockbroker defense in § 546(e) of the Bankruptcy Code creates a safe harbor
for recipients of certain types of transfers and can bar fraudulent transfer
claims brought by a trustee. In Picard v.
Katz, this was a $1 billion issue, and one that will now not go up on
appeal due to the settlement in that case.
statute, in relevant part, states that "the trustee may not avoid . . . [a]
settlement payment . . . made by or to (or for the benefit of) a . . .
stockbroker . . . in connection with a securities contract." 11 U.S.C. §
In Picard v. Katz, District Judge Rakoff
found that § 546(e) is a defense to all of the claims except the actual
fraudulent transfer claims. "Because Madoff Securities was a registered
stockbrokerage firm, the liabilities of customers like the defendants here are
subject to the 'safe harbor' set forth in section 546(e) of the Bankruptcy
Code." Picard v. Katz, 462 B.R. 447
(S.D.N.Y. 2011). The court found that the plain meaning of the statute barred
the claims: "By its literal language, therefore, the Bankruptcy Code precludes
the Trustee from bringing any action to recover from any of Madoff's customers
any of the monies paid by Madoff Securities to those customers except in the
case of actual fraud."
was that. One billion dollars of claims were struck from Picard's case. Picard
attempted to appeal this ruling, and others, before a final judgment was
entered in the adversary proceeding, but Judge Rakoff denied these attempts. Picard v. Katz, 2012 U.S. Dist. LEXIS 5143
(S.D.N.Y. Jan. 13, 2011).
yesterday, we learned that the claims in the Picard v. Katz have been settled, so Judge Rakoff's decision will
stand without further review.
Picard received more favorable results on this same issue in the bankruptcy
court. Judge Lifland, the bankruptcy judge presiding over the Madoff SIPA
liquidation proceeding, has rejected the stockbroker defense on two occasions.
In Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC),
440 B.R. 243 (Bankr. S.D.N.Y. 2010), leave
to appeal denied, 2011 U.S. Dist. LEXIS 97647 (S.D.N.Y. Aug. 31, 2011),
Judge Lifland held that § 546(e) is
inapplicable in fraudulent schemes:
Section 546(e) was intended to promote stability and instill
investor confidence in the commodities and securities markets. . . . Courts have held that to extend
safe harbor protection in the context of a fraudulent securities scheme would
be to "undermine, not protect or promote investor confidence . . . [by]
endorsing a scheme to defraud SIPC," and therefore contradict the goals of the
provision. . . . Simply stated, the transfers sought to be avoided emanate from
Madoff's massive Ponzi scheme, and the safe harbor provision "does not insulate
transactions like these from attack."
Lifland also found that there was no support for the position that "a Ponzi
scheme operator, who allegedly did not execute any trades, was deemed, at the
pleading stage, to be a 'stockbroker' for purposes of Section 546(e)."
Judge Lifland reached the same result in Picard v. Madoff (In re Bernard L. Madoff Inv. Sec. LLC), 458
B.R. 87 (Bankr. S.D.N.Y. 2011), leave to
appeal denied, 464 B.R. 578 (S.D.N.Y. 2011):
cannot find as a matter of law that [the § 546(e) safe harbor] applies to the
transactions at issue. Whether Madoff, through BLMIS, was a stockbroker
"engaged in the business of effecting transactions in securities" is
dubious. Courts have held that Ponzi scheme operators do not affirmatively
"make securities transactions happen" on behalf of legal
"customers," and thus do not fit the definition of
"stockbroker" for purposes of section 546(e). . . . As asserted in
the Complaint, Madoff, through BLMIS, "never in fact purchased any of the
securities he claimed to have purchased for customer accounts."
Id. at 116
On the issue of whether the
payments made were "settlement payments," Judge Lifland found:
For the same reason, it is doubtful whether the payments from
BLMIS to the Defendants are settlement payments as contemplated by the statute.
Settlement payments subject to the safe harbor of section 546(e) must be made
in the context of a "securities transaction." . . . While the Second
Circuit recently defined "transaction in securities" broadly, In re
Enron Creditors Recovery Group, 651 F.3d 329, 2011 U.S. App. LEXIS 13177, 2011
WL 2536101, at *6-7 (holding settlement payment does not require change in
ownership of the security and limiting the requirement of "commonly used
in the securities trade" in connection with settlement payments), it
suggested that "settlement payments" must be made in relation to an
actual securities transaction . . . Here, where securities may never have been
bought, sold, or otherwise existent at BLMIS, withdrawals from IA Accounts may
not constitute "settlement payments" under section 546(e) of the
On the other hand, two
weeks ago, the bankruptcy court presiding over a proceeding related to the
Thomas Petters Ponzi case held that § 546(e) is applicable and granted summary
judgment to the defendants. Peterson v.
Enhanced Investing Corp. (Cayman) Ltd. (In
re Lancelot Investors Fund L.P.),
2012 Bankr. LEXIS 914, at *26-27 (Bankr. N.D. Ill. Mar. 7, 2012). Judge Cox
The court cannot accept the Trustee's position that the redemption
payments herein are not settlement payments eligible for safe harbor protection
because they may be tainted by fraud. Congress did not exempt all fraudulent
transfers from safe harbor protection, only those involving actual fraud,
claims that allege and prove that a debtor acted "with actual intent to
hinder, delay or defraud any entity" to which the debtor was indebted. 11
U.S.C. § 548(a)(1)(A). Congress' judgment call on this matter is clear from the
opening language of Section 546(e) . . . Section 741(8) of the Code defines
settlement payment as "a preliminary settlement payment, a partial
settlement payment, an interim settlement payment, a settlement payment on
account, a final settlement payment, or any other similar payment commonly used
in the securities trade ...." 11 U.S.C. § 741(8). (emphasis added).
the application of § 546(e) is a big-money issue in Ponzi cases. We will
continue to follow it closely.
See also: Wall Street Journal Talks with "The Ponzi Book" Co-Author Kathy Bazoian Phelps about Madoff-NY Mets Settlement
Kathy Bazoian Phelps is the
co-author of The Ponzi Book: A Legal
Resource for Unraveling Ponzi Schemes available for purchase at www.lexisnexis.com/ponzibook.
More information about The
Ponzi Book can be found at www.theponzibook.com.
Read more articles at The Ponzi Blog