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In re Bernard L. Madoff Inv. Sec. LLC

United States Court of Appeals for the Second Circuit

March 5, 2014, Argued; December 8, 2014, Decided

Nos. 12-2557-bk(L), 12-2497-bk(con), 12-2500-bk(con), 12-2616-bk(con), 12-3422-bk(con), 12-3440-bk(con), 12-3582-bk(con), 12-3585-bk(con)


 [*414]  Barrington D. Parker, Circuit Judge:

Bernard L. Madoff orchestrated a massive Ponzi scheme through the investment advisory unit of Bernard L. Madoff Investment Securities LLC ("BLMIS"). After the scheme collapsed, Irving H. Picard (the "Trustee") was appointed trustee for BLMIS pursuant to the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. ("SIPA"). ] Under SIPA, a trustee is empowered to "recover" (or claw back) money paid out by the debtor, as long as the money "would have been customer property" had the payment not occurred, and the transfers could be avoided under the Bankruptcy Code. Id. § 78fff-2(c)(3).

Section 546(e) of the Bankruptcy Code, in turn, establishes an important exception to a trustee's clawback powers. See 11 U.S.C. § 546(e). Section 546(e) provides generally that certain securities-related payments, [**6]  such as transfers made by a stockbroker "in connection with a securities contract," or "settlement payment[s]" cannot be avoided in bankruptcy.

Invoking his clawback powers, the Trustee sued hundreds of BLMIS customers who withdrew more from their accounts than they had invested and, as a result, profited (whether knowingly or not) from Madoff's scheme. The Trustee contends that, if BLMIS had not preferentially paid these customers, the money would have been customer property available to be distributed ratably to all customers, including those who, over time, had withdrawn less than they had invested.

Several defendants moved to dismiss the actions on the ground that the payments received by BLMIS customers were securities-related payments that cannot be avoided under § 546(e). The dispositive  [*415]  issue presented by this appeal is whether the payments that BLMIS made to its customers are the type of securities-related payments that are shielded by § 546(e) from clawback.

The United States District Court for the Southern District of New York (Rakoff, J.) concluded that the payments were shielded by § 546(e) and dismissed the relevant claims under Federal Rule of Civil Procedure 12(b)(6). We agree and therefore we affirm.

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773 F.3d 411 *; 2014 U.S. App. LEXIS 23032 **; 72 Collier Bankr. Cas. 2d (MB) 1295; Bankr. L. Rep. (CCH) P82,737; 60 Bankr. Ct. Dec. 106

IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff-Appellant, SECURITIES INVESTOR PROTECTION CORPORATION, Statutory Intervenor pursuant to Securities Investor Protection Act, 15 U.S.C. § 78eee(d), Intervenor-Appellant, v. IDA FISHMAN REVOCABLE TRUST, PAUL S. SHURMAN, in his capacity as co-trustee of the Ida Fishman Revocable Trust, WILLIAM SHURMAN, in his capacity as co-trustee of the Ida Fishman Revocable Trust and as Executor of the estate of Ida Fishman, Defendants-Appellees.

Subsequent History: As Amended January 14, 2015.

Motion granted by, US Supreme Court certiorari denied by Picard v. Ida Fishman Revocable Trust, 2015 U.S. LEXIS 4229 (U.S., June 22, 2015)

US Supreme Court certiorari denied by, Motion granted by Sec. Investor Prot. Corp. v. Ida Fishman Revocable Trust, 2015 U.S. LEXIS 4232 (U.S., June 22, 2015)

Prior History: Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff Sec.), 476 B.R. 715, 2012 U.S. Dist. LEXIS 70109 (S.D.N.Y., 2012)

Disposition: Appeal from the United States District Court for the Southern District of New York. Nos. 11-bk-7603, 12-mc-0115 — Jed S. Rakoff, Judge.

Appeal from judgments of the United States District Court for the Southern District of New York (Rakoff, J.). Irving H. Picard, as trustee for debtor Bernard L. Madoff Securities LLC, sued to avoid fictitious profits paid by the debtor to hundreds of customers over the life of the Ponzi scheme operated by Madoff. The defendant customers moved to dismiss certain of these avoidance claims pursuant to 11 U.S.C. § 546(e), which shields from recovery securities-related payments made by a stockbroker. The district court agreed that § 546(e) barred the claims, dismissed them, and certified the dismissal as a final judgment. The trustee appealed.



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Bankruptcy Law, Bankruptcy, Liquidations, Clearing Banks, Commodity Brokers & Stockbrokers, Securities Law, Investment Advisers, Adviser, Broker & Dealer Liability, General Overview, Estate Property, Avoidance, Limitations on Trustee Powers, Civil Procedure, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Appeals, Standards of Review, Fraudulent Transfers, Constructively Fraudulent Transfers, Prepetition Transfers, Voidable Transfers, Unsecured Creditors, Business & Corporate Compliance, Contracts Law, Standards of Performance, Creditors & Debtors, Real Property Law, Purchase & Sale, Fraudulent Transfers, Governments, Legislation, Statute of Limitations, Time Limitations, Postoffering & Secondary Distributions, Contract Formation, Consideration, Mutual Obligations, Contracts Law, Breach, Securities Exchange Act of 1934 Actions, Investment Schemes, Ponzi Schemes