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Picard v. Katz

United States District Court for the Southern District of New York

September 27, 2011, Decided

11 Civ. 3605 (JSR); [Adv. Pro. No. 10-05287]




Pending before the Court is the motion of defendants Saul B. Katz, et al., made pursuant to Fed. R. Bankr. P. 7012(b) and Fed. R. Civ. P. 12(b)(6), to dismiss the Amended Complaint filed against them on March 18, 2011, by Irving H. Picard (the "Trustee"), who was appointed under the Securities Investor Protection Act ("SIPA"), 15 U.S.C. §§ 78aaa et seq., to liquidate the business of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC ("Madoff Securities").1 In a "short and plain statement"2 of 373 pages, the Amended Complaint seeks to recover over a billion dollars from the defendants on theories of actual fraud, constructive fraud, preferential transfer, and the like, in violation of various provisions of federal bankruptcy law and New York State debtor and creditor law. For the following reasons, the Court dismisses all claims except those alleging actual  [**6] fraud and equitable subordination and narrows the standard for recovery under the remaining claims.

Although this lawsuit raises important and in some respects unsettled issues of the interaction of securities law with bankruptcy law, given the public interest in this case it is well to begin with the basics. A debtor with assets less than its obligations is considered insolvent in the eyes of the law and may apply for, or be forced into, bankruptcy. See generally, Bankruptcy Code, 11 U.S.C. §§ 101 et seq. Issues then arise regarding whether prior payments made by the debtor  [**7] can be, in effect, rescinded - or, in the language of bankruptcy law, "avoided" - and the money returned ("clawed back") to the bankrupt's estate, from where it can be distributed among creditors in accordance with legal and equitable principles of bankruptcy law.

Some of the avoided payments may take the form of "preferences." If, prior to the bankruptcy filing, the bankrupt transfers some or all of its remaining assets to some of its creditors in preference to the other creditors, this transfer, known as a "preference," may be "avoided" - regardless of the facial validity of the transfer or the intent of the parties to the transfer - if it occurred within 90 days of  [*451]  the filing for bankruptcy. See 11 U.S.C. § 547(b). The idea is that, while an ongoing business may freely decide which of its creditors to pay first, an insolvent business cannot be allowed to deplete its remaining assets in favor of one creditor over another.

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462 B.R. 447 *; 2011 U.S. Dist. LEXIS 109595 **; Bankr. L. Rep. (CCH) P82,077; 55 Bankr. Ct. Dec. 133

IRVING H. PICARD, Plaintiff, -v- SAUL B. KATZ, et al., Defendants.

Subsequent History: Later proceeding at Picard v. Katz, 2011 U.S. Dist. LEXIS 110540 (S.D.N.Y., Sept. 28, 2011)

Affirmed in part and reversed in part by Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC, 2013 U.S. Dist. LEXIS 187380 (S.D.N.Y., Feb. 12, 2013)

Affirmed in part and modified in part by Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff Sec.), 2013 U.S. Dist. LEXIS 187381 (S.D.N.Y., Feb. 12, 2013)

Later proceeding at Strait v. Colvin, 2013 U.S. Dist. LEXIS 56047 (E.D. Wash., Apr. 18, 2013)

Disposition:  Motion denied in part; granted in part.


customers, fraudulent, blindness, settlement, subordinate, equitable

Bankruptcy Law, Avoidance, Fraudulent Transfers, Elements, Estate Property, Limitations on Trustee Powers, Bankruptcy, Liquidations, Clearing Banks, Commodity Brokers & Stockbrokers, General Overview, Governments, Legislation, Interpretation, Intent, Value, Claims, Allowance of Claims, Types of Claims, Unsecured Priority Claims, Subordination