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Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

United States District Court for the Southern District of New York

April 27, 2014, Decided; April 28, 2014, Filed

12 Misc. 115 (JSR)




] Under section 548(a)(1) of the Bankruptcy Code, the trustee of a bankruptcy estate is empowered to, inter alia, "avoid any transfer . . . of  [**23] 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  [*20]  "a transferee . . . of such a transfer . . . that takes for value and in good faith has a lien on or may retain any interest transferred . . . to the extent that such transferee . . . gave value to the debtor in exchange for such transfer . . . ." Id. § 548(c) (emphasis supplied). Section 550(a)(2) of the Bankruptcy Code provides, in turn, that a trustee may recover avoided property or the value of such property from "any immediate or mediate transferee of such initial transferee." Id. § 550(a)(2). But, similarly to the restrictions on avoidance in section 548, section 550(b)(1) provides that a "trustee may not recover" under section 550(a)(2) from "a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge  [**24] of the voidability of the transfer avoided." Id. § 550(b)(1) (emphasis supplied). The Bankruptcy Code does not define "good faith" in the context of section 548(c) or section 550(b), and it is that definitional question to which the instant consolidated proceeding is primarily directed, along with related questions of standards of pleading.1

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-78lll, 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  [**25] 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. 12 Misc. 115, 2012 U.S. Dist. LEXIS 92231, ECF No. 197 (S.D.N.Y. June 25, 2012). The Court received consolidated briefing and oral argument from the defendants (including separate briefs from various subgroups of defendants who raised issues relevant to their particular situations), and responding briefing and argument from the Trustee and the Securities Investor Protection Corporation ("SIPC"). The matter is therefore ripe for ruling.

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516 B.R. 18 *; 2014 U.S. Dist. LEXIS 58709 **; 59 Bankr. Ct. Dec. 119; 2014 WL 1651952


Subsequent History: As Corrected May 1, 2014.

Later proceeding at Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 437, 2014 U.S. Dist. LEXIS 90089 (S.D.N.Y., June 30, 2014)

Motion denied by Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 516 B.R. 18, 2014 U.S. Dist. LEXIS 104277 (S.D.N.Y., July 17, 2014)

Prior History: Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC, 2014 U.S. Dist. LEXIS 24582 (S.D.N.Y., Feb. 17, 2014)


investor, customers, blind

Bankruptcy Law, Avoidance, Fraudulent Transfers, Elements, Value, Estate Property, Transferee Liabilities & Rights, Securities Law, Securities Exchange Act of 1934 Actions, Investment Schemes, General Overview, Civil Procedure, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim