Bernard L. Madoff Investment Securities LLC v. Lisa Beth Nissenbaum Trust

Background

Irving H. Picard, the trustee for the consolidated liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS), sought to avoid and recover $625,551 transferred to Lisa Beth Nissenbaum Trust and Neal Kurn, the Trust’s trustee. The transfers occurred between November 6, 2007, and September 24, 2008, within the two-year period covered by the claim. The defendants did not dispute the dates, receipt, or amount of the transfers.

The Nissenbaum Account was opened with a transfer from another BLMIS account. The court found that the source account had no principal balance, so the Nissenbaum Account had zero principal. The $625,551 withdrawn from the account therefore represented fictitious profits—amounts shown on BLMIS statements but not supported by actual investment gains.

The Trustee moved for summary judgment, which asks whether the undisputed evidence requires judgment under the law. The defendants also moved for summary judgment dismissing the case. The defendants argued, among other things, that the investment-advisory business and the bank accounts used for the transfers belonged to Bernard Madoff personally rather than BLMIS, that the Trustee lacked standing, that the transfers were made for value, that the two-year rule barred the recovery, and that the Trustee had not properly calculated the losses.

Evidence and admissibility

The court considered expert reports, BLMIS books and records, criminal-trial testimony, and plea allocutions. It rejected the defendants’ challenges to that evidence. The court concluded that the expert reports were supported by sufficient data and reliable methods, that the BLMIS records could be considered as business records despite the fraud, and that former BLMIS employee Frank DiPascali’s testimony was sufficiently reliable because he testified under oath, was cross-examined, did not recant, and was corroborated by other evidence. The court also found the relevant plea allocutions admissible.

Standing and ownership of the transfers

The court held that the Trustee had Article III standing, meaning a sufficient injury connected to the defendants’ conduct that a court could remedy. It found no genuine dispute that the investment-advisory business and the JPMorgan accounts holding customer funds were part of BLMIS after the 2001 reorganization from a sole proprietorship to an LLC.

The court relied on the amended Securities and Exchange Commission registration form, which stated that the predecessor would transfer all business-related assets and liabilities to the successor and that there would be no change in ownership or control. The continued use of the same registration number also supported that conclusion. The court rejected reliance on the fact that the amended form did not check a box for investment-advisory services and that some checks and account statements used the name Bernard L. Madoff without the LLC designation.

Fraudulent-transfer claim

Under the Securities Investor Protection Act (SIPA), the Trustee could use the Bankruptcy Code’s avoidance and recovery provisions to recover customer property transferred by BLMIS. The court applied 11 U.S.C. § 548(a)(1)(A), which permits recovery of a transfer of the debtor’s property made within two years of the bankruptcy filing with actual intent to hinder, delay, or defraud creditors.

The court found all required elements established. First, SIPA treated the customer property transferred by BLMIS as property of the debtor for purposes of recovery, and the court found that the transfers were made by BLMIS. Second, the transfers occurred within the relevant two-year period. Third, the court found actual fraudulent intent.

The court applied the Ponzi-scheme presumption, under which transfers made by a debtor operating a Ponzi scheme are presumed to have fraudulent intent. It found that BLMIS did little or no legitimate investment-advisory business, did not actually execute the trades reported to customers, did not purchase Treasury bills for particular investment-advisory customers, and used money from later investors to pay earlier withdrawals. The court also found several independent indicators of fraud, including false records, BLMIS’s insolvency, and the absence of real value supporting the fictitious-profit transfers.

Defendants’ affirmative defenses

The defendants argued that they gave value for the withdrawals because the payments settled securities contracts or satisfied potential contractual and tort claims. The court rejected both arguments. It held that the defendants had no property rights to the amounts credited above their principal and that allowing them to retain those amounts would conflict with SIPA’s priority system for distributing customer property. The court therefore concluded that the transfers were not made for value, even though it found that the defendants acted in good faith.

The defendants also argued that the two-year period barred recovery of amounts connected to an earlier obligation. The court rejected that defense under controlling appellate precedent. It held that the defendants had no enforceable right to fictitious profits that arose before the two-year period because BLMIS never generated legitimate profits. The Trustee’s calculation recovered only amounts received during the two-year period that exceeded the defendants’ actual investment.

Calculation of losses

The court upheld the Trustee’s use of the Inter-Account Transfer Method to calculate the fictitious profits. That method treated the transferor and recipient accounts as separate for determining net equity, credited the recipient account with actual principal that could have been transferred, and did not credit it with fictitious profits. The defendants offered no countervailing expert evidence or other evidence sufficient to create a genuine factual dispute.

Disposition

Judge John G. Koeltl granted the Trustee’s motion for summary judgment and denied the defendants’ motion for summary judgment. The court entered judgment for the Trustee in the amount of $625,551 and awarded prejudgment interest at 4% from November 12, 2010, the date the complaint was filed, through the date judgment is entered. The Clerk was directed to enter judgment and close the case.