Bernard L. Madoff Investment Securities LLC v. Picard

Background

The appeal arose from a bankruptcy-court adversary proceeding involving the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS). Irving H. Picard, the trustee, sought to avoid and recover $1,896,148 in transfers that BLMIS made to the defendants during the two years before its bankruptcy filing. The amount represented funds withdrawn from the Keller Trust Account in excess of the principal deposited into that account.

The account had been opened with BLMIS’s investment-advisory business. The opinion explains that BLMIS commingled customer money in two JPMorgan Chase accounts, called the 703 Account and the 509 Account. The central issue was whether the investment-advisory business, including the money transferred from the Keller Trust Account, belonged to BLMIS after Bernard Madoff reorganized the business as a limited liability company in 2001 or instead remained Madoff’s separate sole proprietorship.

The bankruptcy court granted the Trustee’s motion for summary judgment and denied the defendants’ cross-motion for summary judgment. The defendants appealed that decision.

Ownership of the Investment-Advisory Business and Fraudulent Transfers

The defendants argued that an earlier bankruptcy decision barred the Trustee’s recovery, that the investment-advisory business never became part of the LLC, and that the Trustee had not shown the absence of a genuine dispute over ownership of the JPMorgan accounts. They also argued that the documentary evidence was inadmissible or unreliable because it was produced by Madoff, that the case should proceed to trial, and that the court should not apply the presumption that transfers made through a Ponzi scheme were made with intent to defraud.

Judge Oetken rejected these arguments. He held that the earlier decision did not bar recovery of the transfers at issue. He also found that controlling Second Circuit precedent involved nearly identical evidence and rejected the argument that the investment-advisory business continued independently of BLMIS after the 2001 reorganization. The evidence included Madoff’s statements that the corporate form would change, that the predecessor’s assets would transfer to the successor, and that ownership or control would not change.

The court also rejected the challenge to the evidence’s reliability. Madoff’s personal untrustworthiness did not by itself establish that the amended regulatory filing was untrustworthy. The court further held that a trial was not required because the evidence did not create a genuine dispute of material fact about BLMIS’s ownership of the accounts.

On the fraudulent-transfer issue, the court declined to reconsider controlling Second Circuit precedent holding that certain reasoning from an earlier case did not apply to a Securities Investor Protection Act liquidation. The bankruptcy court’s use of the Ponzi-scheme presumption therefore remained valid.

Barbara Keller and the Conduit Defense

The defendants argued that the bankruptcy court should have dismissed Barbara Keller as a defendant because she died in 2019. Judge Oetken explained that all counts against her in her individual capacity had already been dismissed and that her successor under the family trust would be Gerald Keller, who was already a party. The court also stated that the procedural mechanism for substituting a party after death had not yet been triggered because the defendants had not shown that a statement noting the death had been served as required.

The defendants separately argued that the Keller Trust was a “mere conduit,” meaning it lacked control over the transferred money, and that Keller Publishing was the actual transferee. The court held that the defendants had not shown an enforceable agreement requiring the Trust to transfer withdrawals to Keller Publishing. The declarations did not establish the required elements of a contract, including an offer, acceptance, consideration, mutual assent, and an intent to be bound.

Prejudgment Interest and Disposition

The defendants challenged the bankruptcy court’s award of prejudgment interest at 4%, without compounding, from December 1, 2010, through entry of judgment. Judge Oetken held that the bankruptcy court did not abuse its discretion. The court found that the same 4% rate had been upheld in a closely related case and appropriately balanced the parties’ interests.

The district court affirmed the bankruptcy court’s decision. It directed the Clerk of Court to enter judgment accordingly and close the matter.