Bernard L. Madoff Investment Securities LLC v. Picard

Background

This was an appeal from a bankruptcy court decision granting summary judgment to Irving H. Picard, trustee for the substantively consolidated Securities Investor Protection Act liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff, and denying the Keller defendants’ cross-motion for summary judgment. The defendants were the Gerald and Barbara Keller Family Trust, Gerald E. Keller in his individual capacity and as trustee, and Barbara Keller in her individual capacity and as trustee.

The trustee sought to avoid and recover $1,896,148 in transfers made above the principal deposited into the Keller Trust Account during the two-year period before BLMIS’s bankruptcy filing. The central ownership issue was whether BLMIS’s investment-advisory business, including the money transferred through the Keller account and two JPMorgan Chase accounts, belonged to BLMIS after its 2001 conversion to a limited liability company or remained a separate sole proprietorship operated by Madoff.

Summary-judgment appeal

The district court reviewed the bankruptcy court’s summary-judgment decision from the beginning, without deference to its legal conclusions. It held that the record was materially the same as the record considered by the Second Circuit in a related proceeding, whose controlling reasoning rejected the defendants’ arguments.

The court held that an earlier bankruptcy decision did not bar the trustee’s recovery of the two-year transfers. It also held that the defendants’ evidence was insufficient to create a genuine dispute about whether BLMIS owned the investment-advisory business and the JPMorgan accounts. Evidence concerning account names, endorsement stamps, checks, and the alleged use of investment-advisory funds to buy Treasury bills did not change that conclusion. The court further held that documents prepared by Madoff were not automatically untrustworthy or inadmissible merely because Madoff was untrustworthy.

The defendants argued that the court should require a trial and should reject the presumption that transfers made as part of a Ponzi scheme were made with intent to defraud. The court rejected both arguments. It followed controlling Second Circuit precedent, including the holding that the reasoning in Sharp International does not apply to a Securities Investor Protection Act liquidation.

Barbara Keller and conduit defense

The court rejected the defendants’ argument that Barbara Keller should have been dismissed because she died in 2019. It explained that all counts against her in her individual capacity had already been dismissed and that the bankruptcy court had not been given evidence that the required procedure for substituting a party after death had occurred. The court stated that the defendants could serve a notice of death under Federal Rule of Civil Procedure 25(a)(3) if they wished to seek substitution of a trustee for the Keller Trust.

The court also rejected the Keller Trust’s “mere conduit” defense. That defense requires showing that the Trust lacked control over the transferred money, such as because of a binding contractual duty to pass it to someone else. The court agreed that the declarations offered by the defendants did not establish an enforceable agreement between the Family Trust and Keller Publishing because they did not show the required offer, acceptance, consideration, mutual assent, and intent to be bound.

Prejudgment interest and disposition

The court upheld the bankruptcy court’s award of prejudgment interest at 4%, without compounding, from December 1, 2010, through entry of judgment. It concluded that the bankruptcy court had not abused its discretion and that the same interest rate had been upheld in the related Second Circuit proceeding.

The Bankruptcy Court’s decision was AFFIRMED. The Clerk was directed to enter judgment and close the matter. The opinion states that the amended opinion was issued nunc pro tunc as of September 30, 2022, and that its sole amendment clarified the capacities in which Gerald and Barbara Keller were included as appellants.