In Re: Bernard L. Madoff Investment Securities LLC

Background

Irving Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC and the Chapter 7 estate of Bernard L. Madoff, brought adversary proceedings seeking to avoid transfers from Madoff Securities to Fairfield Sentry Limited and recover later transfers from Fairfield to its investors. The defendants in these related appeals were subsequent transferees of Fairfield: Multi-Strategy Fund Limited, Banque Syz & Co. SA, Lloyds TSB Bank PLC, Banque Cantonale Vaudoise, Bordier & Cie, Barclays Bank (Suisse) S.A., and Delta National Bank and Trust Company.

The Bankruptcy Court denied the defendants’ motions to dismiss. The defendants then requested permission to take an interlocutory appeal, meaning an appeal before the bankruptcy proceedings had ended. The defendants relied primarily on the securities safe harbor in 11 U.S.C. § 546(e), which can protect certain securities-related transfers from being avoided in bankruptcy.

Issues and analysis

The defendants argued that the Trustee’s failure to allege that they knew about Madoff’s fraud meant that the original transfers from Madoff Securities to Fairfield were protected by Section 546(e). Judge Rakoff rejected that argument. The safe harbor is a defense to avoiding the initial transfer, so its application depends on facts concerning that transfer, not on the later transferee’s lack of knowledge. The defendants could still rely on their lack of knowledge when asserting separate defenses to recovery under 11 U.S.C. § 550(b), including the good-faith defense, if the Trustee first proved that the initial transfers were avoidable.

The court also considered an alternative argument made by some defendants: that the original transfers to Fairfield were protected because they were made in connection with securities contracts between Fairfield and the defendants. The court recognized that Section 546(e) can potentially apply to a transfer connected to a securities contract that does not include Madoff Securities as a party. But determining whether a particular transfer was sufficiently connected to a particular contract would require examining facts such as whether a specific customer redemption caused the transfer. The pleadings did not provide enough information to resolve that issue, and the issue might apply to some transfers but not others.

Interlocutory-appeal standard

The court applied the standard commonly used for interlocutory appeals under 28 U.S.C. § 1292(b). The defendants had to show, among other things, a controlling legal question, substantial grounds for disagreement, and that an immediate appeal could materially advance the end of the litigation. The court concluded that the defendants had not shown reasonable grounds for disagreement with the Bankruptcy Court’s treatment of their primary argument. The alternative contract-related argument was fact-intensive and better addressed by the Bankruptcy Court after discovery, rather than through an immediate appeal.

Disposition

The court denied each of the defendants-appellants’ motions seeking an interlocutory appeal. It reaffirmed that decision and directed the Clerk to close each of the related cases. The court did not decide whether the Trustee would ultimately establish that the initial transfers were avoidable or recover money from the defendants.