In Re: Bernard L. Madoff Investment Securities LLC

Background

Irving H. Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC, brought clawback actions to recover transfers made from the debtor’s estate. The trustee first pursued approximately $3 billion in allegedly fraudulent transfers to Fairfield Sentry Limited, a feeder fund. Fairfield later paid only $70 million of a $3 billion consent judgment. The trustee then sued subsequent transferees, including Koch Industries, Inc., to recover approximately $20 million that Fairfield had transferred to Koch.

Koch moved to dismiss, arguing that Section 546(e) of the Bankruptcy Code protected the transfers from recovery. That provision generally protects certain transfers made in connection with a stockbroker’s securities contract. The Bankruptcy Court denied Koch’s motion to dismiss, reasoning that the safe harbor did not apply if Fairfield knew that the transfers were connected to BLMIS’s fraud. Koch sought permission for either a direct appeal to the Second Circuit or an appeal before the Bankruptcy Court issued a final decision.

Direct appeal

The court denied certification for a direct appeal. Direct appeal certification requires a qualifying legal question, such as an issue without controlling authority, a matter of public importance, conflicting decisions, or an appeal that would materially advance the case.

The court concluded that the Bankruptcy Court’s decision was consistent with the Bankruptcy Code’s plain language and Second Circuit authority. Assuming the complaint’s allegations were true, Fairfield allegedly knew that the transfers were connected to a Ponzi scheme rather than genuine securities transactions. The court reasoned that the safe harbor’s protection for transfers made in connection with a “securities contract” did not cover an alleged agreement to commit fraud. The court also relied on the safe harbor’s purpose of protecting legitimate securities markets, not transactions allegedly known to be fraudulent.

The court further concluded that the issue was not a matter of public importance because its resolution was unlikely to affect the public beyond this case and a limited group of related proceedings. It also found that a direct appeal would delay discovery rather than materially advance the litigation.

Interlocutory appeal

The court also denied interlocutory review. An interlocutory appeal is an appeal before a final judgment. It generally requires a controlling legal question, substantial grounds for disagreement about the answer, and a likelihood that immediate review will speed the litigation’s final resolution.

The court assumed, for purposes of its analysis, that the Bankruptcy Court’s decision presented a controlling legal question. It nevertheless found no substantial ground for disagreement because the safe harbor’s text and the Second Circuit’s reasoning made clear, in the court’s view, that the provision did not protect a transferee with actual knowledge of BLMIS’s fraud from clawback. The court also concluded that an appeal would delay discovery and would not materially advance the litigation.

Disposition

The court denied Koch Industries’ requests for direct appeal and interlocutory appeal of the Bankruptcy Court’s decision. The Clerk was directed to terminate all open motions and close the case. This order did not itself decide the ultimate clawback claims; it denied permission to obtain the requested appellate review at that stage.