In Re: Bernard L. Madoff Investment Securities LLC

Background

Irving H. Picard, the trustee in the Securities Investor Protection Act liquidation of Bernard L. Madoff Investment Securities LLC, brought a clawback action against Ken-Wen Family Limited Partnership and its partners Kenneth W. Brown and Wendy Werner. The trustee sought to recover $3.85 million that Ken-Wen withdrew from BLMIS during the two years before the liquidation filing.

Brown and Werner each held general-partner and limited-partner interests in Ken-Wen. Brown signed a written agreement dissociating, or leaving, him from the general partnership on February 29, 2008. Werner later filed an amendment to Ken-Wen’s partnership certificate removing Brown as a general partner. Brown initiated the four withdrawals at issue, including three before his written dissociation and one afterward.

The Bankruptcy Court granted the trustee’s motion for summary judgment, a procedure allowing judgment without a trial when there is no genuine dispute about a material fact and the law entitles one side to prevail. It held that Ken-Wen had received fraudulent transfers and that Brown remained liable as a dissociated general partner under Florida law. The Bankruptcy Court also denied Brown’s motion for reconsideration. Brown, who represented himself, appealed.

District Court’s Analysis

The District Court first held that Brown had impliedly consented to the Bankruptcy Court’s authority to issue a final order. Brown had filed his own motion for summary judgment seeking a final judgment and waited until after an unfavorable ruling to challenge the Bankruptcy Court’s authority. The District Court therefore did not disturb the Bankruptcy Court’s authority on that ground.

The District Court agreed that the transfers were subject to the legal presumption that transfers made as part of a Ponzi scheme were made with fraudulent intent. It also agreed that Ken-Wen, rather than Brown personally, was the initial recipient of the transfers and that Brown’s potential liability arose from his status as a dissociated general partner.

Under the Florida statute applied by the Bankruptcy Court, a person who leaves a general partnership may still be liable for a later partnership transaction if less than two years have passed, the other party did not know about the dissociation, and the other party reasonably believed the person remained a general partner. Florida law also provides that, 90 days after an amendment to a partnership certificate stating that a person has dissociated, the world is considered to have notice of the dissociation.

The District Court held that the Bankruptcy Court had failed to consider the legal significance of the amendment filed with Florida’s Secretary of State. In particular, the Bankruptcy Court had not decided whether that filing meant BLMIS was legally considered to have notice of Brown’s dissociation by the date of the SIPA liquidation filing. The District Court also identified uncertainty about whether the relevant Florida-law “transaction” occurred on the liquidation filing date, as the Bankruptcy Court had held, or at another time connected to the earlier transfers. The District Court did not decide that statutory-interpretation question.

The District Court also addressed Brown’s discovery arguments. It stated that the Bankruptcy Court appropriately denied Brown’s request to extend discovery because Brown and his lawyer had not shown the diligence required to modify the discovery schedule. Brown’s motion to compel discovery had not been resolved and had later been adjourned indefinitely by agreement, so there was no ruling on that motion for Brown to appeal. The opinion further states that Brown waived objections concerning service of process, personal jurisdiction, and venue by failing to raise them in his first responsive pleading.

Disposition

The District Court VACATED the Bankruptcy Court’s judgment granting summary judgment to the trustee and REMANDED the case for further proceedings consistent with the opinion and order. The District Court did not decide whether Florida law ultimately makes Brown liable for the transfers or whether the relevant transaction occurred on the SIPA filing date or at another time.