JED S. RAKOFF, District Judge.
A "Ponzi" scheme, by definition, involves the use of funds received from new victims to pay monies transferred to prior victims who seek to withdraw the promised returns on their investments. A perennial issue when the scheme topples is whether and to what extent such transferred funds can be recaptured by a representative of the debtor's estate or otherwise. See generally In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 231 (2d Cir.2011). Often, moreover, the resolution of this issue is partly a function of just what kind of Ponzi scheme was involved and what specialized laws were applicable thereto. Thus, in the case of the massive Ponzi scheme perpetrated by Bernard L. Madoff through the instrument of his securities brokerage business, Bernard L. Madoff Investment Securities ("Madoff Securities"), the issue of how to apportion the monies already paid to innocent investors raises complicated questions involving the interaction of federal securities laws, federal bankruptcy laws, and New York State debtor and creditor laws.
In the instant four cases — and eighty other cases listed in Appendix A to this Opinion and Order, to which these rulings are, on consent, also made applicable — Irving Picard, the trustee for the Madoff Securities estate appointed under the Securities Investor Protection Act ("SIPA"), 15 U.S.C. § 78aaa et seq., seeks to "avoid" (and thereby recapture), pursuant to 11 U.S.C. §§ 548(a)(1)(A) & (B), § 550(a), and comparable provisions of New York law incorporated by reference under § 544(b), various prior transfers made by Madoff Securities to these defendants. The defendants, in turn, move to dismiss these claims.
The complaints in these cases, of which the Amended Complaint in Picard v. Blumenthal, 11 Civ. 4293, dated December 2, 2011 ("AC") is typical,
In reality, the investment advisory unit of Madoff Securities never, or almost never, made the trades or held the securities described in the statements it sent to investment advisory clients, at least during all years here relevant. Id. ¶ 22.
Defendants contend that these allegations fail to state a claim against them. On a motion to dismiss under Rule 12(b)(6), a court must assess whether the complaint "contain[s] sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Additionally, "[a]n affirmative defense may be raised by a pre-answer motion to dismiss under Rule 12(b)(6), without resort to summary judgment procedure, if the defense appears on the face of the complaint." Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 74 (2d Cir.1998).
The defendants first argue that 11 U.S.C. § 546(e) prohibits the Trustee from avoiding transfers under sections 544 and 548(a)(1)(B), i.e., the provisions that, respectively, incorporate New York law and permit avoidance of constructively fraudulent transfers. The Court has previously concluded that § 546(e) "precludes the Trustee from bringing any action to recover from any of Madoff's customers any of the monies paid by Madoff Securities to those customers except in the case of actual fraud." Picard v. Katz, 462 B.R. 447, 452 (S.D.N.Y.2011). Under ordinary principles of collateral estoppel, this determination likely bars the Trustee from relitigating
Nonetheless, the Court has considered the matter de novo, and, having done so, again concludes, essentially for the reasons stated in Katz, incorporated here by reference, that the rulings there apply equally to the instant cases. Because the Trustee raises some arguments here that were not raised in Katz, however, a few further words may be in order.
Section 546(e) provides that:
The Trustee argues that § 546(e) does not apply in these cases because Madoff Securities was not a "stockbroker" under the Bankruptcy Code and/or because defendants' withdrawals from their accounts were neither "settlement payment[s]" nor payments made "in connection with a securities contract." The arguments are unpersuasive.
As to whether Madoff Securities was a "stockbroker" under the Bankruptcy Code, section 101(53A) of the Code defines "stockbroker" to include entities that "engage[] in the business of effecting transactions in securities."
Alternatively, even if one artificially separated Madoff Securities into its component parts for purposes of § 546(e) — so that Madoff Securities could somehow be said to be a stockbroker and not a stockbroker — Madoff Securities clearly held itself out to all its customers, including its
Turning to the Trustee's argument that defendants' withdrawals from their Madoff Securities accounts did not constitute transfers "in connection with a securities contract, as defined in section 741(7)," the definition of securities contract includes, inter alia, "a master agreement that provides for an agreement or transaction referred to in clause (i)" — i.e., "a contract for the purchase, sale, or loan of a security" — and "any security agreement... related to any agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement obligation by or to a stockbroker." § 741(7)(a)(i), (x), & (xi). Under this definition, the account agreements between Madoff Securities and the defendants clearly qualify as securities contracts. The Trustee's complaints explicitly acknowledge that the "Account Agreements were to be performed ... through securities trading activities." AC ¶ 35. Moreover, the complaints further allege that the defendants had a specific idea of what performance under the agreements entailed, since Madoff Securities promised "that their funds would be invested in a basket of common stocks within the S & P 100 Index" and that it would "hedge such purchases with option contracts." AC ¶ 21. Thus, the "Trading Authorization Limited to Purchases and Sales of Securities and Options" specifically "authorizes Bernard L. Madoff ... to buy, sell and trade in stocks." Neville Decl. Ex. D. Similarly, the "Option Agreement" authorizes Madoff Securities "to carry accounts (`Option Accounts') for ... transactions in option contracts." Id. Finally, the "Customer Agreement" makes numerous references to securities transactions, such as requiring that such transactions "shall be subject" to the securities laws and permitting the customer, "upon appropriate demand, to receive physical delivery of fully paid securities in the Customer's Account." Id.
Each of these agreements constitutes a "securities contract" under § 741(7), and Madoff Securities thus made transfers to defendants "in connection with a securities contract." As described above, each agreement qualifies as a "a master agreement that provides for" the purchase and sale of securities. § 741(7)(a)(x). The complaints themselves acknowledge that the defendants invested with Madoff Securities in the expectation that Madoff Securities would perform under the account agreements by purchasing specific securities. AC ¶¶ 21, 35.
The fact that the transfers that the Trustee seeks to avoid under § 544 and § 548(a)(1)(B) are transfers "made by ... [a] stockbroker ... in connection with a securities contract" is alone sufficient to bring them within the "safe harbor" of § 546(e). Alternatively, however — although the Court concedes it is a closer question — the Court concludes that the defendants' withdrawals from their accounts constituted "settlement payments" from a stockbroker and therefore fall within the coverage of § 546(e) for that independent reason. Section 741(8) defines a settlement
Although the Trustee, sounding a familiar theme, argues that, because Madoff Securities did not trade securities on behalf of its investment advisory clients, withdrawals by those clients did not complete any securities transactions, this ignores the fact that what clients had contracted for was Madoff Securities' implementation of its investment strategy and that the clients' withdrawals therefore constituted partial settlement of these securities contracts. Under those contracts, the clients exchanged money for access to an investment strategy that would be implemented over time, creating, if the strategy was successful, an obligation that was settled when payment was made, in whole or part, from Madoff Securities to the defendants.
From the defendants' perspective, then, withdrawals from their Madoff Securities accounts completed securities transactions. Just as a broker who sells a security to a third party on behalf of a customer does not complete the transaction until the customer gains control over the resulting money, see 17 C.F.R. § 240.15c1-1(b)(4), so a broker that executes a discretionary strategy on behalf of a customer does not complete its transaction until the customer has regained control over whatever funds result from the implementation of the strategy. This approach comports with Enron, where the Second Circuit found that an issuer's retirement of debt completed a transaction in securities even though it did not involve the purchase or sale of a security. 651 F.3d at 336-37. Accordingly, the defendants' withdrawals completed securities transactions and constituted settlement payments under § 741(8) and Enron.
The Trustee's more global response to all the above is that defrauded clients of Madoff Securities cannot avail themselves of § 546(e)'s protections because such customers are not within the ambit of those the statute was designed to protect. As the Second Circuit noted in Enron, Congress enacted § 546(e)'s safe harbor in 1982 as a means of "minimiz[ing] the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries." 651 F.3d at 334 (quoting H.R.Rep. No. 97-420, at 1 (1982), reprinted in 1982 U.S.C.C.A.N. 583, 583). The Trustee reads this as limiting § 546(e)'s coverage to bankruptcy proceedings involving legitimate brokerage firms and transactions — as if disruptive securities bankruptcies were not commonly the end-result of massive fraud. See, e.g., Enron, 651 F.3d at 331-32. But whereas some courts in this Circuit have accepted this argument, e.g., In re MacMenamin's Grill Ltd., 450 B.R. 414, 428 (Bankr.S.D.N.Y.2011) (postulating a purported "illegal conduct exception to section 546(e)"), in this Court's view it cannot survive the broad and literal interpretation given § 546(e) in Enron. See generally In re Plassein Int'l Corp., 590 F.3d 252, 257-58 (3d Cir.2009); In re QSI Holdings, Inc., 571 F.3d 545, 549 (6th Cir. 2009); Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 986-87 (8th Cir.2009).
Most fundamentally this is because, as stated in Katz, "courts must presume that a legislature says in a statute what it
Moreover, the Trustee's arguments wholly overlook the fact that § 546(e), by its plain terms, already contains an exception for certain kinds of fraud. Specifically, § 546(e) permits the Trustee to avoid actually fraudulent transfers under § 548(a)(1)(A). The Trustee offers no explanation for why Congress, if it had in fact wanted to enact the general fraud exception the Trustee advocates, did not express that intention in the statute, when it did express its desire to exempt § 548(a)(1)(A).
Finally, the application of § 546(e) to the instant case is, in fact, wholly consistent with the legislative history cited by the Trustee. Indeed, given the magnitude of Madoff Securities — 4,900 clients and $65 billion under management in 2008, AC ¶ 31 — avoidance of its transfers to clients, who included other investment businesses, would likely cause the very "displacement" that Congress hoped to minimize. See Enron, 651 F.3d at 339; Neville Decl. Ex. B, Trustee's First Interim Report dated July 9, 2009 ¶¶ 99, 101.
The Court concludes, therefore, that § 546(e) bars the Trustee from pursuing the claims here made under § 548(a)(1)(B) and § 544. Conversely, however, § 546(e) does not bar the Trustee from pursuing the claims he here makes under § 548(a)(1)(A) and § 550(a). Section 548(a)(1)(A) permits the Trustee to avoid transfers that Madoff Securities made during the two years prior to bankruptcy "with actual intent to hinder, delay, or defraud any" of its creditors. Moreover, where the Trustee can avoid an initial transfer under § 548(a)(1)(A), § 550(a) then allows the Trustee to recover "the property transferred" from "any immediate or mediate transferee of [the] initial transfer." Here, as in Katz, the complaints plainly allege that "Madoff Securities' transfers during the two-year period were made with actual intent to defraud present and future creditors, i.e., those left
Nonetheless, the defendants can prevail on their motion to dismiss these claims if they prove that, "on the face of the complaint[s]," they can invoke the affirmative defense provided by § 548(c). Section 548(c) prevents the Trustee from avoiding transfers under § 548(a)(1)(A) if the transferee "takes for value and in good faith." The parties primarily dispute
Under § 548(d)(2)(A), "value" includes "satisfaction ... of a[n] ... antecedent debt of the debtor." The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). "Claim" means "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. § 101(5)(A). "When the Bankruptcy Code uses the word `claim' — which the Code itself defines as a `right to payment,' 11 U.S.C. § 101(5)(A) — it is usually referring to a right to payment recognized under state law." Travelers Cas. & Sur. Co. v. Pac. Gas and Elec. Co., 549 U.S. 443, 451, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007). Nonetheless, state law need not apply if "some federal interest requires a different result." Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), cited with approval in Travelers, 549 U.S. at 451, 127 S.Ct. 1199.
The defendants argue that, under applicable New York State law, they had a claim against Madoff Securities for the amounts it transferred. The Second Circuit has found that investors in Madoff Securities "are customers with claims for securities within the meaning of SIPA." In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d at 236. The New York Uniform Commercial Code provides that "a person acquires a security entitlement if a securities intermediary ... indicates by book entry that a financial asset has been credited to the person's securities account." § 8-501(b)(1). That person has such an entitlement "even though the securities intermediary does not itself hold the financial asset." Id. § 8-501(c).
According to the defendants, these state law entitlements reflect the federal securities scheme, under which customers do not receive certificates for their securities, but instead must rely on statements required by Rule 10b-10. See 17 C.F.R. § 240.10b-10. Defendants argue that state law emphasizes "book entry" because investors have no other means for enforcing their rights. The fact that Madoff Securities engaged in fraud does not suspend the application of the securities law. See SEC v. Zandford, 535 U.S. 813, 819, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002) ("[The SEC] has maintained that a broker who accepts payment for securities that he never intends to deliver, or who sells customer securities with intent to misappropriate the proceeds, violates § 10(b) and Rule 10b-5."). Moreover, defendants argue that, despite the fraud, they had a claim for benefit-of-the-bargain damages. See Visconsi v. Lehman Bros., Inc., 244 Fed. Appx. 708, 713-14 (6th Cir.2007) ("Plaintiffs
Notwithstanding these arguments, however, the Court concludes that those transfers from Madoff Securities to defendants that exceeded the return of defendants' principal, i.e., that constituted profits, were not "for value." Unlike the situation under § 546(e), Congress has here created no "safe harbor" to shelter receipts that might otherwise be subject to avoidance. Accordingly, in this context, the transfers must be assessed on the basis of what they really were; and they really were artificial transfers designed to further the fraud, rather than any true return on investments.
It is not surprising, therefore, that every circuit court to address this issue has concluded that an investor's profits from a Ponzi scheme, whether paper profits or actual transfers, are not "for value." See Donell v. Kowell, 533 F.3d 762, 771-72 (9th Cir.2008) ("Amounts transferred by the Ponzi scheme perpetrator to the investor are netted against the initial amounts invested by that individual. If the net is positive, the receiver has established liability...."). In the context of Ponzi schemes:
Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir.1995) (Posner, J.); see In re Hedged-Invs. Assocs., 84 F.3d 1286, 1290 (10th Cir.1996) ("Because she had no claim against HIA Inc. for damages in excess of her original investment, HIA Inc. had no debt to her for those amounts. Therefore, the transfers could not have satisfied an antecedent debt of HIA Inc., which means HIA Inc. received no value in exchange for the transfers.").
The defendants cite only one case in which defrauded investors recovered the amounts reflected on fraudulent brokerage statements: Visconsi v. Lehman Bros., Inc., 244 Fed.Appx. 708, 713-14 (6th Cir. 2007). The immediate cases differ from Visconsi in three important respects. First, unlike in Visconsi, the Court has no reliable basis on which to determine how defendants would have benefited from their bargains with Madoff Securities. See 244 Fed.Appx. at 713 ("In fact, the fictitious statements issued by Lehman, which were designed to track Plaintiffs' funds as if they had been properly invested, indicate that Plaintiffs' accounts would have grown to more than $37.9 million (even accounting for the withdrawal of more than $31.3 million)." (emphasis added)). Here, in contrast, Madoff Securities' statements did not "track [defendants'] funds as if they had been properly invested," but instead constituted an integral part of the fraud, AC ¶ 22, consistently representing favorable returns based on trading that could not have occurred, Looby Decl. ¶¶ 62, 63, 72, & 103.
Second, the court in Visconsi considered innocent investors alongside a defendant who, although not the perpetrator of fraud, "was aware of significant irregularities in
Third, the court in Visconsi did not focus on investors' status as creditors when giving them the benefit of the bargain, but instead on "the harm suffered." Id. at 713. Defendants have undoubtedly suffered harm as a result of investing with Madoff Securities, but they have not shown that this harm in any way corresponds to the amounts reflected on customer statements. Thus, the Court sees no reason to depart from the general rule that investors in a Ponzi scheme did not receive their profits "for value."
The defendants also argue that the circuit court precedents that permitted avoidance dealt with equity investors rather than creditors. For example, at least one court has found that a Ponzi scheme "received a dollar-for-dollar forgiveness of a contractual debt" where it paid investors "agreed upon interest" at a "reasonable" rate. In re Carrozzella & Richardson, 286 B.R. 480, 491 (D.Conn.2002). Defendants implicitly refer to the long recognized principle that, while an insolvent corporation may not pay a dividend to its shareholders, see N.Y. Bus. Corp. Law § 510, subject to the preference provisions, it may pay its creditors, see Sharp, 403 F.3d at 54-55. According to defendants, a concern for finality underlies the preferential treatment of creditors: "to permit in every case of the payment of a debt an inquiry as to the source from which the debtor derived the money, and a recovery if shown to have been dishonestly acquired, would disorganize all business operations and entail an amount of risk and uncertainty which no enterprise could bear." Banque Worms v. BankAmerica Int'l, 77 N.Y.2d 362, 372, 568 N.Y.S.2d 541, 570 N.E.2d 189 (1991).
While the law does provide some support for defendants' distinction between equity investors and creditors, in the immediate context, it is a distinction without a difference. Unlike in Carrozzella, where investors in a Ponzi scheme contracted for "reasonable" interest on their investments, 286 B.R. at 490-91, here the defendants faced the same risks as equity investors. See In re Bayou Group, LLC, 439 B.R. 284, 337 (S.D.N.Y.2010) (distinguishing Carrozzella because the "fictitious profits Appellants received were not promised to them when they initially invested in the Bayou Funds"). Indeed, had Madoff Securities invested as promised, it would have purchased a basket of equity shares in large, publicly traded companies for defendants. AC ¶ 21. Like equity investors, rather than contracting for a definite return on their investment, defendants contracted for another to use its best efforts to try to generate a profit. Any entitlement defendants had to a return on their investment, then, depended on a representation that Madoff Securities had in fact generated a profit. The complaints allege that Madoff Securities' representations in this regard were wholly fraudulent. Thus, defendants, in effect, ask the Court to enforce the fraud on the ground that the vehicle of this particular Ponzi scheme, in contrast to others, styled itself as a stockbroker. Such a distinction pays only lip service to the underlying realities of the Ponzi scheme, and the Court rejects it. While defendants correctly point out that a general rule that prevented creditors from retaining payments from a fraud would
Finally, the Court finds that, even if the defendants had enforceable claims for the amounts reported on their brokerage statements, a conclusion that satisfaction of those claims gave "value" to Madoff Securities would conflict with SIPA. Satisfaction of an antecedent debt gives value to an estate because the "basic object of fraudulent conveyance law is to see that the debtor uses his limited assets to satisfy some of his creditors," not "to choose among them." Boston Trading Grp., 835 F.2d at 1509. SIPA, however, does choose among creditors. Specifically, SIPA differentiates between the fund of "customer property" and the "general estate." See 15 U.S.C. § 78fff-2(c)(1) (allowing customers to participate in the distribution of the general estate if customer property does not satisfy their net equity claims). Section 78lll(4) defines customer property as "cash and securities ... at any time received, acquired, or held by or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such property transferred by the debtor." In a SIPA proceeding, the trustee allocates customer property according to statutorily-established priorities. Id. § 78fff-2(c)(1). Customers, including the defendants and others who invested with Madoff Securities, In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d at 236, "share ratably in such customer property on the basis and to the extent of their respective net equities." 15 U.S.C. § 78fff-2(c)(1)(B) (emphasis added).
Whenever customer property does not suffice to pay priority claims, SIPA permits the trustee to "recover any property transferred by the debtor which ... would have been customer property if and to the extent that such transfer is voidable or void under the provisions of Title 11." Id. 7878fff-2(c)(3). In other words, the Trustee can invoke the avoidance provisions such as § 548(a)(1)(A) to recover "customer property" for distribution according to SIPA's priorities. The Second Circuit has recently held that the Trustee correctly concluded that customers, like defendants, who withdrew more from their Madoff Securities accounts than they deposited have no "net equity," and thus cannot benefit from priority distributions under § 78fff-2(c)(1). In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d at 233.
To allow defendants, who have no net equity claims, to retain profits paid out of customer property on the ground that their withdrawals satisfied creditor claims under state law would conflict with the priority system established under SIPA by equating net equity and general creditor claims. Indeed, as described above, courts typically find that satisfaction of antecedent debt provides value to the debtor because the fraudulent transfer provisions do not try "to choose among" a debtor's creditors. SIPA, however, prioritizes net equity claims over general creditor claims. Moreover, SIPA specifically connects its priority system to its incorporation of the fraudulent transfer provisions, empowering a trustee to invoke those provisions "[w]henever customer property is not sufficient
The situation here is exactly the one for which SIPA provides. The Trustee cannot satisfy the claims described in 15 U.S.C. § 78fff-2(c)(1)(A)-(D). AC ¶ 18. The defendants have no net equity claims, but nonetheless have allegedly received fraudulent transfers of customer property. Id. Thus, the Trustee may, upon appropriate proof, avoid those fraudulent transfers of customer property for distribution in accordance with SIPA's priorities. In other words, the Court finds that, when determining whether an transferee provides value, SIPA requires consideration not only of whether the transfer diminishes the resources available for creditors generally, but also whether it depletes the resources available for the satisfaction of customers' net equity claims and other priority claims.
Two of the defendants, Blumenthal and Hein, also argue that, even if they did not receive their profits for value, provisions of the Internal Revenue Code ("IRC") prohibit the Trustee from certain avoiding withdrawals from individual retirement accounts ("IRAs") that they held with Madoff Securities.
In contrast to Whaley, however, the Internal Revenue Code did not require Madoff Securities to make any payment, but instead ostensibly required Hein and Blumenthal to receive payments. Thus, no third party comparable to the alimony-recipient sought to enforce the law's requirements against Madoff Securities, and avoidance of transfers will not deprive any such third party of its legal rights. Having rejected the claim that Madoff Securities owed the defendants the profits that it transferred to them, the Court declines to conclude that Hein and Blumenthal may now keep their profits because they feared that the IRC would deprive them of half of a benefit to which they had no entitlement. Furthermore, where Congress intends to exempt certain types of transfers from avoidance, it does so not by implication through other law, but instead directly through the fraudulent transfer provisions. See, e.g., 11 U.S.C. § 548(a)(2) (exempting certain "charitable contribution[s]" from avoidance under § 548(a)(1)(B)); see also § 547(c)(7) (preventing avoidance of "domestic support obligation[s]" as preferences). Accordingly, the Court concludes that the IRC does not require dismissal of the Trustee's claims under § 548(a)(1)(A) and § 550(a).
As for the calculation of how much the Trustee may recover under these claims, the Court adopts the two-step approach set forth in Donell v. Kowell, 533 F.3d 762, 771-72 (9th Cir.2008). First, amounts transferred by Madoff Securities to a given defendant at any time are netted against the amounts invested by that defendant in Madoff Securities at any time. Second, if the amount transferred to the defendant exceeds the amount invested, the Trustee may recover these net profits from that defendant to the extent that such monies were transferred to that defendant in the two years prior to Madoff Securities' filing for bankruptcy. Any net profits in excess of the amount transferred during the two-year period are protected from recovery by the Bankruptcy Code's statute of limitations. See 11 U.S.C. § 548(a)(1).
In sum, for the reasons stated above as well as the reasons set forth in Picard v. Katz, 462 B.R. 447 (S.D.N.Y.2011), as amended by 466 B.R. 208, 2012 WL 127397 (S.D.N.Y. Jan. 17, 2012), the Court dismisses all of the Trustee's claims except those proceeding under § 548(a)(1)(A) and § 550(a). The Clerk of the Court is hereby directed to close the motions to dismiss in the four above-captioned cases and the eighty additional cases set forth in Appendix A so that all these cases may — except
SO ORDERED.
On April 30, 2012 the Court entered an Order (ECF No. 57) dismissing certain claims of the Trustee in the above actions except those proceeding under Sections 548(a)(1)(A) and 550(a) of the Bankruptcy Code. On May 1, 2012, the Court entered an Opinion and Order (ECF No. 72) explaining the reasons for its decision.
The Court now supplements the Opinion and Order to make explicit that Section 546(e) of the Bankruptcy Code applies to the Trustee's claims in the above actions for avoidance and recovery of preferences under Section 547 of the Bankruptcy Code.
The supplemental list of cases attached As Appendix A to the Opinion and Order inadvertently omitted Picard v. Marital Trust Under Article X of the Charles D. Kelman Revocable Trust, which was consolidated by Order of the Court dated January 25, 2012 under Picard v. Hein, 11 Civ. 4936. Appendix A is hereby amended, nunc pro tunc, to include that action as well.
SO ORDERED.
Adv. Pro. Docket No. Docket No.
Defendants (Bankr. S.D.N.Y.) (S.D.N.Y.)
Gary Albert, individually and his capacity as
shareholder of Impact Designs Ltd. 10-04966 11-04390
Aspen Fine Arts Co. 10-04335 11-04391
The Aspen Company and Harold Thau 10-05070 11-04400
Jan Marcus Capper 10-05197 11-04389
Norton Eisenberg 10-04576 11-04388
P. Charles Gabriele 10-04724 11-04481
Stephen R. Goldenberg 10-04946 11-04483
Ruth E. Goldstein 10-04725 11-04371
Harnick Bros. Partnership and Gary Harnick individually
and as general partners of The Harnick
Brothers Partnership 10-05157 11-04729
John Denver Concerts, Inc. Pension Plan Trust and
Harold Thau as the Trustee 10-05089 11-04387
Anita Karimian 10-04706 11-04368
Lester Kolodny 10-04515 11-04502
Laurence Leif 10-04601 11-04392
Steven V. Marcus Seperate Property of the Marcus
Family Trust; The Marcus Family Limited Partnership;
Steven V. Marcus, individually and in his capacity
as Trustee of the Steven V. Marcus Separate
Property of the Marcus Family Trust, General Partner
of the Marcus Family Limited Partnership and
Guardian of O.M., K.M. and H.M; and Denise C.
Marcus, in her capacity as Trustee of the Steven V.
Marcus Separate Property of the Marcus Family
Trust 10-04906 11-04504
Trust U/W/O Harriette Myers 10-05401 11-04397
Robert Potamkin and Alan Potamkin 10-04352 11-04401 Potamkin Family Foundation, Inc. 10-05069 11-04398 Delia Gail Rosenberg and Estate of Ira S. Rosenberg 10-04978 11-04482 Miriam Ross 10-05020 11-04480 Leon Ross 10-04723 11-04479 Richard Roth 10-05136 11-04501 Lynn Lazarus Serper 10-04737 11-04370 Harold A. Thau 10-04951 11-04399 William M. Woessner Family Trust, Sheila A. Woessner Family Trust, William M. Woessner individually, and as Trustee of the William M. Woessner Family Trust and the Sheila A. Woessner Family Trust, Sheila A. Woessner, individually, and as Trustee of the William M. Woessner Family Trust and the Sheila A. Woessner Family Trust 10-04741 11-04503 Elbert R. Brown, Viola Brown, and Do Stay Inc. 10-05398 11-05155 Lewis Franck individually and in his capacity as Trustee for the Florence Law Irrevocable Trust dtd 1/24/05 10-04759 11-04723 Michael Mathias, Individually and in his capacity as Joint Tenant of the Michael Mathias and Stacey Mathias J/T WROS, and Stacey Mathias, Individually and in her capacity as Joint Tenant of the Michael Mathias and Stacey Mathias J/T WROS 10-04824 11-04725 Nur C. Gangji Trust Dated 10/16/00, a Virginia trust, and Nur C. Gangji, as trustor, as trustee, and as an individual 10-04754 11-04724 Joseph S. Popkin Revocable Trust DTD 2/9/2006 a Florida trust, Estate of Joseph S. Popkin, Robin Pokin Logue as trustee of the Joseph S. Popkin Revocable Trust Dated Feb. 9, 2006, as the personal representative of the Estate of Joseph S. Popkin, and as an individual 10-04712 11-04726 Bernard Seldon 10-04848 11-04727 Jonathan Sobin 10-04540 11-04728 Patrice M. Auld, Merritt Kevin Auld, and James P. Marden 10-04343 11-05005 Boslow Family Limited Partnership et al. 10-04575 11-05006 Bernard Marden Profit Sharing Plan et al. 10-05168 11-05007 Helene R. Cahners Kaplan et al. 10-05042 11-05008 Charlotte M. Marden et al. 10-05118 11-05008 Robert Fried and Joanne Fried 10-05239 11-05156 Jordan H. Kart Revocable Trust & Jordan H. Kart 10-04718 11-05157 James P. Marden et al. 10-04341 11-05158 Marden Family Limited Partnership et al. 10-04348 11-05160 Norma Fishbein 10-04649 11-05161 Norma Fishbein Revocable Trust et al. 10-04814 11-05162 Oakdale Foundation Inc. et al. 10-05397 11-05163 Bruce D. Pergament et al. 10-05194 11-05216 Sharon A. Raddock 10-04494 11-05217 The Murray & Irene Pergament Foundation, Inc. et al. 10-04565 11-05218
David S. Wallenstein 10-04467 11-05219 Avram J. Goldberg et al. 10-05439 11-05220 Pergament Equities, LLC et al. 10-04944 11-05221 Wallenstein/NY Partnership & David S. Wallenstein 10-04988 11-05222 Bell Ventures Limited et al. 10-05294 11-05507 Kelman Partners Limited Partnership et al. 10-05158 11-05513 Barbara J. Berdon 10-04415 11-07684 Laura E. Guggenheimer Cole 10-04882 11-07670 Sidney Cole 10-04672 11-07669 Epic Ventures, LLC & Eric P. Stein 10-04466 11-07681 Ida Fishman Revocable Trust et al. 10-04777 11-07603 The Frederica Ripley French Revocable Trust et al. 10-05424 11-07622 Alvin Gindel Revocable Trust & Alvin Gindel 10-04925 11-07645 Rose Gindel Trust et al. 10-04401 11-07601 S & L Partnership et al. 10-04702 11-07600 Joel I. Gordon Revocable Trust & Joel 1. Gordon 10-04615 11-07623 Toby T. Hobish et al. 10-05236 11-07559 Helene Cummings Karp Annuity & Helene Cummings Karp 10-05200 11-07646 Lapin Children LLC 10-05209 11-07624 BAM L.P. et al. 10-04390 11-07667 David R. Markin et al. 10-05224 11-07602 Stanley T. Miller 10-04921 11-07579 The Murray Family Trust et al. 10-04510 11-07683 Estate of Marjorie K. Osterman et al. 10-04999 11-07626 Neil Regger Profit Sharing Keogh & Neil Reger 10-05384 11-07577 Eugene J. Ribakoff 2006 Trust et al. 10-05085 11-07644 Sage Associates et al. 10-04362 11-07682 Sage Realty et al. 10-04400 11-07668 The Norma Shapiro Revocable Declaration of Trust Under Agreement Dated 9/16/2008 et al. 10-04486 11-07578 Estate of Jack Shurman et al. 10-05028 11-07625 Barry Weisfeld 10-04332 11-07647
Nonetheless, Sharp and Boston Trading do not govern this case because the Trustee has adequately alleged that transfers not only preferred one creditor over another, but also defrauded Madoff Securities' creditors and depleted the funds available to pay any of them. See In re Bayou Group, LLC, 362 B.R. 624, 638 (Bankr.S.D.N.Y.2007) ("In contrast to the lawful and disclosed payment of a valid contractual antecedent debt in Sharp, the redemption payments at issue here of non-existent investor account balances as misrepresented in fraudulent financial statements were themselves inherently fraudulent and constituted an integral and essential component of the fraudulent Ponzi scheme alleged in the amended complaints."). While they do not fall within any of the three paradigmatic examples described by Judge Breyer, Madoff Securities' transfers defrauded creditors and diminished the assets available to them by, among other things, extending the life of the Ponzi scheme. In order to perpetuate its fraud, Madoff Securities had to make transfers in accordance with the fraudulent account statements it issued. Perpetuating the fraud harmed creditors. Madoff Securities' did not simply funnel money from one client to another. Instead, it also squandered money by, for example, purchasing the appearance of a legal enterprise, see Looby Decl. ¶ 27 (neither the market making nor the proprietary trading division "would have been viable without the fraudulent" investment advisory division), and funding Madoff's lavish lifestyle. The longer the scheme lasted, then, the larger the gap between Madoff Securities' debts and its ability to pay became. Moreover, as described in greater detail below, the defendants have shown neither that they could have enforced their claims for profits against Madoff Securities nor that their claims shared the same priority with those of other debtors. Accordingly, because transfers of profits depleted the estate's resources without providing offsetting benefits, the transfers at issue here prevented the use of Madoff Securities' funds to pay creditors.
