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Picard Wins Against Subsequent Transferee Safe Harbor Bid


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June 30, 2022, US Bankruptcy Court of Southern New York – The Southern New York Bankruptcy Court denied Defendant Bordier & Cie’s motion to dismiss the complaint of Irving Picard, the trustee (“Trustee”) for the liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) seeking to recover subsequent transfers allegedly consisting of BLMIS customer property.

The Trustee, through his complaint, sought to recover alleged subsequent transfers made to Bordier & Cie, a Swiss private bank specializing in asset management and securities trading. The subsequent transfers were allegedly derived from investments with BLMIS made by other funds, including: Fairfield Sentry Limited. 

In its motion to dismiss, Bordier & Cie argued that a safe harbor bars the Trustee’s recovery of this transfer; that the Trustee has failed to allege that Bordier & Cie holds BLMIS customer property; and that the Trustee has improperly used “adoption by reference”.

The Court found that the Trustee pleaded the avoidability of the initial transfer (from BLMIS to Fairfield Sentry) by “adopting by reference” the entirety of the complaint filed against Fairfield Sentry in adversary proceeding 09-1239.

The Court held that the pleadings filed in the “same action” may be properly “adopted by reference” in other pleadings in that action. It concluded that the incorporation of the Fairfield Sentry complaint by reference did not prejudice the interests of Bordier & Cie.

The Court further ruled that the safe harbor defense is a defense to the avoidance of initial transfers and not that of subsequent transfers. The safe harbor under § 546(e) allows the Trustee to avoid and recover only intentional fraudulent transfers under § 548(a)(1)(A), made within two years of the filing date: the transferee must have had actual knowledge of BLMIS’s Ponzi scheme, or more generally, “actual knowledge that there were no actual securities transactions being conducted.” The Court determined that the Trustee cannot clawback subsequent transfers if the safe harbor defense is applicable to the initial transfer.

The Court found that the Trustee’s Fairfield Sentry Complaint is replete with allegations that Fairfield Sentry had actual knowledge that BLMIS was not trading securities and therefore it does not have the benefit of the safe harbor defense. Moreover, the Court held that § 546(e) is inapplicable to subsequent transferees and disallowed Bordier & Cie to raise a safe harbor defense. The Court dismissed Bordier & Cie’s 12(b)(6) motion after finding that the Trustee’s complaint contained sufficient factual matter, to state a claim to relief that is plausible on its face.

Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 2022 Bankr. LEXIS 1828


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