trustee’s memorandum of law in … ecf case v. bernard l. madoff investment securities llc,...

Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York 10111 Telephone (212) 589-4200 Facsimile (212) 589-4201 David J. Sheehan Regina Griffin Thomas L. Long Stacey A. Bell Amanda E. Fein Attorneys for Irving H. Picard, Esq., Trustee for the

Substantively Consolidated SIPA Liquidation of

Bernard L. Madoff Investment Securities LLC and

Bernard L. Madoff

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

SECURITIES INVESTOR PROTECTION CORPORATION,

No. 12-mc-00115 (JSR)

Plaintiff-Applicant, ECF Case

v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC,

Electronically Filed

Defendant.

In re: BERNARD L. MADOFF,

Debtor.

TRUSTEE’S MEMORANDUM OF LAW IN OPPOSITION TO

DEFENDANTS’ MOTIONS TO DISMISS CONCERNING SECTION 550(a)

ISSUES 1 AND 2 AS ORDERED BY THE COURT ON AUGUST 21, 2012

Case 1:12-mc-00115-JSR Document 410 Filed 11/13/12 of 37

TABLE OF CONTENTS

Page

-i-

PRELIMINARY STATEMENT ................................................................................................... 1

BRIEF FACTUAL BACKGROUND............................................................................................ 5

The Trustee’s Action Against Initial Transferee Fairfield ..................................... 5

The Trustee’s Action Against Initial Transferee Kingate ...................................... 6

The Trustee’s Recovery Proceedings Against the Subsequent Transferee Defendants ................................................................................................. 6

THE RELEVANT PROVISIONS OF SIPA AND THE BANKRUPTCY CODE ....................... 7

ARGUMENT ................................................................................................................................. 9

I. THE TRUSTEE DOES NOT NEED TO OBTAIN A JUDGMENT AGAINST INITIAL TRANSFEREES BEFORE COMMENCING SECTION 550 RECOVERY ACTIONS AGAINST SUBSEQUENT TRANSFEREES .................................................................................................... 9

A. SIPA Permits the Trustee to Recover Voidable Transfers ......................... 9

B. Nothing in the Plain Language of Section 550 Requires a Fully Litigated, Court-Issued Judgment of Avoidance Against Initial Transferees Before a Recovery Proceeding May Be Brought Against Subsequent Transferees ................................................................ 9

C. The Majority of Courts Have Rejected the Issue 1 Subsequent Transferee Defendants’ Interpretation of Section 550(a), and Have Held that the Trustee Need Only Establish the Avoidability of the Initial Transfers ........................................................................................ 10

1. The Legislative History of Section 550 Reveals that the Language “To the Extent a Transfer is Avoided” Simply Incorporates the Section 548(c) Defense into Recovery Actions ......................................................................................... 12

2. Section 550 Expressly Authorizes the Trustee To Determine Which Transferee To Pursue, Similar To Joint and Several Liability .................................................................... 13

3. The Defendants’ Argument Is Inconsistent with the Statutory Scheme of the Bankruptcy Code, Which Separates the Concepts of Avoidance and Recovery ................... 14

4. Reading Section 550(a) to Allow for Recovery of Avoidable Transfers Avoids Absurd Results ............................... 16

a. Preventing Trustees from Settling With Initial Transferees ....................................................................... 16


TABLE OF CONTENTS (continued)

Page

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b. Legal and Practical Impossibilities of Suing Initial Transferees ....................................................................... 17

c. Defendants’ Interpretation of Section 550 Would Permit Subsequent Transferees to Avoid Liability and Diminish Assets of the Estate in Direct Contravention of the Statute’s Purpose ............................ 18

D. Interpreting Section 550 to Permit the Trustee to Pursue the Recovery Proceedings Fulfills the Statute’s Purpose .............................. 18

E. Even Were an Avoidance Against Initial Transferees a Prerequisite to Recovery Proceedings, the Defendants are Not Entitled to Dismissal .................................................................................................. 19

II. THE TRUSTEE’S RECOVERY PROCEEDINGS ARE TIMELY ................... 20

A. The Issue 2 Subsequent Transferee Defendants’ Argument Improperly Imports the Statute of Limitations For Avoidance Actions into Section 550 Recovery Proceedings ..................................... 20

B. The Trustee’s Claims Against the Initial Transferees and the Subsequent Transferees Were Timely Under the Applicable Statutes of Limitation ............................................................................... 22

C. The Subsequent Transferee Defendants Cannot Use a Statute of Limitations Defense Under Section 546(a) to Preclude Recovery Where that Defense Is Not Available to Preclude Avoidance of the Initial Transfers ........................................................................................ 23

D. The Defendants’ Interpretation of Section 550 is Counter to the Purpose of Statute of Limitations ............................................................ 25

E. The Subsequent Transferee Defendants Have Been Afforded Their Due Process Rights .................................................................................. 26

III. THE CONFLICTING ARGUMENTS OF THE ISSUE 1 AND ISSUE 2 SUBSEQUENT TRANSFEREE DEFENDANTS DEMONSTRATE THAT NEITHER GROUP’S INTERPRETATION OF SECTION 550 IS CORRECT ........................................................................................................... 26

IV. THE TRUSTEE HAS ADEQUATELY STATED A CLAIM AGAINST DEFENDANTS FOR RECOVERY OF SUBSEQUENT TRANSFERS ........... 28

CONCLUSION ............................................................................................................................ 29


-iii-

TABLE OF AUTHORITIES

Page(s)

CASES

Advanced Telecom Network, Inc. v. Allen (In re Advanced Telecom Network, Inc.), 321 B.R. 308 (Bankr. M.D. Fla. 2005), rev’d on other grounds by 490 F.3d 1325 (11th Cir. 2007) ........................................................................................................................11

Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974) .................................................................................................................25

Asarco LLC v. Shore Terminals LLC, No. C 11-01384, 2012 WL 2050253 (N.D. Cal. June 6, 2012) ...............................................23

Auburn Hous. Authority v. Martinez, 277 F.3d 138 (2d Cir. 2002).....................................................................................................27

Begier v. IRS, 496 U.S. 53 (1990) .....................................................................................................................8

Brown v. Phillips (In re Phillips), 379 B.R. 765 (Bankr. N.D. Ill 2007) .......................................................................................11

Cal. Pub. Emp. Retirement Sys., et al. v. Caboto-Gruppo Intesa BCI, et al. (In re

Worldcom Secs. Litig.), 496 F.3d 245 (2d Cir. 2007).....................................................................................................25

City of Pontiac Gen. Employees Ret. Syst. v. MBIA, Inc. 637 F.3d 169 (2d Cir. 2011).....................................................................................................25

Conn. Ex. Rel. Blumenthal v. U.S. Dep’t of the Interior, 228 F.3d 82 (2d Cir. 2000), cert. denied, 532 U.S. 1007 (2001) .............................................21

Crafts Plus+, Inc. v. Foothill Capital Corp. (In re Crafts Plus+, Inc.), 220 B.R. 331 (Bankr. W.D. Tex. 1998) ...................................................................................11

Dye v. Sachs (In re Flashcom, Inc.), 361 B.R. 519 (Bankr. C.D. Cal. 2007) .....................................................................................26

Exch. Nat’l Bank of Chicago v. Wyatt, 517 F.2d 453 (2d Cir. 1975).......................................................................................................7

IBT Int’l, Inc. v. Northern (In re Int’l Admin. Servs., Inc.), 408 F.3d 689 (11th Cir. 2005) ......................................................................................... passim

In re Adler Coleman Clearing Corp., 198 B.R. 70 (Bankr. S.D.N.Y. 1996) .........................................................................................7


TABLE OF AUTHORITIES (continued)

Page

-iv-

In re Enron Creditors Recovery Corp., 388 B.R. 489 (S.D.N.Y. 2008) .....................................................................................16, 17, 18

In re Jones Storage & Moving, Inc., 2005 WL 2590385 (Bankr. D. Kan. Apr. 14, 2005) ..........................................................24, 26

In re Mid Atlantic Fund, Inc., 60 B.R. 604 (Bankr. S.D.N.Y. 1986) .......................................................................................22

Johnson v. Railway Express Agency, Inc., 421 U.S. 454 (1975) .................................................................................................................21

K Mart Corp. v. Cartier, Inc., 486 U.S. 281 (1988) .................................................................................................................27

Kendall v. Sorani (In re Richmond Produce Co.), 195 B.R. 455 (N.D. Cal. 1996) ......................................................................................9, 13, 15

Leifer v. Murphy, 267 N.Y.S. 701 (1933) .............................................................................................................19

Leonard v. First Commercial Mortgage Co. (In re Circuit Alliance, Inc.), 228 B.R. 225 (Bankr. D. Minn. 1998) ...............................................................................13, 14

Leonard v. Optimal Payments, Ltd. (In re Nat’l Audit Defense Network Inc.), 332 B.R. 896 (Bankr. D. Nev. 2005) .......................................................................................11

Menninger v. Midwest Mfg. Techs., Inc. (In re Midwest Mobile Techs., Inc.), 304 B.R. 787 (Bankr. S.D. Ohio 2003) ....................................................................................14

Miller v. Steinberg (In re Marilyn Steinberg Enters.), 141 B.R. 587 (Bankr. E.D.Pa. 1992) .......................................................................................15

Morton v. Mancari, 417 U.S. 535 (1974) .................................................................................................................21

Official Comm. Of Unsecured Creditors, v. Foss (In re Felt Mfg. Co.), 371 B.R. 589 (Bankr. D.N.H. 2007) ........................................................................................11

Official Comm. of Unsecured Creditors v. J.P. Morgan Chase Bank (In re M. Fabrikant

& Sons, Inc.), 394 B.R. 721 (Bankr. S.D.N.Y. 2008) .....................................................................................11

Oscar Mayer & Co. v. Evans, 441 U.S. 750 (1979) ...........................................................................................................21, 22



Page

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Picard v. Bureau of Labor Ins. (In re Bernard L. Madoff Inv. Secs.), __ B.R. __, 2012 WL 4856207 (Bankr. S.D.N.Y. Oct. 11, 2012) ................................... passim

Picard v. Estate of Stanley Chais, et al. (In re Bernard L. Madoff Inv. Secs.), 445 B.R. 206 (Bankr. S.D.N.Y. 2011) .....................................................................................21

Picard v. Peter Madoff et al. (In re Bernard L. Madoff Inv. Secs.), 468 B.R. 620 (Bankr. S.D.N.Y. 2012) ...............................................................................21, 22

Pirie v. Chicago Title & Trust Co., 182 U.S. 438 (1901) .................................................................................................................28

Pry v. Maxim Global, Inc. (In re Maxim Truck Co.), 415 B.R. 346 (Bankr. S.D. Ind. 2009) .....................................................................................25

Rieser v. Moorman (In re Equity Land Title Agency, Inc.), 370 B.R. 154 (Bankr. S.D. Ohio 2007) ..............................................................................24, 25

Sand & Gravel Co. v. U.S., 552 U.S. 130 (2008) .................................................................................................................25

Savage & Assocs., P.C. v. BLR Servs. SAS, et al. (In re Teligent, Inc.), 307 B.R. 744 (Bankr. S.D.N.Y. 2004) .....................................................................................15

SEC v. F.O. Baroff Co., 497 F.2d 280 (2d Cir. 1974).......................................................................................................7

SEC v. Packer, 498 F.2d 978 (2d Cir. 1974).......................................................................................................7

Shapiro v. Art Leather, Inc. (In re Connolly N. Am., LLC), 340 B.R. 829 (Bankr. E.D. Mich. 2006) ..................................................................................11

Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs., Inc.), 379 B.R. 5 (Bankr. E.D.N.Y. 2007) .........................................................................................28

SIPC v. Barbour, 421 U.S. 412 (1975) ...................................................................................................................7

SIPC v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff Secs.), No. 12-MC-00115 (JSR) (S.D.N.Y. Aug. 12, 2012) .................................................................1

SIPC v. Stratton Oakmont, Inc., 234 B.R. 293 (Bankr. S.D.N.Y. 1999) .....................................................................................15



Page

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Thompson v. Jonovich (In re Food & Fibre Protection, Ltd.), 168 B.R. 408 (Bankr. D. Ariz. 1994) .......................................................................................26

Twyne’s Case, 3 Coke Rep. 80b, 76 Eng. Rep. 809 (K.B. 1601) .....................................................................19

U.S. Lines, Inc. v. U.S. (In re McLean Indus.), 184 B.R. 10 (Bankr. S.D.N.Y. 1995) .................................................................................21, 22

U.S. Nat’l Bank of Oregon v. Indep. Ins. Agents of America, Inc. 508 U.S. 439 (1993) .................................................................................................................27

U.S. v. Menasche, 348 U.S. 528 (1955) .................................................................................................................21

Universal Church v. Geltzer, 463 F.3d 218 (2d Cir. 2006), cert. denied, 549 U.S. 1113 (2007) ...........................................18

William v. Baxter Land Co., Inc. (In re Arkansas Catfish Growers, LLC), 2007 WL 215815 (E.D. Ark. Jan. 25, 2007) ............................................................................11

Woods & Erickson LLP v. Leonard (In re AVI), 389 B.R. 721 (B.A.P. 9th Cir. 2008)................................................................................ passim

World Bazaar Franchise Corp. v. CCC Associates Co. (In re World Bazaar Franchise

Corp.), 167 B.R. 985 (Bankr. N.D. Ga. 1994) .....................................................................................13

STATUTES

11 U.S.C. § 544 ........................................................................................................................1, 7, 8

11 U.S.C. § 545 ................................................................................................................................8

11 U.S.C. § 546 ..............................................................................................................4, 22, 23, 27

11 U.S.C. § 546(a) ................................................................................................................. passim

11 U.S.C. § 546(a)(1)(A) ...............................................................................................................20

11 U.S.C. § 547 ........................................................................................................................1, 7, 8

11 U.S.C. § 548 ..................................................................................................................1, 7, 8, 15

11 U.S.C. § 548(a)(1)(a) .................................................................................................................8



Page

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11 U.S.C. § 548(c) ...................................................................................................................12, 15

11 U.S.C. § 549 ................................................................................................................................8

11 U.S.C. § 550 ...................................................................................................................... passim

11 U.S.C. § 550(a) ................................................................................................................. passim

11 U.S.C. § 550(a)(1) ...............................................................................................................13, 14

11 U.S.C. § 550(a)(2) ...............................................................................................................11, 20

11 U.S.C. § 550(b) .....................................................................................................................8, 15

11 U.S.C. § 550(d) .........................................................................................................................20

11 U.S.C. § 550(f) .................................................................................................................. passim

11 U.S.C. § 553(b) ...........................................................................................................................8

11 U.S.C. § 724(a) ...........................................................................................................................8

15 U.S.C. § 78fff-1 ..........................................................................................................................7

15 U.S.C. § 78fff-2(c)(3) .......................................................................................................7, 9, 10

15 U.S.C. § 78fff(b) .........................................................................................................................7

OTHER AUTHORITIES

5 COLLIER ON BANKRUPTCY ¶ 550 (16th ed. 2010). ..........................................................11, 12, 14

124 CONG. REC. H. 11,047 (Sept. 28, 1978) ............................................................................12, 13

H.R. REP. NO. 95-595 (1977) ...................................................................................................12, 14

S. REP. NO. 95-989 (1978) .......................................................................................................12, 14


Irving H. Picard (the “Trustee”) as trustee for the substantively consolidated liquidation

of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff

(“Madoff”), by and through his undersigned counsel, respectfully submits this Memorandum in

opposition to the motions to dismiss concerning Section 550(a) Issues 1 and 2 filed by

defendants encompassed in this Court’s August 21, 2012 Order (“Issue 1 Subsequent Transferee

Defendants” and “Issue 2 Subsequent Transferee Defendants,” and collectively referred to as

“Subsequent Transferee Defendants”). The Court’s Order of August 21, 2012 specifically

directed common briefing with respect to the following issues:

(1) whether, as a precondition for pursuing a recovery action against a subsequent transferee under 11 U.S.C. § 550(a), the Trustee must first obtain a fully-litigated, final judgment of avoidance against the relevant initial transferee under 11 U.S.C. §§ 544, 547 or 548 (“Issue 1”), or (2) whether the Trustee’s recovery action against a subsequent transferee under 11 U.S.C. § 550(a) must be dismissed unless the Trustee has obtained a judgment against the relevant subsequent transferee avoiding the initial transfer or he asserts a claim against the subsequent transferee to avoid the initial transfer within the period prescribed by 11 U.S.C. § 546(a) (“Issue 2”).1

PRELIMINARY STATEMENT

Utilizing the fraudulent conveyance provisions of Bankruptcy Code §§ 547, 548 and 550,

among others, the Trustee timely commenced a number of avoidance and recovery actions

against initial and subsequent transferees who received stolen BLMIS customer property.

Subsequent to the commencement of the Trustee’s lawsuits, two of the initial transferees who

received billions of dollars of fraudulent transfers from BLMIS, Fairfield Sentry Ltd.

(“Fairfield”) and Kingate Global Fund Ltd. (“Kingate”), commenced liquidation proceedings in

the British Virgin Islands and Cayman Islands, respectively. Faced with the prospect of

1 See Order, SIPC v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff Secs.), No. 12-MC-00115 (JSR) (S.D.N.Y. Aug. 12, 2012) (Dkt. No. 15).


2

protracted and expensive litigation against an insolvent entity in liquidation proceedings in a

foreign jurisdiction, the Trustee entered into a settlement with Fairfield, which yielded a consent

judgment against that initial transferee for the entire amount of initial fraudulent transfers.

Bankruptcy Judge Lifland issued an order approving the settlement agreement, noting that it

offered “significant value to the BLMIS estate for distribution to victims of the Madoff Ponzi

scheme.”2 The Trustee’s action against Kingate, another insolvent initial transferee from whom

certain of the Subsequent Transferee Defendants received transfers, remains pending.

Two groups of defendants who received subsequent transfers from initial transferees

Fairfield and Kingate now move to dismiss, ostensibly under Section 550 of the Code. The Issue

1 Subsequent Transferee Defendants claim that pursuant to Section 550(a), the Trustee’s

recovery claims against them must be dismissed because a condition precedent has not been

satisfied. The Issue 2 Subsequent Transferee Defendants argue that the Trustee’s recovery

proceedings against them under Section 550 of the Code are untimely because, they assert, the

Trustee failed to bring those claims within the statute of limitations set forth in Section 546(a).

Both groups of defendants are wrong.

In particular, the Issue 1 Subsequent Transferee Defendants argue that, before any

recovery actions can be commenced against subsequent transferees, bankruptcy trustees are

required in every case to engage in protracted, burdensome and expensive litigation against the

initial transferees right through to a final court adjudicated judgment of avoidance – regardless

of whether the initial transferees are insolvent, defunct, deceased or even within the court’s

jurisdiction.

2 Picard v. Fairfield Sentry Limited, Settlement Approval Hearing (“Fairfield Tr.”), No. 09-01239 (Dkt. No. 93) June 7, 2011, at 36:21-25.


3

Close examination of the “plain” language of Section 550 reveals that it imposes no such

precondition upon recovery actions. It is therefore not surprising that the Issue 1 Subsequent

Transferee Defendants’ argument has been rejected by the majority of courts that have

considered it, including a recent decision by Judge Lifland in Picard v. Bureau of Labor Ins. (In

re Bernard L. Madoff Inv. Secs.), __ B.R. __, 2012 WL 4856207, at *15 (Bankr. S.D.N.Y. Oct.

11, 2012) (“BLI”). As Judge Lifland and the majority of courts have concluded, Section 550 of

the Code contemplates that the Trustee has the choice to seek recovery from initial transferees,

subsequent transferees or any combination thereof – so long as he can establish in the recovery

proceeding that the initial transfer is avoidable. Moreover, these courts have found that the Issue

1 Subsequent Transferee Defendants’ arguments with respect to Section 550 are contrary to the

Code’s statutory scheme, legislative history and the very purposes for which the avoidance and

recovery provisions were enacted.

As to the Issue 2 Subsequent Transferee Defendants’ argument, there is no question that

the Trustee’s recovery proceedings are timely within the relevant statute of limitations period set

forth in Section 550(f). Consistent with the Code’s distinct separation of the concepts of

avoidance and recovery, the Code provides two independent statutes of limitation that set forth

(i) the period within which a trustee must bring an action to avoid initial transfers, as established

by Section 546(a), and (ii) the period within which a trustee must bring a recovery proceeding, as

set forth in Section 550(f). The Issue 2 Subsequent Transferee Defendants are attempting to

import into these Section 550 recovery proceedings the Section 546(a) statute of limitations, and

in doing so, improperly conflate the two separate and independent statutes of limitations

Congress created for avoidance and recovery, respectively.


4

Moreover, because the two-year statute of limitations defense set forth in Section 546(a)

is unavailable here to preclude avoidance of the initial transfers at issue, it is likewise unavailable

to preclude recovery of those transfers. The Trustee timely brought avoidance actions against

the initial transferees at issue, Fairfield and Kingate, within two years from the date of

commencement of BLMIS’s liquidation. The Trustee also timely commenced recovery actions

against the subsequent transferees by bringing them within the Section 550(f) statute of

limitations period. Accordingly, the motion to dismiss brought by the Issue 2 Subsequent

Transferee Defendants must also be denied.

Nothing demonstrates the fallibility of the Subsequent Transferee Defendants’

construction of Section 550 more than the contradictions between their own arguments. The

Issue 1 Subsequent Transferee Defendants argue that the Trustee cannot pursue an action against

any subsequent transferee defendant until he first obtains a final, litigated judgment of avoidance

against the initial transferees. The Issue 2 Subsequent Transferee Defendants argue that the

Trustee’s recovery proceedings against them are time-barred because he did not commence

actions to avoid the initial transfers against them within the two-year period set forth in Section

546 of the Code. In other words, the Issue 1 Subsequent Transferee Defendants are contending

that the Trustee’s actions against them were brought too early; the Issue 2 Subsequent Transferee

Defendants are arguing that the Trustee’s actions were brought too late.

What the two groups of Subsequent Transferee Defendants have in common is that they

are both attempting to distort the “recovery” provisions of the Code in a manner that would

preclude any recovery whatsoever from subsequent transferees. But their own arguments in

opposition to one another merely demonstrate that neither group’s interpretation of Section 550

is the right one.


5

BRIEF FACTUAL BACKGROUND

Each of the moving Subsequent Transferee Defendants received subsequent transfers of

fraudulent conveyances of BLMIS customer property from initial transferees Fairfield and/or

Kingate. The following summarizes the relevant history of the actions brought by the Trustee

against those initial transferees.

The Trustee’s Action Against Initial Transferee Fairfield

On May 18, 2009, before the expiration of the two-year statute of limitations for

avoidance actions set forth in Section 546(a) of the Code, the Trustee commenced an adversary

proceeding against Fairfield, an initial transferee of funds from BLMIS. In that action, the

Trustee sought, among other things, the avoidance of the transfers made by BLMIS to Fairfield

during the six-year period prior to the Filing Date of the BLMIS proceedings totaling

$3,054,000,000 (the “Fairfield Initial Transfers”). Portions of the Fairfield Initial Transfers were

subsequently transferred, either directly or indirectly, to some of the Subsequent Transferee

Defendants.

On July 21, 2009, the Eastern Caribbean Supreme Court in the High Court of Justice of

the Virgin Islands entered an order commencing the winding up of Fairfield because of its

insolvency. With the Fairfield insolvency filing, it was evident that obtaining a full recovery of

the Fairfield Initial Transfers from Fairfield was impossible. Accordingly, in an effort to recover

the maximum funds for the benefit of BLMIS’s defrauded customers, the Trustee entered into a

settlement with Fairfield (the “Settlement Agreement”), pursuant to which Fairfield agreed to:

(i) pay the Trustee $70 Million; (ii) reduce its customer claim by nearly $730 million; and (iii)

enter into a consent judgment against it in favor of the Trustee for the entire amount of initial

transfers sought to be avoided by the Trustee totaling $3,054,000,000. See Ex. D to Defendants’

Issue 1 brief.


6

On June 10, 2011, Bankruptcy Judge Lifland approved the settlement after an open

hearing on the Trustee’s Bankruptcy Rule 9019 motion. The bankruptcy court conditioned its

approval of the settlement upon approval of the settlement by the BVI court, which was received

on June 24, 2011, and thereafter, the consent judgment against Fairfield Sentry was entered on

July 13, 2011.

The Trustee’s Action Against Initial Transferee Kingate

On April 17, 2009, well before the two-year statute of limitations period applicable to

avoidance actions under Section 546(a) expired, the Trustee commenced a proceeding against

Kingate, and initial transferee, which remains pending. Like Fairfield, Kingate and its

management company are currently in liquidation. A number of the Subsequent Transferee

Defendants are subsequent transferees of the initial fraudulent transfers received by Kingate.

The Trustee’s Recovery Proceedings Against the Subsequent Transferee Defendants

Because the Trustee received only a partial recovery of the Fairfield Initial Transfers, and

has yet to recover the Kingate initial fraudulent transfers, the Trustee commenced recovery

proceedings against the Subsequent Transferee Defendants pursuant to Section 550 of the Code.

The Trustee’s complaints against each of the Subsequent Transferee Defendants alleged that: (i)

the initial transferees Fairfield and/or Kingate received transfers of property from BLMIS; (ii)

those initial transfers are avoidable under one or more sections of the Bankruptcy Code; and (iii)

some or all of those initial transfers were transferred either directly or indirectly to the

Subsequent Transferee Defendants. See, e.g., Issue 2 Defs’ Ex. A. The Trustee’s complaints

against the Subsequent Transferees incorporate by reference all of the allegations from the

respective complaints against the initial transferees, including those concerning the avoidability

of the initial transfers at issue.


7

THE RELEVANT PROVISIONS OF SIPA AND THE BANKRUPTCY CODE

The Securities Investor Protection Act (“SIPA”) was enacted to “protect the public

customers of securities dealers from suffering the consequences of financial instability in the

brokerage industry.” SEC v. F.O. Baroff Co., 497 F.2d 280, 281 (2d Cir. 1974) (citations

omitted); see also SEC v. Packer, 498 F.2d 978, 980 (2d Cir. 1974). Through SIPA, Congress

created “a new form of liquidation proceeding applicable only to SIPC member firms,” which

was designed to return promptly customer property. SIPC v. Barbour, 421 U.S. 412, 416 (1975).

A SIPA liquidation is essentially a bankruptcy proceeding that is conducted under specified

chapters of the Bankruptcy Code. See 15 U.S.C. § 78fff(b); Exch. Nat’l Bank of Chicago v.

Wyatt, 517 F.2d 453, 457-59 (2d Cir. 1975); In re Adler Coleman Clearing Corp., 198 B.R. 70,

74 (Bankr. S.D.N.Y. 1996). A trustee in a SIPA liquidation proceeding has the general powers

of a bankruptcy trustee, as well as additional duties specified by the Act. See 15 U.S.C.

§ 78fff-1.

Consistent with SIPA’s purpose of protecting a broker-dealer’s customers, Section 78fff-

2(c)(3) provides the Trustee with the power to recover customer property that was fraudulently

transferred by BLMIS to restore the funds of customer property for distribution to customers.

Specifically, Section 78fff-2(c)(3) of SIPA provides that the Trustee “may recover any property

transferred by the debtor which, except for such transfer, would have been customer property if

and to the extent that such transfer is voidable or void under the provisions of [the Bankruptcy

Code].” 15 U.S.C. § 78fff-2(c)(3) (emphasis added). Thus, SIPA considers voidable or void

property to be recoverable by the Trustee, and directs us to the avoidance and recovery

provisions of the Bankruptcy Code.

Through Sections 544, 547, 548 and 550 of the Bankruptcy Code, Congress sought to

protect a bankrupt’s creditors by, among other things, providing a trustee with the power to avoid


8

and recover assets fraudulently transferred by a debtor. In Begier v. IRS, 496 U.S. 53, 58 (1990),

the Supreme Court explained that the purpose of these avoidance and recovery provisions was to

“preserve the property includable within the bankruptcy estate” and to restore property to

debtors’ estates for distribution to creditors.

Under Section 548(a)(1)(a) of the Code, a trustee may avoid any transfer “of an interest

of the debtor in property” where, among other things, the debtor made the transfer with “actual

intent to hinder, delay or defraud certain creditors.” Section 550 provides in relevant part:

[T] o the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724 (a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from – (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee.

11 U.S.C. § 550.

Under the avoidance and recovery scheme enacted by Congress, it is the initial transfers

made by a debtor of its property that are avoided. After establishing the initial transfer is

avoidable, a trustee may recover from the initial transferee, or any subsequent transferee in the

chain, subject to the defenses available to them.3 Notably, recovery actions against subsequent

transferees under Section 550 do not avoid subsequent transfers made to these defendants; they

merely seek to recover all or a portion of an initial fraudulent transfer of the debtor’s property

that the subsequent transferee defendant received. See 11 U.S.C. §§ 550(a) and (b).

3 See 11 U.S.C. § 544 (“The Trustee … may avoid any transfer of property of the debtor …”); § 545 (“The Trustee … may avoid the fixing of a statutory lien on property of the debtor …”); § 547 (“The Trustee may avoid any transfer of an interest of the debtor in property …”); § 548 (“The Trustee may avoid any transfer…of an interest of the debtor in property …”).


9

ARGUMENT

I. THE TRUSTEE DOES NOT NEED TO OBTAIN A JUDGMENT AGAINST

INITIAL TRANSFEREES BEFORE COMMENCING SECTION 550 RECOVERY

ACTIONS AGAINST SUBSEQUENT TRANSFEREES

A. SIPA Permits the Trustee to Recover Voidable Transfers

As set forth below, the Issue 1 Subsequent Transferee Defendant’s focus their entire

statutory construction argument on one particular phrase in Section 550 of the Code “to the

extent that a transfer is avoided …” 11 U.S.C. § 550(a) (emphasis added). But SIPA governs

these proceedings, and by its plain language permits the Trustee to recover transfers that are

“voidable or void” under the Bankruptcy Code. See SIPA §78fff-2(c)(3). The Issue 1

Subsequent Transferee Defendants have not advanced – because they cannot advance – any

construction of Section 550 of the Code that will allow them to circumvent the express language

of SIPA, which clearly authorizes the Trustee’s recovery claims here.

B. Nothing in the Plain Language of Section 550 Requires a Fully Litigated,

Court-Issued Judgment of Avoidance Against Initial Transferees Before a

Recovery Proceeding May Be Brought Against Subsequent Transferees

The Issue 1 Subsequent Transferee Defendants’ motion purports to rely upon the “plain

language” of Section 550 of the Code, which provides that “to the extent a transfer is avoided,”

the trustee may recover from the initial transferee of such transfer or any immediate or mediate

transferee of such initial transferee. The Issue 1 Subsequent Transferee Defendants argue that

the language to “the extent a transfer is avoided” prevents a Trustee from pursuing a recovery

against them without a final adjudicated judgment of avoidance as against the initial transferee.

But nowhere in the plain language of the statute is there any such express precondition to

recovery actions brought against subsequent transferees. See, e.g., Kendall v. Sorani (In re

Richmond Produce Co.), 195 B.R. 455, 463 (N.D. Cal. 1996) (holding that nothing in Section

550 suggests “that recovery from immediate transferees is in any way dependent upon a prior


10

action or recovery against the initial transferee”). In fact, Section 550 makes clear that a Trustee

can pursue recovery from any initial transferee, mediate transferee or immediate transferee, or

any combination thereof. But what is not “plain” from the statutory language itself is what the

term “avoid” means, what exactly is required to achieve “avoided” status, or who or what party

(or parties) must do the “avoiding.” Nowhere in the language of Section 550 is there any

specification that a transfer can be “avoided” only after a fully contested and completed litigation

against an initial transferee. Nowhere does the Code require a court to do the “avoiding” of a

transfer. And nowhere does the Code preclude the parties themselves – a trustee and an initial

transferee – from “avoiding” the initial transfer through a court-approved settlement agreement.

As discussed more fully below, the majority of authorities that have reviewed the

language “to the extent … avoided” of Section 550 have concluded that the Trustee need only

establish the avoidability of the initial transfers at issue in a recovery proceeding against

subsequent transferees. Thus, it is clear that the language of Section 550 does not have the

“plain meaning” advanced by defendants.

Even if Section 550 of the Code were interpreted in the strained manner that the Issue 1

Subsequent Transferee Defendants urge, under the express language of SIPA, the Trustee need

only show that a transfer is “voidable” pursuant to the provisions of the Bankruptcy Code to

recover it. See 15 U.S.C. § 78fff-2(c)(3).

C. The Majority of Courts Have Rejected the Issue 1 Subsequent Transferee

Defendants’ Interpretation of Section 550(a), and Have Held that the Trustee

Need Only Establish the Avoidability of the Initial Transfers

The majority of courts to consider the Issue 1 Subsequent Transferee Defendants’

argument have rejected the notion that fully adjudicated judgments against initial transferees are

a precondition to recovery actions against subsequent transferees – including two of the most


11

recent decisions out of the Bankruptcy Court for the Southern District of New York.4 BLI, 2012

WL 4856207, at *14; Official Comm. of Unsecured Creditors v. J.P. Morgan Chase Bank (In re

M. Fabrikant & Sons, Inc.), 394 B.R. 721, 745-46 (Bankr. S.D.N.Y. 2008). These courts have

determined that the appropriate interpretation of the language “to the extent that a transfer is

avoided” requires only that a trustee demonstrate the avoidability of the initial transfer in a

recovery proceeding against subsequent transferees. As the Eleventh Circuit stated in IBT Int’l,

Inc. v. Northern (In re Int’l Admin. Servs., Inc.), 408 F.3d 689, 708 (11th Cir. 2005):

After looking at the statute as a whole, we think Congress contemplated “to the extent that a transfer is avoided” to be a simultaneous as well as successive process. The trustee here did not have to pursue litigation against [the initial transferees] to successfully avoid the transfers of assets to [the subsequent transferees]. Therefore, we hold that Section 550(a) does not mandate a plaintiff to first pursue recovery against the initial transferee and successfully avoid all prior transfers of a mediate transferee…

In re Int’l Admin. Servs..

Collier’s has determined that this is the “better view,”5 and the Ninth and Eleventh

Circuits agree. See Woods & Erickson LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 735

(B.A.P. 9th Cir. 2008) (“a trustee is not required to avoid the initial transfer from the initial

transferee before seeking recovery from subsequent transferees under § 550(a)(2)”); In re Int’l

Admin. Servs., 408 F.3d at 708 (“Section 550(a) does not mandate a plaintiff to first pursue

4 See also William v. Baxter Land Co., Inc. (In re Arkansas Catfish Growers, LLC), 2007 WL 215815, at *2 (E.D. Ark. Jan. 25, 2007); Brown v. Phillips (In re Phillips), 379 B.R. 765, 786 (Bankr. N.D. Ill 2007); Official Comm. Of Unsecured Creditors, v. Foss (In re Felt Mfg. Co.), 371 B.R. 589, 638-39 (Bankr. D.N.H. 2007); Shapiro v. Art Leather, Inc. (In re Connolly N. Am.,

LLC), 340 B.R. 829, 839-43 (Bankr. E.D. Mich. 2006); Leonard v. Optimal Payments, Ltd. (In re

Nat’l Audit Defense Network Inc.), 332 B.R. 896, 915 (Bankr. D. Nev. 2005); Advanced Telecom

Network, Inc. v. Allen (In re Advanced Telecom Network, Inc.), 321 B.R. 308, 327 (Bankr. M.D. Fla. 2005), rev’d on other grounds by 490 F.3d 1325 (11th Cir. 2007); Crafts Plus+, Inc. v.

Foothill Capital Corp., (In re Crafts Plus+, Inc.), 220 B.R. 331, 334-38 (Bankr. W.D. Tex. 1998).

5 5 COLLIER ON BANKRUPTCY ¶ 550.02[1] (16th ed. 2010).


12

recovery against the initial transferee and successfully avoid all prior transfers against a mediate

transferee”).

Notably, the BLI case involved a similarly situated subsequent transferee of Fairfield,

who advanced the same construction of Section 550 as the Issue 1 Subsequent Transferee

Defendants. Judge Lifland rejected the defendant’s argument there, holding that the Trustee

need only establish the avoidability of the initial transfers to Fairfield to pursue recovery from

the subsequent transferee. BLI, 2012 WL 4856207, at *15. His reasoning, and that of the

majority of courts, included: a thorough review of the statutory scheme surrounding the Code’s

avoidance and recovery provisions, the legislative history of Section 550, the purposes

underlying the avoidance and recovery provisions, and the desire to avoid absurd results.

1. The Legislative History of Section 550 Reveals that the Language “To

the Extent a Transfer is Avoided” Simply Incorporates the Section

548(c) Defense into Recovery Actions

One of the reasons courts have rejected the Defendants’ interpretation of “to the extent …

avoided” is because the legislative history of Section 550 makes clear that this language was

adopted for the purpose of providing to subsequent transferees the same defense enjoyed by

initial transferees under the Code as set forth in Section 548(c). H.R. REP. NO. 95-595, at 375-76

(1977); S. REP. NO. 95-989, at 90 (1978); In re Int’l Admin. Servs., 408 F.3d at 706 (citing 124

CONG. REC. H. 11,047, at 79 (Sept. 28, 1978)); 5 COLLIER ON BANKRUPTCY ¶ 550.02[1].

Congress took this language to mean that “liability is not imposed on a transferee to the extent

that a transferee is protected under a provision such as Section 548(c), which grants a good faith

transferee for value of a transfer that is avoided only as a fraudulent transfer, a lien on the

property transferred to the extent of value given.” H.R. REP. NO. 95-595, at 430 (1977). Thus,

“[i]f the value of the property transferred by the debtor exceeds the value given by the transferee,


13

the transfer will be avoidable only to the extent of that excess.” 5 COLLIER ON BANKRUPTCY ¶

550.02[1] (emphasis added).

2. Section 550 Expressly Authorizes the Trustee To Determine Which

Transferee To Pursue, Similar To Joint and Several Liability

Another reason the courts have determined that trustees can pursue recovery actions

against subsequent transferees without first fully litigating avoidance actions against initial

transferees is because, similar to joint and several liability, the Code allows the Trustee to pursue

recovery against whomever he chooses. Section 550(a)(1) is phrased in the disjunctive,

suggesting that a trustee elects between naming the initial transferee, the beneficiary, or the

subsequent transferee as defendant in a recovery action. See In re AVI, Inc., 389 B.R. at 733; In

re Int’l Admin. Servs., 408 F.3d at 707; In re Richmond Produce Co., 195 B.R. at 463; Leonard

v. First Commercial Mortgage Co. (In re Circuit Alliance, Inc.), 228 B.R. 225, 236 (Bankr. D.

Minn. 1998). The statute does not dictate or prioritize a trustee’s choice of whom to sue, so

although it is clear that a trustee can only equitably recover once under Section 550(a), no

language in the statute mandates joinder. In re Circuit Alliance, Inc., 228 B.R. at 236-37. This

is a clear parallel to the joint and several liability doctrine where joint tortfeasors can be sued

independently without barring the potential claims, cross or future, for indemnification that the

named defendant may bring against the unnamed participants. Id.

Because a trustee can use Section 550(a) to recover from the transferee of his choosing,

an avoidable transfer is all that is required to state a claim for recovery against a transferee.

World Bazaar Franchise Corp. v. CCC Associates Co. (In re World Bazaar Franchise Corp.),

167 B.R. 985, 990 (Bankr. N.D. Ga. 1994) (“Under the literal language of the statute, there must

be an avoidable transfer before there can be recovery under § 550”) (citations omitted); see also

Menninger v. Midwest Mfg. Techs., Inc. (In re Midwest Mobile Techs., Inc.), 304 B.R. 787, 789


14

(Bankr. S.D. Ohio 2003) (“Section 550(a)(1) is said to establish joint liability comparable to the

joint and several liability of joint tortfeasors.”). By “neither prioritizing the estate’s recourse nor

mandating joinder, the statute allows the trustee to pick his named defendants.” In re Circuit

Alliance, Inc., 228 B.R. at 236.

3. The Defendants’ Argument Is Inconsistent with the Statutory Scheme

of the Bankruptcy Code, Which Separates the Concepts of Avoidance

and Recovery

Courts have also rejected the Issue 1 Subsequent Transferee Defendants’ argument that a

separate “avoidance” action against initial transferees must precede any recovery proceeding

under Section 550 because such a construction impermissibly conflates the two concepts of

avoidance and recovery.

The legislative history of the Bankruptcy Code reveals that Congress clearly intended to

separate the two concepts of avoidance of transfers and recovery from transferees. See H.R. REP.

NO. 95-595, at 311 (1977) (Section 550 “enunciates the separation between the concepts of

avoiding a transfer and recovering from the transferee”); see S. REP. NO. 95-989, at 90 (1978).

According to the House Report for the Bankruptcy Reform Act of 1978, Section 550 “prescribes

the liability of a transferee of an avoided transfer, and enunciates the separation between the

concepts of avoiding a transfer and recovering from the transferee . . . . or from any immediate or

mediate transferee.” H.R. REP. NO. 95-595, at 122 (1977) (emphasis added); see also 5 COLLIER

ON BANKRUPTCY ¶ 550.LH (“The notions to separate the concepts of avoidability of transfers

and the liability of and recovery from transferees and to consolidate the rules regarding liability

and recovery in section 550 originated with the Commission on the Bankruptcy Laws of the

United States.”). 6

6 See also Savage & Assocs., P.C. v. BLR Servs. SAS, et al. (In re Teligent, Inc.), 307 B.R. 744, 749 (Bankr. S.D.N.Y. 2004) (“The Code separates the avoidance of a fraudulent transfer from


15

Because the concepts of avoidance and recovery are separate and distinct, they are

addressed in separate sections of the Code (see 11 U.S.C. §§ 546-549 and 550, respectively),

each section providing for independent affirmative defenses (see 11 U.S.C. §§ 548(c) and

550(b), respectively) and separate statutes of limitation (see 11 U.S.C. § 546(a) and § 550(f),

respectively).

As recognized by the Ninth Circuit and several other courts, the fact that Congress kept

the concepts of avoidance and recovery distinct indicates that “the trustee need not first avoid a

transfer from the initial transferee when seeking recovery from a subsequent transferee under and

§ 550.” In re AVI, Inc., 389 B.R. at 734.7 It is sufficient that the trustee proves in an action

against the subsequent transferees that the initial transfer was avoidable. Id. at 733. Recognizing

this distinction, Judge Lifland recently concluded that “there is nothing in Section 550 suggesting

that ‘recovery from immediate transferees is in any way dependent upon a prior action or

recovery against the initial transferee.’” BLI, 2012 WL 4856207, at *15 (citing In re Richmond

Produce Co., 195 B.R. at 463).

the recovery of a fraudulent transfer.”); SIPC v. Stratton Oakmont, Inc., 234 B.R. 293, 312 (Bankr. S.D.N.Y. 1999) (“The statute clearly separates ‘(1) the initial transferee of such transfer ...’ from ‘(2) any immediate or mediate transferee of such initial transferee,’ otherwise known as the subsequent transferee ...”) (quoting 11 U.S.C. § 550(a)).

7 See also In re Int’l Admin. Servs., 408 F.3d at 707 (“[T]he distinction between initial transferee and mediate transferee for avoidance purposes is irrelevant. The Defendants need only be transferees.”); In re Richmond Produce Co., 195 B.R. at 463 (holding that “once the trustee proves that a transfer is avoidable under § 548, he may seek to recover against any transferee, initial or immediate, or an entity for whose benefit the transfer is made”) (emphasis added); Miller v. Steinberg (In re Marilyn Steinberg Enters.), 141 B.R. 587, 595-96 (Bankr. E.D.Pa. 1992).


16

4. Reading Section 550(a) to Allow for Recovery of Avoidable Transfers

Avoids Absurd Results

A number of courts have rejected the Issue 1 Subsequent Transferee Defendants’

construction of Section 550(a) because it “produces a harsh and inflexible result that runs

counterintuitive to the nature of avoidance actions.” In re Int’l Admin. Servs., 408 F.3d at 704.

Because bankruptcy law is based in equity, courts attempt to avoid absurd results when faced

with the impracticality or utter impossibility of avoiding a transfer against an initial transferee

prior to pursuing recovery proceedings. BLI, 2012 WL 4856207, at *15; see In re Enron

Creditors Recovery Corp., 388 B.R. 489 (S.D.N.Y. 2008), Hearing Transcript (“Enron Tr.”), No.

07-6597 (Dkt. No. 32) April 16, 2008, at 37:15-25, 38:1-10.

a. Preventing Trustees from Settling With Initial Transferees

One absurd result of interpreting Section 550 to allow for recovery from subsequent

transferees only after a final, fully contested adjudication and judgment of avoidance against

initial transferees would be that bankruptcy trustees would be prevented from ever settling with

initial transferees. As the Ninth Circuit aptly noted in In re AVI, Inc.:

Under a strict construction of §550, the trustee would be precluded from pursuing subsequent transferees after settling with an initial transferee who does not admit liability. In turn, trustees would have little incentive to partially settle avoidance actions, thereby running up the costs of litigation and causing further delay. Congress could not have contemplated this outcome in enacting § 550….Simply put, the statute should be interpreted to provide flexibility and

avoid an absurd result, especially in cases that involve multiple transfers or

settlements as in this case.

In re AVI, Inc., 389 B.R. at 735 (emphasis added) (internal citation omitted); see also BLI, 2012

WL 4856207, at *15.

In BLI, Judge Lifland recently rejected the same argument advanced by the Issue 1

Subsequent Transferee Defendants, because it would “forc[e] the Trustee to choose between

engaging in such burdensome litigation with the insolvent initial transferee on the one hand, or


17

forever forfeit[] the right to recovery from all subsequent transferees on the other.” BLI, 2012

WL 4856207, at *15. Such an absurd result cannot be what Congress intended in its enactment

of Section 550.

b. Legal and Practical Impossibilities of Suing Initial Transferees

The Issue 1 Subsequent Transferee Defendants’ proffered construction of Section 550 as

requiring judgments of avoidance against initial transferees fails to take into account

circumstances where it may be impracticable or impossible for a trustee to litigate to final

judgment against the initial transferees. See Enron Tr., at 38:11-15. For example, initial

transferees may be, and often are, defunct, deceased or insolvent – as is the case with both initial

transferees at issue in this proceeding.

Under such circumstances, interpreting Section 550 to require a fully contested litigation

and court-issued judgment of avoidance against insolvent initial transferees would be asking

bankruptcy trustees to waste resources on litigating a case without the hope of any considerable

recovery. BLI, 2012 WL 4856207, at *15 (“It was ‘impractical’ for the Trustee to obtain such a

judgment against Fairfield Sentry because it would have entailed protracted, expensive litigation

with an insolvent entity in the midst of a liquidation proceeding with little chance of a

meaningful recovery”).

In Enron, Judge Hellerstein recognized that “the whole substructure of bankruptcy is

equity,” and stated that courts should not “create an interpretation of statutes like [Section 550]

in a way that eliminates the possibility of recovery.” In reversing the bankruptcy court’s

decision on which the defendants rely, Judge Hellerstein concluded that:

I think it necessary to leave open the possibility of an exception where for legal or practical reasons it is impossible or impractical to satisfy the precondition of an avoidance. Like any condition precedent two [sic] ready an application of the requirement of the condition precedent can amount to a forfeiture. And in this application it would bar the trustee from seeking recovery of assets that arguably


18

should be recovered for the bankrupt to stay and the creditors thereof. And so I believe that since we are involved with statutory extensions of laws of equity and I think we should inform the way that the bankruptcy code and rules are interpreted not in the feasance of literal terms, but, certainly, where there is sufficient ambiguity to allow such we can satisfy both literal rule and equity.

Enron Tr., at 34:10-11; 38:7-10; In re Enron Creditors Recovery Corp., 388 B.R. at 489.

c. Defendants’ Interpretation of Section 550 Would Permit Subsequent Transferees to Avoid Liability and Diminish Assets of the Estate in Direct Contravention of the Statute’s Purpose

Still other courts have recognized that the defendants’ interpretation of Section 550(a)

would permit subsequent transferee defendants to evade liability. In re Int’l Admin. Servs., 408

F.3d at 707 (“The cornerstone of the bankruptcy courts has always been the doing of equity, and

in situations such as this, where money is spread throughout the globe, fraudulent transferors

should not be allowed to use § 550 as both a shield and a sword. Not only would subsequent

transferees avoid incurring liability, but they would defeat recovery and further diminish the

assets of the estate.”) (citation omitted). In many instances, a bankrupt’s estate and its creditors

would be made to bear the brunt of this ineffectuality because the costs and delay associated with

unnecessary litigation against initial transferees would be borne by the estate and its creditors.

Id.; see also BLI, 2012 WL 4856207, at *15. Under this harsh and inflexible interpretation of the

Section 550, “any streetwise transferee would simply re-transfer the money or asset in order to

escape liability,” and the policies underlying the Bankruptcy Code would be thwarted. In re Int’l

Admin. Servs., 408 F.3d at 704.

D. Interpreting Section 550 to Permit the Trustee to Pursue the Recovery

Proceedings Fulfills the Statute’s Purpose

The purpose of the avoidance and recovery provisions is to “protect the interests of

creditors against fraudulent transfers” and to “preserve property of the estate for distribution to

creditors.” Universal Church v. Geltzer, 463 F.3d 218, 228 (2d Cir. 2006) (citation omitted),


19

cert. denied, 549 U.S. 1113 (2007). Construing Section 550 in the manner advanced by the

Trustee – and as accepted by the majority of courts – would permit him to accomplish the widest

recovery possible of the assets fraudulently conveyed by BLMIS, and is thus the only

interpretation of the statute that is consistent with its very purpose.

Moreover, the Trustee’s interpretation of the statute is the only interpretation consistent

with long-standing jurisprudence, that for more than 500 years has directed the liberal

construction of statutes addressing fraudulent conveyances. Twyne’s Case, 3 Coke Rep. 80b, 76

Eng. Rep. 809 (K.B. 1601) (“And because fraud and deceit abound in these days more than in

former times, it was resolved in this case by the whole court, that all statutes made against fraud

should be liberally and beneficially expanded to suppress the fraud.”); see also Leifer v. Murphy,

267 N.Y.S. 701, 705 (1933) (noting with regard to New York Debtor and Creditor Law, “[i]t is a

remedial statute designed to furnish a creditor, as therein defined, full, complete and speedy

relief against his fraudulent debtor. It should, therefore, receive a liberal construction by the

courts in order to accomplish that purpose”).

E. Even Were an Avoidance Against Initial Transferees a Prerequisite to

Recovery Proceedings, the Defendants are Not Entitled to Dismissal

Even if Section 550 did require the Trustee to obtain an avoidance against initial

transferees as a precondition to the commencement of recovery actions, none of the Subsequent

Transferees Defendants is entitled to dismissal.

The Trustee has, through the settlement with Fairfield, effectively “avoided” the initial

transfers from BLMIS, and indeed, has partially recovered some of those transfers from


20

Fairfield.8 As the action against Kingate remains pending, there is no basis to dismiss as against

any of the Kingate subsequent transferees.

II. THE TRUSTEE’S RECOVERY PROCEEDINGS ARE TIMELY

A. The Issue 2 Subsequent Transferee Defendants’ Argument Improperly

Imports the Statute of Limitations For Avoidance Actions into Section 550

Recovery Proceedings

The Issue 2 Subsequent Transferee Defendants contend that the Trustee’s recovery

claims against them must be dismissed because the initial transfers have not been “avoided,” and

now cannot be avoided as against them because the Trustee failed to do so within the two-year

statute of limitations period prescribed for avoidance proceedings in Section 546(a) of the Code.

Such a construction improperly imports a statute of limitations from another statutory provision,

contrary to the statutory scheme which separates the concepts of avoidance and recovery.

As noted above, consistent with the Code’s bifurcation of avoidance and recovery, the

Code provides two different statutes of limitation for the commencement of avoidance and

recovery actions. Section 546(a) establishes the statute of limitations for avoidance proceedings,

and provides that those actions must be commenced “within two years of entry of the order for

relief.” 11 U.S.C. § 546(a)(1)(A). Section 550(f), which governs the recovery actions like those

at issue on this motion, provides that such recovery actions “must be brought no later than one

year after the avoidance of the transfer or the closing or dismissal, whichever occurs first.”

8 The Issue 1 Subsequent Transferee Defendants acknowledge that, through the Fairfield Settlement Agreement, the Trustee has obtained a substantial recovery from Fairfield. See Defs’ Issue 1 Br. at 14. Rather than recognizing that their argument acknowledges the effective avoidance of the initial transfers, the Issue 1 Subsequent Transferee Defendants assert the Trustee’s claims against them should be dismissed on equitable grounds to prevent the Trustee from recovering more than the estate is due. Id. However, defendants’ argument ignores the fact that Section 550(d) itself provides the defendants with protection against any such unjust results, by limiting the Trustee to a single satisfaction and does not take into account the fact that the Trustee has recovered less than one-third of the avoidable transfers made to Fairfield. See 11 U.S.C. § 550(a)(2).


21

11 U.S.C. § 550(f); see also Picard v. Peter Madoff et al. (In re Bernard L. Madoff Inv. Secs.),

468 B.R. 620, 632 (Bankr. S.D.N.Y. 2012) (citations omitted).

Congress established specific statutes of limitation for particular causes of action, and to

read into one statute a period of limitations from another statute – as Defendants urge – is

contrary to Congressional intent.9 Indeed Defendants’ attempts here to import the limitations

period of Section 546(a) into these recovery proceedings would render the statute of limitations

provision of Section 550(f) a nullity – in direct contravention of fundamental principles of

statutory construction.10

Moreover, the notion that the Issue 2 Subsequent Transferees Defendants advance – that

trustees should be required to bring all suits against subsequent transferees within the two year

period set forth in Section 546(a) – is neither practical nor feasible, particularly in a complex,

globe-spanning case such as this one. See Picard v. Estate of Stanley Chais, et al. (In re Bernard

L. Madoff Inv. Secs.), 445 B.R. 206, 236 (Bankr. S.D.N.Y. 2011) (bankruptcy court recognizing

hurdles to Trustee’s subsequent transferee proceedings, including that the Trustee is an

9 See U.S. Lines, Inc. v. U.S. (In re McLean Indus.), 184 B.R. 10, 15 (Bankr. S.D.N.Y. 1995) (“[h]ad Congress intended to impose a time limitation on objections to claims under section 502(d), they could have done so very easily. Congress’ failure to do so precludes this Court from rewriting the statute…”); see Oscar Mayer & Co. v. Evans, 441 U.S. 750, 757 (1979); Johnson v. Railway Express Agency, Inc., 421 U.S. 454, 464-65 (1975) (“the length of the period allowed for instituting suit inevitably reflects a value judgment concerning the point at which the interests in favor of protecting valid claims are outweighed by the interests in prohibiting the prosecution of stale ones”).

10 See U.S. v. Menasche, 348 U.S. 528, 538 (1955) (“[t]he cardinal principle of statutory construction is to save and not to destroy”) (internal citations and quotations omitted); Morton v.

Mancari, 417 U.S. 535, 551 (1974) (“The courts are not at liberty to pick and choose among congressional enactments, and when two statutes are capable of co-existence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.”); Conn. Ex. Rel. Blumenthal v. U.S. Dep’t of the Interior, 228 F.3d 82, 88 (2d Cir. 2000) (explaining that the court is required to disfavor an interpretation of a statute that renders language superfluous), cert. denied, 532 U.S. 1007 (2001).


22

“outsider” to the subsequent transfer transactions, and will need discovery to identify the specific

subsequent transfers by date, amount and the manner in which they were effected) (citation

omitted).

In analogous circumstances, other courts have rejected attempts of defendants to import

statutes of limitations from one statutory provision to another.11 So too here, Defendants’

attempt to import the two-year avoidance statute of limitations period set forth in Section 546

into this Section 550 recovery action is improper.

B. The Trustee’s Claims Against the Initial Transferees and the Subsequent

Transferees Were Timely Under the Applicable Statutes of Limitation

As set forth above, the Trustee timely commenced avoidance actions against the initial

transferees, Fairfield and Kingate, well within the two-year Section 546(a) statute of limitations

period. The Trustee also commenced timely recovery actions against the Kingate and Fairfield

subsequent transferees.

Because the avoidance action against Kingate remains pending, the statute of limitations

for the Kingate Subsequent Transferee Defendants has not even begun to run. See Picard v.

Peter Madoff, et al., 468 B.R. at 623. As to the Fairfield subsequent transferee defendants, the

Bankruptcy Court entered an order approving the Fairfield Settlement Agreement on June 11,

2011. This order triggered the one year statute of limitations under Section 550(f) for the

Trustee’s actions against the Fairfield Subsequent Transferee Defendants. See BLI, 2012 WL

11 In re Mid Atlantic Fund, Inc., 60 B.R. 604, 610 (Bankr. S.D.N.Y. 1986) (rejecting defendant’s argument that Section 546(a) statute of limitations applied to bar a trustee’s Section 502(d) claim); In re McLean Indus., 184 B.R. at 15 (same); see also Oscar Mayer & Co. v. Evans, 441 U.S. 750, 757 (1979).


23

4856207, at *16.12 Thus, the recovery actions brought by the Trustee based on subsequent

transfers by Fairfield brought within one year of June 11, 2011 were timely.

The Bankruptcy Court rejected a similar statute of limitations argument advanced by

another Fairfield subsequent transferee defendant in BLI. 2012 WL 4856207, at *16. There, like

here, BLI argued that the Trustee’s recovery action was time-barred. In rejecting that argument,

the Bankruptcy Court found that the Fairfield Settlement Agreement – the same settlement

agreement at issue on these motions – “presents the court with finality with respect to Fairfield

Sentry” and that finality triggers the one-year statute of limitations in Section 550(f). Id. The

court found that so long as the Trustee has brought his action against the subsequent transferees

within one year of the Fairfield Settlement, that action is timely. Id.; see Asarco LLC v. Shore

Terminals LLC, No. C 11-01384, 2012 WL 2050253, at *5 (N.D. Cal. June 6, 2012).

C. The Subsequent Transferee Defendants Cannot Use a Statute of Limitations

Defense Under Section 546(a) to Preclude Recovery Where that Defense Is

Not Available to Preclude Avoidance of the Initial Transfers

The Code bifurcates the concepts of avoidance and recovery, and provides separate

defenses for both. The subsequent transferees’ defenses are set forth in Section 550 of the Code,

including the statute of limitation defense in 550(f). In addition, subsequent transferees can take

advantage of the defenses set forth in Section 546 or 548, but only to the extent those defenses

are available to preclude the avoidance of an initial transfer. The converse is also true: if a

defense set forth in Sections 546 or 548 is not available to preclude avoidance of an initial

transfer, then it is not available to preclude recovery of that transfer from subsequent transferees.

12 Issue 1 Subsequent Transferee Defendants argue that to give Section 550(f) full effect would require the trustee to first avoid the initial transfer as to the initial transferee before recovering against subsequent transferees. See Defs’ Issue 1 Br. at 9. But as the court noted in BLI, a trustee’s settlement with an initial transferee serves as an adequate trigger to commence the Section 550(f) statute of limitations period, rendering Section 550(f) fully consistent with the Trustee’s reading of Section 550(a). BLI, 2012 WL 4856207, at *16.


24

The Trustee timely commenced avoidance actions against the initial transferees, Kingate

and Fairfield. Thus, because the statute of limitations defense set forth in Section 546(a) is

unavailable to preclude avoidance of the initial transfers made to Kingate and Fairfield, that

defense is unavailable to preclude the Trustee’s recovery of those transfers from the Subsequent

Transferee Defendants.

In re Jones Storage & Moving, Inc., a case on which the Subsequent Transferee

Defendants heavily rely, supports the Trustee’s position here. 2005 WL 2590385, at *1 (Bankr.

D. Kan. Apr. 14, 2005). In that case, the trustee’s avoidance action was not brought within the

two-year limitation period of Section 546(a), but the initial transferee defendants failed to raise

Section 546(a) as a defense to the avoidance action. Id. After the trustee settled with the initial

transferee, the court permitted the subsequent transferee defendant to assert the untimeliness of

the avoidance action as a defense in the action against them. Id. The Jones decision was based,

in part, on the fact that the statute of limitations defense under Section 546(a) would have been

available to the initial transferee in the avoidance action, and thus, the subsequent transferees

should have had that same defense available to them. Id. Here, to the contrary, no such defense

under Section 546(a) is available to Fairfield or Kingate to preclude avoidance of the initial

transfers, and therefore the Subsequent Transferee Defendants cannot avail themselves of a

Section 546(a) defense to preclude recovery.

The Issue 2 Subsequent Transferee Defendants’ reliance on Rieser v. Moorman (In re

Equity Land Title Agency, Inc.), 370 B.R. 154, 158 (Bankr. S.D. Ohio 2007) is also misplaced.

There, the bankruptcy court entered a default judgment against the initial transferees, but in its

order, expressly limited the use of the default judgment solely to the trustee and the initial

transferees. Id. In a later action against the subsequent transferees, the court held that the default


25

judgment could not be used to establish avoidance of the transfers because of the restrictive

language in the default judgment. Id. In granting the dismissal motion, the court recognized that

its holding was an “unusual result” because “absent restrictive language, a court’s decision is

available for all appropriate purposes.” Id. By way of contrast, the Settlement Agreement and

Judge Lifland’s order approving it expressly contemplated that the Trustee would use the

settlement and consent judgment in recovery proceedings against subsequent transferees. See

Issue 1 Defs’ Ex. D, Fairfield Settlement Agreement ¶ 24.

D. The Defendants’ Interpretation of Section 550 is Counter to the Purpose of

Statute of Limitations

The Issue 2 Subsequent Transferee Defendants’ statute of limitations argument is also not

consistent with the purpose of statutes of limitations, which is to protect defendants against stale

claims. Cal. Pub. Emp. Retirement Sys., et al. v. Caboto-Gruppo Intesa BCI, et al. (In re

Worldcom Secs. Litig.), 496 F.3d 245, 254 (2d Cir. 2007) (“Statutes of limitations are designed

to prevent ‘the revival of claims that have been allowed to slumber until evidence has been lost,

memories have faded, and witnesses have disappeared.’”) (citing Am. Pipe & Constr. Co. v.

Utah, 414 U.S. 538, 554 (1974)); see Sand & Gravel Co. v. U.S., 552 U.S. 130, 133 (2008); City

of Pontiac Gen. Employees Ret. Syst. v. MBIA, Inc. 637 F.3d 169, 175 (2d Cir. 2011). No such

concerns regarding the assertion of stale claims are implicated here, where it is clear from the

statutory scheme that Congress intended for a trustee to have an open-ended statute of limitations

under Section 550(f) that may not be triggered for several years. See, e.g., Pry v. Maxim Global,

Inc. (In re Maxim Truck Co.), 415 B.R. 346, 353 (Bankr. S.D. Ind. 2009) (permitting trustee to

add a named defendant’s spouse as a subsequent transferee where no transfer had been avoided

and more than seven years had elapsed between the commencement of the case and the trustee’s

filing of an amended complaint).


26

E. The Subsequent Transferee Defendants Have Been Afforded Their Due

Process Rights

The Issue 2 Subsequent Transferee Defendants argue that unless an avoidance action is

brought against them within the two year time period set forth in Section 546(a), their due

process rights will be violated. To the contrary, the cases cited by these defendants merely hold

that their rights to due process afford them the opportunity to contest the avoidability of initial

transfers, to the extent that issue was not fully adjudicated in a prior proceeding – a proposition

that the Trustee does not contest.13 See Dye v. Sachs (In re Flashcom, Inc.), 361 B.R. 519, 525

(Bankr. C.D. Cal. 2007); Thompson v. Jonovich (In re Food & Fibre Protection, Ltd.), 168 B.R.

408, 422 (Bankr. D. Ariz. 1994) (in finding that the subsequent transferee had a due process right

to contest the avoidability of the initial transfers, the court held subsequent transferee had the

right to raise whatever defenses were available to the initial transferee); In re Jones Storage and

Moving, Inc., 2005 WL 2590385, at *4-5.

III. THE CONFLICTING ARGUMENTS OF THE ISSUE 1 AND ISSUE 2

SUBSEQUENT TRANSFEREE DEFENDANTS DEMONSTRATE THAT

NEITHER GROUP’S INTERPRETATION OF SECTION 550 IS CORRECT

The Issue 1 Subsequent Transferee Defendants argue that the Trustee cannot pursue an

action against them until he first obtains a final, litigated judgment of avoidance against the

initial transferees. In other words, this group of defendants argues that the Trustee’s claims are

too early, and he must wait before suing subsequent transferees.

13 As noted in the Issue 2 Subsequent Transferee Defendants’ brief, at the bankruptcy court hearing to approve the Fairfield Settlement Agreement, the Trustee specifically acknowledged that a subsequent transferee could assert any defenses available to the initial transferee. Defs’ Issue 2 Br. at 4. But as noted above, the converse is also true: a subsequent transferee cannot assert defenses to the avoidability of an initial transfer to the extent that defense is not available to the initial transferee.


27

But in contrast, the Issue 2 Subsequent Transferee Defendants argue that the Trustee is

too late, and that he should not have waited to pursue his claims against them. This group of

subsequent transferees argues that the Trustee’s recovery proceedings against them are time-

barred because he did not commence actions against them within the two-year period set forth in

Section 546 of the Code to avoid the initial transfers to Fairfield and/or Kingate.

Thus, not only do the majority of courts disagree with the arguments of both the Issue 1

and the Issue 2 Subsequent Transferee Defendants, the two groups of defendants actually

disagree with each other. The two conflicting arguments are the best evidence that neither group

of defendants is advancing a proper construction of Section 550. Both advance a construction of

the statute that isolates a subpart of Section 550, without regard to the fact that their construction

conflicts with other subparts of that same provision. In addition, the defendants ignore other

related statutory provisions without regard to the purposes of the statutory scheme as a whole.

This is in direct contravention to fundamental principles of statutory construction. See U.S. Nat’l

Bank of Oregon v. Indep. Ins. Agents of America, Inc. 508 U.S. 439, 455 (1993) (“Over and over

we have stressed that ‘[i]n expounding a statute, we must not be guided by a single sentence or

member of a sentence, but look to the provisions of the whole law, and to its object and

policy.’”) (internal citations omitted); Auburn Hous. Authority v. Martinez, 277 F.3d 138, 144

(2d Cir. 2002) (“The meaning of a particular section in a statute can be understood in context

with and by reference to the whole statutory scheme, by appreciating how sections relate to one

another. In other words, the preferred meaning of a statutory provision is one that is consonant

with the rest of the statute”); K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988) (“In

ascertaining the plain meaning of the statute, the court must look to the particular statutory

language at issue, as well as the language and design of the statute as a whole.”).


28

The Bankruptcy Code, particularly the avoidance and recovery provisions of Chapter 5 of

the Code, works as a cohesive whole to replenish a debtor’s estate with assets fraudulently

conveyed by debtors in order to provide for the fair treatment of creditors. Pirie v. Chicago Title

& Trust Co., 182 U.S. 438, 449 (1901) (“all the sections of the [Bankruptcy Act] must be

construed together as means to effect its purpose”). The only construction of Section 550 that is

in harmony with the avoidance and recovery statutory scheme as a whole, as well as Congress’

purpose in enacting Chapter 5 of the Code – and SIPA – is an interpretation that does not result

in a forfeiture of a trustee’s ability to recover fraudulently conveyed assets for the benefit of

defrauded creditors. See Enron, Tr. at 34:10-13; see generally In re AVI, Inc., 389 B.R. at 735.

IV. THE TRUSTEE HAS ADEQUATELY STATED A CLAIM AGAINST

DEFENDANTS FOR RECOVERY OF SUBSEQUENT TRANSFERS

For the purposes of these motions to dismiss, the Trustee need only state a claim, not

prove his entire case. See, e.g., Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs., Inc.),

379 B.R. 5, 20-24 (Bankr. E.D.N.Y. 2007). In In re Allou Distribs. Inc., the court denied the

defendants’ motion to dismiss where avoidance actions against initial transferees had reached the

stage of default judgments, settlements, and summary judgment, finding that the trustee had

stated a claim against the subsequent transferees. Id. In reaching its conclusion, the court

determined that at the motion to dismiss phase, “the question posed at this stage in the

proceedings is whether the Amended Complaint states a claim, not whether the Trustee has

established all of the elements necessary for an ‘actual recovery’ from the Movants.” Id. As

demonstrated above, because the Trustee has adequately stated a claim against Defendants for

recovery pursuant to Section 550, the motions to dismissed should be denied.


29

CONCLUSION

For the foregoing reasons, the Trustee respectfully requests the Court deny the Motions.

Dated: November 13, 2012 New York, New York

/s/ Regina Griffin_______

David J. Sheehan Regina Griffin Thomas L. Long Stacey A. Bell Amanda E. Fein BAKER & HOSTETLER LLP New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 Attorneys for Irving H. Picard, Trustee

for the Substantively Consolidated SIPA

Liquidation of Bernard L. Madoff Investment

Securities LLC and Bernard L. Madoff


UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

SECURITIES INVESTOR PROTECTION

CORPORATION,

Plaintiff-Applicant,

v.

BERNARD L. MADOFF INVESTMENT

SECURITIES LLC,

Defendant.

In re:

BERNARD L. MADOFF,

Debtor.

Case No. 12-mc-00115 (JSR)

ECF Case

Electronically Filed

AFFIDAVIT OF SERVICE

STATE OF NEW YORK )

) ss.:

COUNTY OF NEW YORK )

KERIN DONAHUE, being duly sworn, deposes and says: I am over eighteen years age,

not a party to this action and am employed by the law firm of Baker & Hostetler LLP, located at

45 Rockefeller Plaza, New York, NY 10111.

On November 13, 2012, I served the TRUSTEE'S MEMORANDUM OF LAW IN

OPPOSITION TO DEFENDANTS' MOTIONS TO DISMISS CONCERNING SECTION

550(a) ISSUES 1 AND 2 AS ORDERED BY THE COURT ON AUGUST 21, 2012 by emailing

the interested parties true and correct copies via electronic transmission to the email addresses

designated for delivery to those parties as set forth on Schedule A.

Case 1:12-mc-00115-JSR Document 410-1 Filed 11/13/12 Page 1 of 3

TO: See Attached Schedule A

Sworn to before me this 131

h day ofNovember, 2012

ｾｫｊｾNotary Public 7

CHRISTINA I. BELANGER NOTARY PUBLIC, State of New York

No. 01BE-4845827 Qualified in Suffolk County

Cel"tilicate ｆｩｬｾ､ in New York County

｣｟Ｌｭｭｴｾｳｩ｣ｮｅｸｯｩｲｯｾ Sept. 30, ｴＩＩｾ


Case No. 12-mc-00115 (JSR) Schedule A:

[email protected]; [email protected]; [email protected];



[email protected]; [email protected]; tmoloney @cgsh.com; [email protected];


J [email protected]; [email protected]; [email protected]; [email protected];

ｺｬ｡ｮ､ｳｭ｡ｮｾ｢･｣ｫ･ｲｧｬｹｮｮＮ｣ｯｭ［ [email protected]; [email protected];


george. ｳｨｵｳｴ･ｲｾｷｩｬｭ･ｲｨ｡ｬ･Ｎ com; tel ynch@j onesday. com; sj friedman@j onesday. com;


[email protected]; ･ｲｩ｣ｫ｡ｹｾｱｵｩｮｮ･ｭ｡ｮｵ･ｬＮ｣ｯｭ［

[email protected]; ｫ､｡ｮＭｾｳｴ･ｰｴｯ･Ｎ｣ｯｭ［ [email protected]; [email protected]; ｭ･ｷｩｬ･ｳｾ､･｢･ｶｯｩｳ･Ｎ｣ｯｭ［ [email protected];

Kent. Y ｡ｬｯｷｩｴｺｾ｡ｰｯｲｴ･ｲ .com; [email protected]; [email protected];


[email protected]; ｲｬ｡｣ｫｾｦｫｬ｡ｷＮ｣ｯｭ［ [email protected];

[email protected]; [email protected];

erin. valentine@chaffetzlindsey. com; rcirillo@kslaw. com; j edgemon@kslaw. com;

[email protected]; [email protected]; [email protected]; [email protected];


[email protected]; [email protected]; [email protected]


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