Opinion
No. 08-01789 (CGM) Adv. Pro. No. 12-01205 (CGM)
2022-06-13
SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: Bernard L. Madoff, Debtor. Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. Multi-Strategy Fund Limited, Defendant.
BAKER HOSTETLER LLP, Attorneys for the Plaintiff, 45 Rockefeller Plaza, New York, N.Y. 10111, BY: MATTHEW FEIL (via Zoomgov), MATTHEW B. FRIEDMAN (via Zoomgov) FRIEDMAN KAPLAN SEILER & ADELMAN LLP, Attorneys for Defendant, Multi-Strategy Fund Limited, 7 Times Square, New York, NY 10036, BY: ROBERT J. LACK (via Zoomgov)
BAKER HOSTETLER LLP, Attorneys for the Plaintiff, 45 Rockefeller Plaza, New York, N.Y. 10111, BY: MATTHEW FEIL (via Zoomgov), MATTHEW B. FRIEDMAN (via Zoomgov)
FRIEDMAN KAPLAN SEILER & ADELMAN LLP, Attorneys for Defendant, Multi-Strategy Fund Limited, 7 Times Square, New York, NY 10036, BY: ROBERT J. LACK (via Zoomgov)
SIPA LIQUIDATION (Substantively Consolidated)
MEMORANDUM DECISION DENYING DEFENDANT'S MOTION TO DISMISS
CECELIA G. MORRIS, UNITED STATES BANKRUPTCY JUDGE Pending before the Court is Defendant's, Multi-Strategy Fund Limited ("Multi-Strategy"), 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 one subsequent transfer allegedly consisting of BLMIS customer property. Multi-Strategy seeks dismissal for lack of personal jurisdiction, for failure to state a claim due to the safe harbor provision of the Bankruptcy Code, and for failure to allege that it received BLMIS customer property. For the reasons set forth herein, the motion to dismiss is denied in its entirety.
Jurisdiction
This is an adversary proceeding commenced in this Court, in which the main underlying SIPA proceeding, Adv. Pro. No. 08-01789 (CGM) (the "SIPA Proceeding"), is pending. The SIPA Proceeding was originally brought in the United States District Court for the Southern District of New York (the "District Court") as Securities Exchange Commission v. Bernard L. Madoff Investment Securities LLC et al. , No. 08-CV-10791, and has been referred to this Court. This Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and (e)(1), and 15 U.S.C. § 78eee(b)(2)(A) and (b)(4).
This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (F), (H) and (O). This Court has subject matter jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 1334(b) and 157(a), the District Court's Standing Order of Reference, dated July 10, 1984, and the Amended Standing Order of Reference, dated January 31, 2012. In addition, the District Court removed the SIPA liquidation to this Court pursuant to SIPA § 78eee(b)(4), (see Order, Civ. 08– 01789 (Bankr. S.D.N.Y. Dec. 15, 2008) ("Main Case"), at ¶ IX (ECF No. 1)), and this Court has jurisdiction under the latter provision. Personal jurisdiction has been contested by this Defendant and will be discussed infra .
Background
The Court assumes familiarity with the background of the BLMIS Ponzi scheme and its SIPA proceeding.
This adversary proceeding was filed on March 22, 2012, by Trustee. The Trustee brings this proceeding to recover the subsequent transfer of BLMIS customer property that Multi-Strategy allegedly received from Fairfield Sentry Limited ("Fairfield Sentry"). (Compl. ¶ 2, ECF No. 97). Fairfield Sentry ("Fairfield Sentry") is known as a "feeder fund" of BLMIS because it invested "all or substantially all" of its assets in BLMIS. (Id. ¶ 3). In his amended complaint, filed on February 18, 2022 ("Complaint" ), the Trustee alleges that Multi-Strategy, a foreign investment fund organized under Caman law (Id. ¶ 58), received a transfer of $25,763,374 from Fairfield Sentry Limited ("Sentry") on March 15, 2005. (Id. ¶ 120).
For simplicity, the Court uses the term "Complaint" to refer to the Trustee's amended complaint docketed at ECF No. 97.
According to the Complaint, Defendant is a company organized under the laws of the Cayman Islands (Id. ¶ 58) and is a wholly owned subsidiary of Caisse de dépôt et placement du Quebec ("Caisse"), and Defendant's address is alleged to be Caisse's headquarters in Montreal, Canada. (Id. ) It is alleged that CDP Capital was Defendant's investment manager and directed Defendant's investments in and redemptions from the BLMIS Feeder Funds. (Id. ¶ 4).
Following BLMIS's collapse, the Trustee filed an adversary proceeding against Fairfield Sentry and related defendants to avoid and recover fraudulent transfers of customer property in the amount of approximately $3 billion. (Id. ¶ 114). In 2011, the Trustee settled with Fairfield Sentry. (Id. ¶ 115). As part of the settlement, Fairfield Sentry consented to a judgment in the amount of $3.054 billion (Id. ) but repaid only $70 million to the BLMIS customer property estate. The Trustee then commenced a number of adversary proceedings against subsequent transferees like Defendant to recover the approximately $3 billion in missing customer property.
In its motion to dismiss, Multi-Strategy argues that the safe harbor bars the Trustee's recovery of this transfer, the Trustee has failed to allege that it holds BLMIS customer property, and that this Court lacks personal jurisdiction over it. The Trustee opposes the motion to dismiss.
Discussion
Personal Jurisdiction
Defendant objects to the Trustee's assertion of personal jurisdiction over it. In the Complaint, the Trustee argues that Defendant purposefully availed itself of the laws of the United States and New York. Compl. ¶¶ 87–113.
To survive a motion to dismiss for lack of personal jurisdiction pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure, the Trustee "must make a prima facie showing that jurisdiction exists." SPV Osus Ltd. v. UBS AG , 882 F.3d 333, 342 (2d Cir. 2018) (quoting Penguin Grp. (USA) Inc. v. Am. Buddha , 609 F.3d 30, 34–35 (2d Cir. 2010) ). A trial court has considerable procedural leeway when addressing a pretrial dismissal motion under Rule 12(b)(2). Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A. , 722 F.3d 81, 84 (2d Cir. 2013). " ‘It may determine the motion on the basis of affidavits alone; or it may permit discovery in aid of the motion; or it may conduct an evidentiary hearing on the merits of the motion.’ " Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A. , 722 F.3d 81, 84 (2d Cir. 2013) (quoting Marine Midland Bank, N.A. v. Miller , 664 F.2d 899, 904 (2d Cir. 1981) ); see also Picard v. BNP Paribas S.A. (In re BLMIS ), 594 B.R. 167, 187 (Bankr. S.D.N.Y. 2018) (same). At this preliminary stage, "the plaintiff's prima facie showing may be established solely by allegations." Dorchester Fin. , 722 F.3d at 84–85 (quoting Ball v. Metallurgie Hoboken-Overpelt, S.A. , 902 F.2d 194, 197 (2d Cir. 1990) ); Picard v. Fairfield Greenwich Grp. (In re Fairfield Sentry Ltd. ), 627 B.R. 546, 565 (Bankr. S.D.N.Y. 2021) (same).
In order to be subjected to personal jurisdiction in the United States, due process requires that a defendant have sufficient minimum contacts with the forum in which defendant is sued " ‘such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.’ " Picard v. Bureau of Labor Ins. (In re BLMIS) , 480 B.R. 501, 516 (Bankr. S.D.N.Y. 2012) (quoting Int'l Shoe Co. v. Washington , 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945) ). The pleadings and affidavits are to be construed " ‘in the light most favorable to the plaintiffs, resolving all doubts in their favor.’ " Chloé v. Queen Bee of Beverly Hills, LLC , 616 F.3d 158, 163 (2d Cir. 2010) (quoting Porina v. Marward Shipping Co. , 521 F.3d 122, 126 (2d Cir. 2008) ); Picard v. BNP Paribas S.A. (In re BLMIS) , 594 B.R. 167, 187 (Bankr. S.D.N.Y. 2018).
The Supreme Court has set out three conditions for the exercise of specific jurisdiction over a nonresident defendant. First, the defendant must have purposefully availed itself of the privilege of conducting activities within the forum State or have purposefully directed its conduct into the forum State. Second, the plaintiff's claim must arise out of or relate to the defendant's forum conduct. Finally, the exercise of jurisdiction must be reasonable under the circumstances.
U.S. Bank Nat'l Ass'n v. Bank of Am. N.A. , 916 F.3d 143, 150 (2d Cir. 2019) (cleaned up).
Purposeful Availment
"[M]inimum contacts ... exist where the defendant purposefully availed itself of the privilege of doing business in the forum and could foresee being haled into court there." Charles Schwab Corp. v. Bank of Am. Corp. , 883 F.3d 68, 82 (2d Cir. 2018). "Although a defendant's contacts with the forum state may be intertwined with its transactions or interactions with the plaintiff or other parties, a defendant's relationship with a third party, standing alone, is an insufficient basis for jurisdiction." U.S. Bank Nat'l Ass'n v. Bank of Am. N.A. , 916 F.3d 143, 150 (2d Cir. 2019) (cleaned up). "It is insufficient to rely on a defendant's random, fortuitous, or attenuated contacts or on the unilateral activity of a plaintiff with the forum to establish specific jurisdiction." Id.
A party "purposefully avail[s] itself of the benefits and protections of New York laws by knowing, intending and contemplating that the substantial majority of funds invested in Fairfield Sentry would be transferred to BLMIS in New York to be invested in the New York securities market." Picard v. Bureau of Labor Ins. (In re BLMIS ), 480 B.R. 501, 517 (Bankr. S.D.N.Y. 2012).
The Trustee has devoted over five pages of his twenty-seven-page Complaint to Defendant's contacts with New York. (Compl. ¶¶ 87–113). It is alleged that "Defendant invested in the BLMIS Feeder Funds with the specific purpose of having funds invested with BLMIS in New York. Defendant knew and intended that its investments in the BLMIS Feeder Funds were ultimately investments with New York-based BLMIS." (Id. ¶ 88). And that Defendant "purchased shares in the BLMIS Feeder Funds intending to direct funds to New York-based BLMIS." (Id. ¶ 89). "Prior to subscribing to Fairfield Sentry, Defendant affirmed having ‘received and read’ a Fairfield Sentry private placement memorandum, dated July 1, 2003, which provided that ‘approximately 95% of the Fund's assets’ were under the custody of New York based BLMIS." (Id. ¶ 90). And the Trustee allegedly has evidence that Defendant was referred to as a "Madoff addict" by a partner at Fairfield Greenwich Group. (Id. ¶ 91). Defendant, through its president, director and authorized signatory, asked about additional capacity for Fairfield Sentry on at least seven occasions. (Id. ¶ 91).
"Defendant's knowledge and intention that its investments in Fairfield Sentry and Kingate Global[ ] were investments with BLMIS are reflected in Defendant's total redemption of its investments in both BLMIS Feeder Funds after [Defendant's president] discussed ‘Madoff and the potential ponzi [sic] scheme.’ " (Id. ¶ 92). "[I]n connection with Defendant's Fairfield Sentry investments," persons associated with the Defendant asked "for ‘info that you've got on Madoff,’ including asking ‘how Maddoff [sic] made money’ and for help ‘understand[ing] when Maddoff [sic] was invested.’ " (Id. ¶ 93).
Kingate Global Fund Ltd. ("Kingate Global") was another feeder fund of BLMIS. (Compl. ¶ 2). According to the Trustee, "[t]his Amended Complaint removes claims that have been resolved by the Trustee's Court-approved settlement .... Specifically, pursuant to the single satisfaction rule set forth in 11 U.S.C. § 550(d), the Trustee is not seeking to recover subsequent transfers that Defendant received from Kingate Global." (Id. ¶ 3, n.1). Despite the dismissal of this claim, allegations regarding the Defendant's investment in multiple BLMIS feeder funds lends support to the Trustee's allegations that Defendant purposefully invested in BLMIS.
It is also alleged that Defendant's president and other associated persons met with Fairfield Greenwich Group partners in New York at the Fairfield Greenwich Group New York office. (Id. ¶ 97). "Defendant sent wiring instructions specifically designating a New York-based bank account to which Defendant directed FGG to wire Defendant's redemption payments from Fairfield Sentry, and from which Defendant was going to fund its subscriptions in Fairfield Sentry." (Id. ¶ 97; see also id. ¶¶ 110–113) ("Defendant derived significant revenue from New York and maintained minimum contacts and general business contacts with the United States and New York in connection with the claims alleged herein."). Defendant intentionally invested in United States investments (id. ¶¶100–107) and Defendant submitted to the laws of New York and to personal jurisdiction in New York (id. ¶ 108).
Despite these allegations, Defendant argues that it had no contact with the forum state and that under Walden v. Fiore , 571 U.S. 277, 134 S.Ct. 1115, 188 L.Ed.2d 12 (2014), the Court may not use a third-party's contacts to determine whether it purposefully availed itself of this Court's jurisdiction. This case is no assistance to Defendant. The Supreme Court explicitly states in Walden , "although physical presence in the forum is not a prerequisite to jurisdiction, physical entry into the State—either by the defendant in person or through an agent, goods, mail, or some other means—is certainly a relevant contact." Walden v. Fiore , 571 U.S. 277, 285, 134 S.Ct. 1115, 188 L.Ed.2d 12 (2014). The Trustee has sufficiently alleged that Defendant, through its president and investment manager, was physically present in New York at Fairfield Greenwich Group's New York office, received payments and sold shares through its New York based bank account, and used that New York based bank account to gain access, through its agent Fairfield Sentry, to BLMIS, a New York based investment broker who invested in United States investments.
As described by Judge Lifland, "[Defendant] intentionally tossed a seed from abroad to take root and grow as a new tree in the Madoff money orchard in the United States and reap the benefits therefrom." Picard v. Bureau of Labor Ins. (In re BLMIS ), 480 B.R. 501, 506 (Bankr. S.D.N.Y. 2012). Defendant's alleged contacts with New York are not random, isolated, or fortuitous.
Arise out of or relate to the defendant's forum conduct
As to the second prong, the suit must "arise out of or relate to the defendant's contacts with the forum." Ford Motor Co. v. Montana Eighth Jud. Dist. Ct. , ––– U.S. ––––, 141 S. Ct. 1017, 1026, 209 L.Ed. 2d 225 (2021) (emphasis in original). "[P]roof that a plaintiff's claim came about because of the defendant's in-state conduct" is not required. Id. at 1027. Instead, the court need only find "an affiliation between the forum and the underlying controversy." Goodyear Dunlop Tires Operations, S.A. v. Brown , 564 U.S. 915, 919, 131 S.Ct. 2846, 180 L.Ed.2d 796 (2011) ; Picard v. BNP Paribas S.A. (In re BLMIS ), 594 B.R. 167, 190 (Bankr. S.D.N.Y. 2018) ("Where the defendant's contacts with the jurisdiction that relate to the cause of action are more substantial, however, it is not unreasonable to say that the defendant is subject to personal jurisdiction even though the acts within the state are not the proximate cause of the plaintiff's injury.") (internal quotations omitted).
Here, the Trustee is asserting subsequent transfer claims against Defendant for monies it received from Fairfield Sentry. (Compl. ¶¶ 125–28). This lawsuit is directly related to its investment activities with Fairfield and BLMIS. Picard v. BNP Paribas S.A. (In re BLMIS ), 594 B.R. 167, 191 (Bankr. S.D.N.Y. 2018) (finding that the redemption and other payments the defendants received as direct investors in a BLMIS feeder fund arose from the New York contacts such as sending subscription agreements to New York, wiring funds in U.S. dollars to New York, sending redemption requests to New York, and receiving redemption payments from a Bank of New York account in New York, and were the proximate cause of the injuries that the Trustee sought to redress).
Defendant argues that its contacts with the forum are alleged to have occurred after its initial investment in Fairfield and, therefore, the Court cannot use them to find personal jurisdiction. This is not the test. The suit only need be affiliated with the alleged in-state conduct. Goodyear Dunlop Tires Operations, S.A. v. Brown , 564 U.S. 915, 919, 131 S.Ct. 2846, 180 L.Ed.2d 796 (2011). Even if this were the standard, the Trustee is seeking to recover of funds Defendant received after its contacts were alleged to have occurred.
Reasonableness
Having found sufficient minimum contacts, the Court must determine if exercising personal jurisdiction over the Defendant is reasonable and "comport[s] with fair play and substantial justice." Burger King Corp. v. Rudzewicz , 471 U.S. 462, 477, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) (internal quotations omitted). Factors the Court may consider include the burden on the defendant, the forum State's interest in adjudicating the dispute, the plaintiff's interest in obtaining convenient and effective relief, the interstate judicial system's interest in obtaining the most efficient resolution of controversies, and the shared interest of the several States in furthering fundamental substantive social policies.
The exercise of jurisdiction is reasonable. Defendant is not burdened by this litigation. Defendant has actively participated in this Court's litigation for over ten years. It is represented by U.S. counsel and "irrevocably" submitted to the jurisdiction of New York courts’ when it signed its subscription agreements with the Fairfield Funds. The forum and the Trustee both have a strong interest in litigating BLMIS adversary proceedings in this Court. Pichard v. Maxam Absolute Return Fund, L.P. (In re BLMIS) , 460 B.R. 106, 117 (Bankr. S.D.N.Y. 2011), aff'd , 474 B.R. 76 (S.D.N.Y. 2012) ; Picard v. Chais (In re BLMIS) , 440 B.R. 274, 278 (Bankr. S.D.N.Y. 2010) ; Picard v. Cohmad Sec. Corp. (In re BLMIS) , 418 B.R. 75, 82 (Bankr. S.D.N.Y. 2009) ; Picard v. Fairfield Greenwich Grp., (In re Fairfield Sentry Ltd. ), 627 B.R. 546, 568 (Bankr. S.D.N.Y. 2021) ; see also In re Picard , 917 F.3d 85, 103 (2d Cir. 2019) ("The United States has a compelling interest in allowing domestic estates to recover fraudulently transferred property.").
Even though this Court held that the Defendant's consent to jurisdiction in New York courts contained in the subscription agreements it signed prior to investing with Fairfield Sentry could not be used as the sole basis for this Court's exercise of personal jurisdiction over an action by foreign liquidators to recover redemption payments under British Virgin Island law, the fact that Defendant agreed to submit to the jurisdiction of this Court is certainly a relevant factor in determining whether the exercise of jurisdiction over Defendant is reasonable. In Fairfield Sentry v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd. ), Case No. 10-13164 (SMB), Adv. No. 10-03496 (SMB), 2018 WL 3756343, at *12 (Bankr. S.D.N.Y. Aug. 6, 2018) ("Defendants’ consent to the Subscription Agreement does not constitute consent to personal jurisdiction in the U.S. Redeemer Actions.").
The Trustee has made a prima facie showing of personal jurisdiction with respect to the Fairfield Funds subsequent transfers at issue in this Complaint.
12(b)(6) standard
"To survive a motion to dismiss, the complaint must contain 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, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (cleaned up). The claim is facially plausible when a plaintiff pleads facts that allow the Court to draw a "reasonable inference that the defendant is liable for the misconduct alleged." Id. "The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. ; see also Bell Atl. Corp. v. Twombly , 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ("Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement."). In deciding a motion to dismiss, the Court should assume the factual allegations are true and determine whether, when read together, they plausibly give rise to an entitlement of relief. Iqbal , 556 U.S. at 679, 129 S.Ct. 1937. "And, of course, a well-pl[ed] complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely." Twombly , 550 U.S. at 556, 127 S.Ct. 1955.
In deciding the motion, "courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). A complaint is "deemed to include any written instrument attached to it as an exhibit[,] ... documents incorporated in it by reference[,]" and other documents "integral" to the complaint. Chambers v. Time Warner, Inc. , 282 F.3d 147, 152–53 (2d Cir. 2002) (citations omitted). A document is "integral" to a complaint when the plaintiff has "actual notice" of the extraneous information and relied on it in framing the complaint. DeLuca v. AccessIT Grp., Inc. , 695 F. Supp. 2d 54, 60 (S.D.N.Y. 2010) (citing Chambers , 282 F.3d at 153 ).
Count One: Recovery of Subsequent Transfers
Section 550(a) of the Bankruptcy Code states:
Except as otherwise provided in this section, to 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.
"To plead a subsequent transfer claim, the Trustee must plead that the initial transfer is avoidable, and the defendant is a subsequent transferee of that initial transferee, that is, that the funds at issue originated with the debtor." Picard v. BNP Paribas S.A. (In re BLMIS ), 594 B.R. 167, 195 (Bankr. S.D.N.Y. 2018) ; see also SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 546(e) ), No. 12 MC 115(JSR), 2013 WL 1609154, at *7 (S.D.N.Y. Apr. 15, 2013) (consolidated proceedings on 11 U.S.C. § 546(e) ). " Federal Civil Rule 9(b) governs the portion of a claim to avoid an initial intentional fraudulent transfer and Rule 8(a) governs the portion of a claim to recover the subsequent transfer. Picard v. BNP Paribas S.A. (In re BLMIS ), 594 B.R. 167, 195 (Bankr. S.D.N.Y. 2018) (citing Sharp Int'l Corp. v. State St. Bank & Trust Co., (In re Sharp Int'l Corp. ), 403 F.3d 43, 56 (2d Cir. 2005) and Picard v. Legacy Capital Ltd. (In re BLMIS) , 548 B.R. 13, 36 (Bankr. S.D.N.Y. 2016), rev'd on other grounds , Picard v. Citibank, N.A. (In re BLMIS ), 12 F.4th 171 (2d Cir. 2021) ).
To properly plead a subsequent transfer claim, the Trustee need only provide "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). "The plaintiff must allege the necessary vital statistics—the who, when, and how much–of the purported transfers to establish an entity as a subsequent transferee of the funds. However, the plaintiff's burden at the pleading stage does not require dollar-for-dollar accounting of the exact funds at issue." Picard v. BNP Paribas S.A. (In re BLMIS ), 594 B.R. 167, 195 (Bankr. S.D.N.Y. 2018).
In order to properly plead a subsequent transfer claim, the Trustee must allege that the initial transfer from BLMIS to Fairfield Sentry is avoidable. The Trustee is not required to avoid the transfer received by the initial transferee before asserting an action against subsequent transferees. While the plaintiff can choose to pursue the initial transferee, he is not obligated to do so. The plaintiff is free to pursue any of the immediate or mediate transferees, and nothing in the statute requires a different result. IBT Int'l, Inc. v. Northern (In re Int'l Admin. Servs., Inc. ), 408 F.3d 689, 706-07 (11th Cir. 2005).
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 ("Fairfield Complaint"). (Compl. ¶¶ 114–19). Whether the Fairfield Complaint properly pleads the avoidability of the initial transfer, is governed by Rule 9(b). Rule 9(b) states: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). "Where the actual fraudulent transfer claim is asserted by a bankruptcy trustee, applicable Second Circuit precedent instructs courts to adopt a more liberal view since a trustee is an outsider to the transaction who must plead fraud from second-hand knowledge. Moreover, in a case such as this one, where the Trustee's lack of personal knowledge is compounded with complicated issues and transactions that extend over lengthy periods of time, the trustee's handicap increases, and even greater latitude should be afforded." Picard v. Cohmad Secs. Corp., (In re BLMIS ), 454 B.R. 317, 329 (Bankr. S.D.N.Y. 2011) (cleaned up).
In the Complaint, the Trustee "incorporates by reference the allegations contained in the Second Amended Complaint as if fully set forth herein, including but not limited to paragraphs 1-10, 79-313, and 315-16." (Compl. ¶ 118). Adoption by reference is government by Rule 10 of the Federal Rules of Civil Procedure. Fed. R. Civ. P. 10(c). Rule 10(c) states: "A statement in a pleading may be adopted by reference elsewhere in the same pleading or in any other pleading or motion." The district court has already found that adoption by reference of the entire Fairfield Complaint is proper. See SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 550(a) ), 501 B.R. 26, 36 (S.D.N.Y. 2013) ("The Trustee's complaint against Standard Chartered Financial Services incorporates by reference the complaints against Kingate and Fairfield, including the allegations concerning the avoidability of the initial transfers, and further alleges the avoidability of these transfers outright. Thus, the avoidability of the transfers from Madoff Securities to Kingate and Fairfield is sufficiently pleaded for purposes of section 550(a).") (cleaned up).
The Court follows the district court's instruction. As was explained in In re Geiger, pleadings filed in the "same action" may be properly adopted by reference in other pleadings in that action. 446 B.R. 670, 679 (Bankr. E.D. Pa. 2010). The Fairfield Complaint was filed in the "same action" as this adversary proceeding for purposes of Rule 10(c). Id. Cases within this SIPA proceeding are filed in the same "proceeding"—the SIPA proceeding. In re Terrestar Corp ., No. 16 CIV. 1421 (ER), 2017 WL 1040448, at *4 (S.D.N.Y. Mar. 16, 2017) ("Adversary proceedings filed in the same bankruptcy case do not constitute different cases."); see also Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC , 610 B.R. 197, 237 (Bankr. S.D.N.Y. 2019) ("The prior decisions within this SIPA proceeding constitute law of the case ...."); Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC , 603 B.R. 682, 700 (Bankr. S.D.N.Y. 2019), (citing In re Motors Liquidation Co ., 590 B.R. 39, 62 (S.D.N.Y. 2018) (law of the case doctrine applies across adversary proceedings within the same main case), aff'd , 943 F.3d 125 (2d Cir. 2019) ); Perez v. Terrestar Corp. (In re Terrestar Corp.) , No. 16 Civ. 1421 (ER), 2017 WL 1040448, at *4 (S.D.N.Y. Mar. 16, 2017) ("Adversary proceedings filed in the same bankruptcy case do not constitute different cases."), appeal dismissed , No. 17-1117 (2d Cir. June 29, 2017); Bourdeau Bros., Inc. v. Montagne (In re Montagne) , No. 08-1024 (CAB), 2010 WL 271347, at *6 (Bankr. D. Vt. Jan. 22, 2010) ("[D]ifferent adversary proceedings in the same main case do not constitute different ‘cases.’ ").
Through the reference to the Fairfield Complaint, the Trustee has adequately pleaded the avoidability of the initial transfer. (Fairfield Compl. ¶¶ 314–318, 09-1239, ECF No. 286); see also SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 550(a) ), 501 B.R. 26, 37 (S.D.N.Y. 2013) ("[T]he Court directs that the following adversary proceedings be returned to the Bankruptcy Court for further proceedings consistent with this Opinion and Order ...."); Order at 14, 12-MC-115 (JSR), ECF No. 314 (applying holding to Multi-Strategy). The Safe Harbor does not bar the avoidance of the Fairfield Initial Transfers
Defendant has raised the "safe harbor" defense, found in § 546(e), to the Trustee's allegations. Section 546(e) is referred to as the safe harbor because it protects a transfer that is a "settlement payment ... made by or to (or for the benefit of) a ... financial institution [or] financial participant," or that is "made by or to (or for the benefit of) a ... financial institution [or] financial participant ... in connection with a securities contract." 11 U.S.C. § 546(e). "By its terms, the safe harbor is a defense to the avoidance of the initial transfer. Picard v. BNP Paribas S.A. (In re BLMIS ), 594 B.R. 167, 197 (Bankr. S.D.N.Y. 2018) (emphasis added). However, where the initial transferee fails to raise a § 546(e) defense against the Trustee's avoidance of certain transfers, as is the case here, the subsequent transferee is entitled to raise a § 546(e) defense against recovery of those funds. Picard v. Fairfield Inv. Fund (In re BLMIS ), No. 08-01789 (CGM), 2021 WL 3477479, at *3 (Bankr. S.D.N.Y. Aug. 6, 2021).
In light of the safe harbor granted under 11 U.S.C. § 546(e), the Trustee may only avoid and recover intentional fraudulent transfers under § 548(a)(1)(A) made within two years of the filing date, unless the transferee had actual knowledge of BLMIS's Ponzi scheme, or more generally, "actual knowledge that there were no actual securities transactions being conducted." SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 546(e) ), No. 12 MC 115(JSR), 2013 WL 1609154, at *4 (S.D.N.Y. Apr. 15, 2013). "The safe harbor was intended, among other things, to promote the reasonable expectations of legitimate investors. If an investor knew that BLMIS was not actually trading securities, he had no reasonable expectation that he was signing a contract with BLMIS for the purpose of trading securities for his account. In that event, the Trustee can avoid and recover preferences and actual and constructive fraudulent transfers to the full extent permitted under state and federal law." Picard v. Legacy Capital Ltd. (In re BLMIS) , 548 B.R. 13, 28 (Bankr. S.D.N.Y. 2016) (internal citations omitted), vacated and remanded on other grounds , Picard v. Citibank, N.A. (In re BLMIS ), 12 F.4th 171 (2d Cir. 2021) ). "In sum, if the Trustee sufficiently alleges that the [initial] transferee from whom he seeks to recover a fraudulent transfer knew of [BLMIS ]’[s] fraud, that transferee cannot claim the protections of Section 546(e) ’s safe harbor." Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC , No. 08-01789 (CGM), 2021 WL 3477479, at *4 (Bankr. S.D.N.Y. Aug. 6, 2021).
This Court has already determined that the Fairfield Complaint contains sufficient allegations of Fairfield Sentry's actual knowledge to defeat the safe harbor defense on a Rule 12(b)(6) motion. See Picard v. Fairfield Inv. Fund (In re BLMIS ), No. 08-01789 (CGM), Adv. No. 09-01239 (CGM), 2021 WL 3477479, at *4 (Bankr. S.D.N.Y. Aug. 6, 2021) ("[T]he Trustee has alleged that the agents and principals of the Fairfield Funds had actual knowledge of Madoff's fraud"). In that adversary proceeding, the Court held that "[t]he Trustee has pled [actual] knowledge in two ways: 1) that certain individuals had actual knowledge of Madoff's fraud, which is imputed to the Fairfield Funds; and 2) that actual knowledge is imputed to the Fairfield Funds through ‘FGG,’ an alleged ‘de facto’ partnership." Id. at *4 ; see also Fairfield Compl. ¶ 320 ("Fairfield Sentry had actual knowledge of the fraud at BLMIS"); Fairfield Compl. ¶ 321 ("Greenwich Sentry and Greenwich Sentry Partners had actual knowledge of the fraud at BLMIS"); Fairfield Compl. ¶ 322 ("FIFL had actual knowledge of the fraud at BLMIS"); Fairfield Compl. ¶ 323 ("Stable Fund had actual knowledge of the fraud at BLMIS"); Fairfield Compl. ¶ 324 ("FG Limited had actual knowledge of the fraud at BLMIS"); Fairfield Compl. ¶ 325 ("FG Bermuda had actual knowledge of the fraud at BLMIS"); ¶ 326 ("FG Advisors had actual knowledge of the fraud at BLMIS"); Fairfield Compl. ¶ 327 ("Fairfield International Managers had actual knowledge of the fraud at BLMIS"); Fairfield Compl. ¶ 328 ("FG Capital had actual knowledge of the fraud at BLMIS"); Fairfield Compl. ¶ 329 ("Share Management had actual knowledge of the fraud at BLMIS"); Fairfield Compl. ¶ 9 ("It is inescapable that FGG partners knew BLMIS was not trading securities. They knew BLMIS's returns could not be the result of the split strike conversion strategy (the "SSC Strategy"). They knew BLMIS's equities and options trading volumes were impossible. They knew that BLMIS reported impossible, out-of-range trades, which almost always were in Madoff's favor. They knew Madoff's auditor was not certified and lacked the ability to audit BLMIS. They knew BLMIS did not use an independent broker or custodian. They knew Madoff refused to identify any of BLMIS's options counterparties. They knew their clients and potential clients raised numerous due diligence questions they would not and could not satisfactorily answer. They knew Madoff would refuse to provide them with honest answers to due diligence questions because it would confirm the details of his fraud. They knew Madoff lied about whether he traded options over the counter or through the exchange. They knew they lied to clients about BLMIS's practices in order to keep the money flowing and their fees growing. And they knowingly misled the SEC at Madoff's direction.").
The Fairfield Complaint can be found on the docket of adversary number 09-01239-cgm, ECF No. 286.
This Court determined that the Fairfield Complaint is replete with allegations demonstrating that Fairfield Sentry had actual knowledge that BLMIS was not trading securities. See Picard v. Fairfield Inv. Fund (In re BLMIS ), No. 08-01789(CGM), Adv. No. 09-01239 (CGM), 2021 WL 3477479, at *3–*7 (Bankr. S.D.N.Y. Aug. 6, 2021). The district court determined that "those defendants who claim the protections of Section 546(e) through a Madoff Securities account agreement but who actually knew that Madoff Securities was a Ponzi scheme are not entitled to the protections of the Section 546(e) safe harbor, and their motions to dismiss the Trustee's claims on this ground must be denied. SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 546(e) ), No. 12 MC 115(JSR), 2013 WL 1609154, at *10 (S.D.N.Y. Apr. 15, 2013). And "to the extent that a defendant claims protection under Section 546(e) under a separate securities contract" this Court was directed to "adjudicate those claims in the first instance consistent with [the district court's] opinion." See Order, 12-MC-115, ECF No. 119, Ex. A at 24.
This Court is powerless to reconsider this issue, agrees with the district court's reasoning, and finds its holding consistent with dicta set forth by the Court of Appeals for the Second Circuit. See Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Inv. Sec. LLC ), 773 F.3d 411, 420 (2d Cir. 2014) ("The clawback defendants, having every reason to believe that BLMIS was actually engaged in the business of effecting securities transactions, have every right to avail themselves of all the protections afforded to the clients of stockbrokers, including the protection offered by § 546(e)."). This Court agrees with the district court's holding.
The Trustee's allegations in the Fairfield Complaint are sufficient to survive a Rule 12(b)(6) motion on this issue.
The Safe Harbor cannot be used to defeat a subsequent transfer
The safe harbor is not applicable to subsequent transfers. "By its terms, the safe harbor is a defense to the avoidance of the initial transfer." Picard v. BNP Paribas S.A. (In re BLMIS) , 594 B.R. 167, 197 (Bankr. S.D.N.Y. 2018) (emphasis in original); see also 11 U.S.C. § 546(e) (failing to include § 550 in its protections). Since there must be an initial transfer in order for the Trustee to collect against a subsequent transferee, a subsequent transferee may raise the safe harbor as a defense—but only in so far as the avoidance of the initial transfer is concerned. The safe harbor cannot be used as a defense by the subsequent transferee because the Trustee is not "avoiding" a subsequent transfer, "he recovers the value of the avoided initial transfer from the subsequent transferee under 11 U.S.C. § 550(a), and the safe harbor does not refer to the recovery claims under section 550." Picard v. BNP Paribas S.A. (In re BLMIS) , 594 B.R. 167, 197 (Bankr. S.D.N.Y. 2018).
Defendant argues that this Court applied the safe harbor to redemption payments made by Fairfield Sentry in In re Fairfield Sentry Ltd. , 2020 WL 7345988, at *5 (Dec. 14, 2020) (" Fairfield III "). Reliance on this case is misplaced. While many facts overlap between this SIPA liquidation of BLMIS and the foreign liquidation of BLMIS's largest feeder fund, Fairfield Sentry, the legal holdings in these liquidations are not interchangeable. In this case, the Court is analyzing subsequent transfers; in Fairfield III the Court was analyzing initial transfers. The safe harbor is not available to be raised as defense to subsequent transfer claims.
In Fairfield III , this Court analyzed whether the safe harbor applied to avoidance claims under BVI law to recover "unfair preferences" and "undervalue transactions" and constructive trust claims against a defendant who allegedly "knew or willfully blinded itself to the fact that the [Fairfield Sentry's] BLMIS investments were worthless or virtually worthless." In re Fairfield Sentry Ltd ., No. 10-13164 (SMB), 2020 WL 7345988, at *1 (Bankr. S.D.N.Y. Dec. 14, 2020), reconsideration denied , No. 10-13164 (SMB), 2021 WL 771677 (Bankr. S.D.N.Y. Feb. 23, 2021). The Court was not considering the safe harbor's effect on subsequent transfer claims brought under § 550 of the Bankruptcy Code. In the Fairfield Sentry liquidation, Defendant would be an initial transferee as redemption payments paid by Fairfield Sentry were paid directly to Multi-Strategy. Fairfield III is not applicable here.
Fairfield Sentry liquidated under the laws of the British Virgin Islands ("BVI") and this Court's chapter 15 case is ancillary to the primary proceeding brought in the BVI.
Defendant also argues that this Court permitted a subsequent transferee to raise the safe harbor as a defense in Picard v. Fairfield Inv. Fund (In re BLMIS ), No. 08-01789(CGM), Adv. No. 09-01239 (CGM), 2021 WL 3477479, at *3–*7 (Bankr. S.D.N.Y. Aug. 6, 2021). The Court never considered whether the safe harbor could be raised by a subsequent transferee in that case. In Picard v. Fairfield , the subsequent transferees were also the principals and insiders of Fairfield Sentry, the initial transferee. The Court considered the insider's actual knowledge of BLMIS's fraud only as it related to whether Fairfield Sentry had actual knowledge of the fraud. The Court never considered whether the subsequent transferees could raise the safe harbor defense on their own behalf nor could it have, as § 546 is inapplicable to subsequent transferees.
Defendant is not permitted to raise the safe harbor defense on its own behalf as a subsequent transferee.
BLMIS Customer Property
Defendant's final argument is that the Trustee has not adequately pleaded that the funds Multi-Strategy received from Fairfield Sentry were BLMIS customer property. Defendant's argument is essentially that, based on the timing of the transfers, the funds that Multi-Strategy received from Fairfield Sentry could not have come from BLMIS. See May 18, 2022 Hr'g Tr. at 25 ("Simply adding these up -- ... shows that all the Madoff money was gone by the time Multi-Strategy received its redemption in March 2005. The money Multi-Strategy received could not have come from Madoff. It had to have come from other Sentry investors."). To reach this conclusion, Defendant asks the Court to only count funds Fairfield Sentry received during the six-year look-back period. Id. ("The first transfers from Madoff to Sentry within the six year period preceding the petition date began on May 9th, 2003.").
On the other hand, the Complaint plausibly alleges that Fairfield Sentry did not have any assets that were not customer property. The Trustee has pleaded that "Fairfield Sentry invested all or substantially all of its assets into the BLMIS Ponzi scheme." (Compl. ¶ 123). The Fairfield Complaint, which is adopted by reference, alleges that the Fairfield Fund was required to invest 95% of its assets in BLMIS. (Fairfield Compl. ¶ 89); see also (Fairfield Compl. ¶ 91) ("From the beginning, to comport with Madoff's requirement for BLMIS feeder funds, Fairfield Sentry ceded control of not only its investment decisions, but also the custody of its assets, to BLMIS.").
Defendant attempts to make a very intricate factual argument about how millions of dollars might have come from non-BLMIS property. Memo. Law at 19, ECF No. 102. ("BLMIS made $120,000,000 of transfers into Sentry during that period, ... while Sentry made $888,268,729 of transfers out as redemptions to its investors and to its related entities ...."). Defendant's calculation ignores any money received by Fairfield Sentry prior to December 11, 2002. Id. at 18. The Court is not convinced that this is the only method of calculating customer property.
Taking all allegations as true and reading them in a light most favorable to the Trustee, the Complaint plausibly pleads that Defendant received customer property because Fairfield Sentry did not have other property to give. The calculation of Fairfield Sentry's customer property and what funds it used to make redemption payments are issues of fact better resolved at a later stage of litigation.
Exhibit C to the Complaint shows the subsequent transfer at issue here is the transfer made from Sentry to Defendant on March 15, 2005 in the amount of $25,763,374. This exhibit provides Multi-Strategy with the "who, when, and how much" of each transfer.
To the extent that Defendant is worried about the Trustee recovering more than he is entitled, such a fear is unfounded. There is no dispute that the Trustee is limited to "a single satisfaction" under § 550(a). 11 U.S.C. § 550(d). He may nevertheless pursue any and all subsequent transferees in order to achieve that satisfaction. § 550(a)(2) (providing that the Trustee may recover property from "any immediate or mediate transferee"). Calculation of whether the Trustee is fully satisfied is a factual finding to be made by this Court at a later stage of litigation.
Conclusion
For the foregoing reasons, Multi-Strategy's motion to dismiss is denied. The Trustee shall submit a proposed order within fourteen days of the issuance of this decision, directly to chambers (via E-Orders), upon not less than two days’ notice to all parties, as required by Local Bankruptcy Rule 9074-1(a).