Picard v. Ida Fishman Revocable Trust (In re Bernard Madoff Investment Securities LLC)

Summarized by Jordan Wishnew , Shearman & Sterling LLP
11 years 2 months ago

Citation:

12-2557-bk(L)

Tag(s):

Ruling:

SIPA Trustee's avoidance claims to recover fictitious profits paid by Bernard L. Madoff Securities LLC to hundreds of customers were not avoidable and fell within the section 546(e) safe harbor because such payments constituted securities-related payments. Section 546(e) applied because BLMIS was a stockbroker, the account documents executed by the defendant customers were securities contracts, and the various payments BLMIS made to those customers were in connection with securities contracts under section 741(7) of the Bankruptcy Code, or were settlement payments as defined in section 741(8) of the Bankruptcy Code because the customer granted BLMIS discretion to liquidate securities in their accounts to the extent necessary to implement their sell orders or withdrawal requests.

Procedural context:

The clawback defendants first litigated the applicability of section 546(e) in two cases before the bankruptcy court. The bankruptcy court (Lifland, Bankr. J.) declined to reach the issue, concluding that the question of whether section 546(e) applies to the transfers at issue should not be determined at the pleadings stage of the litigation. Thereafter, the district court withdrew the bankruptcy reference in one clawback action. The U.S. District Court for the Southern District of New York (Rakoff, J.) dismissed the avoidance claims pursuant to Fed. R. Civ. P. 12(b)(6). After this initial opinion, hundreds of other clawback defendants moved to withdraw the bankruptcy references and sought to dismiss the clawback suits pursuant to section 546(e). The district court dismissed clawback claims in 84 other suits, with the exception (as in the initial case) of actual fraud claims invoking section 548(a)(1)(A). The Trustee agreed to a limited consolidation of all pending actions brought by the Trustee raising the section 546(e) issue and appealed said decisions to the U.S. Court of Appeals for the Second Circuit

Facts:

The Trustee argues that section 546(e) should not apply because BLMIS never initiated, executed, completed or settled the securities transactions contemplated by the customer agreements. The clawback defendants argue that a "securities contract" was created by three of the documents that BLMIS customers were required to execute when opening their accounts - a "Customer Agreement", wherein the customer authorized BLMIS to "open or maintain one or more accounts" for his benefit; a "Trading Authorization", wherein each customer appointed BLMIS to be the customer's "agent and attorney in fact to buy, sell and trade in stocks, bonds, and any other securities in accordance with [BLMIS's] terms and conditions for the [customer's] account; and an "Option Agreement", wherein each customer authorized BLMIS to engage in options trading for the customer's account. The Second Circuit agreed. It noted that "the transfers at issue originated with, and could not have been possible but for, the relationship created by the Account Documents." Therefore, the documents fell within the "broad" definition of "securities contract" set forth in 11 U.S.C. section 741(7)(A)(I). In addition, the Court held that whether or not BLMIS actually transacted in securities is not determinative because section 546(e) only requires that a covered transfer be broadly related to a securities contract, not that it be connected to an actual securities transaction. Moreover, to allow the clawback sought by the Trustee would cause the very "displacement" that Congress sought to avoid in enacting section 546(e), especially since the clawback defendants had every reason to believe that BLMIS actually engaged in the business of effecting securities transactions. Despite the Trustee's arguments to the contrary, the Court emphasizes that section 546(e), by using the phrase "in connection with", sets a low bar for the required relationship between the securities contract and the transfer to be avoided, and if it sought raise the bar, Congress could have required that the transfer be made "pursuant to" or "in accordance with the terms of", but it did not.

Judge(s):

Parker, Lynch and Droney

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