District Court Ruling Could Significantly Limit Madoff Trustee's

On September 27, 2011, U.S. District Judge Jed S. Rakoff issued an important ruling in the action commenced by Irving Picard ("Trustee"), trustee for Bernard L. Madoff Securities LLC ("Madoff"), against a group of individuals and investment entities affiliated with the New York Mets (collectively, "Defendants"). Picard v. Katz, No. 11 Civ. 3605 (S.D.N.Y. Sept. 27, 2011).

Judge Rakoff dismissed nine of the 11 counts against Defendants, leaving only the Trustee's claim to void actual fraudulent transfers as a possible avenue of recovery against the Defendants.1 The ruling limits the Trustee's possible recovery to those transfers that occurred within two years before the Madoff bankruptcy rather than the six-year reach-back allowed under New York state law and, if upheld on appeal, would extinguish billions of dollars of claims held by the estate.2

Background

Defendants invested heavily with Madoff before it collapsed in 2008 amidst allegations of widespread fraud. Over a number of years, Defendants had received transfers from Madoff on account of their principal investment and apparent profits. Of course these fictitious profits were revealed to be the ill-gotten gains of a Ponzi scheme. The Trustee filed a complaint against Defendants seeking to recover over a billion dollars on account actual fraudulent transfers, constructive fraudulent transfers and preferences received by Defendants from Madoff (as amended, the "Complaint").3 Defendants moved to dismiss the Complaint.

The Opinion

Section 546(e) Safe Harbor

Section 546(e) of the Bankruptcy Code provides in relevant part that: Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) . . . , the trustee may not avoid a transfer that is a . . . settlement payment . . . made by or to (or for the benefit of) a . . . stockbroker . . . or that is a transfer made by or to (or for the benefit of) a . . . stockbroker . . . in connection with a securities contract . . ., except under section 548 (a)(1)(A) of this title. (emphasis added) Defendants argued that all of the allegedly preferential and constructively fraudulent transfers challenged by the Trustee are protected from avoidance by this "safe harbor." The Trustee countered that application of Section 546(e) to these transfers would be inconsistent with Congress' intent because avoiding the transfers to Madoff's "customers" would not cause the displacement in the securities markets that this "safe harbor" was intended to prevent.

Judge...