Second Circuit Affirms Judge Rakoff's Section 546(E) Ruling In Madoff Appeal: Clawback Actions Against 'Innocent Investor' Defendants Limited To Transfers Made Two Years Prior To The SIPA Proceeding

The Second Circuit's recent decision in the Madoff clawback actions effectively limited the exposure period that "innocent investor" defendants face for the return of transfers they received in connection with the Bernie Madoff Ponzi scheme to two years prior to the date of its collapse. In re BLMIS, Nos. 12-2557-bk(L), (2d Cir. Dec. 8, 2014) (hereinafter, Second Circuit Decision). For many individual investors who were sued by Irving H. Picard (the "Trustee"), the trustee for Bernard L. Madoff Investment Securities LLC ("BLMIS"), as "net winners,"1 and thus subject to clawback actions, that designation only heightened their misery -- and potentially left them liable for up to six years of "fictitious profits."2 So when District Court Judge Rakoff in the Southern District of New York (the "District Court") dismissed the Trustee's constructive fraudulent conveyance claims in 2011 in Picard v. Katz, 462 B.R. 447 (S.D.N.Y. 2011) (Rakoff, J.), many "innocent investor" defendants found some relief in the potential (and often significant) reduction in their litigation exposure. The District Court's dismissal of those claims was based on the safe-harbor provisions of section 546(e) of the Bankruptcy Code, which shields a trustee from recovering certain securities-related payments.3 Following the Katz decision, Judge Rakoff applied section 546(e) to dismiss the Trustee's constructive fraudulent transfer claims in numerous other clawback actions, and the appeals of those decisions had been consolidated at the Second Circuit since 2012. With the issuance of the Second Circuit Decision, clawback defendants now have certainty that the Trustee will be limited to reaching back only two years prior to the BLMIS liquidation to recover transfers made to recipients.


The BLMIS liquidation was commenced in December 2008 when Bernie Madoff's Ponzi scheme was discovered and he was arrested. As part of his mandate to recover assets to distribute to BLMIS customers who suffered losses as a result of the Ponzi scheme, the Trustee commenced nearly 1,000 lawsuits against investors to recover fictitious profits from the "net winners" in order to satisfy claims of "net losers." The Trustee's claims generally were based on constructive fraudulent transfers4 made by BLMIS as far back as six years preceding the BLMIS liquidation, and actual fraudulent transfers5 in the two years preceding the liquidation. The defendants in the Katz lawsuit withdrew the...

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