Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

• Decision Date: 05 June 2018
• Docket Number: Adv. Proc. No. 08–01789 (SMB) (Substantively Consolidated)
• Citation: 590 B.R. 200
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, 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. Defendants in Adversary Proceedings Listed on Appendix Attached Hereto, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

590 B.R. 200

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

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.Defendants in Adversary Proceedings Listed on Appendix Attached Hereto, Defendants.

Adv. Proc. No. 08–01789 (SMB) (Substantively Consolidated)

United States Bankruptcy Court, S.D. New York.

Signed June 5, 2018

BAKER & HOSTETLER LLP, 45 Rockefeller Plaza, New York, NY 10111, David J. Sheehan, Esq., Regina L. Griffin, Esq., Thomas L. Long, Esq., Matthew Feil, Esq., Camille C. Bent, Esq., Of Counsel, and WINDELS MARX LANE & MITTENDORF, LLP, 156 West 56th Street, New York, NY 10019, Howard L. Simon, Esq., Of Counsel, Attorneys for Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC

CLEARY GOTTLIEB STEEN & HAMILTON LLP, One Liberty Plaza, New York, NY 10006, Carmine D. Boccuzzi, Esq., Erica Klipper, Esq., Pascale Bibi, Esq., Of Counsel, Attorneys for Citibank N.A. and Citibank North America, Inc.

O'MELVENY & MYERS LLP, Seven Times Square, New York, NY 10036, William J. Sushon, Esq., Daniel Shamah, Esq., Of Counsel, Attorneys for Mistral (SPC) and Zephyros Limited

LATHAM & WATKINS LLP, 885 Third Avenue, New York, NY 10022, Christopher R. Harris, Esq., Thomas J. Giblin, Esq., Of Counsel, Attorneys for ABN AMRO Bank (Ireland) Ltd. (f/k/a Fortis Prime Fund Solutions Bank (Ireland) Ltd.) (n/k/a ABN AMRO Retained Custodial Services (Ireland) Limited) and ABN AMRO Custodial Services (Ireland) Ltd. (f/k/a Fortis Prime Fund Solutions Custodial Services (Ireland) Ltd.)

SHEARMAN & STERLING LLP, 599 Lexington Avenue, New York, NY 10022, Brian H. Polovoy, Esq., Randall L. Martin, Esq., Of Counsel, Attorneys for Citrus Investment Holdings Ltd.

DAVIS & GILBERT LLP, 1740 Broadway, New York, NY 10019, Brian M. Ginsberg, Esq., James R. Serritella, Esq., Of Counsel, Attorneys for Natixis Financial Products LLC (as successor-in-interest to Natixis Financial Products Inc.)

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, 1285 Avenue of the Americas, New York, NY 10019, Martin Flumenbaum, Esq., Andrew J. Ehrlich, Esq., Of Counsel, Attorneys for Inter Investissements S.A. (f/k/a Inter Conseil S.A.), in its capacity as former Liquidator of Oréades SICAV

THOMPSON HINE LLP, 335 Madison Avenue, 12th Floor, New York, NY 10017, Emily Mathieu, Esq., Barry M. Kazan, Esq., Of Counsel, Attorneys for Square One Fund Ltd.

CLIFFORD CHANCE US LLP, 31 West 52nd Street, New York, NY 10019, Jeff E. Butler, Esq., Rijie Ernie Gao, Esq., Of Counsel, Attorneys for Cardinal Management, Inc.

ALLEN & OVERY LLP, 1221 Avenue of the Americas, New York, NY 10020, Michael S. Feldberg, Esq., Of Counsel, Attorneys for ABN AMRO Bank N.V. (presently known as The Royal Bank of Scotland N.V.)

KATTEN MUCHIN ROSENMAN LLP, 575 Madison Avenue, New York, NY 10022, Anthony L. Paccione, Esq., Mark T. Ciani, Esq., Of Counsel, Attorneys for Royal Bank of Canada, Guernoy Limited, RBC Alternative Assets, L.P., and RBC Dexia Investor Services Trust

DECHERT LLP, 1095 Avenue of the Americas, New York, NY 10036, Neil A. Steiner, Esq., Of Counsel, Attorneys for Equity Trading Portfolio Limited and Equity Trading Fund Limited

SIPA LIQUIDATION

MEMORANDUM DECISION DENYING THE TRUSTEE'S MOTION FOR DISCOVERY PURSUANT TO RULE 26(d) OF THE FEDERAL RULES OF CIVIL PROCEDURE

STUART M. BERNSTEIN, United States Bankruptcy Judge

Irving H. Picard (the "Trustee"), the trustee for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. ("SIPA"), moves for an order authorizing limited, expedited discovery pursuant to Rule 26(d)(1) of the Federal Rules of Civil Procedure, made applicable pursuant to Rule 7026 of the Federal Rules of Bankruptcy Procedure, from certain Defendants in the thirteen adversary proceedings listed in the annexed Appendix (the "Avoidance Actions"). For the reasons stated, the Trustee's motion is denied.

BACKGROUND

A. The Avoidance Actions and Rule 2004 Discovery

The Court assumes familiarity with the circumstances leading to the demise of the BLMIS Ponzi scheme perpetrated by Bernard Madoff, the commencement of the BLMIS SIPA liquidation proceeding on December 11, 2008 (the "Filing Date"), and the appointment of the Trustee. See SIPC v. BLMIS (In re BLMIS ), 424 B.R. 122, 124–32 (Bankr. S.D.N.Y. 2010), aff'd , 654 F.3d 229 (2d Cir. 2011), cert. denied , 567 U.S. 934, 133 S.Ct. 24, 183 L.Ed.2d 675 (2012). The Avoidance Actions represent thirteen of the remaining adversary proceedings commenced by the Trustee to avoid and recover pre-Filing Date fraudulent transfers from initial and/or subsequent transferees. Nine of the Avoidance Actions were commenced in November or December 2010 and four were commenced in April or June 2012.

Like many bankruptcy trustees, the Trustee utilized Rule 2004 of the Federal Rules of Bankruptcy Procedure to obtain discovery from third parties, including certain of the Defendants in the Avoidance Actions, before commencing his adversary proceedings. In 2009 and 2010, the Trustee served Rule 2004 subpoenas requesting the production of documents on Defendants ABN AMRO Bank N.V. (presently known as The Royal Bank of Scotland N.V.) ("RBS") ("RBS Subpoena")¹ and Royal Bank of Canada ("RBC") ("RBC Subpoena"),² and served two Rule 2004 subpoenas for production of documents on the predecessor to the parent company of Natixis Financial Products LLC ("Natixis") on July 28, 2009 ("Natixis Subpoena I") and on August 26, 2010 ("Natixis Subpoena II").³ The Trustee also deposed a Natixis officer pursuant to Rule 2004 in October 2010. (Ginsberg Declaration at ¶ 7; Declaration of Regina Griffin in Further Support of the Trustee's Omnibus Motion for Court Order Authorizing Limited Discovery Pursuant to Fed. R. Civ. P. 26(d)(1) , signed Nov. 20, 2017, at ¶ 8 (ECF Doc. # 16927).) Finally, the Trustee served a Rule 2004 subpoena on Equity Trading Portfolio Ltd. (See Letter of Regina L. Griffin , dated Feb. 23, 2018, at 3 n. 1 (ECF Doc. # 17283).) Armed with the fruits of his Rule 2004 pre-litigation discovery, the Trustee commenced over 1,000 adversary proceedings to avoid and recover fraudulent transfers. (See Trustee's Fifth Interim Report for the Period Ending March 31, 2011 , dated May 16, 2011, at ¶ 6 (ECF Doc. # 4072).)

B. The Progression of Fraudulent Transfer Law in BLMIS Adversary Proceedings

The nine Avoidance Actions commenced in 2010 pled claims to avoid and recover fraudulent transfers under New York and/or federal bankruptcy law. These included claims asserted against initial transferees under 11 U.S.C. §§ 548(a) and 550(a)(1) and/or claims against immediate or mediate transferees under 11 U.S.C. § 550(a)(2). The four Avoidance Actions commenced in 2012 were limited to claims to recover avoidable transfers from immediate or mediate transferees.

The need for expedited discovery, according to the Trustee, is the product of changes in the law resulting from a series of decisions issued by the District Court in the BLMIS cases. Ordinarily, an initial transferee may defend a fraudulent transfer action brought under Bankruptcy Code § 548(a) by showing that he received the transfer in good faith and for value. 11 U.S.C. § 548(c). Section 548(c) is an affirmative defense, and the transferee bears the burden of proof. Marshall v. Picard (In re BLMIS ), 740 F.3d 81, 90 n. 11 (2d Cir. 2014) ("A recipient of a transfer is entitled to a 'good faith' defense upon a showing that it took the transfer 'for value' and 'in good faith.' "); Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Grp., LLC ), 439 B.R. 284, 308 (S.D.N.Y. 2010) ("A transferee bears the burden of proving that it took: (1) 'for value ... to the extent that [it] gave value' to the debtor in exchange for such transfer and (2) 'in good faith.' "); Silverman v. Actrade Capital, Inc. (In re Actrade Fin. Techs. Ltd. ), 337 B.R. 791, 805 (Bankr. S.D.N.Y. 2005) ("Under the Bankruptcy Code, § 548(c) has been construed as an affirmative defense, all elements of which must be proven by the defendant-transferee.") (internal quotation marks and citation omitted). Moreover, courts typically apply an objective standard to determine whether a transferee received the transfer in "good faith." Marshall v. Picard , 740 F.3d at 90 n. 11 ("The presence of 'good faith' depends upon, inter alia, 'whether the transferee had information that put it on inquiry notice that the transferor was insolvent or that the transfer might be made with a fraudulent purpose.' ") (quoting Bayou , 439 B.R. at 310 ); see Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd. ), 397 B.R. 1, 23 (S.D.N.Y. 2007).

The same principles govern issues relating to the good faith of a subsequent transferee. Section 550(b) provides a defense to a subsequent transferee who "takes for value ... in good faith, and without knowledge of the voidability of the transfer avoided ...." 11 U.S.C. § 550(b). The majority of courts place the burden of proving the defense on the subsequent transferee. See Genova v. Gottlieb (In re Orange Cty. Sanitation, Inc. ). 221 B.R. 323, 330 (Bankr. S.D.N.Y. 1997) (placing burden on subsequent transferee); Hooker Atlanta (7) Corp. v. Hooker (In re Hooker Invs., Inc. ), 155 B.R. 332, 337 (Bankr. S.D.N.Y. 1993) ("The party seeking recourse to section 550(b) has the burden of proof on these issues.") (citation omitted); accord 5 ALAN N. RESNICK & HENRY J. SOMMER, COLLIER ON BANKRUPTCY , ¶ 550.03[5] at 550–30 (16th ed. Apr. 2018 update) (noting the split in authority but stating that the "better-reasoned position" is to place the burden on the transferee). The "good faith" requirement under section 550(b), like section 548(c), is typically analyzed under an objective standard. See Mazer–Marino v. S.J.P.B., Inc. (In re Thakur ), 498 B.R....