23 June 2015
Practice Group:
Securities and
Transactional
Litigation
Supreme Court’s Denial of Cert Preserves Safe
Harbor for Madoff Victims
By Richard A. Kirby, Laura K. Clinton, Martha Rodriguez-Lopez, and D. Matthew Doden
Yesterday, the Supreme Court denied two petitions for certiorari filed by Irving H. Picard—
the Trustee for the estate of Bernard L. Madoff Investment Securities (“Madoff Securities”)—
and the Securities Investor Protection Corporation (“SIPC”). Specifically, the Trustee and
SIPC sought review of the Second Circuit’s holding that Bankruptcy Code Section 546(e)
bars the Trustee’s attempts to recover innocent investor withdrawals from Madoff Securities
made more than two years before Madoff Securities’ liquidation. Picard, Irving H. v. Ida
Fishman Revocable, et al. (14-1129); Securities Investor Prot. Corp. v. Ida Fishman
Revocable, et al. (14-1128). The Trustee has stated that the application of Section 546(e)
will prevent him from recovering more than $4 billion from innocent customers of Madoff (i.e.,
investors with no knowledge of Madoff’s fraudulent scheme).
The 546(e) Safe Harbor
Picard, as a trustee appointed under the Securities Investor Protection Act (“SIPA”), has
authority to claw back transfers from Madoff Securities to the extent the transfers are
avoidable under the Bankruptcy Code. SIPA § 8(c)(3). This includes transfers in the form of
withdrawals made by Madoff Securities’ account holders. Picard sought to recover transfers
made to customers as far back as six years prior to the disclosure of Madoff’s fraud, under
state law provisions for fraudulent transfer. However, Section 546(e) of the Bankruptcy Code
bars all of a trustee’s clawback claims to recover stockbroker transfers that are made in
connection with securities contracts or qualify as settlement payments, except for claims
brought under section 548(a)(1)(A). Specifically, section 546(e) provides:
The trustee may not avoid a transfer that is a … settlement payment, as
defined in section 101 or 741 of this title, made by … a … stockbroker … or
that is a transfer made by … a … stockbroker … in connection with a
securities contract, as defined in section 741(7) … that is made before the
commencement of the case, except under section 548(a)(1)(A) of this title.
11 U.S.C. § 546(e). Thus, section 546(e), where applicable, bars all of a trustee’s clawback
claims against innocent customers except for the two-year claims brought under Section
548(a)(1)(A).
The District Court for the Southern District of New York and the Court of
Appeals for the Second Circuit Held That 546(e) Applies.
Several innocent customers moved to dismiss the Trustee’s clawback claims under 546(e).
The District Court for the Southern District of New York withdrew the reference to decide the
546(e) issue, as well as other issues that required substantial interpretation of nonbankruptcy federal law. Judge Jed S. Rakoff presided over the 546(e) issue, and granted
the customers’ motions to dismiss, holding that section 546(e) barred the Trustee’s clawback
Supreme Court Denies Madoff Trustee’s Cert Petition on 546(e) Issue
claims, except for the two-year claims brought under 548(a)(1)(A). Sec. Investor Prot. Corp.
v. Bernard L. Madoff Inv. Sec. LLC, 476 B.R. 715, 722, 730 (S.D.N.Y. 2012).
On review, the Second Circuit affirmed. In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d
411, 423 (2d Cir. 2014). As a threshold matter, the court acknowledged that “[s]ection
546(e) is a very broadly-worded safe-harbor provision that was enacted to ‘minimiz[e] the
displacement caused in the commodities and securities markets in the event of a major
bankruptcy affecting those industries.’” Id. at 416 (quoting Enron Creditors Recovery Corp.
v. Alfa, S.A.B. de C.V., 651 F.3d 329, 334 (2d Cir. 2011)). Interpreting the plain language of
546(e) in light of that purpose, the court held that Madoff Securities was a stockbroker, and
that his customers withdrew funds from their accounts in connection with their “securities
contracts,” or, alternatively, that the customers’ withdrawals qualified as “settlement
payments.” Id. at 417-23. Thus, the Second Circuit held that the section 546(e) safe harbor
applied and barred all of Picard’s clawback claims against innocent customers, except for the
two-year claims brought under section 548(a)(1)(A).
Impact of the Supreme Court’s Denial of Certiorari
Picard and SIPC petitioned the Supreme Court for review of the Second Circuit’s decision.
Yesterday, the Supreme Court denied that petition. Picard has claimed that the application
of 546(e) will reduce his potential recoveries by over $4 billion. For customers , the Supreme
Court’s decision greatly reduces not only their potential liability, but also the scope of the
remaining clawback litigation. Picard will only be able to proceed against customers under
548(a)(1)(A), and only for transfers occurring in the two years prior to the filing date of Madoff
Securities’ liquidation (December 11, 2006–December 11, 2008). The Supreme Court’s
denial of certiorari is a significant blow to Picard’s expansive view of a SIPA trustee’s
clawback power.
Authors:
Richard A. Kirby
richard.kirby@klgates.com
+1.202.661.3730
Laura K. Clinton
laura.clinton@klgates.com
+1.206.370.7808
Martha Rodriguez Lopez
martha.rodriguezlopez@klgates.com
+1.206.370-7663
D. Matthew Doden
matt.doden@klgates.com
+1.206.370.7660
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Supreme Court Denies Madoff Trustee’s Cert Petition on 546(e) Issue
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