In In re Bernard L. Madoff Investment Securities LLC,
12 F.4th 171 (2d Cir. 2021), the U.S. Court of Appeals for the
Second Circuit revived litigation filed by the trustee
administering the assets of defunct investment firm Bernard L.
Madoff Inv. Sec. LLC (“MIS”) seeking to recover hundreds
of millions of dollars in allegedly fraudulent transfers made to
former MIS customers and certain other defendants as part of the
Madoff Ponzi scheme. The court of appeals vacated a 2019 bankruptcy
court ruling dismissing the trustee’s claims against certain
defendants because he failed to allege that they had not received
the transferred funds in “good faith.”

The Second Circuit also reversed a 2014 district court decision
in holding that: (i) “inquiry notice,” rather than
“willful blindness,” is the proper standard for pleading
a lack of good faith in fraudulent transfer actions commenced as
part of a stockbroker liquidation case under the Securities
Investor Protection Act, 15 U.S.C. §§ 78aaa et
(“SIPA”); and (ii) the defendants, rather than
the SIPA trustee, bear the burden of pleading on the issue of good
faith. The ruling, which involves test cases for approximately 90
dismissed actions, breathes new life into avoidance litigation
seeking recovery of $3.75 billion from global financial
institutions, hedge funds, and other participants in the global
financial markets.

Good-Faith Defense to Avoidance of Fraudulent Transfers

Section 548(a)(1) of the…

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