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 seq. (“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 Bankruptcy Code…