Irving H. Picard, Trustee for the Liquidation of B v. Multi-Strategy Fund Limited

FOR PUBLICATION

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

SECURITIES INVESTOR PROTECTION

CORPORATION, No. 08-01789 (CGM)

Plaintiff-Applicant, SIPA LIQUIDATION

v. (Substantively Consolidated)

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,

Adv. Pro. No. 12-01205 (CGM)

v.

MULTI-STRATEGY FUND LIMITED,

Defendant.

MEMORANDUM DECISION DENYING DEFENDANT’S MOTION TO DISMISS

A P P E A R A N C E S :

BAKER HOSTETLER LLP

Attorneys for the Plaintiff

45 Rockefeller Plaza

New York, N.Y. 10111

BY: MATTHEW FEIL (via Zoomgov)

MATTHEW B. FRIEDMAN (via Zoomgov)

FRIEDMAN KAPLAN SEILER & ADELMAN LLP

Attorneys for Defendant, Multi-Strategy Fund Limited

7 Times Square

New York, NY 10036

BY: ROBERT J. LACK (via Zoomgov)

CECELIA G. MORRIS

UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is Defendant’s, Multi-Strategy Fund Limited (“Multi-

Strategy”), motion to dismiss the complaint of Irving Picard, the trustee (“Trustee”) for the

liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) seeking to recover one

subsequent transfer allegedly consisting of BLMIS customer property. Multi-Strategy seeks

dismissal for lack of personal jurisdiction, for failure to state a claim due to the safe harbor

provision of the Bankruptcy Code, and for failure to allege that it received BLMIS customer

property. For the reasons set forth herein, the motion to dismiss is denied in its entirety.

Jurisdiction

This is an adversary proceeding commenced in this Court, in which the main underlying

SIPA proceeding, Adv. Pro. No. 08-01789 (CGM) (the “SIPA Proceeding”), is pending. The

SIPA Proceeding was originally brought in the United States District Court for the Southern

District of New York (the “District Court”) as Securities Exchange Commission v. Bernard L.

Madoff Investment Securities LLC et al., No. 08-CV-10791, and has been referred to this Court.

This Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and (e)(1),

and 15 U.S.C. § 78eee(b)(2)(A) and (b)(4).

This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (F), (H) and (O). This Court

has subject matter jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§

1334(b) and 157(a), the District Court’s Standing Order of Reference, dated July 10, 1984, and

the Amended Standing Order of Reference, dated January 31, 2012. In addition, the District

Court removed the SIPA liquidation to this Court pursuant to SIPA § 78eee(b)(4), (see Order,

Civ. 08– 01789 (Bankr. S.D.N.Y. Dec. 15, 2008) (“Main Case”), at ¶ IX (ECF No. 1)), and this

Court has jurisdiction under the latter provision. Personal jurisdiction has been contested by this

Defendant and will be discussed infra.

Background

The Court assumes familiarity with the background of the BLMIS Ponzi scheme and its

SIPA proceeding.

This adversary proceeding was filed on March 22, 2012, by Trustee. The Trustee brings

this proceeding to recover the subsequent transfer of BLMIS customer property that Multi-

Strategy allegedly received from Fairfield Sentry Limited (“Fairfield Sentry”). (Compl. ¶ 2, ECF

No. 97). Fairfield Sentry (“Fairfield Sentry”) is known as a “feeder fund” of BLMIS because it

invested “all or substantially all” of its assets in BLMIS. (Id. ¶ 3). In his amended complaint,

filed on February 18, 2022 (“Complaint”1), the Trustee alleges that Multi-Strategy, a foreign

investment fund organized under Caman law (Id. ¶ 58), received a transfer of $25,763,374 from

Fairfield Sentry Limited (“Sentry”) on March 15, 2005. (Id. ¶ 120).

According to the Complaint, Defendant is a company organized under the laws of the

Cayman Islands (Id. ¶ 58) and is a wholly owned subsidiary of Caisse de dépôt et placement du

Quebec (“Caisse”), and Defendant’s address is alleged to be Caisse’s headquarters in Montreal,

Canada. (Id.) It is alleged that CDP Capital was Defendant’s investment manager and directed

Defendant’s investments in and redemptions from the BLMIS Feeder Funds. (Id. ¶ 4).

Following BLMIS’s collapse, the Trustee filed an adversary proceeding against Fairfield

Sentry and related defendants to avoid and recover fraudulent transfers of customer property in

1 For simplicity, the Court uses the term “Complaint” to refer to the Trustee’s amended complaint docketed at ECF

No. 97.

the amount of approximately $3 billion. (Id. ¶ 114). In 2011, the Trustee settled with Fairfield

Sentry. (Id. ¶ 115). As part of the settlement, Fairfield Sentry consented to a judgment in the

amount of $3.054 billion (Id.) but repaid only $70 million to the BLMIS customer property

estate. The Trustee then commenced a number of adversary proceedings against subsequent

transferees like Defendant to recover the approximately $3 billion in missing customer property.

In its motion to dismiss, Multi-Strategy argues that the safe harbor bars the Trustee’s

recovery of this transfer, the Trustee has failed to allege that it holds BLMIS customer property,

and that this Court lacks personal jurisdiction over it. The Trustee opposes the motion to

dismiss.

Discussion

Personal Jurisdiction

Defendant objects to the Trustee’s assertion of personal jurisdiction over it. In the

Complaint, the Trustee argues that Defendant purposefully availed itself of the laws of the

United States and New York. Compl. ¶¶ 87–113.

To survive a motion to dismiss for lack of personal jurisdiction pursuant to Rule 12(b)(2)

of the Federal Rules of Civil Procedure, the Trustee “must make a prima facie showing that

jurisdiction exists.” SPV Osus Ltd. v. UBS AG, 882 F.3d 333, 342 (2d Cir. 2018) (quoting

Penguin Grp. (USA) Inc. v. Am. Buddha, 609 F.3d 30, 34–35 (2d Cir. 2010)). A trial court has

considerable procedural leeway when addressing a pretrial dismissal motion under Rule 12(b)(2).

Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A., 722 F.3d 81, 84 (2d Cir. 2013). “‘It may

determine the motion on the basis of affidavits alone; or it may permit discovery in aid of the

motion; or it may conduct an evidentiary hearing on the merits of the motion.’” Dorchester Fin.

Sec., Inc. v. Banco BRJ, S.A., 722 F.3d 81, 84 (2d Cir. 2013) (quoting Marine Midland Bank,

N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981)); see also Picard v. BNP Paribas S.A. (In re

BLMIS), 594 B.R. 167, 187 (Bankr. S.D.N.Y. 2018) (same). At this preliminary stage, “the

plaintiff’s prima facie showing may be established solely by allegations.” Dorchester Fin., 722

F.3d at 84–85 (quoting Ball v. Metallurgie Hoboken-Overpelt, S.A., 902 F.2d 194, 197 (2d Cir.

1990)); Picard v. Fairfield Greenwich Grp. (In re Fairfield Sentry Ltd.), 627 B.R. 546, 565

(Bankr. S.D.N.Y. 2021) (same).

In order to be subjected to personal jurisdiction in the United States, due process requires

that a defendant have sufficient minimum contacts with the forum in which defendant is sued

“‘such that the maintenance of the suit does not offend traditional notions of fair play and

substantial justice.’” Picard v. Bureau of Labor Ins. (In re BLMIS), 480 B.R. 501 (Bankr.

S.D.N.Y. 2012), 480 B.R. 501, 516 (Bankr. S.D.N.Y. 2012) (quoting Int’l Shoe Co. v.

Washington, 326 U.S. 310, 316 (1945)). The pleadings and affidavits are to be construed “‘in

the light most favorable to the plaintiffs, resolving all doubts in their favor.’” Chloé v. Queen

Bee of Beverly Hills, LLC, 616 F.3d 158, 163 (2d Cir. 2010) (quoting Porina v. Marward

Shipping Co., 521 F.3d 122, 126 (2d Cir. 2008)); Picard v. BNP Paribas S.A. (In re BLMIS), 594

B.R. 167, 187 (Bankr. S.D.N.Y. 2018).

The Supreme Court has set out three conditions for the exercise of specific

jurisdiction over a nonresident defendant. First, the defendant must have

purposefully availed itself of the privilege of conducting activities within the

forum State or have purposefully directed its conduct into the forum State.

Second, the plaintiff's claim must arise out of or relate to the defendant’s forum

conduct. Finally, the exercise of jurisdiction must be reasonable under the

circumstances.

U.S. Bank Nat’l Ass’n v. Bank of Am. N.A., 916 F.3d 143, 150 (2d Cir. 2019) (cleaned up).

Purposeful Availment

“[M]inimum contacts . . . exist where the defendant purposefully availed itself of the

privilege of doing business in the forum and could foresee being haled into court there.” Charles

Schwab Corp. v. Bank of Am. Corp., 883 F.3d 68, 82 (2d Cir. 2018). “Although a defendant’s

contacts with the forum state may be intertwined with its transactions or interactions with the

plaintiff or other parties, a defendant’s relationship with a third party, standing alone, is an

insufficient basis for jurisdiction.” U.S. Bank Nat’l Ass’n v. Bank of Am. N.A., 916 F.3d 143, 150

(2d Cir. 2019) (cleaned up). “It is insufficient to rely on a defendant’s random, fortuitous, or

attenuated contacts or on the unilateral activity of a plaintiff with the forum to establish specific

jurisdiction.” Id.

A party “purposefully avail[s] itself of the benefits and protections of New York laws by

knowing, intending and contemplating that the substantial majority of funds invested in Fairfield

Sentry would be transferred to BLMIS in New York to be invested in the New York securities

market.” Picard v. Bureau of Labor Ins. (In re BLMIS), 480 B.R. 501, 517 (Bankr. S.D.N.Y.

2012).

The Trustee has devoted over five pages of his twenty-seven-page Complaint to

Defendant’s contacts with New York. (Compl. ¶¶ 87–113). It is alleged that “Defendant

invested in the BLMIS Feeder Funds with the specific purpose of having funds invested with

BLMIS in New York. Defendant knew and intended that its investments in the BLMIS Feeder

Funds were ultimately investments with New York-based BLMIS.” (Id. ¶ 88). And that

Defendant “purchased shares in the BLMIS Feeder Funds intending to direct funds to New York-

based BLMIS.” (Id. ¶ 89). “Prior to subscribing to Fairfield Sentry, Defendant affirmed having

‘received and read’ a Fairfield Sentry private placement memorandum, dated July 1, 2003, which

provided that ‘approximately 95% of the Fund’s assets’ were under the custody of New York

based BLMIS.” (Id. ¶ 90). And the Trustee allegedly has evidence that Defendant was referred

to as a “Madoff addict” by a partner at Fairfield Greenwich Group. (Id. ¶ 91). Defendant,

through its president, director and authorized signatory, asked about additional capacity for

Fairfield Sentry on at least seven occasions. (Id. ¶ 91).

“Defendant’s knowledge and intention that its investments in Fairfield Sentry and

Kingate Global[2] were investments with BLMIS are reflected in Defendant’s total redemption

of its investments in both BLMIS Feeder Funds after [Defendant’s president] discussed ‘Madoff

and the potential ponzi [sic] scheme.’” (Id. ¶ 92). “[I]n connection with Defendant’s Fairfield

Sentry investments,” persons associated with the Defendant asked “for ‘info that you’ve got on

Madoff,’ including asking ‘how Maddoff [sic] made money’ and for help ‘understand[ing] when

Maddoff [sic] was invested.’” (Id. ¶ 93).

It is also alleged that Defendant’s president and other associated persons met with

Fairfield Greenwich Group partners in New York at the Fairfield Greenwich Group New York

office. (Id. ¶ 97). “Defendant sent wiring instructions specifically designating a New York-

based bank account to which Defendant directed FGG to wire Defendant’s redemption payments

from Fairfield Sentry, and from which Defendant was going to fund its subscriptions in Fairfield

Sentry.” (Id. ¶ 97; see also id. ¶¶ 110–113) (“Defendant derived significant revenue from New

York and maintained minimum contacts and general business contacts with the United States and

New York in connection with the claims alleged herein.”). Defendant intentionally invested in

2 Kingate Global Fund Ltd. (“Kingate Global”) was another feeder fund of BLMIS. (Compl. ¶ 2). According to the

Trustee, “[t]his Amended Complaint removes claims that have been resolved by the Trustee’s Court-approved

settlement . . . . Specifically, pursuant to the single satisfaction rule set forth in 11 U.S.C. § 550(d), the Trustee is not

seeking to recover subsequent transfers that Defendant received from Kingate Global.” (Id. ¶ 3, n.1). Despite the

dismissal of this claim, allegations regarding the Defendant’s investment in multiple BLMIS feeder funds lends

support to the Trustee’s allegations that Defendant purposefully invested in BLMIS.

United States investments (id. ¶¶100–107) and Defendant submitted to the laws of New York

and to personal jurisdiction in New York (id. ¶ 108).

Despite these allegations, Defendant argues that it had no contact with the forum state

and that under Walden v. Fiore, 571 U.S. 277 (2014), the Court may not use a third-party’s

contacts to determine whether it purposefully availed itself of this Court’s jurisdiction. This

case is no assistance to Defendant. The Supreme Court explicitly states in Walden, “although

physical presence in the forum is not a prerequisite to jurisdiction, physical entry into the State—

either by the defendant in person or through an agent, goods, mail, or some other means—is

certainly a relevant contact.” Walden v. Fiore, 571 U.S. 277, 285 (2014). The Trustee has

sufficiently alleged that Defendant, through its president and investment manager, was

physically present in New York at Fairfield Greenwich Group’s New York office, received

payments and sold shares through its New York based bank account, and used that New York

based bank account to gain access, through its agent Fairfield Sentry, to BLMIS, a New York

based investment broker who invested in United States investments.

As described by Judge Lifland, “[Defendant] intentionally tossed a seed from abroad to

take root and grow as a new tree in the Madoff money orchard in the United States and reap the

benefits therefrom.” Picard v. Bureau of Labor Ins. (In re BLMIS), 480 B.R. 501, 506 (Bankr.

S.D.N.Y. 2012). Defendant’s alleged contacts with New York are not random, isolated, or

fortuitous.

Arise out of or relate to the defendant’s forum conduct

As to the second prong, the suit must “arise out of or relate to the defendant’s contacts

with the forum.” Ford Motor Co. v. Montana Eighth Jud. Dist. Ct., __ U.S. __, 141 S. Ct. 1017,

1026, 209 L. Ed. 2d 225 (2021) (emphasis in original). “[P]roof that a plaintiff’s claim came

about because of the defendant’s in-state conduct” is not required. Id. at 1027. Instead, the court

need only find “an affiliation between the forum and the underlying controversy.” Goodyear

Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011); Picard v. BNP Paribas S.A.

(In re BLMIS), 594 B.R. 167, 190 (Bankr. S.D.N.Y. 2018) (“Where the defendant’s contacts with

the jurisdiction that relate to the cause of action are more substantial, however, it is not

unreasonable to say that the defendant is subject to personal jurisdiction even though the acts

within the state are not the proximate cause of the plaintiff's injury.”) (internal quotations

omitted).

Here, the Trustee is asserting subsequent transfer claims against Defendant for monies it

received from Fairfield Sentry. (Compl. ¶¶ 125–28). This lawsuit is directly related to its

investment activities with Fairfield and BLMIS. Picard v. BNP Paribas S.A. (In re BLMIS), 594

B.R. 167, 191 (Bankr. S.D.N.Y. 2018) (finding that the redemption and other payments the

defendants received as direct investors in a BLMIS feeder fund arose from the New York

contacts such as sending subscription agreements to New York, wiring funds in U.S. dollars to

New York, sending redemption requests to New York, and receiving redemption payments from

a Bank of New York account in New York, and were the proximate cause of the injuries that the

Trustee sought to redress).

Defendant argues that its contacts with the forum are alleged to have occurred after its

initial investment in Fairfield and, therefore, the Court cannot use them to find personal

jurisdiction. This is not the test. The suit only need be affiliated with the alleged in-state

conduct. Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011). Even if

this were the standard, the Trustee is seeking to recover of funds Defendant received after its

contacts were alleged to have occurred.

Reasonableness

Having found sufficient minimum contacts, the Court must determine if exercising

personal jurisdiction over the Defendant is reasonable and “comport[s] with fair play and

substantial justice.” Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477 (1985) (internal

quotations omitted). Factors the Court may consider include the burden on the defendant, the

forum State’s interest in adjudicating the dispute, the plaintiff's interest in obtaining convenient

and effective relief, the interstate judicial system’s interest in obtaining the most efficient

resolution of controversies, and the shared interest of the several States in furthering fundamental

substantive social policies.

The exercise of jurisdiction is reasonable. Defendant is not burdened by this litigation.

Defendant has actively participated in this Court’s litigation for over ten years. It is represented

by U.S. counsel and “irrevocably” submitted to the jurisdiction of New York courts’ when it

signed its subscription agreements with the Fairfield Funds.3 The forum and the Trustee both

have a strong interest in litigating BLMIS adversary proceedings in this Court. Picard v. Maxam

Absolute Return Fund, L.P. (In re BLMIS), 460 B.R. 106, 117 (Bankr. S.D.N.Y. 2011), aff’d, 474

B.R. 76 (S.D.N.Y. 2012); Picard v. Chais (In re BLMIS), 440 B.R. 274, 278 (Bankr. S.D.N.Y.

2010); Picard v. Cohmad Sec. Corp. (In re BLMIS), 418 B.R. 75, 82 (Bankr. S.D.N.Y. 2009);

Picard v. Fairfield Greenwich Grp., (In re Fairfield Sentry Ltd.), 627 B.R. 546, 568 (Bankr.

S.D.N.Y. 2021); see also In re Picard, 917 F.3d 85, 103 (2d Cir. 2019) (“The United States has a

compelling interest in allowing domestic estates to recover fraudulently transferred property.”).

3 Even though this Court held that the Defendant’s consent to jurisdiction in New York courts contained in the

subscription agreements it signed prior to investing with Fairfield Sentry could not be used as the sole basis for this

Court’s exercise of personal jurisdiction over an action by foreign liquidators to recover redemption payments under

British Virgin Island law, the fact that Defendant agreed to submit to the jurisdiction of this Court is certainly a

relevant factor in determining whether the exercise of jurisdiction over Defendant is reasonable. In Fairfield Sentry

v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.), Case No. 10-13164 (SMB), Adv. No. 10-03496 (SMB),

2018 WL 3756343, at *12 (Bankr. S.D.N.Y. Aug. 6, 2018) (“Defendants’ consent to the Subscription Agreement

does not constitute consent to personal jurisdiction in the U.S. Redeemer Actions.”).

The Trustee has made a prima facie showing of personal jurisdiction with respect to the

Fairfield Funds subsequent transfers at issue in this Complaint.

12(b)(6) standard

“To survive a motion to dismiss, the complaint must contain sufficient factual matter,

accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S.

662, 678 (2009) (cleaned up). The claim is facially plausible when a plaintiff pleads facts that

allow the Court to draw a “reasonable inference that the defendant is liable for the misconduct

alleged.” Id. “The plausibility standard is not akin to a ‘probability requirement,’ but it asks for

more than a sheer possibility that a defendant has acted unlawfully.” Id.; see also Bell Atl. Corp.

v. Twombly, 550 U.S. 544, 556 (2007) (“Asking for plausible grounds to infer an agreement does

not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise

a reasonable expectation that discovery will reveal evidence of illegal agreement.”). In deciding

a motion to dismiss, the Court should assume the factual allegations are true and determine

whether, when read together, they plausibly give rise to an entitlement of relief. Iqbal, 556 U.S.

at 679. “And, of course, a well-pl[ed] complaint may proceed even if it strikes a savvy judge

that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.”

Twombly, 550 U.S. at 556.

In deciding the motion, “courts must consider the complaint in its entirety, as well as

other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in

particular, documents incorporated into the complaint by reference, and matters of which a court

may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322

(2007). A complaint is “deemed to include any written instrument attached to it as an exhibit[,] .

. . documents incorporated in it by reference[,]” and other documents “integral” to the complaint.

Chambers v. Time Warner, Inc., 282 F.3d 147, 152–53 (2d Cir. 2002) (citations omitted). A

document is “integral” to a complaint when the plaintiff has “actual notice” of the extraneous

information and relied on it in framing the complaint. DeLuca v. AccessIT Grp., Inc., 695 F.

Supp. 2d 54, 60 (S.D.N.Y. 2010) (citing Chambers, 282 F.3d at 153).

Count One: Recovery of Subsequent Transfers

Section 550(a) of the Bankruptcy Code states:

Except as otherwise provided in this section, to the extent that a transfer is

avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the

trustee may recover, for the benefit of the estate, the property transferred, or, if the

court so orders, the value of such property, from--

(1) the initial transferee of such transfer or the entity for whose benefit such

transfer was made; or

(2) any immediate or mediate transferee of such initial transferee.

“To plead a subsequent transfer claim, the Trustee must plead that the initial transfer is

avoidable, and the defendant is a subsequent transferee of that initial transferee, that is, that the

funds at issue originated with the debtor.” Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R.

167, 195 (Bankr. S.D.N.Y. 2018); see also SIPC v. BLMIS (In re Consolidated Proceedings on

11 U.S.C. § 546(e)), No. 12 MC 115(JSR), 2013 WL 1609154, at *7 (S.D.N.Y. Apr. 15, 2013)

(consolidated proceedings on 11 U.S.C. § 546(e)). “Federal Civil Rule 9(b) governs the portion

of a claim to avoid an initial intentional fraudulent transfer and Rule 8(a) governs the portion of a

claim to recover the subsequent transfer. Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R.

167, 195 (Bankr. S.D.N.Y. 2018) (citing Sharp Int’l Corp. v. State St. Bank & Trust Co., (In re

Sharp Int’l Corp.), 403 F.3d 43, 56 (2d Cir. 2005) and Picard v. Legacy Capital Ltd. (In re

BLMIS), 548 B.R. 13, 36 (Bankr. S.D.N.Y. 2016), rev’d on other grounds, Picard v. Citibank,

N.A. (In re BLMIS), 12 F.4th 171 (2d Cir. 2021)).

To properly plead a subsequent transfer claim, the Trustee need only provide “a short and

plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P.

8(a)(2). “The plaintiff must allege the necessary vital statistics—the who, when, and how much–

of the purported transfers to establish an entity as a subsequent transferee of the funds. However,

the plaintiff’s burden at the pleading stage does not require dollar-for-dollar accounting of the

exact funds at issue.” Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167, 195 (Bankr.

S.D.N.Y. 2018).

In order to properly plead a subsequent transfer claim, the Trustee must allege that the

initial transfer from BLMIS to Fairfield Sentry is avoidable. The Trustee is not required to avoid

the transfer received by the initial transferee before asserting an action against subsequent

transferees. While the plaintiff can choose to pursue the initial transferee, he is not obligated to

do so. The plaintiff is free to pursue any of the immediate or mediate transferees, and nothing in

the statute requires a different result. IBT Int’l, Inc. v. Northern (In re Int’l Admin. Servs., Inc.),

408 F.3d 689, 706-07 (11th Cir. 2005).

The Trustee pleaded the avoidability of the initial transfer (from BLMIS to Fairfield

Sentry) by adopting by reference the entirety of the complaint filed against Fairfield Sentry in

adversary proceeding 09-1239 (“Fairfield Complaint”). (Compl. ¶¶ 114–19). Whether the

Fairfield Complaint properly pleads the avoidability of the initial transfer, is governed by Rule

9(b). Rule 9(b) states: “In alleging fraud or mistake, a party must state with particularity the

circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a

person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). “Where the actual fraudulent

transfer claim is asserted by a bankruptcy trustee, applicable Second Circuit precedent instructs

courts to adopt a more liberal view since a trustee is an outsider to the transaction who must

plead fraud from second-hand knowledge. Moreover, in a case such as this one, where the

Trustee’s lack of personal knowledge is compounded with complicated issues and transactions

that extend over lengthy periods of time, the trustee's handicap increases, and even greater

latitude should be afforded.” Picard v. Cohmad Secs. Corp., (In re BLMIS), 454 B.R. 317, 329

(Bankr. S.D.N.Y. 2011) (cleaned up).

In the Complaint, the Trustee “incorporates by reference the allegations contained in the

Second Amended Complaint as if fully set forth herein, including but not limited to paragraphs

1-10, 79-313, and 315-16.” (Compl. ¶ 118). Adoption by reference is government by Rule 10 of

the Federal Rules of Civil Procedure. Fed. R. Civ. P. 10(c). Rule 10(c) states: “A statement in a

pleading may be adopted by reference elsewhere in the same pleading or in any other pleading or

motion.” The district court has already found that adoption by reference of the entire Fairfield

Complaint is proper. See SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. §

550(a)), 501 B.R. 26, 36 (S.D.N.Y. 2013) (“The Trustee’s complaint against Standard Chartered

Financial Services incorporates by reference the complaints against Kingate and Fairfield,

including the allegations concerning the avoidability of the initial transfers, and further alleges

the avoidability of these transfers outright. Thus, the avoidability of the transfers from Madoff

Securities to Kingate and Fairfield is sufficiently pleaded for purposes of section 550(a).”)

(cleaned up).

The Court follows the district court’s instruction. As was explained in In re Geiger,

pleadings filed in the “same action” may be properly adopted by reference in other pleadings in

that action. 446 B.R. 670, 679 (Bankr. E.D. Pa. 2010). The Fairfield Complaint was filed in the

“same action” as this adversary proceeding for purposes of Rule 10(c). Id. Cases within this

SIPA proceeding are filed in the same “proceeding”—the SIPA proceeding. In re Terrestar

Corp., No. 16 CIV. 1421 (ER), 2017 WL 1040448, at *4 (S.D.N.Y. Mar. 16, 2017) (“Adversary

proceedings filed in the same bankruptcy case do not constitute different cases.”); see also Sec.

Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 610 B.R. 197, 237 (Bankr. S.D.N.Y. 2019)

(“The prior decisions within this SIPA proceeding constitute law of the case . . . . “); Sec. Inv.

Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 603 B.R. 682, 700 (Bankr. S.D.N.Y. 2019),

(citing In re Motors Liquidation Co., 590 B.R. 39, 62 (S.D.N.Y. 2018) (law of the case doctrine

applies across adversary proceedings within the same main case), aff’d, 943 F.3d 125 (2d Cir.

2019)); Perez v. Terrastar Corp. (In re Terrestar Corp.), No. 16 Civ. 1421 (ER), 2017 WL

1040448, at *4 (S.D.N.Y. Mar. 16, 2017) (“Adversary proceedings filed in the same bankruptcy

case do not constitute different cases.”), appeal dismissed, No. 17-1117 (2d Cir. June 29, 2017);

Bourdeau Bros., Inc. v. Montagne (In re Montagne), No. 08-1024 (CAB), 2010 WL 271347, at

*6 (Bankr. D. Vt. Jan. 22, 2010) (“[D]ifferent adversary proceedings in the same main case do

not constitute different ‘cases.’”).

Through the reference to the Fairfield Complaint, the Trustee has adequately pleaded the

avoidability of the initial transfer. (Fairfield Compl. ¶¶ 314–318, 09-1239, ECF No. 286); see

also SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 550(a)), 501 B.R. 26, 37

(S.D.N.Y. 2013) (“[T]he Court directs that the following adversary proceedings be returned to

the Bankruptcy Court for further proceedings consistent with this Opinion and Order . . . .”);

Order at 14, 12-MC-115 (JSR), ECF No. 314 (applying holding to Multi-Strategy).

The Safe Harbor does not bar the avoidance of the Fairfield Initial Transfers

Defendant has raised the “safe harbor” defense, found in § 546(e), to the Trustee’s

allegations. Section 546(e) is referred to as the safe harbor because it protects a transfer that is a

“settlement payment ... made by or to (or for the benefit of) a ... financial institution [or]

financial participant,” or that is “made by or to (or for the benefit of) a ... financial institution [or]

financial participant ... in connection with a securities contract.” 11 U.S.C. § 546(e). “By its

terms, the safe harbor is a defense to the avoidance of the initial transfer. Picard v. BNP Paribas

S.A. (In re BLMIS), 594 B.R. 167, 197 (Bankr. S.D.N.Y. 2018) (emphasis added). However,

where the initial transferee fails to raise a § 546(e) defense against the Trustee’s avoidance of

certain transfers, as is the case here, the subsequent transferee is entitled to raise a § 546(e)

defense against recovery of those funds. Picard v. Fairfield Inv. Fund (In re BLMIS), No. 08-

01789 (CGM), 2021 WL 3477479, at *3 (Bankr. S.D.N.Y. Aug. 6, 2021).

In light of the safe harbor granted under 11 U.S.C. § 546(e), the Trustee may only avoid

and recover intentional fraudulent transfers under § 548(a)(1)(A) made within two years of the

filing date, unless the transferee had actual knowledge of BLMIS’s Ponzi scheme, or more

generally, “actual knowledge that there were no actual securities transactions being conducted.”

SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 546(e)), No. 12 MC 115(JSR),

2013 WL 1609154, at *4 (S.D.N.Y. Apr. 15, 2013). “The safe harbor was intended, among other

things, to promote the reasonable expectations of legitimate investors. If an investor knew that

BLMIS was not actually trading securities, he had no reasonable expectation that he was signing

a contract with BLMIS for the purpose of trading securities for his account. In that event, the

Trustee can avoid and recover preferences and actual and constructive fraudulent transfers to the

full extent permitted under state and federal law.” Picard v. Legacy Capital Ltd. (In re BLMIS),

548 B.R. 13, 28 (Bankr. S.D.N.Y. 2016) (internal citations omitted), vacated and remanded on

other grounds, Picard v. Citibank, N.A. (In re BLMIS), 12 F.4th 171 (2d Cir. 2021)). “In sum, if

the Trustee sufficiently alleges that the [initial] transferee from whom he seeks to recover a

fraudulent transfer knew of [BLMIS ]’[s] fraud, that transferee cannot claim the protections of

Section 546(e)’s safe harbor.” Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, No. 08-

01789 (CGM), 2021 WL 3477479, at *4 (Bankr. S.D.N.Y. Aug. 6, 2021).

This Court has already determined that the Fairfield Complaint4 contains sufficient

allegations of Fairfield Sentry’s actual knowledge to defeat the safe harbor defense on a Rule

12(b)(6) motion. See Picard v. Fairfield Inv. Fund (In re BLMIS), No. 08-01789 (CGM), Adv.

No. 09-01239 (CGM), 2021 WL 3477479, at *4 (Bankr. S.D.N.Y. Aug. 6, 2021) (“[T]he Trustee

has alleged that the agents and principals of the Fairfield Funds had actual knowledge of

Madoff's fraud”). In that adversary proceeding, the Court held that “[t]he Trustee has pled

[actual] knowledge in two ways: 1) that certain individuals had actual knowledge of Madoff's

fraud, which is imputed to the Fairfield Funds; and 2) that actual knowledge is imputed to the

Fairfield Funds through ‘FGG,’ an alleged ‘de facto’ partnership.” Id. at *4; see also Fairfield

Compl. ¶ 320 (“Fairfield Sentry had actual knowledge of the fraud at BLMIS”); Fairfield Compl.

¶ 321 (“Greenwich Sentry and Greenwich Sentry Partners had actual knowledge of the fraud at

BLMIS”); Fairfield Compl. ¶ 322 (“FIFL had actual knowledge of the fraud at BLMIS”);

Fairfield Compl. ¶ 323 (“Stable Fund had actual knowledge of the fraud at BLMIS”); Fairfield

Compl. ¶ 324 (“FG Limited had actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶

325 (“FG Bermuda had actual knowledge of the fraud at BLMIS”); ¶ 326 (“FG Advisors had

actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶ 327 (“Fairfield International

Managers had actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶ 328 (“FG Capital

had actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶ 329 (“Share Management had

actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶ 9 (“It is inescapable that FGG

partners knew BLMIS was not trading securities. They knew BLMIS’s returns could not be the

result of the split strike conversion strategy (the “SSC Strategy”). They knew BLMIS’s equities

4 The Fairfield Complaint can be found on the docket of adversary number 09-01239-cgm, ECF No. 286.

and options trading volumes were impossible. They knew that BLMIS reported impossible, out-

of-range trades, which almost always were in Madoff’s favor. They knew Madoff’s auditor was

not certified and lacked the ability to audit BLMIS. They knew BLMIS did not use an

independent broker or custodian. They knew Madoff refused to identify any of BLMIS’s options

counterparties. They knew their clients and potential clients raised numerous due diligence

questions they would not and could not satisfactorily answer. They knew Madoff would refuse to

provide them with honest answers to due diligence questions because it would confirm the

details of his fraud. They knew Madoff lied about whether he traded options over the counter or

through the exchange. They knew they lied to clients about BLMIS’s practices in order to keep

the money flowing and their fees growing. And they knowingly misled the SEC at Madoff’s

direction.”).

This Court determined that the Fairfield Complaint is replete with allegations

demonstrating that Fairfield Sentry had actual knowledge that BLMIS was not trading securities.

See Picard v. Fairfield Inv. Fund (In re BLMIS), No. 08-01789(CGM), Adv. No. 09-01239

(CGM), 2021 WL 3477479, at *3–*7 (Bankr. S.D.N.Y. Aug. 6, 2021). The district court

determined that “those defendants who claim the protections of Section 546(e) through a Madoff

Securities account agreement but who actually knew that Madoff Securities was a Ponzi scheme

are not entitled to the protections of the Section 546(e) safe harbor, and their motions to dismiss

the Trustee’s claims on this ground must be denied. SIPC v. BLMIS (In re Consolidated

Proceedings on 11 U.S.C. § 546(e)), No. 12 MC 115(JSR), 2013 WL 1609154, at *10 (S.D.N.Y.

Apr. 15, 2013). And “to the extent that a defendant claims protection under Section 546(e) under

a separate securities contract” this Court was directed to “adjudicate those claims in the first

instance consistent with [the district court’s] opinion.” See Order, 12-MC-115, ECF No. 119,

Ex. A at 24.

This Court is powerless to reconsider this issue, agrees with the district court’s reasoning,

and finds its holding consistent with dicta set forth by the Court of Appeals for the Second

Circuit. See Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Inv. Sec. LLC),

773 F.3d 411, 420 (2d Cir. 2014) (“The clawback defendants, having every reason to believe that

BLMIS was actually engaged in the business of effecting securities transactions, have every right

to avail themselves of all the protections afforded to the clients of stockbrokers, including the

protection offered by § 546(e).”). This Court agrees with the district court’s holding.

The Trustee’s allegations in the Fairfield Complaint are sufficient to survive a Rule

12(b)(6) motion on this issue.

The Safe Harbor cannot be used to defeat a subsequent transfer

The safe harbor is not applicable to subsequent transfers. “By its terms, the safe harbor is

a defense to the avoidance of the initial transfer.” Picard v. BNP Paribas S.A. (In re BLMIS),

594 B.R. 167, 197 (Bankr. S.D.N.Y. 2018) (emphasis in original); see also 11 U.S.C. § 546(e)

(failing to include § 550 in its protections). Since there must be an initial transfer in order for the

Trustee to collect against a subsequent transferee, a subsequent transferee may raise the safe

harbor as a defense—but only in so far as the avoidance of the initial transfer is concerned. The

safe harbor cannot be used as a defense by the subsequent transferee because the Trustee is not

“avoiding” a subsequent transfer, “he recovers the value of the avoided initial transfer from the

subsequent transferee under 11 U.S.C. § 550(a), and the safe harbor does not refer to the

recovery claims under section 550.” Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167,

197 (Bankr. S.D.N.Y. 2018).

Defendant argues that this Court applied the safe harbor to redemption payments made by

Fairfield Sentry in In re Fairfield Sentry Ltd., 2020 WL 7345988, at *5 (Dec. 14, 2020)

(“Fairfield III”). Reliance on this case is misplaced. While many facts overlap between this

SIPA liquidation of BLMIS and the foreign liquidation of BLMIS’s largest feeder fund, Fairfield

Sentry, the legal holdings in these liquidations are not interchangeable. In this case, the Court is

analyzing subsequent transfers; in Fairfield III the Court was analyzing initial transfers. The

safe harbor is not available to be raised as defense to subsequent transfer claims.

In Fairfield III, this Court analyzed whether the safe harbor applied to avoidance claims

under BVI law5 to recover “unfair preferences” and “undervalue transactions” and constructive

trust claims against a defendant who allegedly “knew or willfully blinded itself to the fact that

the [Fairfield Sentry’s] BLMIS investments were worthless or virtually worthless.” In re

Fairfield Sentry Ltd., No. 10-13164 (SMB), 2020 WL 7345988, at *1 (Bankr. S.D.N.Y. Dec. 14,

2020), reconsideration denied, No. 10-13164 (SMB), 2021 WL 771677 (Bankr. S.D.N.Y. Feb.

23, 2021). The Court was not considering the safe harbor’s effect on subsequent transfer claims

brought under § 550 of the Bankruptcy Code. In the Fairfield Sentry liquidation, Defendant

would be an initial transferee as redemption payments paid by Fairfield Sentry were paid directly

to Multi-Strategy. Fairfield III is not applicable here.

Defendant also argues that this Court permitted a subsequent transferee to raise the safe

harbor as a defense in Picard v. Fairfield Inv. Fund (In re BLMIS), No. 08-01789(CGM), Adv.

No. 09-01239 (CGM), 2021 WL 3477479, at *3–*7 (Bankr. S.D.N.Y. Aug. 6, 2021). The Court

never considered whether the safe harbor could be raised by a subsequent transferee in that case.

In Picard v. Fairfield, the subsequent transferees were also the principals and insiders of

5 Fairfield Sentry liquidated under the laws of the British Virgin Islands (“BVI”) and this Court’s chapter 15 case is

ancillary to the primary proceeding brought in the BVI.

Fairfield Sentry, the initial transferee. The Court considered the insider’s actual knowledge of

BLMIS’s fraud only as it related to whether Fairfield Sentry had actual knowledge of the fraud.

The Court never considered whether the subsequent transferees could raise the safe harbor

defense on their own behalf nor could it have, as § 546 is inapplicable to subsequent transferees.

Defendant is not permitted to raise the safe harbor defense on its own behalf as a

subsequent transferee.

BLMIS Customer Property

Defendant’s final argument is that the Trustee has not adequately pleaded that the funds

Multi-Strategy received from Fairfield Sentry were BLMIS customer property. Defendant’s

argument is essentially that, based on the timing of the transfers, the funds that Multi-Strategy

received from Fairfield Sentry could not have come from BLMIS. See May 18, 2022 Hr’g Tr. at

25 (“Simply adding these up -- . . . shows that all the Madoff money was gone by the time Multi-

Strategy received its redemption in March 2005. The money Multi-Strategy received could not

have come from Madoff. It had to have come from other Sentry investors.”). To reach this

conclusion, Defendant asks the Court to only count funds Fairfield Sentry received during the

six-year look-back period. Id. (“The first transfers from Madoff to Sentry within the six year

period preceding the petition date began on May 9th, 2003.”).

On the other hand, the Complaint plausibly alleges that Fairfield Sentry did not have any

assets that were not customer property. The Trustee has pleaded that “Fairfield Sentry invested

all or substantially all of its assets into the BLMIS Ponzi scheme.” (Compl. ¶ 123). The

Fairfield Complaint, which is adopted by reference, alleges that the Fairfield Fund was required

to invest 95% of its assets in BLMIS. (Fairfield Compl. ¶ 89); see also (Fairfield Compl. ¶ 91)

(“From the beginning, to comport with Madoff’s requirement for BLMIS feeder funds, Fairfield

Sentry ceded control of not only its investment decisions, but also the custody of its assets, to

BLMIS.”).

Defendant attempts to make a very intricate factual argument about how millions of

dollars might have come from non-BLMIS property. Memo. Law at 19, ECF No. 102. (“BLMIS

made $120,000,000 of transfers into Sentry during that period, . . . while Sentry made

$888,268,729 of transfers out as redemptions to its investors and to its related entities . . . .”).

Defendant’s calculation ignores any money received by Fairfield Sentry prior to December 11,

2002. Id. at 18. The Court is not convinced that this is the only method of calculating customer

property.

Taking all allegations as true and reading them in a light most favorable to the Trustee,

the Complaint plausibly pleads that Defendant received customer property because Fairfield

Sentry did not have other property to give. The calculation of Fairfield Sentry’s customer

property and what funds it used to make redemption payments are issues of fact better resolved

at a later stage of litigation.

Exhibit C to the Complaint shows the subsequent transfer at issue here is the transfer

made from Sentry to Defendant on March 15, 2005 in the amount of $25,763,374. This exhibit

provides Multi-Strategy with the “who, when, and how much” of each transfer.

To the extent that Defendant is worried about the Trustee recovering more than he is

entitled, such a fear is unfounded. There is no dispute that the Trustee is limited to “a single

satisfaction” under § 550(a). 11 U.S.C. § 550(d). He may nevertheless pursue any and all

subsequent transferees in order to achieve that satisfaction. § 550(a)(2) (providing that the

Trustee may recover property from “any immediate or mediate transferee”). Calculation of

whether the Trustee is fully satisfied is a factual finding to be made by this Court at a later stage

of litigation.

Conclusion

For the foregoing reasons, Multi-Strategy’s motion to dismiss is denied. The Trustee

shall submit a proposed order within fourteen days of the issuance of this decision, directly to

chambers (via E-Orders), upon not less than two days’ notice to all parties, as required by Local

Bankruptcy Rule 9074-1 (a).

/s/ Cecelia G. Morris

Poughkeepsie, New York Hon. Cecelia G. Morris

ees U.S. Bankruptcy Judge

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