# Irving H. Picard, Trustee for the Liquidation of B v. Parson Finance Panama S.A.

> United States Bankruptcy Court, S.D. New York · August 3, 2022

URL: https://www.frixlaw.com/law-library/cases/10460678

## Case

- **Court:** United States Bankruptcy Court, S.D. New York
- **Decided:** August 3, 2022
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

NOT FOR PUBLICATION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. 11-02542 (CGM)

v.

Parson Finance Panama S.A.,

Defendant.

MEMORANDUM DECISION DENYING DEFENDANT’S MOTION TO DISMISS

A P P E A R A N C E S :
Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff Investment Securities LLC and the Chapter 7 Estate of
Bernard L. Madoff
Baker & Hostetler LLP
45 Rockefeller Plaza
New York, NY 10111
By: Matthew Friedman (via Zoom)

Counsels for Defendant Parson Finance Panama S.A.
Kellner Herlihy Getty & Friedman
470 Park Avenue South
7th Floor
New York, NY 10016-6819
By: Douglas Kellner (via Zoom)

CECELIA G. MORRIS
UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is Defendant’s, Parson Finance Panama S.A.’s (“Parson”),
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 subsequent
transfers allegedly consisting of BLMIS customer property. Parson seeks dismissal for lack of
personal jurisdiction, for failure to plead a cause of action due to improper adoption by reference;
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. See Picard v. Citibank, N.A. (In re BLMIS), 12 F.4th 171, 178–83 (2d Cir.
2021), cert. denied sub nom. Citibank, N.A. v. Picard, 142 S. Ct. 1209, 212 L. Ed. 2d 217 (2022).
This adversary proceeding was filed on August 8, 2011. (Compl., ECF1 No. 1). Via the
complaint (“Complaint”), the Trustee seeks to recover subsequent transfers made to Parson, a

limited company domiciled in Panama. (Id. ¶ 20). The subsequent transfers were derived from
investments with BLMIS made by Fairfield Sentry Limited (“Fairfield Sentry”). (Id. ¶ 2).
Fairfield Sentry is referred to as “feeder fund” of BLMIS because the intention of Fairfield
Sentry was to invest in BLMIS. (Id. ¶ 2).
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
the amount of approximately $3 billion. (Id. ¶ 33). In 2011, the Trustee settled with Fairfield
Sentry. (Id. ¶ 38). As part of the settlement, Fairfield Sentry consented to a judgment in the
amount of $3.054 billion (Consent J., 09-01239-cgm, ECF No. 109) but repaid only $70 million
to the BLMIS customer property estate. The Trustee then commenced a number of adversary

1 Unless otherwise indicated, all references to “ECF” are references to this Court’s electronic docket in adversary
proceeding 11-02542-cgm.
proceedings against subsequent transferees like Defendant to recover the approximately $3
billion in missing customer property.
In its motion to dismiss, Parson 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. The Trustee opposes the motion to dismiss.
Discussion
Personal Jurisdiction
Defendant objects to the Trustee’s assertion of personal jurisdiction. In the Complaint,
the Trustee argues that Defendant purposefully availed itself of the laws of the United States and
New York. (Compl. ¶¶ 5–6).
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).

“Prior to discovery, a plaintiff challenged by a jurisdiction testing motion may defeat the
motion by pleading in good faith, legally sufficient allegations of jurisdiction.” 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 this case, the Trustee has alleged legally sufficient
allegations of jurisdiction simply by stating that Parson “knowingly directing funds to be

invested with New York-based BLMIS through Fairfield Sentry.” (Compl. ¶ 5). This allegation
alone is sufficient to establish a prima facie showing of jurisdiction over Defendant in the pre-
discovery stage of litigation—but as will be made clear, this was not the only allegation that
establishes the Trustee’s prima facie showing. At the pre-discovery stage, the allegations need
not be factually supported. See Dorchester Fin. Securities Inc. v. Banco BRJ, S.A., 722 F.3d 81,
85 (2d. Cir. 2013) (an averment of facts is necessary only after discovery).
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).
Parson argues that the Trustee has not alleged that it has sufficient contacts with the
United States and/or New York. The Complaint suggests otherwise. In the Complaint, the
Trustee alleges that Parson “knowingly directed funds to be invested with New York-based
BLMIS through [Fairfield Sentry].” (Compl. ¶ 5). The Trustee has also alleged that Fairfield
Sentry invested almost all of its assets in BLMIS. See 09-1239 Compl. ¶ 228 (“Under Fairfield
Sentry’s offering memorandum, the fund’s investment manager was required to invest no less
than 95% of the fund’s assets through BLMIS.”) (adopted by reference, at paragraph 33, of this
Complaint). The Trustee also alleges that Defendant “knowingly received transfers of
Customer Property from BLMIS;” directing its investment in Fairfield Sentry through Fairfield
Greenwich Group (“FGG”), a New York based partnership; “entered into a subscription

agreement with Fairfield Sentry under which Defendant Parson submitted to New York
jurisdiction, sent a copy of the subscription agreement to FGG’s New York City office, and
wired funds to Fairfield Sentry through a bank in New York.” (Id. ¶ 5).
The Trustee has submitted additional evidence in response to the motion to dismiss
demonstrating that Parson traveled to FGG’s New York office to discuss its investment in
Fairfield Sentry. The Trustee also asserts that
[t]hrough its agents, Anova AG (“Anova”) and Bamont Trust Company Limited
(“Bamont”) and their personnel, Parson maintained a relationship with [Fairfield]
Sentry’s manager, Fairfield Greenwich Group (“FGG”), for more than two years.
This relationship with FGG—which began months before Parson’s July 2003
subscription in Sentry—included regular in-person meetings in New York,
meetings elsewhere, and frequent email and telephonic communications about, for
example, Sentry’s performance, Madoff’s role in Sentry, and BLMIS’s
investment strategy.

Opp. Memo. L. at 1, ECF No. 96. FGG referred to Defendant in its records as “ANOVA (Parson
Finance).” Feil Decl., ex.7 at 1, ECF No. 97.
As evidence of his assertions, the Trustee has submitted emails as exhibits to his
opposition. Feil Decl., ECF No. 97. One email, dated October 21, 2002, discusses alleged
agents of Parsons traveling to New York to meet with FGG to discuss investing with FGG and
asking to meet with “Madoff.” Id. at Ex. 31. The email goes on to state that the meeting would
be with “the resident experts for [Fairfield] Sentry in lieu of Madoff.” Id. This email provides
factual support that the Trustee expects to be able to prove at trial that Parson intended to invest
with BLMIS through Fairfield Sentry. It is also evidence that Parson purposefully availed itself
of the privilege of doing business in New York by traveling to New York to meet with FGG
regarding the investments at issue in this case. In another email, dated April 10, 2005, FGG
employees discuss additional meetings with Anova personnel that took place in New York and
Boston. Id. at ex. 27. That same email discusses Anova withdrawing money from Fairfield

Sentry and, again, links the investments in Fairfield Sentry to Madoff. Id. (“Fairfield Sentry
Limited: ANOVA redeemed the almost $11.0 mm it had invested in FSL April 1st. Vock told me
the decision had nothing to do with the Fund's performance or any concerns about Madoff . . .
.”); see also id. at ex. 26 (email chain containing conversations about Defendant’s agents
meeting with FGG in New York, Boston, and Philadelphia in September 2004); id. at ex. 25
(email chain discussing an in-person meeting in New York in February 2004); id. at ex. 24
(email chain discussing an in-person meeting in New York in March 2004); id. at ex. 23 (email
chain discussing an in-person meeting in New York in July 2003).
The Trustee also submitted an email, dated May 13, 2003, from Daniel Vock, who,
according to the Trustee, was the head of hedge fund selection for Anova, which states:

Dear Ron, having looked through the questionnaire a few questions came up: 1.)
is it possible to get more information about Madoff himself, his role within the
firm, his personal background? 2). who is actually managing the fund? Would it
be possible to meet either one of these guys or a HF representative of Madoff
Securities? 3.) how much of the business of Madoff Securities is the Sentry Fund
(in relation to their market making / securities trading business)? 4.) I was looking
for some indication for target returns/ risks? Are there any and if so what are
they? 5.) what is the whole idea of seeding managers like Redstone and/ or
Schlarbaum through the Sentry Fund if the allocation is limited to 5% of Sentry
anyway? Have a nice day and kind regards Daniel[.]

Id. at ex. 21.
Additionally, the Trustee has alleged that Defendant has used a United States bank
account to receive transfers. Compl. ¶ 5. Where a defendant chooses to use a United States bank
account to received funds, exercising personal jurisdiction over the defendant for causes of
action relating to those transfers is constitutional. Off. Comm. of Unsecured Creditors of
Arcapita v. Bahrain Islamic Bank, 549 B.R. 56, 71 (S.D.N.Y. 2016); Bahrain Islamic Bank v.
Arcapita Bank (In re Arcapita Bank B.S.C.(C)), 640 B.R. 604, 618 (S.D.N.Y. 2022) (a bank
submits to personal jurisdiction in the United States when it is “free to accept or reject the

proposed terms” and still chooses to use a United States bank account); see also Eldesouky v.
Aziz, No. 11–CV–6986 (JLC), 2014 WL 7271219, at *6–7 (S.D.N.Y. Dec. 19, 2014) (finding
jurisdiction under New York long-arm statute based solely on defendant’s use of New York
account to receive payment at issue: “receiving Plaintiffs’ money at a New York bank account
suffices to establish personal jurisdiction over [Defendant].”); HSH Nordbank AG N.Y. Branch v.
Street, No. 11 CIV. 9405 DLC, 2012 WL 2921875, at *4 (S.D.N.Y. July 18, 2012)(“District
courts in this Circuit have upheld personal jurisdiction based upon a defendant's use of a
correspondent bank account in New York where the use of that account was held to lay at the
very root of the plaintiff's action.”)(quoting Licci ex rel. Licci v. Lebanese Canadian Bank, SAL,
673 F.3d 50, 66 (2d Cir. 2012).); Dandong v. Pinnacle Performance Ltd., 966 F. Supp.2d 374,

382–83 (S.D.N.Y. 2013) (same). Defendant argues that it did not use any New York bank
accounts. July 13, 2022 Hr’g Tr. at 12:1–2, ECF No. 108. This is contrary to evidence presented
by Defendant showing Defendant’s use of a New York bank account. Verling Decl. ex.3, ECF
No. 94 (“Please pay redemption proceeds to the following bank account:- The Bank of New
York 1 Wall Street New York, NY-10286”).
“[A]lthough 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).
“[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. These allegations are legally
sufficient to constitute a prima facie showing of jurisdiction. Dorchester Fin. Securities Inc. v.

Banco BRJ, S.A., 722 F.3d 81, 85 (2d. Cir. 2013).

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 the Fairfield Funds. (Compl. ¶¶ 54–58). These allegations are 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). The suit is affiliated with the alleged in-state conduct. Goodyear

Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011).
Defendant asks the Court to hold a jurisdictional hearing on the issue of personal
jurisdiction. Defendant is permitted to raise its factual issues at a later stage of litigation.
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.2 The forum and the Trustee both

2 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),
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.”).
The Trustee has made a prima facie showing of personal jurisdiction with respect to all of
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

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.”).
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).
The Trustee is seeking to recover subsequent transfers made to Parson by Fairfield Sentry
(“Count One”).

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). While the Trustee must allege that the initial transfer from BLMIS to Fairfield
Sentry is avoidable, he is not required to avoid the transfer received by the initial transferee
before asserting an action against subsequent transferees. The Trustee 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. ¶ 35). 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).
Adoption by Reference
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 will follow 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.’”).
Some courts have worried that wholesale incorporation of a pleading can lead to
“confusing and inconvenient” results. Hinton v. Trans Union, LLC, 654 F. Supp. 2d 440, 446–47
(E.D. Va. 2009) (footnote omitted), aff’d, 382 F. App’x 256 (4th Cir. 2010). That is not a
concern in these proceedings. Parson, like many subsequent transfer defendants in this SIPA
proceeding, is uniquely aware of what has been filed in the other adversary proceeding in this
SIPA liquidation. It routinely follows what is happening on a proceeding-wide basis. See Stip.,
ECF No. 75 (dismissing adversary proceeding based on consolidated extraterritoriality ruling).
Allowing the Trustee to incorporate the Fairfield Complaint by reference, does not
prejudice Parson. If the Court were to dismiss this Complaint and permit the Trustee to amend
his Complaint to include all of the allegations that are already contained in the Fairfield
Complaint, all parties would be prejudiced by delay in these already, overly-prolonged

proceedings. 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) (“Rule 15 places no
time bar on making motions to amend pleadings and permits the amending of pleadings “when
justice so requires.”).
Through the adoption of the Fairfield Complaint, the Trustee has adequately pleaded,
with particularity, the avoidability of the initial transfer due to Fairfield Sentry’s knowledge of
BLMIS’ fraud. (Fairfield Compl. ¶¶ 314–318, 09-01239, ECF No. 286); see also SIPC v. BLMIS
(In re Consolidated Proceedings on 11 U.S.C. § 550(a)), 501 B.R. 26, 36 (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 . . . .”).

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), Adv. No. 09-01239 (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 Complaint3 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
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

3 The Fairfield Complaint can be found on the docket of adversary number 09-01239-cgm, ECF No. 286.
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).”). 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
Defendant argues that the safe harbor prevents the Trustee from avoiding the subsequent
transfer between Fairfield Sentry and Parson on account of the securities contract between
Fairfield and Parson.
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 law4 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

4 Fairfield Sentry liquidated under the laws of the British Virgin Islands (“BVI”) and this Court’s separate 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
The Trustee has pleaded that “[b]ased on the Trustee’s investigation to date,
approximately $11,089,081 of the money transferred from BLMIS to Fairfield Sentry was
subsequently transferred by Fairfield Sentry to Defendant Parson . . . .” (Compl. ¶ 39). The
exhibits attached to the Complaint provide Parson with the “who, when, and how much” of each
transfer. Compl. at ex. C; Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167, 195 (Bankr.
S.D.N.Y. 2018).
The Fairfield Complaint, which is incorporated by reference into this, 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.”).
The Complaint plausibly alleges that Fairfield Sentry did not have any assets that were
not customer property. Defendants ask this Court to consider allegations made in the other
complaints filed by the Trustee in this SIPA proceeding. Memo. L. at 22, ECF No. 93. These
complaints have not been adopted by reference by the Trustee in this adversary proceeding and,
as such, are not within the Court’s power to consider on a Rule 12(b)(6) motion. Williams v.
Time Warner Inc., 440 F. App’x 7, 9 (2d Cir. 2011) (“A district court, in deciding whether to
dismiss a complaint under Rule 12(b)(6), is generally limited to the facts as presented within the
four corners of the complaint, to documents attached to the complaint, or to documents
incorporated within the complaint by reference.”) (citing Taylor v. Vt. Dep’t of Educ., 313 F.3d
768, 776 (2d Cir. 2002)).
Taking all allegations as true and reading them in a light most favorable to the Trustee,
the Complaint plausibly pleads that Parson 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.
Conclusion
For the foregoing reasons, Parson’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
Page 24 of 24

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10460678. Public record. Not legal advice.