Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities, LLC. et a

NOT FOR PUBLICATION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. 11-02572 (CGM)

v.

KOREA EXCHANGE BANK, individually

and as Trustee for Korea Global All Asset

Trust I-1, and as Trustee for Tams Rainbow

Trust III, and KOREA INVESTMENT TRUST

MANAGEMENT COMPANY1,

Defendants.

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

1 The Complaint was voluntarily dismissed against Korea Investment Trust Management Company on December 22,

2021. ECF No. 130.

Baker & Hostetler LLP

45 Rockefeller Plaza

New York, NY 10111

By: Eric R. Fish, Esq.

Counsels for Defendant Korea Exchange Bank, Individually And As Trustee For Korea Global

All Asset Trust I-1, And For Tams Rainbow Trust III

Cirillo Law Office

246 East 33rd Street – 1FR

New York, NY 10016-4802

By: Richard A. Cirillo, Esq.

CECELIA G. MORRIS

UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is Defendant’s, Korea Exchange Bank’s (“KEB”), 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. KEB seeks dismissal for lack of personal jurisdiction,

for failure to plead a cause of action under Federal Rule of Civil Procedure 8; 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. Defendant also argues that its affirmative defenses are plain

on the face of the Complaint and that the Trustee is not entitled to reply on the Ponzi scheme

presumption. 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 September 1, 2011. (Compl., ECF2 No. 1). An

amended complaint (“Complaint”) was filed on June, 6, 2012. (Am. Compl., ECF No. 30). Via

the complaint (“Complaint”), the Trustee seeks to recover subsequent transfers made to KEB, a

Korean foreign exchange bank maintaining its principal executive office at 181- 2ga, Euljiro,

Chung-gu, Seoul 100-793, South Korea. (Id. ¶ 21). The subsequent transfers were derived from

KEB’s investments with BLMIS made by Fairfield Sentry Limited (“Fairfield Sentry”). (Id. ¶

2). Fairfield Sentry is considered a “feeder fund” of BLMIS because the intention of the fund

was to invest in BLMIS. (Id. ¶ 2).

2 Unless otherwise indicated, all references to “ECF” are references to this Court’s electronic docket in adversary

proceeding 11-02572-cgm.

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. ¶ 35). In 2011, the Trustee settled with Fairfield

Sentry. (Id. ¶ 40). 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

proceedings against subsequent transferees, like Defendant, to recover the approximately $3

billion in missing customer property.

In its motion to dismiss, KEB 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, that this

Court lacks personal jurisdiction, and that the Trustee has failed to plead a cause of action under

Federal Rule of Civil Procedure 8. 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. (Am. Compl. ¶¶ 5–7).

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 KEB “knowingly directing funds to be invested

with New York-based BLMIS.” (Am. Compl. ¶ 5). This allegation alone is sufficient to

establish a prima facie showing of jurisdiction over Defendant in the pre-discovery stage of

litigation. 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).

KEB argues that the Trustee has not alleged that it has sufficient contacts with New York.

The Complaint suggests otherwise. In the Complaint, the Trustee alleges that KEB “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 35, of this Complaint); see also Confidential

private Placement Memorandum at 15, Fish Decl., ex. 1 (“Currently, BLM3 has approximately

95% of the Fund’s assets under custody.”). Additionally, the Trustee has alleged that KEB

“entered into a subscription agreement that subjected it to New York jurisdiction, sent a copy of

the subscription agreement to F[airfield]G[reenwich]G[roup]’s New York City office, wired

funds to Fairfield Sentry through a bank in New York, and received funds through its own bank

account in New York” and “thus derived significant revenue from New York and maintained

minimum contacts and/or general business contacts with the United States and New York in

connection with the claims alleged herein.” Id.; see also (Cirillo Decl., ex 1, ECF No. 137)

(subscription agreement between KEB and Fairfield Sentry).

In response to the motion to dismiss, the Trustee has provided evidence of KEB’s use of

New York bank accounts to receive the redemption payments at issue here. (Fish Decl. exs. 2 &

3, ECF No. 141). KEB requested that redemptions of its shares in Fairfield Sentry be paid to its

Deutsche Bank Trust Co. account and the bank’s address was listed as “New York.” (Fish Decl.

ex. 2, ECF No. 141). The Trustee has also provided evidence of the requested redemptions being

completed via wire transfer to KEB’s New York bank account. (Fish Decl. ex. 3, ECF No. 141)

3 “BLM” is defined as “Bernard L. Madoff Investment Securities LLC.” Confidential private Placement

Memorandum at 14, Fish Decl., ex. 1.

(showing wire transfers of $623,600.38; $3,374,185.48; and $4,009,264.23). These match the

transfers that the Trustee is seeking to collect in this Complaint. (Am. Compl., ex. C., ECF No.

30).

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).

KEB filed customer claims with this SIPA estate. (Cirillo Decl. exs. 1–3, ECF No. 137).

KEB’s customer claims are another contact demonstrating that KEB has purposefully availed

itself to this Court’s jurisdiction. See Picard v. Banque SYZ & Co, SA (In re BLMIS), 2022 WL

2135019, at *4 (Bankr. S.D.N.Y. June 14, 2022) (noting filing of customer claim as factor in

denying motion to dismiss based on personal jurisdiction).

The Complaint contains allegations that 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). “[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.

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 Sentry. (Am. Compl. ¶¶ 54–58). These allegations are directly

related to its investment activities with Fairfield Sentry. 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).

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, held bank accounts in New York, and “irrevocably” submitted to the

jurisdiction of New York courts’ when it signed its subscription agreements with the Fairfield

Funds.4 (Am. Compl. ¶ 5). 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.”).

By alleging that Defendant intentionally invested in BLMIS, the Trustee has met his

burden of alleging jurisdiction as to each subsequent transfer that originated with BLMIS. And

by alleging that Defendant used a New York bank account, the Trustee has met his burden of

alleging jurisdiction over each transfer that KEB received through that New York bank account.

As recognized by the Second Circuit, “[w]hen these [subsequent transfer] investors chose to buy

into feeder funds that placed all or substantially all of their assets with Madoff Securities, they

knew where their money was going.” In re Picard, 917 F.3d 85, 105 (2d Cir. 2019). 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

4 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.”), aff’d, Fairfield Sentry Ltd. v.

Citibank, N.A. London, No. 19-CV-3911 (VSB), 2022 WL 3644436, at *9 (S.D.N.Y. Aug. 24, 2022).

“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).

The Trustee is seeking to recover subsequent transfers made to KEB 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”). (Am. 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. KEB, like many subsequent transfer defendants in this SIPA

proceeding, is 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. 68 (dismissing adversary proceeding based on consolidated extraterritoriality ruling).

Allowing the Trustee to incorporate the Fairfield Complaint by reference, does not

prejudice KEB. 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 . . . .”).

KEB argues not the adoption by reference is improper in this case but that the wholesale

adoption of the Fairfield Complaint violates Federal Rule of Civil Procedure 8, which requires a

“short and plain statement of [a] claim.” Fed. R. Civ. P. 8(a)(2). It argues that the Trustee

should be required to provide paragraph numbers to it so that it can know which paragraphs it

must answer. The Court disagrees. KEB has been following this and the Fairfield Sentry

chapter 15 case and has been familiar with the allegations contained in the Fairfield Complaint

for over a decade. Indeed, it has been privy to information that this Court has not seen. This

Court has reviewed the Fairfield Complaint, in detail, on numerous occasions and there is not

much of that document that could omitted. The Trustee has to plead nearly the entire Fairfield

Complaint to demonstrate that the initial transfer is voidable. Fairfield Sentry has a complicated5

corporate structure with various insiders many of whom are alleged to have had knowledge of

BLMIS’ fraud.

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

5 In a related adversary proceeding, Picard v. Fairfield Greenwich Group, et al., 10-03800-cgm, the Court asked the

parties to provide it with a chart showing the relationships of the Fairfield entities. The Court received three

different charts. See Feb. 12, 2021 Hr’ Tr. at 51:9-10, Picard v. Fairfield Greenwich Grp., et al., 10-03800-cgm,

ECF No. 158 (“I ask you all for charts and ended up with three.”).

“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 Complaint6 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

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

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

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

The safe harbor cannot be used to prevent the Trustee from avoiding the subsequent

transfer between Fairfield Sentry and KEB on account of the securities contract between

Fairfield and KEB.

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).

BLMIS Customer Property

The Defendants argue that this Court needs to consider all of the subsequent transfer

cases pending before this Court in order to determine whether allegations in this Complaint are

feasible. At oral argument, Defendant argued that it is alleged that Fairfield received only $3

billion in transfers from BLMIS. Yet, if one were to total all of the alleged subsequent transfers

across all of these BLMIS adversary proceedings, the Trustee has alleged that Fairfield paid out

approximately $5 billion. Sept. 14, 2022 Tr. at 156-57, ECF No. 152. This, arguably, leaves $2

billion dollars unaccounted for by the Trustee. KEB argues that Fairfield Sentry was running its

own Ponzi scheme—"paying subsequent transfers out of newly-received subscription money

rather than passing it to BLMIS and then having BLMIS pass it back to Fairfield.” Id. at 166:16-

20. This is not the first time that the Court has heard such allegations from subsequent transfer

defendants—but these allegations are not contained in the Complaint and so, they are not an

appropriate basis for dismissal on a Rule 12(b)(6) motion. The Court will determine if this

money came from BLMIS or from some other source at a later date.

Defendant has asserted that the money it received from Fairfield Sentry is untainted

money that never was invested with BLMIS simply because the Trustee has filed complaints

against other defendants who may have taken the money first. To consider allegations made in

dozens of other complaints filed by the Trustee in this SIPA proceeding is impractical and not

required at this stage of the litigation. The other 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)).

In order to determine how Fairfield Sentry spent the billions of dollars it received from

BLMIS, this Court would need review financial documents in order to trace the monies to all of

Fairfield Sentry’s principals, insiders, creditors, and customers. Undoubtedly, the Court will

trace and calculate how Fairfield Sentry spent its BLMIS (and any non-BLMIS) funds at a later

stage of litigation. At this stage, the Trustee need only assert allegations that make it seem

plausible that Defendant received BLMIS monies.

In this case, the Trustee is not seeking to collect $5 billion from KEB. He is seeking only

$33,593,108, which easily could from the $3 billion Fairfield received from BLMIS. If the

Court were to accept Defendant’s argument, it would need to do one of two things: 1) dismiss

ALL of the Trustee’s subsequent transfer claims in all of the adversary proceedings since the

Court has no idea which transfers came from BLMIS customer property; or 2) hold a pre-

discovery trial on all of the subsequent transfers actions to determine which transfers were made

from the $3 billion of BLMIS customer property and which were not. The Court is simply not

willing to have such a trial at this stage of litigation.

The Trustee has pleaded that “Defendants[7] received the Fairfield Sentry Subsequent

Transfers totaling approximately $33,593,108 which are recoverable pursuant to Section 550 of

the Bankruptcy Code.” (Am. Compl. ¶ 44). The Fairfield Complaint, which is incorporated by

7 The only other Defendant in this case was dismissed from the action on December 22, 2021. Ntc. Dismissal, ECF

No. 130.

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.

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

the Complaint plausibly pleads that KEB 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, KEB’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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