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NOT FOR PUBLICATION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, and

Bernard L. Madoff,

Adv. Pro. No. 10-05346 (CGM)

Plaintiff,

v.

MERRILL LYNCH INTERNATIONAL,

Defendant.

MEMORANDUM DECISION DENYING DEFENDANT’S MOTION TO DISMISS

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

Attorneys for Plaintiff Irving H. Picard, Trustee for the Substantively Consolidated SIPA

Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L.

Madoff

Baker & Hostetler LLP

45 Rockefeller Plaza

New York, NY 10111

By: David J. Sheehan

Carrie Longstaff

Peter B. Shapiro

Brittany A. Yantis

Deirdre Farrell

Attorneys for Defendant Merrill Lynch International

O’MELVENY & MYERS LLP

Seven Times Square

New York, New York 10036

By: Pamela A. Miller

Amber Covucci

CECELIA G. MORRIS

UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is Defendant’s, Merrill Lynch International, 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. Defendant seeks dismissal for lack of personal

jurisdiction, for failure to state a claim for relief 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. Defendant has raised the good faith defense.

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 the

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 December 8, 2010. (Compl., ECF1 No. 1). The

Trustee filed an amended complaint (“Amended Complaint”) on August 19, 2022. (Am. Compl.,

ECF No. 137). Via the Amended Complaint, “[t]he Trustee seeks to recover $16,077,730 in

subsequent transfers of BLMIS customer property” made to Merrill Lynch International by

Fairfield Sentry Limited (“Fairfield Sentry”) and Fairfield Sigma Limited (“Fairfield Sigma,”

collectively the “Fairfield Funds”). (Am. Compl. ¶ 2, ECF No. 137).

Defendant Merrill Lynch International is a broker dealer based in London, United

Kingdom. (Id. ¶ 18). Defendant was, at the time of the allegations, a wholly owned subsidiary

of Merrill Lynch & Co., Inc. (“ML & Co.”), a Delaware corporation with principal place of

business in New York, New York. (Id. ¶¶ 18–19).

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

proceeding 10-05346-cgm.

Beginning around 2000, Merrill Lynch International and other ML & Co. subsidiaries

(collectively, “Merrill Lynch”) were internally barred from investments related to Bernard L.

Madoff and from offering products on BLMIS funds, including the Fairfield Funds. (Id. ¶¶ 5–6)

(“As Mr. [Fabio] Savoldelli[, a former executive in Merrill Lynch’s New York office,]

explained, the prohibition against Madoff trading was instituted because Merrill Lynch had

identified ‘many, many, many red flags’ at BLMIS and said that ‘the whole thing smelled.’”).

This internal policy was known at Merrill Lynch as the “No Madoff” policy. (Id.). To work

around this prohibition, Merrill Lynch constructed several “leveraged products using the

Fairfield Funds as reference funds. Merrill Lynch would loan investors money, and in return, the

investors would receive a synthetic investment in a basket of funds that was four times . . . the

amount the client contributed to the investment.” (Id. ¶ 7). These leveraged products were

structured to reduce Merrill Lynch’s risk from investments in the Fairfield Funds and pass along

most of the risk from investments in the Fairfield Funds to Merrill Lynch’s clients. (Id. ¶¶ 8–9).

Merrill Lynch further shorted its BLMIS investments in these leveraged products by having

Merrill Lynch International take redemptions out of the Fairfield Funds. (Id. ¶ 10). After

BLMIS collapsed and its fraud was fully exposed, executives at Merrill Lynch described it as

“[n]ot a big surprise” and a confirmation of their suspicions that “there was something wrong at

Madoff.” (Id. ¶ 11).

Fairfield Sentry and Fairfield Sigma are considered ‘feeder funds’ of BLMIS because the

single purpose of the funds was to invest all or substantially all of their assts in BLMIS. (Id. ¶

3). 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. ¶ 70).

In 2011, the Trustee settled with Fairfield Sentry and others. (Id. ¶ 71). As part of the

settlement, Fairfield Sentry and Fairfield Sigma consented to judgments in the amounts of

$3.054 billion and $752.3 million, respectively. (Id.; Consent Js., 09-01239-cgm, ECF Nos.

109–10). Only $70 million has been repaid to the BLMIS customer property estate. (Settlement

Agreement, 09-01239-cgm, ECF No. 169). 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, Merrill Lynch International argues that this Court lacks personal

jurisdiction over it, that the Amended Complaint improperly incorporates the Fairfield Complaint

by reference, that the Amended Complaint fails to allege the redemption payments made to it

were of BLMIS customer property, that the Safe Harbor provision under § 546(e) bars the

Trustee’s claims, and that the defense of good faith applies. The Trustee opposes the motion to

dismiss.

Discussion

Personal Jurisdiction

Defendant objects to the Trustee’s assertion of personal jurisdiction. (Mem. L. 7–19,

ECF No. 141). In the Amended Complaint, the Trustee argues that Defendant purposefully

availed itself of the laws of the United States and New York. (Am. Compl. ¶ 21–37).

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 Merrill Lynch International “knowingly

directe[d] funds through leveraged transactions to be invested with, and then redeemed from,

BLMIS through the Fairfield Funds.” (Am. Compl. ¶ 21). 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. Sec. Inc. v. Banco BRJ, S.A., 722 F.3d 81, 85 (2d Cir. 2013) (an averment of

facts is necessary only after discovery). That being stated, this was not the only allegation made

by the Trustee.

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, 916 F.3d at 150 (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).

Defendant argues that the Trustee has not alleged that it has sufficient contacts with New

York. (Mem. L. 9–16, ECF No. 141). The Amended Complaint suggests otherwise. The

Trustee has alleged that Defendant “purposefully targeted the New York securities market by

investing in the Fairfield Funds, knowing that their assets were managed and custodied by

BLMIS in New York.” (Am. Compl. ¶ 23). The Trustee has alleged that Fairfield Sentry

invested a large majority of its assets in BLMIS. (See Fairfield Compl. ¶ 89, Picard v. Fairfield

Inv. Fund Ltd., Adv. Pro. No. 09-1239 ECF No. 286 (the “Fairfield Complaint”) (“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 74 of

the Amended Complaint).

Defendant agreed to make and then directed all subscription payments to Fairfield

Sentry’s bank account in New York. (Am. Compl. ¶ 25). Defendant maintained its own “bank

account in New York through which it directed funds, in U.S. dollars, to be invested with or

redeemed from BLMIS through Fairfield Sentry.” (Id. ¶ 26). In doing so, Defendant derived

significant revenue from New York. (Id. ¶ 37).

Defendant agreed in subscription agreements with Fairfield Sentry that it has read and

reviewed Fairfield Sentry’s private placement memoranda, which explained BLMIS’s split strike

strategy which involved purchasing United States securities. (Id. ¶¶ 27–28). Tear sheets

provided by the Fairfield Greenwich Group2 (“FGG”) and semi-annual update letters from

Fairfield Sentry confirmed that the split strike conversion strategy relied on investments in the

2 The Fairfield Greenwich Group was a de facto partnership in New York that created and operated the Fairfield

Funds. (Am. Compl. ¶ 3).

United States. (Id. ¶ 29). The Fairfield Sigma private placement memorandum received by

Defendant, “contained similar representations regarding the [split strike conversion] strategy and

BLMIS’s role as investment advisor, executing broker, and custodian.” (Id. ¶ 31). These

documents show that Defendant knew that BLMIS maintained custody of its investments in the

Fairfield Funds in New York. (Id. ¶ 30). Merrill Lynch International was aware of BLMIS’s

actions in New York through the due diligence team of Merrill Lynch. (Id. ¶ 32).

Defendant discussed its investments with the Fairfield Funds with FGG employees in

New York, including Lauren Ross, FGG’s director of investor relations, who was based in New

York headquarters. (Id. ¶ 33). Defendant “regularly communicated directly with FGG in New

York about its investments, the terms, and negotiations of draft letter agreements. Ms. Ross is

listed on many of [Defendant]’s subscription agreements as the person at Fairfield Greenwich

Group with whom the [Defendant]’s subscriptions were associated.” (Id.). The Fairfield

Greenwich Group’s office in New York provided substantial documentation to Defendant about

the Fairfield Funds, including: tear sheets of BLMIS historic performance, semi-annual updates

on BLMIS’s performance, weekly fund reports showing month-to-month performance of

BLMIS, monthly fund reports and rate of return, prospectuses showing BLMIS strategy,

information on BLMIS employees and roles, fund presentations and marketing material, and

records of Fairfield Sentry and Fairfield Sigma returns. (Id. ¶ 34).

The Trustee has submitted additional evidence in response to the motion to dismiss.

Attached as exhibits to the Longstaff Declaration, the Trustee has provided evidence that

Defendant communicated with FGG in New York regarding the Fairfield Funds. (Longstaff

Decl. Exs. 9–12, 19, ECF No. 147). In one email, a Merrill Lynch International vice president

asks to set up a conference call with FGG, to “get a better understanding of the different entities

working with Fairfield, such as the prime broker, administrator and custodian.” (Id. Ex. 9). By

knowingly investing in the Fairfield Funds, Defendant purposefully invested in BLMIS.

The Amended Complaint contains allegations that are legally sufficient to constitute a

prima facie showing of jurisdiction. Dorchester Fin. Sec. 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 Merrill Lynch

International for monies it received from the Fairfield Funds. (Am. Compl. ¶¶ 77–86). These

allegations are directly related to its investment activities with BLMIS via the Fairfield Funds.

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, 476 (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. Id. at 477.

The exercise of jurisdiction is reasonable. Merrill Lynch International 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 submitted to the

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

Funds. (Am. Compl. ¶ 24). 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 New York bank accounts, the Trustee has met his burden of

alleging jurisdiction over each transfer received through those New York bank accounts. 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 Amended 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-pleaded 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 Defendant by Fairfield

Sentry and Fairfield Sigma. (Am. Compl. ¶ 77, ECF No. 137). Defendant argues that the

Amended Complaint fails to state a claim for relief by improperly relying on adoption by

reference of the Fairfield Complaint. (Mem. L. 20, ECF No. 141).

Adoption by Reference

Adoption by reference is governed 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 in SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C.

§550(a)).

As was explained in In re Geiger, 446 B.R. 670, 679 (Bankr. E.D. Pa. 2010), 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. Perez v. Terrestar 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.”); see also Picard v. Nelson (In re BLMIS), 610 B.R. 197, 237 (Bankr. S.D.N.Y. 2019)

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

Legacy Capital Ltd. (In re BLMIS), 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. Merrill Lynch International, like many other 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. 107) (dismissing adversary proceeding based on consolidated

extraterritoriality ruling).

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

prejudice Defendant. On the other hand, dismissing this Amended Complaint and permitting the

Trustee to amend his Complaint to include all of the allegations that are already contained in the

Fairfield Complaint, would prejudice all parties by delaying the 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 transfers due to the Fairfield Funds’ knowledge

of BLMIS’ fraud. (Fairfield Compl. ¶¶ 314–18, 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 . . . .”).

Recovery of Subsequent Transfers

Pursuant to § 550(a) of the Bankruptcy Code, a trustee is entitled to recover avoided

transfers of customer property from initial transferees as well as from “any immediate or mediate

transferee of such initial transferee.” 11 U.S.C. § 550(a). “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 Consol. Proc. On 11 U.S.C. § 546(e)), No. 12 MC 115, 2013 WL

1609154, at *7 (S.D.N.Y. Apr. 15, 2013). “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.” BNP Paribas, 594 B.R. at 195 (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).

The Trustee only needs to 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’s burden at the pleading

stage does not require exact accounting of the funds at issue. BNP Paribas, 594 B.R. at 195.

Rather “[t]he 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.” Id.

“However, the plaintiff’s burden at the pleading stage does not require dollar-for-dollar

accounting of the exact funds at issue.” Id.

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. IBT Int’l Inc. v. Northern (In re Int’l Admin

Servs., Inc.), 408 F.3d 689, 706-07 (11th Cir. 2005). The Trustee is free to pursue any of the

immediate or mediate transferees, and nothing in the statute requires a different result. Id.

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. (Am. Compl. ¶ 74). 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).

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 in original).

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 the initial transfer. 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 Fishman, the Court of Appeals for the Second Circuit determined that, in many of the

Trustee’s avoidance actions, § 546(e) applied because BLMIS’ transfers to its customers

qualified as payments made “in connection with” securities contracts between BLMIS and its

customers. See Picard v. Ida Fishman Recoverable Trust (In re BLMIS), 773 F.3d 411, 422 (2d

Cir. 2014). However, the safe harbor does not apply, by its plain terms, to transfers where the

transferee is complicit in BLMIS’ fraud. Picard v. Multi-Strategy Fund Ltd. (In re BLMIS), No.

22-CV-06502 (JSR), 2022 WL 16647767, at *7 (S.D.N.Y. Nov. 3, 2022). This is because “any

transferee who knew the transfers it received from Madoff Securities contained only stolen

proceeds also knew those transfers were neither settlement payments [n]or transfers in

connection with a security agreement” and therefore, § 546(e) cannot apply.3 Id.

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)). By holding that the affirmative defense provided by §

546(e) is not applicable in situations such as the one alleged here, “sham” securities contracts do

not prevent the Trustee from clawing back complicit parties’ ill-gotten gains. The district court

has already 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.” Cohmad, No. 12 MC

115(JSR), 2013 WL 1609154, at *10 (S.D.N.Y. Apr. 15, 2013); see also Picard v. Multi-Strategy

Fund Ltd. (In re BLMIS), No. 22-CV-06502 (JSR), 2022 WL 16647767, at *7 (S.D.N.Y. Nov. 3,

2022) (“[I]n circumstances in which a transferee was complicit in Madoff Securities’ fraud,

Section 546(e) d[oes] not apply as a matter of its express terms.”).

On the issue of the safe harbor, the Court adopts the district court’s reasoning in: Picard

v. Multi-Strategy Fund Ltd. (In re BLMIS), No. 22-CV-06502 (JSR), 2022 WL 16647767

3 While this is sometimes referred to as the “knowledge exception” to the safe harbor, “Cohmad did not carve out

any atextual but equitable exception to an otherwise applicable Section 546(e) defense; rather, it simply concluded

that, in circumstances in which a transferee was complicit in Madoff Securities’ fraud, Section 546(e) did not apply

as a matter of its express terms.” Picard v. Multi-Strategy Fund Ltd. (In re BLMIS), No. 22-CV-06502 (JSR), 2022

WL 16647767, at *7 (S.D.N.Y. Nov. 3, 2022).

(S.D.N.Y. Nov. 3, 2022). The Trustee has alleged that Fairfield Sentry knew the payments it

received from BLMIS were neither settlement payments nor payments in connection with a

securities contract. “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)).

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

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

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

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

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

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

protection offered by § 546(e).”).

This Court has already determined that the Fairfield Complaint 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”); (Fairfield Compl. ¶ 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 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.”).

“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 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). Where § 546(e) does not “embrace the initial

transfer, the subjective knowledge of a subsequent transferee cannot retroactively render it

applicable.” Picard v. Multi-Strategy Fund Ltd. (In re BLMIS), No. 22-CV-06502 (JSR), 2022

WL 16647767, at *7 (S.D.N.Y. Nov. 3, 2022). The Trustee’s allegations in the Fairfield

Complaint are sufficient to survive a Rule 12(b)(6) motion on this issue.

In Fairfield III, this Court applied the safe harbor to redemption payments made by

Fairfield Sentry to its shareholders. Fairfield III is inapplicable in this case for two reasons.

First, and most obviously, Fairfield III is a holding in Fairfield Sentry’s chapter 15 case, which is

not binding on the Court in this adversary proceeding; whereas the district court’s decision in

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), which holds that the safe harbor does not

apply in this case, is binding on the Court on this issue. Second, the issue in Fairfield III is not

comparable. The Court found that the plaintiffs had not met their pleading burden and were not

permitted to amend their complaints. Fairfield III, 2020 WL 7345988, at *9 (Bankr. S.D.N.Y.

Dec. 14, 2020) (“[T]he Citibank Complaint alleges that the [Fairfield] Funds were duped,

believing that their BLMIS investments were worth what the BLMIS monthly statements

showed. The Funds were the transferors and if they were duped, they could not have intended to

‘hinder, delay or defraud’ the Funds’ other creditors by redeeming investments at prices they

believed to be accurate.”) (emphasis added). In Fairfield III, Fairfield Sentry was the initial

transferor, not the initial transferee as it is here. And the Court did not rule on whether the

“knowledge exception” to the safe harbor applied. Here, the Trustee has sufficiently plead

Fairfield Sentry’s actual knowledge that BLMIS was not trading securities.

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 the Fairfield Funds and Defendant on account of the securities contracts

between the Fairfield Funds and Defendant.

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 Trustee has pleaded that “[b]ased on the Trustee’s investigation to date, the Fairfield

Sentry-[Merrill Lynch International] Subsequent Transfers to [Merrill Lynch International total

$14,200,000, at least $3,000,000 of which was part of Merrill Lynch’s “synthetic short” of the

Fairfield Funds.” (Am. Compl. ¶ 77). The Trustee has provided Defendant in exhibits C and E

with the exact date and amount of each transfer from the Fairfield Funds that the Trustee is

seeking to recover. (Id. Exs. C, E). These exhibits provide Defendant with the “who, when, and

how much” of each transfer. Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167, 195

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

Merrill Lynch International argues that this Court needs to consider all of the subsequent

transfer cases pending before this Court in order to determine whether allegations in this

Amended Complaint are feasible. (Mem. L. 24, ECF No. 141). It is alleged that Fairfield Sentry

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 Sentry paid out approximately $5 billion. Defendant has asserted that some of the

monies received from Fairfield Sentry are untainted and were never invested with BLMIS simply

because the Trustee has filed complaints against other defendants who may have taken the

money first. (Id. 24–25)

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.

The Fairfield Complaint, which is incorporated by reference into this, alleges that

Fairfield Sentry 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 Amended Complaint plausibly alleges that Fairfield

Sentry did not have any assets that were not customer property. In this case, the Trustee is not

seeking to collect $5 billion from Merrill Lynch International. He is seeking $14.2 million

which easily could come from the $3 billion Fairfield Sentry 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.

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

the Amended Complaint plausibly pleads that Defendant received customer property because the

Fairfield Funds did not have other property to give. The calculation of the Fairfield Funds’

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

resolved at a later stage of litigation.

Good Faith Defense

Defendant argues that it took subsequent transfers “for value, in good faith, and without

knowledge of the voidability of the transfer avoided.” (Mem. L. 31, ECF No. 141).

i. For Value

The “value” that a subsequent transferee must provide is “merely consideration sufficient

to support a simple contract, analogous to the ‘value’ required under state law to achieve the

status of a bona fide purchaser for value.” Picard v. Legacy Capital Ltd. (In re BLMIS), 548

B.R. 13, 37 (Bankr. S.D.N.Y. 2016) (citation omitted); accord Enron Corp. v. Ave. Special

Situations Fund II, L.P. (In re Enron Corp.), 333 B.R. 205, 236 (Bankr. S.D.N.Y. 2005). In

addition, the “value” element under § 550(b)(1) looks to what the transferee gave up rather than

what the transferor received. The Amended Complaint contains no mention of Merrill Lynch

International exchanging shares for consideration. (Am. Compl. ¶¶ 77–86). Therefore, the

“value” defense is not asserted on the face of the Amended Complaint.

Defendant argues that the payments it received were given in exchange for the

redemption of shares in the Fairfield Funds. (Mem. L. 31, ECF No. 141). If Defendant knew at

the time it redeemed its shares that the shares were worthless, then it did not receive the

subsequent transfer funds “for value” as is required under § 550. See Fairfield Sentry Ltd. v.

Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.), 596 B.R. 275, 301 (Bankr. S.D.N.Y.

2018), aff'd sub nom. Fairfield Sentry Ltd. v. Citibank, N.A. London, No. 19-CV-3911 (VSB),

2022 WL 4391023 (S.D.N.Y. Sept. 22, 2022) (“The only exception concerns the Knowledge

Defendants that received redemption payments with the knowledge that the NAV was wrong. In

those circumstances, the Liquidators may seek to impose a constructive trust.”). It has not yet

been determined whether Defendant knew if the shares it redeemed from the Fairfield Funds had

value. However, the Trustee has alleged that Merrill Lynch International knew the Fairfield

Funds and BLMIS were a fraud. (Am. Compl. ¶¶ 11–12) (“Merrill Lynch exhibited a kind of

indifference because it knew it had insulated itself from risk . . . . [A]s one Merrill Lynch

executive remarked, ‘[b]arring a clawback, the direct result will be positive.’”).

“Value” is Defendant’s burden to plead and prove. Picard v. BNP Paribas S.A. (In re

BLMIS), 594 B.R. 167, 198 (Bankr. S.D.N.Y. 2018). Whether the Defendant gave value is a

question of fact to be resolved either at the summary judgment stage or at trial. Picard v.

Fairfield Inv. Fund (In re BLMIS), No. 08-01789 (CGM), Adv. No. 09-01239 (CGM), 2021 WL

3477479, at *9 (Bankr. S.D.N.Y. Aug. 6, 2021).

ii. Good Faith

Where, in light of surrounding circumstances, a transferee should have known of the

debtor’s precarious financial condition, the transferee will be deemed to have taken in bad faith,

unless an investigation into the debtor’s financial condition actually discloses no reason to

suspect financial trouble. 2 Bankruptcy Desk Guide § 19:105. The District Court recently

explained that good faith is a fact-intensive inquiry that almost always requires a trial: “[t]he

Second Circuit made clear in its decision in [Picard v.] Citibank[, N.A. (In re BLMIS), 12 F.4th

171 (2d Cir. 2021), cert. denied No. 21-1059 (Feb. 28, 2022)] that the inquiry notice standard

requires a ‘fact-intensive inquiry to be determined on a case-by-case basis, which naturally takes

into account the disparate circumstances of differently-situated transferees.’” In re BLMIS, LLC,

Dec. & Order, 20-cv-02586(CM) (May 2, 2022). And that “such a fact-based determination can

only be made based on the entirety of the factual record after discovery . . . .” Id. (internal

quotation omitted).

The burden of proving good faith falls squarely on Defendant and this Court cannot make

a determination on Defendant’s affirmative defense until after a fact-intensive inquiry.

Discovery is required on this issue.

iii. Knowledge of the Voidability

Good faith is linked with whether one had knowledge of the voidability of the transfer.

Picard v. Citibank, N.A. (In re BLMIS), 12 F.4th 171, 189 (2d Cir. 2021) (“[A] transferee does

not act in good faith when he has sufficient actual knowledge to place him on inquiry notice of

the debtor’s possible insolvency.”), cert. denied sub nom. Citibank, N.A. v. Picard, 212 L. Ed. 2d

217, 142 S. Ct. 1209 (2022). Having determined that “good faith” cannot be found on the face of

a complaint, the Court must deny the Defendant’s motion on this element. Additionally, §

550(b)(1) provides a defense to recovery making lack of knowledge Defendant’s burden to plead

and prove. It is a fact-intensive inquiry that requires a three-step inquiry into 1) what the

Defendant subjectively knew; “whether these facts put the transferee on inquiry notice of the

fraudulent purpose behind a transaction—that is, whether the facts the transferee knew would

have led a reasonable person in the transferee’s position to conduct further inquiry into a debtor-

transferor’s possible fraud; and whether “diligent inquiry by [Defendant] would have discovered

the fraudulent purpose of the transfer.” Jd. at 192.

It is not appropriate for the Court to resolve these factual issues at this stage of the

litigation.

Conclusion

For the foregoing reasons, Merrill Lynch International’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, Now York (Co) Hon. Cecelia G. Morris

ees U.S. Bankruptcy Judge

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