# Irving H. Picard, Trustee for the Liquidation of B v. Merrill Lynch International

> United States Bankruptcy Court, S.D. New York · March 16, 2023

URL: https://www.frixlaw.com/law-library/cases/10460858

## Case

- **Court:** United States Bankruptcy Court, S.D. New York
- **Decided:** March 16, 2023
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

SECURITIES INVESTOR PROTECTION
CORPORATION, No. 08-01789 (CGM)

Plaintiff-Applicant, SIPA LIQUIDATION

v. (Substantively Consolidated)

BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,

Defendant.

In re:

BERNARD L. MADOFF,

Debtor.

IRVING H. PICARD, Trustee for the Liquidation of

Bernard L. Madoff Investment Securities LLC, 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
Page 29 of 29

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10460858. Public record. Not legal advice.