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

UNITED STATES BANKRUPTCY COURT NOT FOR PUBLICATION

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 Substantively

Consolidated SIPA Liquidation of Bernard L. Madoff

Investment Securities LLC and the Chapter 7 Estate of

Bernard L. Madoff,

Adv. Pro. No. 12-01195 (CGM)

Plaintiff,

v.

SIX SIS AG,

Defendants.

MEMORANDUM DECISION DENYING DEFENDANT’S MOTION TO DISMISS

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

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

Liquidation of Bernard L. Madoff Investment Securities LLC and the Chapter 7 Estate of

Bernard L. Madoff

Baker & Hostetler LLP

45 Rockefeller Plaza

New York, NY 10111

By: David Sheehan

Keith R. Murphy

Ferve E. Khan

Anat Maytal

Special Counsel for Irving H. Picard, Trustee for the Substantively Consolidated SIPA

Liquidation of Bernard L. Madoff Investment Securities LLC and the Chapter 7 Estate of

Bernard L. Madoff

Windels Marx Lane & Mittendorf, LLP

156 West 56th Street

New York, New NY 10019

By: Kim M. Longo

Attorneys for Defendant Six Sis

CHAFFETZ LINDSEY LLP

1700 Broadway, 33rd Floor

New York, New York 10019

By: Andreas Frischknecht

Erin E. Valentine

CECELIA G. MORRIS

UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is Defendant’s, Six Sis AG (“Six Sis”), 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. Six Sis seeks dismissal for lack of personal jurisdiction

and for failure to state a claim due to the statute of limitations. Defendant raises the “good faith”

and “mere conduit” defenses. For the reasons set forth herein, the motion to dismiss is denied in

its entirety.

Jurisdiction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Defendant and will be discussed infra.

Background

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

SIPA proceeding. See Picard v. Citibank, N.A. (In re BLMIS), 12 F.4th 171, 178–83 (2d Cir.

2021), cert. denied sub nom. Citibank, N.A. v. Picard, 142 S. Ct. 1209, 212 L. Ed. 2d 217 (2022).

This adversary proceeding was filed on March 22, 2012. (Compl., ECF1 No. 1). The

Trustee filed an amended complaint on October 17, 2022. (Am. Compl., ECF No. 126). Via the

amended complaint (“Amended Complaint”), the Trustee seeks to recover $52,653,947 in

subsequent transfers made to Six Sis. (Id. ¶ 2). Six Sis is a corporation organized under the laws

of Switzerland and maintains two places of business in Switzerland. (Id. ¶ 61).

The subsequent transfers were derived from investments with BLMIS made by Fairfield

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

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

proceeding 12-1195-cgm.

(collectively, the “Fairfield Funds”). (Id. ¶¶ 69, 73). Fairfield Sentry and Fairfield Sigma are

considered “feeder funds” of BLMIS because the intention of the funds was to invest in BLMIS.

(Id. ¶ 2).

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

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

the amount of approximately $3 billion. (Id. ¶ 62). In 2011, the Trustee settled with Fairfield

Sentry. (Id. ¶ 63). As part of their settlement, Fairfield Sentry and Fairfield Sigma consented to

judgments in the amounts of $3.054 billion and $752.3 million, respectively. (Consent Js., 09-

01239-cgm, ECF Nos. 109–10). Only $70 million has been paid 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, Defendant argues that the Trustee has failed to plead personal

jurisdiction and that the subsequent transfers the Trustee seeks to recover in the Amended

Complaint that were not in the original complaint are barred by the statute of limitations. The

Defendant raises the “good faith” and “mere conduit” defenses. The Trustee opposes the motion

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

Discussion

Personal Jurisdiction

Defendant objects to the Trustee’s assertion of personal jurisdiction. (Mem. L. ¶ 4–14,

ECF No. 134). In the Complaint, the Trustee argues that Defendant purposefully availed itself to

the laws of the United States and New York. (Am. Compl. ¶¶ 8–16).

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 the absence of discovery, “a plaintiff’s prima facie showing

of jurisdiction ‘may be established solely by allegations.’” Paroni v. GE UK Holdings Ltd.,

2021 U.S. Dist. LEXIS 148930 (N.D.N.Y. 2021) (quoting Ball, 902 F.2d at 197

In this case, the Trustee has alleged legally sufficient allegations of jurisdiction simply by

stating that Defendant “knowingly direct[ed] funds to be invested with, and then redeemed from,

New York-based BLMIS via the Fairfield Funds.” (Am. Compl. ¶ 11). 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) (explaining that

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 v. Bank of Am. N.A., 916 F.3d 143, 150

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

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

jurisdiction.” Id.

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

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

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

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

2012).

Minimum Contacts

In the Complaint, the Trustee alleges that Six Sis “knowingly directed funds to be

invested with and then redeemed from New York-based BLMIS via the Fairfield Funds” (Am.

Compl. ¶ 11, ECF No. 126). The Trustee has also alleged that Fairfield Sentry invested almost

all of its assets in BLMIS. See 09-01239 Compl. ¶ 228 (“Under Fairfield Sentry’s offering

memorandum, the fund’s investment manager was required to invest no less than 95% of the

fund’s assets through BLMIS.”) (adopted by reference, at paragraph 96, of this Complaint).

The Trustee has alleged that Six Sis signed subscription agreements with the Fairfield

Funds and that each time they signed defendant affirmed that they read the fund’s private

placement memoranda. (Id. ¶ 12). Based on this defendant having acknowledged reading the

private placement memoranda, the Trustee has alleged that Six Sis knew it was transacting

business in New York in connection with its investments in the Fairfield Funds. (Id.). The

private placement memoranda alerted Six Sis that:

Fairfield Sentry invested at least 95% of its assets with New York-based BLMIS,

and Sigma invested substantially all of its assets in Fairfield Sentry; BLMIS

performed all investment management duties for these assets; BLMIS was

registered with the U.S. Securities and Exchange Commission. . . ; BLMIS was

the executing broker for Fairfield Sentry’s investments, and purportedly operated

and executed the split strike conversion strategy . . . on the funds’ behalf;

BLMIS’s [split strike conversion [s]trategy purportedly involved the purchase of

U.S. equities, U.S. options, and U.S. Treasury securities . . . and the decisions

regarding which U.S. securities to purportedly purchase, and when to make such

purchases, were made by BLMIS in New York; BLMIS was the custodian of

Fairfield Sentry’s investments with BLMIS; and BLMIS was ‘essential to the

continued operation of’ Fairfield Sentry.

(Id.).

The Trustee also alleges that by executing the subscription agreements with Fairfield

Sentry, Six Sis submitted to the jurisdiction of New York as the agreement specified that

Defendant:

(i) ‘[A]greed that any suit, action, or proceeding . . . with respect to this

Agreement and the Fund may be brought in New York,’ (ii) ‘irrevocably

submit[ted] to the jurisdiction of the New York courts with respect to any

[p]roceeding,’ (iii) ‘consent[ed] to the service of process out of any New York

court,’ and (iv) agreed that ‘[t]his Agreement shall be governed and enforced in

accordance with the laws of New York . . . .

(Id. at ¶ 16). Though the subscription agreements do not, alone, give this Court

jurisdiction over Six Sis as discussed infra in footnote two, the agreements show that Defendant

were willing to, and knew that they could, face litigation in New York courts.

The Trustee has alleged that Six Sis used New York bank accounts to receive redemption

payments from and remit subscription payments to Fairfield Sentry. (Id. ¶ 15). Six Sis used a

bank account at Brown Brother Harriman to receive subsequent transfers on at least forty-seven

occasions and to remit subscription payments on at least 35 occasions. (Id.). The Trustee has

alleged that Six Sis also used an account at HSBC Bank USA in New York to receive

redemptions and remit subscriptions. (Id.).

Where a defendant chooses to use a United States bank account to receive funds,

exercising personal jurisdiction over the defendant for causes of action relating to those transfers

is constitutional. Off. Comm. of Unsecured Creditors of Arcapita v. Bahrain Islamic Bank, 549

B.R. 56, 71 (S.D.N.Y. 2016); Bahrain Islamic Bank v. Arcapita Bank (In re Arcapita Bank

B.S.C.(C)), 640 B.R. 604, 618 (S.D.N.Y. 2022) (stating that a bank submits to personal

jurisdiction in the United States when it is “free to accept or reject the proposed terms” and still

chooses to use a United States bank account); see also Eldesouky v. Aziz, No. 11–CV–6986

(JLC), 2014 WL 7271219, at *6–7 (S.D.N.Y. Dec. 19, 2014) (finding jurisdiction under New

York long-arm statute based solely on defendant’s use of New York account to receive payment

at issue: “receiving Plaintiffs’ money at a New York bank account suffices to establish personal

jurisdiction over [Defendant].”); HSH Nordbank AG N.Y. Branch v. Street, No. 11 CIV. 9405

DLC, 2012 WL 2921875, at *4 (S.D.N.Y. July 18, 2012) (“District courts in this Circuit have

upheld personal jurisdiction based upon a defendant’s use of a correspondent bank account in

New York where the use of that account was held to lay at the very root of the plaintiff’s

action.”) (quoting Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 673 F.3d 50, 66 (2d Cir.

2012)); Dandong v. Pinnacle Performance Ltd., 966 F. Supp.2d 374, 382–83 (S.D.N.Y. 2013)

(same).

The Complaint contains allegations that are legally sufficient to constitute a prima facie

showing of jurisdiction over Six Sis. 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. Mont. Eighth Jud. Dist. Ct., __ U.S. __, 141 S. Ct. 1017,

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

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

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

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

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

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

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

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

omitted).

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

received from the Fairfield Funds. (Am. Compl. ¶¶ 69–78, ECF No. 126). These allegations are

directly related to their investment activities with BLMIS via the Fairfield Funds. BNP Paribas

S.A., 594 B.R. at 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 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 defendants, 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. Defendant is not burdened by this litigation.

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

U.S. counsel and intentionally invested in the Fairfield Funds. Further, Defendant held bank

accounts in New York and submitted to the jurisdiction of New York courts’ when it signed

subscription agreements with the Fairfield Funds.2 (Am. Compl. ¶ 16). The forum and the

Trustee both have a strong interest in litigating BLMIS adversary proceedings in this Court.

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

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

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

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

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

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

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

does not constitute consent to personal jurisdiction in the U.S. Redeemer Actions.”), aff’d, Fairfield Sentry Ltd. v.

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

Picard v. Maxam Absolute Return Fund, L.P. (In re BLMIS), 460 B.R. 106, 117 (Bankr.

S.D.N.Y. 2011), aff’d, 474 B.R. 76 (S.D.N.Y. 2012); Picard v. Chais (In re BLMIS), 440 B.R.

274, 278 (Bankr. S.D.N.Y. 2010); Picard v. Cohmad Sec. Corp. (In re BLMIS), 418 B.R. 75, 82

(Bankr. S.D.N.Y. 2009); Picard v. Fairfield Greenwich Grp., (In re Fairfield Sentry Ltd.), 627

B.R. 546, 568 (Bankr. S.D.N.Y. 2021); see also In re Picard, 917 F.3d 85, 103 (2d Cir. 2019)

(“The United States has a compelling interest in allowing domestic estates to recover

fraudulently transferred property.”).

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

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

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

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

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

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

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

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

Fairfield Funds subsequent transfers at issue in this Complaint.

12(b)(6) standard

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

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

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

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

misconduct alleged.” Id. “The plausibility standard is not akin to a ‘probability requirement,’

but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id.; see also

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

agreement does not impose a probability requirement at the pleading stage; it simply calls for

enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal

agreement.”). In deciding a motion to dismiss, the Court should assume the factual allegations

are true and determine whether, when read together, they plausibly give rise to an entitlement of

relief. Iqbal, 556 U.S. at 679. “And, of course, a well-pl[ed] complaint may proceed even if it

strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very

remote and unlikely.” Twombly, 550 U.S. at 556.

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

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

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

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

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

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

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

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

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

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

The Trustee is seeking to recover approximately $52.6 million in subsequent transfers

made to Defendant by Fairfield Sentry and Fairfield Sigma. (Am. Compl. ¶ 2, ECF No. 126).

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.” Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R.

167, 195 (Bankr. S.D.N.Y. 2018).

While the Trustee must allege that the initial transfer from BLMIS to Fairfield Sentry is

avoidable, he is not required to avoid the transfer received by the initial transferee before

asserting an action against subsequent transferees. 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 (“Fairfield Complaint”). (Am. Compl. ¶ 66). 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).

Relation Back

The Trustee’s Amended Complaint alleges $33,000,038 in recently added transfers. (See

Am. Compl.). Six Sis argues that the Trustee’s new allegations of subsequent transfers are time-

barred. (Mem. L. 18–21, ECF No. 155).

Under Rule 15, “[a]n amendment to a pleading relates back to the date of the original

pleading when . . . the amendment asserts a claim or defense that arose out of the conduct,

transaction, or occurrence set out—or attempted to be set out—in the original pleading[.]” Fed. R.

Civ. P. 15(c)(1)(B). Rule 15 “does not set a high bar for relation back, so long as the claims

attempted to be asserted in the new complaint share a reasonable measure of common ground with

the allegations in the original pleading.” Picard v. Madoff (In re BLMIS), 468 B.R. 620, 633 (Bankr.

S.D.N.Y. 2012) (“Peter Madoff”) (quoting Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs.,

Inc.), 379 B.R. 5, 27 (Bankr. E.D.N.Y. 2007)). Rule 15(c) should be “liberally construed.” Siegel v.

Converters Transp., Inc., 714 F.2d 213, 215 (2d Cir. 1983). This is because “[t]he purpose of Rule

15 is to provide maximum opportunity for each claim to be decided on its merits rather than on

procedural technicalities.” Picard v. Fairfield Inv. Fund (In re BLMIS), No. 08-01789 (CGM), Adv.

Pro. No. 09-01239, 2021 WL 3477479, at *12 (Bankr. S.D.N.Y. Aug. 6, 2021) (quoting Siegel, 714

F.2d at 217). Thus, “[t]he principal inquiry . . . is whether the general fact situation alleged in the

original pleading provides adequate notice to the opposing party of the matters raised in the amended

pleading.” Peter Madoff, 468 B.R. at 633 (quotations omitted).

New fraudulent transfer claims relate back to the original pleading where the newly alleged

transfers occurred as part of the “same ‘course of conduct’” as the originally alleged transfers. Peter

Madoff, 468 B.R. at 633 (citing Adelphia Recovery Trust v. Bank of Am., N.A., 624 F. Supp. 2d 292,

334 (S.D.N.Y. 2009)). When examining “conduct” under Rule 15, courts typically analyze whether

“the [recently added transfers] occurred as part of the same course of conduct as the transfers alleged

in the original complaint,” and whether “the original complaint gave sufficient notice to the

defendants that the Trustee may sue for additional transfers that were part of the same course of

conduct.” Hill v. Oria (In re Juliet Homes, LP), Bankr. No. 07-36424, Adv. No. 09-03429, 2011 WL

6817928, at *7 (Bankr. S.D. Tex. Dec. 28, 2011) (citations omitted) (cleaned up).

The additional transfers relate back to the original complaint. The original complaint states:

“[T]he Trustee seeks to recover at least $7,023,692 in subsequent transfers of [c]ustomer [p]roperty

made to Defendant Six Sis.” (Compl. ¶ 2, ECF No. 1). As to Fairfield Sentry, the Trustee goes on to

state: “[t]he Trustee’s investigation is ongoing, and the Trustee reserves the right to: (i) supplement

the information on the Fairfield Sentry [i]nitial [t]ransfers, the the Fairfield Sentry [s]ubsequent

[t]ransfers, and any additional transfers, and (ii) seek recovery of such additional transfers.” (Id. ¶

42). As to Fairfield Sigma, the Trustee makes a similar statement: “[t]he Trustee’s investigation is

ongoing, and the Trustee reserves the right to: (i) supplement the information on the Fairfield Sentry

[i]nitial [t]ransfers, the Fairfield Sigma [s]ubsequent [t]ransfers, and any additional transfers, and (ii)

seek recovery of such additional transfers.” (Id. ¶ 44).

As this Court stated about another defendant in a similar litigation, “Defendant[] had over 10

years notice that they would be asked to account for these transfers.” Picard. v. Fairfield Inv. Fund

(In re BLMIS), No. 08-01789 (CGM), Adv. Pro. No. 09-01239, 2021 WL 3477479, at *13 (Bankr.

S.D.N.Y. Aug. 6, 2021). Six Sis was adequately appraised that the Trustee intended to collect any

additional subsequent transfers that were uncovered. The recently added transfers “relate back” and

are properly brought.

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. 23–27, ECF No. 134).

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 Six Sis

exchanging shares for consideration. (See Am. Compl., ECF No. 126). 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. at 24). 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.

“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, 2021

WL 3477479, at *9.

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 . . . 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, No 20-cv-02586(CM), 2022

WL 1304589, at *3 (S.D.N.Y. May 2, 2022) (citing Picard v. Citibank, N.A. (In re BLMIS), 12

F.4th 171 (2d Cir. 2021), cert. denied No. 21-1059 (Feb. 28, 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 Avoidability

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 Six Sis

subjectively knew; 2) “whether these facts put [it] on inquiry notice of the fraudulent purpose

behind a transaction—that is, whether the facts the transferee[s] knew would have led a

reasonable person in [its] position to conduct further inquiry into a debtor-transferor’s possible

fraud; and 3) whether “diligent inquiry by [Six Sis] would have discovered the fraudulent

purpose of the transfer.” Id. at 192.

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

litigation.

Mere Conduit

Six Sis argues that the Trustee has failed to allege that it was a transferee of any

subsequent transfers because it was a “mere conduit” and not a subsequent transferee. Six Sis

asserts that the Trustee need allege an averment of facts that Six Sis exercised dominion and

control over the money it received from the Fairfield Funds. (Mem. L. 19–22, ECF No. 134).

The Court of Appeals for the Second Circuit held in In re Finley that a financial intermediary is

not an “initial transferee” for purposes of § 550. Finley v. Alexander (In re Finley), 130 F.3d 52,

57 (2d Cir. 1997). Some courts have applied the “dominion or control” test to subsequent

transferees. See Miller v. Porush (In re Stratton Oakmont, Inc.), 234 B.R. 293, 313 n.9 (Bankr.

S.D.N.Y. 1999) (applying the dominion and control test to subsequent transferees) (citing

Bonded Fin. Servs., Inc. v. Eur. Am. Bank, 838 F.2d 890, 894 (7th Cir. 1988)).

It is not beyond doubt that Six Sis was a “mere conduit.” Six Sis has failed to even

identify for whom they were allegedly acting as a conduit. The Trustee has alleged that Six Sis

was a customer of Fairfield Sentry and Fairfield Sigma. (Am. Compl. ¶¶ 72, 76). Six Sis signed

subscription agreements with Fairfield Sentry and Fairfield Sigma. (Id. ¶ 16). The Trustee has

plausibly alleged that Six Sis exercised dominion and control over the investments and

redemption of BLMIS customer property. Defendant is free plead and prove otherwise at a later

stage of litigation. See Enron Corp. v. J.P. Morgan Sec. Inc. (In re Enron Corp.), 361 B.R. 36,

49 (Bankr. S.D.N.Y. 2006) (stating that the burden of proof is on the defendant asserting a mere

conduit defense); Isaiah v. JPMorgan Chase Bank, 960 F.3d 1296, 1304 (11th Cir. 2020) (“[T]he

mere conduit defense is an affirmative defense that must be proved by the defendant seeking its

protection.”).

Conclusion

For the foregoing reasons, Defendant’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

pated: Apri oe k oy Hon. Cecelia G. Morris

ougnkeepsie, New Yor ee ee U.S. Bankruptcy Judge

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