Amicus Curiae Brief — Citibank, N.A., et al., Petitioners v. Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, et al.

No. 21-1059

In the

Supreme Court of the United States

CITIBANK, N.A., ET AL.,

Petitioners,

V.

IRVING H. PICARD, TRUSTEE FOR THE

LIQUIDATION OF BERNARD L. MADOFF

INVESTMENT SECURITIES LLC, ET AL.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR ABN AMRO RETAINED CUSTODIAL

SERVICES (IRELAND) LIMITED AND ABN AMRO

CUSTODIAL SERVICES (IRELAND) LTD. AS

AMICI CURIAE IN SUPPORT OF PETITIONERS

CHRISTOPHER R. HARRIS

THOMAS J. GIBLIN

LATHAM & WATKINS LLP

1271 Avenue of the Americas

New York, NY 10020

(212) 906-1200

MELISSA ARBUS SHERRY

Counsel of Record

ERIC J. KONOPKA

LATHAM & WATKINS LLP

555 Eleventh Street, NW

Suite 1000

Washington, DC 20004

(202) 637-2200

melissa.sherry@lw.com

Counsel for Amici Curiae

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ...................................... ii

INTEREST OF AMICI CURIAE ................................1

INTRODUCTION

AND

SUMMARY

OF

ARGUMENT ..........................................................2

ARGUMENT ...............................................................4

I. THE SECOND CIRCUIT’S DECISION IS

WRONG .................................................................4

A. Section 550 Places The Burden Of Pleading

Subsequent Transferees’ Lack Of Good

Faith On Trustees ............................................4

B. Policy Concerns Favor Placing The Burden

On Trustees ....................................................12

II. THIS COURT’S REVIEW IS NEEDED NOW ...18

CONCLUSION ..........................................................21

ii

TABLE OF AUTHORITIES

Page(s)

CASES

Ashcroft v. Iqbal,

556 U.S. 662 (2009) ..............................................14

Bonded Financial Services, Inc. v.

European American Bank,

838 F.2d 890 (7th Cir. 1988)................................16

Carroll v. Tese-Milner (In re Red Dot

Scenic, Inc.),

351 F.3d 57 (2d Cir. 2003) ...................................19

Central Altagracia, Inc. v. Javierre,

3 P.R.F. Rep. 256 (D.P.R. 1908),

https://books.google.com/books/download

/Porto_Rico_Federal_Reports.pdf?id=M2

4sAQAAMAAJ&output=pdf, rev’d, 217

U.S. 502 (1910).....................................................11

Commonwealth v. Banellis,

682 A.2d 383 (Pa. Super. Ct. 1996) .......................9

Commonwealth v. Hart,

65 Mass. (11 Cush.) 130 (1853) ...........................10

Cooledge v. Continental Insurance Co.,

30 A. 798 (Vt. 1894) .............................................10

Davidson v. Brady,

732 F.2d 552 (6th Cir. 1984)................................14

Elkins v. State,

13 Ga. 435 (1853) ...................................................9

iii

TABLE OF AUTHORITIES—Continued

Page(s)

In re Enron Corp.,

281 B.R. 836 (Bankr. S.D.N.Y. 2002) ..................12

Evankavitch v. Green Tree Servicing, LLC,

793 F.3d 355 (3d Cir. 2015) .................................17

Farmer v. Brennan,

511 U.S. 825 (1994) ..............................................14

FTC v. Morton Salt Co.,

334 U.S. 37 (1948) ................................................11

Goldman v. Capital City Mortgage Corp.

(In re Nieves),

648 F.3d 232 (4th Cir. 2011)................................19

Gowan v. Patriot Group, LLC (In re Dreier

LLP),

452 B.R. 391 (Bankr. S.D.N.Y. 2011) ..................15

Henry v. Official Committee of Unsecured

Creditors of Walldesign, Inc. (In re

Walldesign, Inc.),

872 F.3d 954 (9th Cir. 2017), cert.

denied, 138 S. Ct. 2575 (2018) ...............................5

IBT International, Inc. v. Northern (In re

International Administrative Services,

Inc.),

408 F.3d 689 (11th Cir. 2005)................................5

iv

TABLE OF AUTHORITIES—Continued

Page(s)

IRS v. Nordic Village, Inc. (In re Nordic

Village, Inc.),

915 F.2d 1049 (6th Cir. 1990), rev’d sub

nom. United States v. Nordic Village,

Inc., 503 U.S. 30 (1992) .......................................19

Javierre v. Central Altagracia,

217 U.S. 502 (1910) ..............................................11

Khachatryan v. Blinken,

4 F.4th 841 (9th Cir. 2021) ..................................14

Logan v. Commercial Union Insurance Co.,

96 F.3d 971 (7th Cir. 1996)..................................14

Mano-Y&M, Ltd. v. Field (In re Mortgage

Store, Inc.),

773 F.3d 990 (9th Cir. 2014)................................19

Maxwell Land-Grant Co. v. Dawson,

151 U.S. 586 (1894) ..........................................9, 10

McKelvey v. United States,

260 U.S. 353 (1922) ..............................................11

Meacham v. Knolls Atomic Power

Laboratory,

554 U.S. 84 (2008) ..........................................11, 12

Meoli v. Huntington National Bank (In re

Teleservices Group, Inc.),

444 B.R. 767 (Bankr. W.D. Mich. 2011) ..............16

v

TABLE OF AUTHORITIES—Continued

Page(s)

Merit Management Group, LP v. FTI

Consulting, Inc.,

138 S. Ct. 883 (2018)..............................................5

In re MF Global Holdings Ltd.,

465 B.R. 736 (Bankr. S.D.N.Y. 2012) ..................13

Minis v. United States,

40 U.S. (15 Pet.) 423 (1841) ...................................9

Mirax Chemical Products Corp. v. First

Interstate Commercial Corp.,

950 F.2d 566 (8th Cir. 1991)................................14

Nayab v. Capital One Bank (USA), N.A.,

942 F.3d 480 (9th Cir. 2019)................................18

Perkins v. Haines,

661 F.3d 623 (11th Cir. 2011)..............................15

Picard v. ABN AMRO Bank (Ireland) Ltd.

(In re Madoff), Adv. Pro. No. 10-05355,

2020 WL 401822 (Bankr. S.D.N.Y. Jan.

23, 2020) .................................................................1

Picard v. Fairfield Greenwich Ltd.,

762 F.3d 199 (2d Cir. 2014) .................................19

Rowell v. Janvrin,

45 N.E. 398 (N.Y. 1896) ................... 8, 9, 10, 11, 12

Rupp v. Markgraf,

95 F.3d 936 (10th Cir. 1996)..................................5

vi

TABLE OF AUTHORITIES—Continued

Page(s)

Schaffer ex rel. Schaffer v. Weast,

546 U.S. 49 (2005) ........................................6, 7, 17

Securities Investor Protection Corp. v.

Bernard L. Madoff Investment Securities

LLC (In re Madoff),

516 B.R. 18 (S.D.N.Y. 2014) ................................13

Securities Investor Protection Corp. v.

Bernard L. Madoff Investment Securities

LLC (In re Madoff),

528 F. Supp. 3d 219 (S.D.N.Y. 2021),

appeal docketed, No. 21-872 (2d Cir.

Apr. 6, 2021) .........................................................15

Securities Investor Protection Corp. v.

Bernard L. Madoff Investment Securities

LLC (In re Madoff),

590 B.R. 200 (Bankr. S.D.N.Y. 2018) ............13, 16

Smith v. SIPI, LLC (In re Smith),

811 F.3d 228 (7th Cir.), cert. denied, 137

S. Ct. 103 (2016)...................................................19

Stanziale v. Nachtomi (In re Tower Air,

Inc.),

416 F.3d 229 (3d Cir. 2005) .................................14

Staples v. United States,

511 U.S. 600 (1994) ..............................................14

Sullivan v. Ward,

24 N.E.2d 672 (Mass. 1939) ...................................9

vii

TABLE OF AUTHORITIES—Continued

Page(s)

Tantaros v. Fox News Network, LLC,

12 F.4th 135 (2d Cir. 2021)..........................8, 9, 10

Tavenner v. Smoot (In re Smoot),

265 B.R. 128 (Bankr. E.D. Va. 1999),

aff’d, 257 F.3d 401 (4th Cir. 2001), cert.

denied, 534 U.S. 1116 (2002) ...............................19

The General Smith,

17 U.S. (4 Wheat.) 438 (1819) ...............................7

United States v. Britton,

107 U.S. 655 (1883) ................................................8

United States v. Cook,

84 U.S. (17 Wall.) 168 (1872).......................8, 9, 10

United States v. Hayward,

26 F. Cas. 240 (C.C.D. Mass. 1815) .......................9

United States v. McCombs,

30 F.3d 310 (2d Cir. 1994) ...................................14

United States v. Vuitch,

402 U.S. 62 (1971) ..................................................9

Van Iderstine v. National Discount Co.,

174 F. 518 (2d Cir. 1909), aff’d, 227 U.S.

575 (1913) .............................................................14

Wasserman v. Bressman (In re Bressman),

327 F.3d 229 (3d Cir. 2003) ...........................17, 19

Wisconsin Central Ltd. v. United States,

138 S. Ct. 2067 (2018)............................................7

viii

TABLE OF AUTHORITIES—Continued

Page(s)

STATUTES

11 U.S.C. § 521(a)(4) .................................................12

11 U.S.C. § 546(e) ......................................................15

11 U.S.C. § 546(f) ......................................................15

11 U.S.C. § 546(g) ......................................................15

11 U.S.C. § 547(g) ........................................................7

11 U.S.C. § 548(a)(1)(A) ............................................15

11 U.S.C. § 548(c) ....................................................4, 7

11 U.S.C. § 550(a)........................................ 2, 3, 4, 5, 6

11 U.S.C. § 550(b)...................................... 3, 4, 6, 7, 16

11 U.S.C. § 550(b)(1) ...............................................2, 5

11 U.S.C. § 550(c) ......................................................18

29 U.S.C. § 623 ..........................................................11

Pub. L. No. 95-598, 92 Stat. 2549 (1978) ...................9

Pub. L. No. 103-394, 108 Stat. 4106 (1994)..............18

OTHER AUTHORITIES

1 Joseph Chitty, A Treatise on Pleading,

and Parties to Actions (9th Am. ed.

1844) .................................................................8, 10

H.R. Doc. No. 93-137, pt. II (1973) ...........................17

ix

TABLE OF AUTHORITIES—Continued

Page(s)

2 Robert P. Mosteller et al., McCormick on

Evidence (8th ed. Jan. 2020, Westlaw) .................5

S. Rep. No. 95-989 (1978) ............................................5

1A Norman Singer et al., Sutherland

Statutes and Statutory Construction (7th

ed. Nov. 2021, Westlaw) ........................................8

INTEREST OF AMICI CURIAE1

ABN AMRO Retained Custodial Services (Ireland)

Limited and ABN AMRO Custodial Services (Ireland)

Ltd. (together, “Amici” or “ABN AMRO”) are

defendants in a case that is similar to this one. ABN

AMRO’s case will be directly affected by the decision

below if this Court does not intervene.

Amici, who are financial institutions within the

ABN AMRO corporate family that provided services

to hedge funds and other investment managers,

entered into transactions with investment funds tied

to Bernard L. Madoff Investment Securities LLC

(“BLMIS”).2 After BLMIS was revealed to be a

massive Ponzi scheme, ABN AMRO’s assets linked to

BLMIS became essentially worthless. ABN AMRO

lost over $450 million, making it one of the biggest

“net losers” in the Madoff saga.

Despite these substantial losses, Irving H. Picard,

as trustee for the liquidation of BLMIS and the

substantively consolidated estate of Bernard L.

Madoff (the “Trustee”), has sought to claw back about

$265 million more from ABN AMRO. In 2010, the

1

The parties have consented in writing to the filing of this

brief, and received timely notice of the intent to file. No counsel

for a party authored this brief in whole or in part; and no such

counsel, any party, or any other person or entity—other than

amici curiae and their counsel—made a monetary contribution

intended to fund the preparation or submission of this brief.

2

The facts of ABN AMRO’s case are drawn from the

bankruptcy court’s decision, which is based on the pleadings in

that case. See generally Picard v. ABN AMRO Bank (Ireland)

Ltd. (In re Madoff), Adv. Pro. No. 10-05355, 2020 WL 401822

(Bankr. S.D.N.Y. Jan. 23, 2020). At this stage, ABN AMRO does

not admit or concede any of the facts alleged.

2

Trustee filed an adversary proceeding in bankruptcy

court alleging that ABN AMRO had received that

amount as a “subsequent transferee” of BLMIS. That

is, the Trustee claimed that he can recover that

amount from ABN AMRO under 11 U.S.C. § 550(a)(b)—the same theory the Trustee has employed

against petitioners and numerous others. See Pet. 78, 23-24. As in petitioners’ case, the bankruptcy court

found that the Trustee’s claims failed as a matter of

law because the Trustee had not carried his burden of

pleading that ABN AMRO lacked good faith in

receiving the transfers at issue.

ABN AMRO filed an amicus brief in the Second

Circuit focusing on how the burden with respect to

good faith should be allocated—the question

presented here. See Pet. at I. And the Second

Circuit’s holding that the Trustee need not plead lack

of good faith because “good faith is an affirmative

defense” will be applied to ABN AMRO’s case unless

this Court grants review. Pet. App. 37a; see id. at 37a45a. ABN AMRO has a strong interest in the outcome

of this case, which will directly affect the disposition

of its own case.

INTRODUCTION AND

SUMMARY OF ARGUMENT

Section 550(a) of the Bankruptcy Code allows

trustees to recover avoided transfers from both initial

transferees and subsequent transferees, “[e]xcept as

otherwise provided in this section.”

11 U.S.C.

§ 550(a). Section 550(b) then “provide[s]” “otherwise,”

carving out a portion of trustees’ recovery power with

respect to subsequent transferees who, among other

things, “take[] . . . in good faith.” Id. § 550(b)(1). This

good-faith requirement is part of a trustee’s pleading

3

burden, and is not an affirmative defense for which

subsequent transferees have the burden.

That is the best way to read the statutory text.

Section 550(a) addresses “the trustee,” and trustees

undoubtedly bear the burden of pleading (and

proving) their right to recovery under Section 550(a).

Section 550(b) also addresses “[t]he trustee,” in terms

that precisely negate Section 550(a), so the burden

logically falls on the same party—the “trustee,” not

the transferee. Compare 11 U.S.C. § 550(a) (“[T]he

trustee may recover . . . .”), with id. § 550(b) (“The

trustee may not recover . . . .”). Differences between

Section 550(b) and a nearby statute, as well as the

relevant principles of statutory interpretation,

reinforce that conclusion.

Assigning this burden to trustees also makes

sense. Plaintiffs often have the burden of pleading a

lack of good faith—or its equivalent, bad faith—and

trustees have all the tools they need to satisfy that

burden. Unlike ordinary civil litigants, trustees have

expansive powers to obtain information before ever

filing a complaint. Take this case, for example. The

Trustee

conducted

an

enormous

pre-filing

investigation—paid for by the BLMIS estate—before

commencing over a thousand adversary proceedings.

Trustees should have to use those powers to plead a

lack of good faith before tying up subsequent

transferees—to whom Congress granted special

protection because they are more likely than initial

transferees to be innocent—in litigation that could

drag on for years.

Review is needed now, and this case is the ideal

vehicle for resolving the question presented.

Everything that needs to be said about that question

has already been said, and courts have resolved it in

4

different ways. The issue is also exceptionally

important. The decision below will directly affect

dozens of Madoff-related cases—and will subject

countless innocent subsequent transferees in these

cases and other major bankruptcies to years of

needless and costly litigation.

ARGUMENT

I. THE SECOND CIRCUIT’S DECISION IS

WRONG

A. Section 550 Places The Burden Of

Pleading Subsequent Transferees’ Lack

Of Good Faith On Trustees

Section 550(a) of the Bankruptcy Code gives

trustees the power to recover avoided transfers from

both initial and subsequent transferees. But Section

550(b) takes away a portion of that power—in terms

that precisely negate it—with respect to subsequent

transferees. The burden of pleading falls where it is

expressly directed:

on “[t]he trustee,” not on

transferees. 11 U.S.C. § 550(b); see id. § 550(a). And

comparing Section 550(b) to Section 548(c) bolsters

that conclusion because, unlike Section 550(b),

Section 548(c) is directed to the “transferee.” Id.

§ 548(c). So does a longstanding principle of statutory

interpretation, under which Section 550(b) is an

“exception” that the plaintiff (i.e., a trustee) must

plead and prove.

1. When a trustee seeks to avoid a transfer and

recover funds from a transferee, two statutes play

separate, but related roles. Section 548 of the

Bankruptcy Code governs transfers that may be

avoided; Section 550 governs from whom and under

what conditions “the trustee may recover” avoided

5

transfers. 11 U.S.C. § 550(a); see Merit Mgmt. Grp.,

LP v. FTI Consulting, Inc., 138 S. Ct. 883, 888-89

(2018).

Although avoidance and recovery work

together, Congress intentionally separated the two

concepts. See, e.g., IBT Int’l, Inc. v. Northern (In re

International Admin. Servs., Inc.), 408 F.3d 689, 703

(11th Cir. 2005) (noting “demarcation between

avoidance and recovery”); S. Rep. No. 95-989, at 90

(1978) (similar). The differences between avoidance

and recovery are especially pronounced with respect

to subsequent transferees.

When a transfer is avoided under Section 548,

Section 550 places no additional burden on trustees to

recover from initial transferees. See, e.g., Henry v.

Official Comm. of Unsecured Creditors of Walldesign,

Inc. (In re Walldesign, Inc.), 872 F.3d 954, 965 (9th

Cir. 2017) (“Section 550 imposes strict liability on . . .

initial transferees . . . .”), cert. denied, 138 S. Ct. 2575

(2018). But Section 550(b) does impose limits on

recovering from subsequent transferees. “The trustee

may not recover under section (a)(2) [concerning

subsequent transferees] . . . from . . . a transferee that

takes for value, . . . in good faith, and without

knowledge of the voidability of the transfer avoided.”

11 U.S.C. § 550(b)(1) (footnote omitted); see Rupp v.

Markgraf, 95 F.3d 936, 944 (10th Cir. 1996)

(“Congress has . . . distinguish[ed] between initial

transferees, who are strictly liable, and subsequent

transferees, who are not strictly liable.”).

That provision is aimed directly at “[t]he trustee,”

taking away a portion of the power that Section 550(a)

grants. Nobody disputes that trustees must plead

and prove their right to recovery under Section

550(a). See 2 Robert P. Mosteller et al., McCormick

on Evidence § 337 (8th ed. Jan. 2020, Westlaw) (“The

6

burdens of pleading and proof with regard to most

facts have been and should be assigned to the plaintiff

. . . .”); see also, e.g., Schaffer ex rel. Schaffer v. Weast,

546 U.S. 49, 56 (2005) (recognizing this as “the

ordinary default rule”). Since Section 550(b) is

written in language precisely negating Section 550(a),

trustees should likewise have to plead (and prove)

that Section 550(b) does not apply. Compare 11

U.S.C. § 550(a) (“[T]he trustee may recover . . . .”),

with id. § 550(b) (“The trustee may not recover . . . .”).

That is, Section 550 authorizes trustees to recover

from subsequent transferees, but only if they can

overcome the burden that Section 550(b) imposes.

2. The Second Circuit disagreed, holding that

Section 550(b) operates as an affirmative defense that

subsequent transferees must plead and prove. See

Pet. App. 37a-45a. To get there, the court of appeals

drew a parallel between Section 550(b) and Section

548(c), which some courts have construed as a “good

faith” affirmative defense to avoidance. See id. at

37a-38a. But Section 548(c) stands in marked

contrast. As discussed above, Congress intentionally

separated the concepts of avoidance and recovery and

made initial transferees strictly liable for avoided

transfers unless Section 548(c) offers relief. But in

Section 550(b), Congress specifically gave subsequent

transferees additional protection—countering the

notion that Sections 550(b) and 548(c) should be

treated the same.

That is especially true given other key differences

between the statutes. Textually speaking, Section

548(c) is not a defense at all; it grants transferees

“that take[] for value and in good faith” a “lien on,” or

similar “interest” in, property transferred to the

extent they “gave value to the debtor in exchange for

7

such transfer.” 11 U.S.C. § 548(c). Of course, the

party seeking a lien or similar interest—in the case of

Section 548(c), the transferee—normally has the

burden of pleading and proving its claim. See, e.g.,

Schaffer, 546 U.S. at 51 (“[T]he burden lies, as it

typically does, on the party seeking relief.”); The

General Smith, 17 U.S. (4 Wheat.) 438, 443 (1819)

(“[I]t is incumbent upon those who seek the aid of the

court[] to establish the existence of [a specific] lien in

the particular case.”). By contrast, Section 550(b)

flatly prevents trustees from recovering from goodfaith subsequent transferees. And, importantly, the

two statutes are directed at different parties. Section

548(c) speaks to the “transferee.” If that statute

imposes a burden on the transferee, then Section

550(b) should also impose a burden on the party to

whom it is directed—the “trustee.” Compare 11

U.S.C. § 548(c) (“[A] transferee or obligee . . . has a

lien . . . .”), with id. § 550(b) (“The trustee may not

recover . . . .”).

If Congress wanted Section 550(b) to impose a

burden on subsequent transferees, it knew how to do

so. Cf., e.g., 11 U.S.C. § 547(g) (allocating the burden

between trustees and creditors). It did not. Congress

deliberately chose to use different words in two

provisions enacted in the same law at the same time.

That choice ought to be respected. See, e.g., Wisconsin

Cent. Ltd. v. United States, 138 S. Ct. 2067, 2071

(2018) (“We usually ‘presume differences in language

like this convey differences in meaning.’” (citation

omitted)).

3. The Second Circuit also relied on the supposed

principle that “when there is an exception to the

general rule, the party claiming the benefit of the

exception bears the burden of pleading it.” Pet. App.

8

39a. The court of appeals misstated and misapplied

that principle of statutory interpretation.

a. Stated more fully, courts have distinguished

between “exceptions” and “provisos.” “[O]ne who

asserts a claim based upon a statute must negative,

in pleadings and proofs, any exceptions in the

provision on which the claim is based, whereas matter

in a proviso can be left for the adversary as a defensive

matter.” 1A Norman Singer et al., Sutherland

Statutes and Statutory Construction § 21:11 (7th ed.

Nov. 2021, Westlaw); see, e.g., United States v. Cook,

84 U.S. (17 Wall.) 168, 173-78 (1872) (discussing this

principle in depth); Tantaros v. Fox News Network,

LLC, 12 F.4th 135, 143-44 (2d Cir. 2021); 1 Joseph

Chitty, A Treatise on Pleading, and Parties to Actions

222 (9th Am. ed. 1844) (“Chitty on Pleading”). The

real question, then, is whether Section 550(b) is an

exception (in which case trustees must plead and

prove that it does not apply) or a proviso (in which

case they need not).

While there is no magic way to classify a particular

clause as an exception or a proviso, courts have set

out certain guideposts. An exception is normally

“stated in the enacting clause,” United States v.

Britton, 107 U.S. 655, 670 (1883), or “connected with

it [through] words of reference,” Cook, 84 U.S. at 181,

and “exempts something absolutely from the

operation of a statute . . . that otherwise would be part

of the subject-matter of it,” Rowell v. Janvrin, 45 N.E.

398, 400 (N.Y. 1896). An exception is also normally

enacted at the same time as the statute of which it is

a part. See, e.g., Tantaros, 12 F.4th at 143-44; Rowell,

45 N.E. at 400. By comparison, a “proviso defeats

[the] operation [of a statute] conditionally” or “avoids

[the statute] by way of defeasance or excuse.” Rowell,

9

45 N.E. at 400; accord Cook, 84 U.S. at 177; Minis v.

United States, 40 U.S. (15 Pet.) 423, 445 (1841);

Tantaros, 12 F.4th at 143-44. And it usually appears

in a separate sentence, section, or statute, and is often

enacted at a later date. See, e.g., Cook, 84 U.S. at 17576; Minis, 40 U.S. at 445-46; Tantaros, 12 F.4th at

143-44; United States v. Hayward, 26 F. Cas. 240,

244-45 (C.C.D. Mass. 1815) (Story, J.).

Section 550(b) is an exception, not a proviso. The

grant of the recovery power in Section 550(a) is

expressly limited by the clause “[e]xcept as otherwise

provided in this section”—a common “exception”

formulation. See, e.g., Maxwell Land-Grant Co. v.

Dawson, 151 U.S. 586, 603-06 (1894) (prefatory

“excepting” clause); Tantaros, 12 F.4th at 143-44

(prefatory “except” clause); Elkins v. State, 13 Ga.

435, 436-37 (1853) (“except” clause); Commonwealth

v. Banellis, 682 A.2d 383, 384-88 (Pa. Super. Ct. 1996)

(prefatory “except” clause); see also United States v.

Vuitch, 402 U.S. 62, 67-71 (1971) (“unless” clause);

Sullivan v. Ward, 24 N.E.2d 672, 673-74 (Mass. 1939)

(“unless” clause). Moreover, the prefatory except

clause links to and incorporates Section 550(b), which

was enacted at the same time as Section 550(a). See

Bankruptcy Reform Act of 1978, Pub. L. No. 95-598,

§ 550, 92 Stat. 2549, 2601-02. Finally, Section 550(b)

expressly carves out a portion of the recovery power

in terms that precisely negate the grant of that power

in Section 550(a). It thereby “exempts [subsequent

transferees] absolutely from the operation of” Section

550(a) unless the trustee pleads and proves that the

exception does not apply. Rowell, 45 N.E. at 400; see

supra at 5-6.

10

b. The Second Circuit attempted to minimize the

distinction between exceptions and provisos in two

ways. Neither withstands scrutiny.

First, the court of appeals suggested that the

requirement to negate exceptions in a pleading

applies only when a “criminal statute” is at issue. Pet.

App. 39a (discussing Cook, 84 U.S. at 173). Not so.

The same principle has been applied equally to civil

cases. See, e.g., Maxwell Land-Grant Co., 151 U.S. at

594, 603-06; Tantaros, 12 F.4th at 139, 143-44;

Rowell, 45 N.E. at 398, 400; see also, e.g., Cook, 84

U.S. at 175-76 (recognizing that the same pleading

rule applies “whether speaking of a statute or private

contract”); Commonwealth v. Hart, 65 Mass. (11

Cush.) 130, 134 (1853) (similar); Pet. 20.

Second, the court of appeals noted that, for Section

550(b) to be an exception, it must supply “ingredients”

of a claim for recovery under Section 550(a). Pet. App.

40a (quoting Cook, 84 U.S. at 173). But, the court

said, Section 550(b) cannot do so because it is

connected to Section 550(a) through “‘except as

otherwise provided’ language.” Id. (citation omitted).

This purported distinction fares no better. As Cook

itself recognized, an exception can be “connected” to

the enacting clause through “words of reference.” 84

U.S. at 181. And, as a classic treatise explained, when

an enacting clause says “except as hereinafter

mentioned,” “the clause thereinafter mentioned must

be considered as an exception,” not a proviso. 1 Chitty

on Pleading, supra, at 223-24 (describing English case

of Vavasour v. Ormrod, 6 B. & C. 430); see, e.g.,

Cooledge v. Continental Ins. Co., 30 A. 798, 803-04

(Vt. 1894).

Nor do this Court’s precedents undermine that

conclusion. The court of appeals relied primarily on

11

Meacham v. Knolls Atomic Power Laboratory, 554

U.S. 84 (2008), but that case merely recognized “the

familiar principle that ‘[w]hen a proviso . . . carves an

exception out of the body of a statute or contract those

who set up such exception must prove it.’” Id. at 91

(alterations in original) (emphasis added) (quoting

Javierre v. Central Altagracia, 217 U.S. 502, 508

(1910)).

Meacham did not distinguish between

exceptions and provisos—and certainly did not call

that distinction into question.3

And while Meacham applied this proviso principle,

the statute at issue there, 29 U.S.C. § 623, differs

markedly from Section 550. Section 623 has five

subsections establishing unlawful acts followed by

§ 623(f) which, the Court held, contains affirmative

defenses that a defendant must plead and prove. See

Meacham, 554 U.S. at 91-95. But unlike Section 550,

the liability-creating provisions in § 623 do not crossreference § 623(f).

Instead, § 623(f) contains

numerous “exemptions laid out apart from the

3

The court of appeals also relied on FTC v. Morton Salt Co.,

334 U.S. 37, 44-45 (1948), see Pet. App. 39a, but that case did not

grapple with the distinction between exceptions and provisos

either. And, in any event, the statutory clause at issue began

with “[p]rovided,” which is the “usual” formulation of a proviso.

Rowell, 45 N.E. at 400. Other cases frequently cited alongside

Meacham and Morton Salt are similar in kind. See McKelvey v.

United States, 260 U.S. 353, 356-57 (1922) (“[p]rovided” clause);

Javierre, 217 U.S. at 506 (summarily deeming contract provision

a proviso); see also Central Altagracia, Inc. v. Javierre, 3 P.R.F.

Rep. 256, 260-61 (D.P.R. 1908), https://books.google.com/books/

download/Porto_Rico_Federal_Reports.pdf?id=M24sAQAAMAA

J&output=pdf (setting forth the relevant language in Javierre,

which modified a contract and added a clause beginning with “it

being understood, nevertheless”), rev’d on other grounds, 217

U.S. 502.

12

prohibitions,” which defeat liability for “otherwise

prohibited” conduct—language showing that § 623(f)

“refers to an excuse or justification for behavior that,

standing alone, violates the statute’s prohibition.” Id.

at 91, 94-95. Wholly independent subsections that

contain excuses or defeat liability for otherwise

unlawful conduct are quintessential provisos. See,

e.g., Rowell, 45 N.E. at 400 (provisos are typically

“found in some other part of the statute” apart from

the enacting clause and “avoid[] [the statute] by way

of defeasance or excuse”).

Section 550(b)’s structure is different in kind. It

provides an exception to Section 550(a) that trustees

must plead (and prove).

B. Policy Concerns Favor

Burden On Trustees

Placing

The

There are compelling policy reasons why trustees

should bear the burden of pleading a subsequent

transferee’s lack of good faith.

1. Trustees have potent tools to meet this burden,

even at the pleading stage. A trustee gains access to

the debtor’s records and can find out before initiating

an adversary proceeding whether, for example, the

debtor, an initial transferee, and a subsequent

transferee were in cahoots. See 11 U.S.C. § 521(a)(4)

(a debtor must “surrender to the trustee all property

of the estate and any recorded information, including

books, documents, records, and papers, relating to the

property of the estate”). And if those records are not

enough, trustees can conduct pre-litigation discovery

under Bankruptcy Rule 2004—which courts have

described as “broad and unfettered and in the nature

of [a] fishing expedition[].” In re Enron Corp., 281

B.R. 836, 840 (Bankr. S.D.N.Y. 2002).

13

The Madoff-related proceedings show just how

expansive Rule 2004 discovery can be. The Trustee

“issued ‘more than 1,110 subpoenas’ pursuant to

Federal Bankruptcy Rule 2004 seeking documents

from individuals, funds, and banks, and ‘conducted

hundreds of interviews and depositions.’” Securities

Inv. Prot. Corp. v. BLMIS (In re Madoff), 590 B.R.

200, 209 (Bankr. S.D.N.Y. 2018) (“Discovery Order”)

(citation omitted). The Trustee ultimately collected

tens of millions of documents.4 Trustees, including

the Trustee here, have ample opportunity to find out

everything they need to know to plead a lack of good

faith under Section 550(b). Cf. Securities Inv. Prot.

Corp. v. BLMIS (In re Madoff), 516 B.R. 18, 25

(S.D.N.Y.

2014)

(“Good

Faith

Decision”)

(“[E]xperience in the Madoff Trustee’s own cases

shows that when the Trustee has even a modest basis

for claiming that a transferee took a transfer without

good faith, he is fully capable of so pleading.”).5

4

See Trustee’s Mot. for Rep. & Recommendations for

Appointment of Special Disc. Masters, Etc. ¶ 20, Securities Inv.

Prot. Corp. v. BLMIS (In re Madoff), No. 08-ap-01789 (Bankr.

S.D.N.Y. Aug. 5, 2011), ECF No. 4290.

5

Trustees also should investigate lack of good faith from the

outset. They have a “duty to investigate” the estate’s claims, and

good faith will be an issue in virtually every Section 550 claim

against a subsequent transferee. In re MF Glob. Holdings Ltd.,

465 B.R. 736, 743-44 (Bankr. S.D.N.Y. 2012) (citation omitted).

In fact, the Trustee here conducted extensive pre-litigation

discovery bearing on good faith. See, e.g., Discovery Order

Consol. Mem. of Law in Opp’n to Trustee’s Mot. for Disc. on Good

Faith Issue 12-15 (No. 10-ap-05355), ECF No. 133 (describing

the Trustee’s discovery). And from the very beginning, he tried

to use that information to allege a lack of good faith in many

cases. See, e.g., Discovery Order, 590 B.R. at 209-10.

14

2. There is nothing unusual about assigning

trustees the burden of pleading and proving

subsequent transferees’ lack of good faith. Plaintiffs

often have to plead and prove lack of good faith or its

equivalent, bad faith—including with respect to

claims similar to those at issue here. See, e.g., United

States v. McCombs, 30 F.3d 310, 326 & n.1 (2d Cir.

1994) (fraudulent conveyance); Van Iderstine v.

National Discount Co., 174 F. 518, 522 (2d Cir. 1909)

(fraudulent conveyance), aff’d, 227 U.S. 575 (1913);

Pet. 15-16 (recovery of stolen and resold negotiable

instruments); see also, e.g., Khachatryan v. Blinken, 4

F.4th 841, 851-52 (9th Cir. 2021) (certain

constitutional claims); Stanziale v. Nachtomi (In re

Tower Air, Inc.), 416 F.3d 229, 238 (3d Cir. 2005)

(breach of fiduciary duty); Logan v. Commercial

Union Ins. Co., 96 F.3d 971, 980 (7th Cir. 1996)

(breach of insurer’s duty of good faith); Mirax Chem.

Prods. Corp. v. First Interstate Com. Corp., 950 F.2d

566, 570 (8th Cir. 1991) (breach of duty of good faith

under the Uniform Commercial Code); Davidson v.

Brady, 732 F.2d 552, 553 (6th Cir. 1984) (disclosure of

tax information).

Lack of good faith—or bad faith—is also

comparable to a mens rea requirement. Ordinarily,

plaintiffs bear the burden of pleading mens rea. See,

e.g., Ashcroft v. Iqbal, 556 U.S. 662, 683 (2009);

Farmer v. Brennan, 511 U.S. 825, 846-47 (1994);

Staples v. United States, 511 U.S. 600, 619 (1994).

And there is no dispute that trustees must plead and

prove mens rea requirements—such as actual intent

to defraud—to use other advantageous Bankruptcy

15

Code provisions.6 Trustees should likewise have the

burden on mens rea (i.e., lack of good faith or bad

faith) before using Section 550 to recover from

subsequent transferees.

3. Having to plead and prove a lack of good faith

is a small price to pay compared to the enormous cost

to subsequent transferees. If the Second Circuit’s

decision is allowed to stand, trustees will inevitably

argue—as the Trustee argued below—that they can

plead a viable Section 550(a) subsequent transferee

claim by alleging two things: (1) that a particular

transfer is avoidable and (2) that the defendant

indirectly received funds from the debtor.7 And, in

Ponzi scheme cases like this one, trustees will seek to

lower their pleading burden even more by using the

“Ponzi scheme presumption.” Courts—including the

bankruptcy and district courts below—have applied

that presumption to hold that virtually every transfer

made in the two years before a bankruptcy filing is

presumptively avoidable. Securities Inv. Prot. Corp.

v. BLMIS (In re Madoff), 528 F. Supp. 3d 219, 237

(S.D.N.Y. 2021), appeal docketed, No. 21-872 (2d Cir.

Apr. 6, 2021); see, e.g., Perkins v. Haines, 661 F.3d

623, 626 (11th Cir. 2011).

6

For example, trustees must plead that transfers were made

“with actual intent to hinder, delay, or defraud,” which may

remove the transfers from certain avoidance safe harbors. 11

U.S.C. § 548(a)(1)(A); see id. § 546(e)-(g); Gowan v. Patriot Grp.,

LLC (In re Dreier LLP), 452 B.R. 391, 423 (Bankr. S.D.N.Y.

2011).

7

See, e.g., Good Faith Decision Trustee’s Mem. of Law

Responding to Good Faith Issues 7 (No. 12-mc-0115), ECF

No. 324.

16

With threadbare allegations, a trustee may try to

bury hundreds or thousands of subsequent

transferees—and transferees of such transferees—in

litigation for years or use the threat of costly discovery

and litigation to extract undeserved settlements from

innocent parties. That is precisely what the Trustee

has done here. See Discovery Order, 590 B.R. at 204

(“[T]he Trustee commenced over 1,000 adversary

proceedings to avoid and recover fraudulent

transfers.”).

The cost of the court of appeals’ rule is especially

onerous for remote transferees who, unlike

petitioners and ABN AMRO, are protected only by

Section 550(b)(2). Whereas Section 550(b)(1) protects

subsequent transferees who “take[] for value, . . . in

good faith, and without knowledge of the voidability

of the transfer avoided,” Section 550(b)(2) protects

“good faith transferee[s] of such transferee[s]” even if

they take without value or with knowledge of

voidability. 11 U.S.C. § 550(b). Construing Section

550(b) as an affirmative defense, as the court of

appeals did, could allow trustees to argue that goodfaith transferees protected only by Section 550(b)(2)

would have to prove not only their own good faith, but

the good faith of “some transferee further up the

chain.” Meoli v. Huntington Nat’l Bank (In re

Teleservices Grp., Inc.), 444 B.R. 767, 791 n.89

(Bankr. W.D. Mich. 2011).

None of this can be squared with the minor role of

subsequent transferees or Congress’s desire to protect

them.

Subsequent transferees do not transact

directly with the debtor, “usually do not know where

the assets came from,” and “would be ineffectual

monitors [of the debtor] if they did.” Bonded Fin.

Servs., Inc. v. European Am. Bank, 838 F.2d 890, 892-

17

93 (7th Cir. 1988). As compared to initial transferees,

“subsequent transferees are much more likely to be

innocent third parties.” Wasserman v. Bressman (In

re Bressman), 327 F.3d 229, 236 n.2 (3d Cir. 2003)

(citation omitted). That is why Section 550 includes

extra protections for subsequent transferees: “to

avoid litigation and unfairness to innocent

purchasers.” H.R. Doc. No. 93-137, pt. II, at 180

(1973); see Pet. 17. Section 550(b) can serve that

purpose effectively only if it imposes a pleading

burden on trustees rather than a defense that

subsequent transferees must spend years litigating.

4. Courts have given other reasons for assigning

the burden on particular issues to the defendant, but

none supports doing so for Section 550(b). Courts

sometimes suggest that a party bears the burden on

issues that are “peculiarly within [its] knowledge” or

to which it has “easier access to relevant information.”

E.g., Evankavitch v. Green Tree Servicing, LLC, 793

F.3d 355, 365 (3d Cir. 2015) (citations omitted). But

good faith, at least as interpreted by the court of

appeals, is an “inquiry notice” standard over which

the defendant has no special advantage—especially in

light of trustees’ access to debtors’ records and

extensive discovery powers under Rule 2004. Pet.

App. 27a; see supra at 14-15. In any event, “this ‘rule

is far from being universal’”; “‘[v]ery often one must

plead and prove matters as to which his adversary

has superior access to the proof’”; and plaintiffs

frequently bear the burden of pleading and proving

lack of good faith or bad faith. Schaffer, 546 U.S. at

60 (citations omitted); see supra at 13-15.

Courts sometimes also consider the number of

ways liability can be defeated. When a statute

provides a “numerous and diverse list of exceptions,”

18

courts may deem those “exceptions” to be affirmative

defenses because “‘fairness’” requires the defendant to

“‘give notice of a particular exception upon which it

relies’” and to plead and prove it. Nayab v. Capital

One Bank (USA), N.A., 942 F.3d 480, 495 (9th Cir.

2019) (citation omitted). But Section 550(b) is the

only exception to subsequent-transferee liability

under Section 550(a).8 And unlike cases like Nayab,

fairness here cuts the other way. Trustees who

pursue (probably innocent) subsequent transferees

should have to overcome the special protection

Congress granted to subsequent transferees.

II. THIS COURT’S REVIEW IS NEEDED NOW

The Court should not allow the decision below to

stand. The lower courts have resolved the question

presented in different ways. And resolving that

question—for this case and other bankruptcy cases—

is exceptionally important.

1. There is disagreement among the lower courts

about who bears the burden on good faith under

Section 550(b). The Third Circuit has recognized the

merit of petitioners’ position, stating that “a

substantial argument can be made in favor of placing

8

Another provision, Section 550(c), uses the language “the

trustee may not recover,” and could possibly be construed as

placing the burden on the trustee. 11 U.S.C. § 550(c). But

Section 550(c) was enacted over 15 years after Section 550(a), so

under the principles described above, it could also be construed

as a proviso on which the defendant bears the burden. See

Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 202, 108

Stat. 4106, 4121; supra at 8-9. Section 550(b) is the only

exception to Section 550(a) that was enacted at the same time as

Section 550(a). See supra at 7-12. A singular exception is clearly

neither numerous nor diverse.

19

the burden of proof on the trustee with respect to

subsequent transferees.” Bressman, 327 F.3d at 23536 & n.2. And it openly questioned a contrary Sixth

Circuit decision. See id. In that decision, the Sixth

Circuit provided no serious statutory analysis and

emphasized a bankruptcy rule over the statutory text.

IRS v. Nordic Vill., Inc. (In re Nordic Vill., Inc.), 915

F.2d 1049, 1055-56 (6th Cir. 1990), rev’d on other

grounds sub nom. United States v. Nordic Vill., Inc.,

503 U.S. 30 (1992). The majority decision drew a

forceful dissent—and the decision itself was

overturned by this Court on a different ground. See

id.; id. at 1063-64 (Kennedy, J., dissenting).

There are similarly divergent views in the

bankruptcy and district courts.9 The Second Circuit’s

claim of a “uniform[]” rule, Pet. App. 40a, rests largely

on statements made in passing and overlooks case law

going the other way.10

9

Compare Tavenner v. Smoot (In re Smoot), 265 B.R. 128, 140

(Bankr. E.D. Va. 1999) (collecting cases for the proposition that

“a defendant claiming a defense to liability under § 550(b) bears

the burden of proof”), aff’d, 257 F.3d 401 (4th Cir. 2001), cert.

denied, 534 U.S. 1116 (2002), with Citibank CA Br. 50-52

(collecting cases for the proposition that the trustee bears this

burden).

10

Most of the cases cited by the court of appeals summarily

called Section 550(b) an affirmative defense—without further

elaboration and often when the question was not at issue. See

Smith v. SIPI, LLC (In re Smith), 811 F.3d 228, 246 (7th Cir.),

cert. denied, 137 S. Ct. 103 (2016); Mano-Y&M, Ltd. v. Field (In

re Mortgage Store, Inc.), 773 F.3d 990, 994-95 (9th Cir. 2014);

Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 209 & n.8 (2d

Cir. 2014); Goldman v. Capital City Mortg. Corp. (In re Nieves),

648 F.3d 232, 237 (4th Cir. 2011); Carroll v. Tese-Milner (In re

Red Dot Scenic, Inc.), 351 F.3d 57, 58 (2d Cir. 2003) (per curiam).

20

This is an ideal vehicle to resolve the confusion.

The question of who bears the burden on good faith

under Section 550(b) has been squarely presented and

extensively considered by the parties, amici curiae,

and multiple courts below. This Court should resolve

that question once and for all.

2. The consequences of allowing the Second

Circuit’s erroneous ruling to remain on the books are

also stark. The decision below will immediately affect

dozens of Madoff-related cases involving billions of

dollars. It will impact other major bankruptcy cases

too, which are often filed in the Second Circuit.

Without the Court’s intervention, countless

subsequent transferees may be subjected to years of

costly litigation—even if, like ABN AMRO, they did

everything right and still lost hundreds of millions of

dollars. See supra at 1-2. This case deserves the

Court’s attention.

21

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted,

CHRISTOPHER R. HARRIS

MELISSA ARBUS SHERRY

THOMAS J. GIBLIN

Counsel of Record

ERIC J. KONOPKA

LATHAM & WATKINS LLP

1271 Avenue of the Americas LATHAM & WATKINS LLP

New York, NY 10020

555 Eleventh Street, NW

(212) 906-1200

Suite 1000

Washington, DC 20004

(202) 637-2200

melissa.sherry@lw.com

Counsel for Amici Curiae

February 24, 2022