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Second Circuit Affirms Important District Court’s Ruling That Payments To Madoff Investors Outside Two Years Of The Petition Date Were Shielded by § 546 (e) of the Bankruptcy Code, Which Warranted Dismissal Under FRCP 12(b)(6)

On December 8, 2014, in a long awaited decision, the United States Court of Appeals for the Second Circuit affirmed the United States District Court of the Southern District of New York’s (Rakoff, J.) judgment dismissing the trustee’s § 546 (e) claims in In re: Bernard L. Madoff Investment Securities LLC. This ruling was important to many Madoff victims because Irving H. Picard, trustee for debtor Bernard L. Madoff Securities LLC (“BLMIS”), invoking his clawback powers, sued hundreds of BLMIS customers seeking to avoid fictitious profits paid by the Madoff firm to the customers. These clawback claims fall into two categories, claims for withdrawals exceeding a customer’s net deposits in the two (2) years prior to the BLMS failure, and withdrawals exceeding net deposits in the two (2) – six (6) year time frame. Some defendant customers moved to dismiss the two (2) – six (6) year avoidance claims pursuant to 11 U.S.C. § 546 (e), which shields from recovery securities-related payments made by a stockbroker. The District Court ruled in favor of the defendant customers, holding that § 546 (e) barred any claims outside two (2) years of the petition date and dismissed those claims. The District Court certified the dismissal as a final judgment and the trustee appealed.

The dispositive issue presented to the Second Circuit on appeal was whether the payments that BLMIS made to its customers were the type of securities-related payments shielded by § 546 (e) from clawback. The Second Circuit concluded that § 546 (e) shields these transfers from avoidance because they were “made in connection with a securities contract,” and were also “settlement payment[s].” Therefore, it agreed with the District Court’s final judgment and affirmed.
Lax & Neville represents many Madoff investor victims and has been involved in the important aspects of the case since its unfortunate beginning. We have successfully settled many clawback claims in the Madoff matter and in other investor Ponzi scheme matters.

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