Picard v. Chais et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------X 	FOR PUBLICATION
In re:
SIPA LIQUIDATION
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC, 	No. 08-01789 (BRL)
Debtor. 	(Substantively Consolidated)
---------------------------------------------------------X
IRVING H. PICARD, as Trustee for the
Liquidation of BERNARD L. MADOFF
INVESTMENT SECURITIES LLC,
Adv. Pro. No. 09-1172 (BRL)
Plaintiff,
v.
ESTATE OF STANLEY CHAIS, et al.,1
Defendants.
---------------------------------------------------------X
APPEARANCES:
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, NY 10111
Telephone: (212) 589-4200
Facsimile: (212) 589-4201
By: 	David J. Sheehan
John Moscow
Marc E. Hirschfield
Oren J. Warshavsky
Seanna R. Brown
Attorneys for Plaintiff, Irving H. Picard, Trustee for the Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff
1 Defendant Stanley Chais passed away during the pendency of this action. See Suggestion of Death of Defendant
Stanley Chais (Dkt. No. 85). As a result, Stanley Chais has been substituted by the Estate of Stanley Chais, and the
caption above reflects such change. 	See Stipulation and Order Substituting Party (Dkt. No. 88). 	The complete
caption, as amended, is attached hereto as Exhibit A.
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SILLS CUMMIS & GROSS P.C.
One Rockefeller Plaza
New York, NY 10020
Telephone: 	(212) 643-7000
Facsimile: 	(212) 643-6500
By: 	Philip R. White
Andrew H. Sherman
Attorneys for Defendants Emily Chasalow, Mark Chais, Wrenn Chais, William Chais, Miri
Chais and the Entities Identified on Exhibit 1 to the Notice of Motion to Dismiss
Before: Hon. Burton R. Lifland
United States Bankruptcy Judge
MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN
PART DEFENDANTS’ PARTIAL MOTION TO DISMISS TRUSTEE’S COMPLAINT
Before the Court is the motion (the “Motion to Dismiss”) of defendants Emily Chasalow,
Mark Chais, Wrenn Chais, William Chais, Miri Chais, and other related entities (collectively, the
“Moving Defendants”) seeking to partially dismiss the complaint (the “Complaint”) of Irving H.
Picard, Esq. (the “Trustee” or “Plaintiff”), trustee for the substantively consolidated Securities
Investor Protection Act2 (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC
(“BLMIS”) and Bernard L. Madoff (“Madoff”), filed pursuant to SIPA sections 78fff(b) and
78fff-2(c)(3), sections 105(a), 502(d), 542, 544, 547, 548(a), 550(a) and 551 of the Bankruptcy
Code (the “Code”), various sections of New York Debtor and Creditor Law3 (the “NYDCL”)
and 	other 	applicable 	law 	for 	turnover, 	accounting, 	preferences, 	fraudulent 	conveyances,
damages, and objections to SIPA claims.
The Moving Defendants assert that the Complaint fails to state a claim upon which relief
can be granted pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6), made applicable
herein by Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 7012, with respect to ten
2 15 U.S.C. § 78aaa et seq. References to sections of SIPA hereinafter shall replace “15 U.S.C.” with “SIPA.”
3 N.Y. D EBT. & CRED. LAW § 270 et seq. (McKinney 2010).
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of the eleven counts asserted, and it should therefore be partially dismissed. 	The Moving
Defendants do not seek to dismiss Count Two of the Complaint, which seeks the return of $46
million in allegedly preferential transfers.
For the reasons set forth below and at oral argument, the Motion to Dismiss is
GRANTED in part and DENIED in part. 	Specifically, the Motion to Dismiss is GRANTED
with respect to Count One of the Complaint, seeking immediate turnover under section 542 of
the Code and SIPA section 78fff-2(c)(3). 	The Motion to Dismiss is DENIED with respect to
Counts Three through Eleven of the Complaint.
BACKGROUND4
The Complaint arises in connection with the infamous Ponzi scheme perpetrated by
Bernard L. Madoff for decades through his investment company, BLMIS. As recognized by the
Securities Investor Protection Corporation (“SIPC”), and as relayed in this Court’s recent
decision in Picard v. Merkin,5 “this is not a typical SIPC proceeding in which securities or cash
were on hand at the time of the failure of the brokerage house.” Letter from Stephen P. Harbeck,
President of SIPC to the Subcommittee on Capital Markets, Insurance and Government
Sponsored Enterprises at p. 6 (dated Sept. 7, 2010) [hereinafter “SIPC Letter”]. Rather, it was a
fraud of unparalleled magnitude “in which the only assets were other people’s money or assets
derived from such funds.” Id. During the course of this fraud, there were approximately 90,000
disbursements of fictitious profits to Madoff investors totaling $18.5 billion. Id. at p. 5. Due to
the longstanding nature of the Ponzi scheme, many of the customer accounts presented multiple
generational investments, requiring the Trustee to conduct a full forensic analysis of all of
4 A comprehensive discussion of the facts underlying this SIPA liquidation and Madoff’s notorious Ponzi scheme is
set forth in this Court’s March 1, 2010 net equity decision (the “Net Equity Decision”). See Sec. Investor Prot.
Corp. v. BLMIS (In re BLMIS), 424 B.R. 122, 125–33 (Bankr. S.D.N.Y. 2010).
5 Picard v. Merkin (In re BLMIS), 440 B.R. 243 (Bankr. S.D.N.Y. 2010).
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BLMIS’s books and records, dating back to at least the early 1980s. Id. at p. 7. As of February
18, 2011, the Trustee has determined 16,267 claims, denied 2,740 claims (and 10,731 third party
claims), and allowed 2,403 claims in the amount of $6,854,549,449.81. 	Moreover, SIPC has
committed $791,149,690.14 in SIPC advances. 	See http://www.madofftrustee.com (last visited
Feb. 23, 2011). 	The Trustee has reviewed, and continues to review, millions of documents to
determine the thousands of customer claims filed in this SIPA liquidation. SIPC Letter at p. 7.
I. 	THE M OVING DEFENDANTS
In the instant Complaint, the Trustee seeks to recover over $1 billion in preferential
payments and fraudulent transfers from the Moving Defendants, Stanley Chais, and other non-
moving defendants (collectively, the “Defendants”).
Each 	of 	the 	Moving 	Defendants 	is 	connected 	with 	defendant 	Stanley 	Chais,6 a
sophisticated investment advisor who has been closely associated with Madoff since the 1970s.
Prior to Madoff’s arrest, Stanley Chais invested in BLMIS for over three decades through more
than 60 entity and/or personal accounts. 	From his investments with BLMIS, Stanley Chais
purportedly withdrew hundreds of millions of dollars of other investors’ money, funneling much
of it to his children and their spouses, his grandchildren, and various entities he created for the
benefit of his family. He is the settlor and trustee for many of the trust defendants named in the
Complaint, as well as the general partner and investment advisor to defendants The Brighton
Company, The Lambeth Company, and The Popham Company (the “Chais Funds”), who have
not moved to dismiss the Complaint. As the general partner of the Chais Funds, which invested
heavily in BLMIS, Stanley Chais collected management fees equal to 25% of each Chais Funds’
entire net profit for every calendar year in which profits exceeded 10%, which has occurred
6 Stanley Chais did not move to dismiss the complaint, but rather answered and filed counterclaims against the
Trustee. The Trustee filed a motion to dismiss these counterclaims, which was granted in its entirety on November
30, 2010. See Picard v. Chais, et al. (In re BLMIS), 440 B.R. 282 (Bankr. S.D.N.Y. 2010) (Dkt. No. 86).
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every calendar year since at least 1996. The Trustee asserts that by virtue of, inter alia, his close
and personal relationship with Madoff and expertise as an investment advisor, Stanley Chais
knew or should have known that BLMIS was predicated on fraud.
The Moving Defendants consist of two groups, all of whom held accounts allegedly
directed and controlled by Stanley Chais: 	(1) family members of Stanley Chais and (2) related
entities of Stanley Chais. 	The family members include Stanley Chais’s daughter, Emily
Chasalow,7 his two sons, Mark Chais and William Chais, and their wives, Miri Chais8 and Wren
Chais, respectively (the “Family Defendants”). 	The related entities include trusts and other
entities that Stanley Chais purportedly created for the benefit of his family (the “Entity
Defendants”).9 Aside from Miri Chais, the Family Defendants are trustees and/or directors of
these Entity Defendants. 	The Trustee asserts that all of the Moving Defendants were clients of
the investment advisory business (the “IA Business”) and maintained the BLMIS accounts
highlighted in Exhibit A to the Complaint (the “IA Accounts”). 	Compl. at ¶ 93; see also id. at
Ex. A.
7 Defendant Emily Chasalow is married to defendant Michael Chasalow, who filed a separate motion to dismiss the
Complaint. The parties have consented by stipulation entered January 18, 2011 that the Trustee will amend the
Complaint as to Michael Chasalow, at which time Michael Chasalow’s motion to dismiss will be deemed withdrawn
without prejudice. See Stipulation and Order Granting Leave to File Amended Complaint (Dkt. No. 89).
8 Defendant Miri Chais also separately filed a motion to dismiss before this Court, which was denied in its entirety
on November 30, 2010. See Picard v. Chais, et al., (In re BLMIS), 440 B.R. 274 (Bankr. S.D.N.Y. 2010) (denying
motion to dismiss for lack of personal jurisdiction) (Dkt. No. 87).
9 The Entity Defendants are: Unicycle Trading Company, Unicycle Corporation, Emily Chais Trust No. 2, Emily
Chais Trust No. 3, Emily Chais 1983 Trust, Emily Chais Issue Trust No. 1, Emily Chais Issue Trust No. II,
Benjamin Paul Chasalow Transferee Trust No.1, Benjamin Paul Chasalow 1999 Trust, Rachel Allison Chasalow
Transferee Trust No. 1, Rachel Allison Chasalow 1999 Trust, Justin Robert Chasalow Transferee Trust No. 1, Justin
Robert Chasalow 1999 Trust, Onondaga, Inc. Pension Plan, William Frederick Chais Trust No. 2, William Frederick
Chais Trust No. 3, William Frederick Chais 1983 Trust, William Frederick Chais Issue Trust No. I, William
Frederick Chais Issue Trust No. II, Madeline Chais Transferee Trust No. I, Madeline Celia Chais 1992 Trust, Chloe
Frances Chais Transferee Trust No. I, Chloe Frances Chais 1994 Trust, Jonathan Chais Transferee Trust No. I,
Jonathan Wolf Chais 1996 Trust, Mark Hugh Chais Trust No. 2, Mark Hugh Chais Trust No. 3, Mark Hugh Chais
1983 Trust, Mark Hugh Chais Issue Trust No. I, Mark Hugh Chais Issue Trust No. II, Tali Chais Transferee Trust
No. I, Tali Chais 1997 Trust, Ari Chais Transferee Trust No. I, Ari Chais 1999 Trust, 1994 Trust for the Children of
Stanley and Pamela Chais, 1996 Trust for the Children of Stanley and Pamela Chais, William & Wrenn Chais 1994
Family Trust, 1999 Trust for the Grandchildren of Stanley and Pamela Chais, Chais Investments, Ltd., Onondaga,
Inc., Chais Management, Ltd., Chais Management, Inc., and Chais Venture Holdings.
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II. 	THE COMPLAINT
The Complaint, filed on May 1, 2009, seeks to avoid and recover preferential and
fraudulent transfers made to or for the benefit of the Defendants as initial or subsequent
transferees pursuant to sections 544, 547, 548, 550, and 551 of the Bankruptcy Code (the
“Code”) and various sections of New York Debtor and Creditor Law (the “NYDCL”). 	The
Complaint additionally seeks turnover and accounting under section 542 of the Code and SIPA
section 78fff-2(c)(3) and objects to Defendants’ SIPA claims, which the Trustee asserts should
be disallowed under section 502(d) of the Code and because they are not supported by the books
and records of BLMIS.
The following facts alleged in the Complaint, presented in the light most favorable to the
Trustee, are assumed to be true for purposes of the Motion to Dismiss. 	Between December 1,
1995 and December 11, 2008 (the “Filing Date”),10 BLMIS allegedly made transfers to the
Defendants in excess of $1 billion (the “Transfers”). 	Of these Transfers, $804 million was
transferred within six years of the Filing Date (the “Six Year Transfers”); $377 million was
transferred within two years of the Filing Date (the “Two Year Transfers”); and $46 million was
transferred within ninety days of the Filing Date (the “Ninety Day Transfers”). 	The particular
details of these transactions from BLMIS to the Defendants as initial transferees—including the
date, transferee, and amount transferred—are highlighted in Exhibit B to the Complaint (“Exhibit
B”). 	The Complaint then provides that “some or all of the[se] Transfers were subsequently
transferred . . . to Defendant Chais and/or other Defendants in the form of payment of
commissions or fees, transfers from one account to another, or other means” (collectively, the
“Subsequent Transfers”). See Compl. at ¶ 166.
10 See SIPA § 78lll(7)(B) (defining the “Filing Date”).
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The Trustee asserts that the Moving Defendants, independently or through Stanley Chais,
knew or should have known that BLMIS was predicated on fraud and failed to exercise
reasonable due diligence into BLMIS. 	In support of this assertion, the Trustee alleges that the
Moving Defendants were on notice of, inter alia, the following indicia of irregularity and fraud:
(1) the Moving Defendants’ accounts, directed and controlled by Stanley Chais, received
fantastical rates of return from 1996 through 2007, including 125 instances of returns exceeding
50%, more than 35 instances of returns exceeding 100%, and one instance of returns exceeding
300%; 	(2) losses were manufactured after the dates when the subject transactions purportedly
took place, including a purchase and sale of 125,000 shares of Micron Technology Inc. for a loss
of more than $1 million appearing for the first time on a date 150 days after the purported
purchase; (3) purported losses were generally remedied in subsequent periods with monumental
rates of return that far outpaced the market, including a rebound in one Moving Defendant’s
account from negative 89% returns in 2003 to positive 165% returns the following year; (4)
financial industry press reports questioned the legitimacy of BLMIS and Madoff and their ability
to achieve promised consistent returns, and many banks and advisors refused to deal with
BLMIS and Madoff; (5) BLMIS lacked transparency to investors, regulators, and other outside
parties by failing to provide customers with real-time online access to their accounts and
excluding an independent custodian of securities; and (6) BLMIS, one of the world’s largest
hedge funds, was supposedly audited by Friehling & Horowitz, an accounting firm with only
three employees, one of whom was semi-retired, with offices located in a strip mall.11 Compl. at
11 David Friehling is the subject of a criminal information filed by the United States alleging, inter alia, securities
fraud. 	See Friehling Information, United States v. Friehling, No. 09-CR-0700 (AKH) (S.D.N.Y. July 17, 2009)
(Dkt. No. 14). He has since pled guilty, and sentencing has been adjourned to March 18, 2011 due to continuing
cooperation. Id. at Dkt. No. 43.
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¶¶ 103–04.
STANDARD OF REVIEW – MOTION TO DISMISS UNDER RULE 12(b)(6)
Rule 12(b)(6) allows a party to move to dismiss a cause of action for “failure to state a
claim upon which relief can be granted.” FED. R. CIV. P. 12(b)(6). When considering a motion
to dismiss under Rule 12(b)(6), a court must accept all factual allegations in the complaint as true
and draw all reasonable inferences in the plaintiff’s favor. 	Ashcroft v. Iqbal, 129 S. Ct. 1937,
1949 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555–56 (2007); E.E.O.C. v. Staten Island
Sav. Bank, 207 F.3d 144, 148 (2d Cir. 2000).
To survive a motion to dismiss, a pleading must contain a “short and plain statement of
the claim showing that the pleader is entitled to relief.” 	FED. R. CIV. P. 8(a)(2); FED. R. B ANKR.
P. 7008. 	However, a recitation of the elements of the cause of action, supported by mere
conclusory statements, is insufficient. 	Iqbal, 129 S. Ct. at 1949 (“[T]he tenet that a court must
accept 	as 	true 	all 	of 	the 	allegations 	contained 	in 	a 	complaint 	is 	inapplicable 	to 	legal
conclusions.”). 	Rather, “only a complaint that states a plausible claim for relief survives a
motion to dismiss.” Id. at 1950. A claim is facially plausible where “the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” 	Id. at 1949. 	In determining plausibility, this Court must “draw on its
judicial experience and common sense,” id. at 1950, to decide whether the factual allegations
“raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555.
In contrast, allegations of fraud are held to the higher pleading standard of Rule 9(b),
requiring a party to “state with particularity the circumstances constituting fraud.” FED. R. CIV.
P. 9(b); F ED. R. BANKR. P. 7009(b). 	Rule 9(b) permits, however, that “[m]alice, intent,
knowledge, and other conditions of a person’s mind” be pled generally. FED. R. CIV. P. 9(b). In
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applying this heightened pleading requirement where applicable, this Court is mindful of the
vastness and complexity of the Trustee’s investigation of the Madoff Ponzi scheme, and the
disadvantage the Trustee faces in pleading fraud against multiple defendants. 	It has been held
that courts will take a “liberal” approach in construing allegations of actual fraud asserted by a
bankruptcy trustee on behalf of all creditors of an estate. Pereira v. Grecogas Ltd., et al. (In re
Saba Enters., Inc.), 421 B.R. 626, 640 (Bankr. S.D.N.Y. 2009); Gredd v. Bear, Stearns Sec.
Corp. (In re Manhattan Inv. Fund Ltd.), 310 B.R. 500, 505 (Bankr. S.D.N.Y. 2002), leave to
appeal denied by 288 B.R. 52 (S.D.N.Y. 2002). 	Courts have found that “[g]reater liberality in
the pleading of fraud is particularly appropriate in bankruptcy cases, because . . . it is often the
trustee, a third party outsider to the fraudulent transaction, that must plead the fraud on
secondhand knowledge for the benefit of the estate and all of its creditors.” Sec. Investor Prot.
Corp. v. Stratton Oakmont, Inc., 234 B.R. 293, 310 (Bankr. S.D.N.Y. 1999) (citing Atlanta
Shipping Corp., Inc. v. Chem. Bank, 631 F. Supp. 335, 348 (S.D.N.Y. 1986), aff’d 818 F.2d 240
(2d Cir. 1987)). 	Consistent with the foregoing, as the Trustee is pleading from secondhand
knowledge, “allegations of circumstantial evidence are sufficient to establish fraudulent intent.”
In re Saba Enters., Inc., 421 B.R. at 643. Moreover, as “the trustee’s lack of personal knowledge
is compounded with complicated issues and transactions which extend over lengthy periods of
time, the trustee’s handicap increases,” and he should therefore be afforded “even greater
latitude.” Stratton Oakmont, Inc., 234 B.R. at 310 (citing A.I.A. Holdings, S.A. v. Lehman Bros.,
Inc., No. 97-CIV-4978 (LMM), 1998 WL 159059, at *6 (S.D.N.Y. Apr. 1, 1998)).
DISCUSSION
I. 	THE TRUSTEE H AS SUFFICIENTLY PLED ACTUAL FRAUD P URSUANT TO THE CODE AND
THE NYDCL
The Trustee has sufficiently pled Count Three of the Complaint pursuant to sections
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548(a)(1)(A), 550 and 551 of the Code and Counts Five and Nine pursuant to sections 276,
276-a, 278, and 279 of the NYDCL, in conjunction with sections 544, 550 and 551 of the Code,
to avoid and recover actual fraudulent transfers.12
A. THE TRUSTEE’ S C LAIMS FOR ACTUAL FRAUD UNDER SECTIONS 548(a)(1)(A),
550 AND 551 OF THE CODE ARE SUFFICIENTLY PLED
Under the Code, “the trustee may avoid any transfer . . . of an interest of the debtor in
property . . . made or incurred on or within 2 years before the date of the filing of the petition, if
the debtor . . . made such transfer . . . with actual intent to hinder, delay or defraud.” 11 U.S.C. §
548(a)(1)(A). To adequately plead such a claim, the complaint must state with particularity the
factual circumstances constituting fraud under Rule 9(b). Am. Tissue, Inc. v. Donaldson, Lufkin
& Jenrette Sec. Corp., 351 F. Supp. 2d 79, 106–07 (S.D.N.Y. 2004). To do this, the complaint
must allege “(1) the property subject to the transfer, (2) the timing and, if applicable, frequency
of the transfer and (3) the consideration paid with respect thereto.” In re Saba Enters., Inc., 421
B.R. at 640. In contrast, fraudulent intent may be pled generally under Rule 9(b). FED. R. CIV.
P. 9(b). Under the Code, the trustee must show such intent on the part of the debtor-transferor.
11 U.S.C. § 548(a)(1)(A) (requiring a showing by the trustee that “the debtor . . . made such
transfer . . . with actual intent to hinder, delay, or defraud”) (emphasis added); Andrew Velez
Constr., Inc. v. Consolidated Edison Co. of N.Y., Inc. (In re Andrew Velez Constr., Inc.), 373
B.R. 262, 269 (Bankr. S.D.N.Y. 2007); Gredd v. Bear Stearns Sec. Corp. (In re Manhattan Inv.
Fund Ltd.), 310 B.R. 500, 505 (Bankr. S.D.N.Y. 2002) (“The operative requirement for a transfer
12 A SIPA trustee’s authority to utilize these sections of the Code and the NYDCL derives from SIPA sections
78fff(b) and 78fff-2(c)(3). SIPA sectoin 78fff(b) provides that “[t]o the extent consistent with the provisions of this
chapter, a liquidation proceeding shall be conducted in accordance with, and as though, it were being conducted
under chapters 1, 3, and 5 and subchapters I and II of chapter 7 of title 11.” SIPA § 78fff(b). Similarly, SIPA
section 78fff-2(c)(3) allows a SIPA trustee to utilize the avoidance powers enjoyed by a bankruptcy trustee:
“Whenever customer property is not sufficient to pay in full the claims set forth in subparagraphs (A) through (D) of
paragraph (1), the trustee may recover any property transferred by the debtor which, except for such transfer, would
have been customer property if and to the extent that such transfer is voidable or void under the provisions of Title
11.” SIPA § 78fff-2(c)(3).
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to be avoided under this section is the debtor’s actual fraudulent intent.”). Thus, the intent of the
transferee is irrelevant for purposes of pleading under section 548(a)(1)(A) of the Code.
Silverman v. Actrade Capital, Inc. (In re Actrade Fin’l Tech. Ltd.), 337 B.R. 791, 808 (Bankr.
S.D.N.Y. 2005).
Contrary to the Moving Defendants’ position, the Trustee has pled with particularity the
identity of the Two Year Transfers and the Six Year Transfers sought to be avoided in
accordance with Rule 9(b). 	Exhibit B to the Complaint specifically identifies the date, account
number, transferor, transferee, method of transfer, and amount of each of the Transfers that the
Trustee has thus far identified. 	See Compl. at Ex. B. 	In addition, the Trustee alleges that the
Transfers represent redemptions of both principal and fictitious profits. 	Id. at ¶ 106. 	The Six
Year Transfers total $804 million, the Two Year Transfers total $377 million, and the Ninety
Day Transfers total $46 million.13 Compl. at ¶¶ 108–10. 	Therefore, the Trustee’s allegations,
together with Exhibit B, sufficiently identify the specific Transfers sought to be avoided in
accordance with Rule 9(b).
Further, the Moving Defendants do not dispute that the Trustee has sufficiently alleged
the intent of the transferor, BLMIS, for purposes of section 548(a)(1)(A) of the Code. It is now
well recognized that the existence of a Ponzi scheme establishes that transfers were made with
the intent to hinder, delay and defraud creditors. 	See, e.g., In re Bayou Group, LLC, 439 B.R.
284, 306 n.19 (S.D.N.Y. 2010) (“[W]here a Ponzi scheme exists, there is a presumption that
transfers were made with the intent to hinder, delay and defraud creditors.”); Bear, Stearns Sec.
Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1, 8–14 (S.D.N.Y. 2007)
(“Manhattan Inv. II”). The breadth and notoriety of the Madoff Ponzi scheme leave no basis for
13 Notably, the Moving Defendants have not sought to dismiss Count Two of the Complaint seeking the return of the
allegedly preferential Ninety Day Transfers, totaling $46 million.
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disputing the application of the Ponzi scheme presumption to the facts of this case, particularly in
light of Madoff’s criminal admission. See Compl. at ¶ 1; Memorandum of Law in Support of the
Defendants’ Partial Motion to Dismiss (“Defs’ Partial MTD”) at p. 5; see also Manhattan
Investment II, 397 B.R. at 12 (relying on transferor’s criminal guilty plea to establish the
existence of a Ponzi scheme); see also Johnson v. Neilson (In re Slatkin), 525 F.3d 805, 814 (9th
Cir. 2008) (“[A] debtor’s admission, through guilty pleas and a plea agreement admissible under
the Federal Rules of Evidence, that he operated a Ponzi scheme with the actual intent to defraud
his 	creditors 	conclusively 	establishes 	the 	debtor’s 	fraudulent 	intent 	under 	11 	U.S.C. 	§
548(a)(1)(A).”). 	Accordingly, BLMIS’s fraudulent intent is established as a matter of law for
purposes of the Trustee’s Code-based actual fraudulent transfer claims.
Accordingly, the Trustee has sufficiently pled actual fraud under the Code, and the
Motion to Dismiss Count Three is denied.
B. THE TRUSTEE H AS SUFFICIENTLY ALLEGED ACTUAL FRAUD U NDER THE
NYDCL
Under the NYDCL, a trustee may avoid any “conveyance made . . . with actual intent, as
distinguished from intent presumed in law, to hinder, delay, or defraud either present or future
creditors.” 	NYDCL § 276. 	As under the Code, to adequately plead a claim to recover actual
fraudulent transfers under the NYDCL, the Complaint must state with particularity the factual
circumstances constituting fraud under Rule 9(b). 	Am. Tissue, Inc. v. Donaldson, Lufkin &
Jenrette Sec. Corp., 351 F. Supp. 2d 79, 106, 107 (S.D.N.Y. 2004). As a preliminary matter, for
the reasons set forth above in Section I, A, this Court finds that the Trustee has identified the
Transfers sought to be avoided with particularity in accordance with Rule 9(b) and fraudulent
intent on the part of BLMIS, the transferor, has been established by virtue of the Ponzi scheme
presumption.
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Unlike under the Code, under the NYDCL, courts differ as to whether the fraudulent
intent of both the transferor and the transferee must be pled. 	While some courts have held that
section 276 requires a plaintiff to show intent to “hinder, delay, or defraud” simply on the part of
the transferor, see, e.g., Sharp Int’l Corp. v. State St. Bank and Trust Co. (In re Sharp Int'l
Corp.), 403 F.3d 43, 56 (2d Cir. 2005) (citing HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1059
n.5 (2d Cir. 1995)); Geron v. Schulman (In re Manshul Constr. Corp.), No. 97-CIV-8851 (JGK),
2000 WL 1228866, at *46 (S.D.N.Y. Aug. 30, 2000) (“It is not necessary under DCL § 276 to
show fraudulent intent on the part of the transferee.”); Le Café Crème, Ltd. v. Le Roux (In re Le
Café Crème, Ltd.), 244 B.R. 221, 239 (Bankr. S.D.N.Y. 2000). 	The Moving Defendants’
position that a plaintiff must also plead the transferee’s fraudulent intent is likewise supported,
see, e.g., Nisselson v. Softbank AM Corp. (In re MarketXT Holdings Corp.), 361 B.R. 369, 396
(Bankr. S.D.N.Y. 2007) (“[the debtor] must plead . . . the intent of the transferor and transferee
[]under NYDCL[].”); Picard v. Taylor (In re Park South Sec., LLC), 326 B.R. 505, 517 (Bankr.
S.D.N.Y. 2005) (“[U]nder section 276 of the N.Y. D.C.L . . . the Trustee must establish both the
debtor’s and the transferee’s actual fraudulent intent.”). Assuming that a transferee’s intent must
also be pled under section 276 of the NYDCL, the Court finds that the Complaint contains
circumstantial evidence of fraudulent intent on the part of the Moving Defendants sufficient to
raise the curtain for discovery into the Trustee’s claims.
i. 	THE TRUSTEE H AS SUFFICIENTLY PLED FRAUDULENT I NTENT U NDER
THE NYDCL ON THE P ART OF THE FAMILY DEFENDANTS
To adequately plead intent, the Trustee must allege “facts that give rise to a strong
inference of fraudulent intent.” Musicland Holding Corp. v. Best Buy Co., Inc. (In re Musicland
Holding Corp.), 398 B.R. 761, 773 (Bankr. S.D.N.Y. 2008) (quoting Shields v. Citytrust
Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)); Silverman v. K.E.R.U. Realty Corp. (In re
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Allou Distrib., Inc.), 379 B.R. 5, 17 (Bankr. E.D.N.Y. 2007). 	Such facts may either (1)
demonstrate that defendants had both the motive and the opportunity to commit fraud; or (2)
constitute strong circumstantial evidence of conscious misbehavior or recklessness.14 Official
Comm. Of Asbestos Claimants of G-I Holding, Inc. v. Heyman, 277 B.R. 20, 36 (S.D.N.Y. 2002).
The facts alleged in the Complaint “give rise to a strong inference” of the Family
Defendants’ “motive and . . . opportunity to commit fraud.” In re Saba Enters., Inc., 421 B.R. at
642. 	With regard to motive, the Family Defendants were receiving “fantastical,” implausibly
high and consistent rates of return, as well as millions of dollars in transfers of fictitious profits
by continuing to participate in the fraud. Compl. at ¶ 103(b), Ex. B. Specifically, between 1996
and 2007, while the S&P 500 saw average annual returns of 10.72% and 52 months of negative
returns, the Family Defendants, along with the Entity Defendants, “enjoyed more than 35
instances of supposed annual returns of more than 100% and more than 125 in which the annual
returns purportedly exceeded 50%” with an average annual rate of return of over 39%. Compl.
at ¶ 103(a), (b). In fact, the Family Defendants even “received drastically higher rates of returns
than those reported for [other accounts Stanley Chais managed] during the same time periods.”
Id. at ¶ 103(b). 	Moreover, the Family Defendants reported anomalous “losses,” sometimes
purporting to lose almost the entire value of their accounts with a negative 95% annual rate of
return, which were allegedly manufactured to provide significant tax benefits. 	See id. at ¶
103(d).
14 This two-prong test is commonly applied to analyze scienter in securities fraud actions, but the “same standard
has been applied in [the Second] Circuit to non-securities fraud claims.” 	In re Musicland, 398 B.R. at 774 n.7
(applying the two-prong test to establish fraudulent intent under section 544 of the Code and applicable state law);
see also Serova v. Teplen, No. 05-CIV-6748 (HB), 2006 WL 349624, at *8 (S.D.N.Y. Feb. 16, 2006) (“This Circuit
applies the same [two-prong] standard to pleading fraudulent intent under common law fraud as to pleading scienter
in securities fraud.”); G-I Holding, Inc., 277 B.R. at 36–37 (applying the two-prong test to establish fraudulent intent
under section 276 of the NYDCL); In re Saba Enters., Inc., 421 B.R. at 641–42 (applying the two-prong test to
establish fraudulent intent under section 548(a)(1)(A) of the Code).
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Additionally, with regard to opportunity, the Family Defendants had a unique opportunity
to benefit from Madoff’s fraud by virtue of their strong familial ties to Stanley Chais, who was
closely associated with Madoff. 	The Family Defendants are members of Stanley Chais’s
immediate family and innermost circle, consisting of his wife, his three children and their
respective spouses. 	Stanley Chais completely controlled their accounts for “his personal
interests and those of [the Family Defendants].” 	Compl. at ¶ 92. 	In turn, Stanley Chais was
“closely associated with Madoff on both a business and social level since at least the 1970s”—so
much so that Stanley Chais’s telephone number was the first speed dial entry on a BLMIS
telephone. 	Compl. at ¶¶ 33, 99. 	Stanley Chais thereby “enjoyed unusually intimate access to
Madoff, allowing him an opportunity to gain special access to extensive information about the
operations of BLMIS.” 	Id. at 99. 	In light of the foregoing, it is plausible that the Family
Defendants, who were closely related and connected to Stanley Chais and whose accounts were
controlled by him, likewise had special access to inside information about BLMIS, and thus an
exceptional opportunity to participate in, and benefit from, the fraudulent scheme.
While motive and opportunity are sufficient to infer fraudulent intent, the allegations in
the Complaint additionally support a finding of “conscious misbehavior or recklessness.” In re
Saba Enters., Inc., 421 B.R. at 642. 	The allegations in the Complaint, accepted as true,
demonstrate that Stanley Chais, who earned substantial fees in connection with his management
of the Family Defendants’ accounts, was consciously aware of the fraud. 	See Compl. at ¶ 97.
Despite his sophisticated knowledge as an investment advisor, Stanley Chais, inter alia, (i)
instructed Madoff to backdate trades and manufacture account losses for tax purposes; (ii)
actively concealed BLMIS’s role as money manager; (iii) and failed to investigate numerous
indicia of fraud, including consistent and astronomical rates of return and BLMIS’s lack of
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transparency. See Compl. at ¶¶ 99, 103, 104. Through their close familial ties to Stanley Chais,
who controlled their accounts, it is plausible that the Family Defendants were similarly aware
that BLMIS was predicated on fraud.
Accordingly, assuming the NYDCL requires it, the Trustee has sufficiently pled the
Family 	Defendants’ 	fraudulent 	intent 	such 	that 	discovery 	into 	the 	Trustee’s 	claims 	is
warranted.15
ii. 	THE TRUSTEE H AS SUFFICIENTLY PLED FRAUDULENT I NTENT U NDER
THE NYDCL O N THE P ART OF THE ENTITY D EFENDANTS
The Trustee has sufficiently pled the fraudulent intent of the Entity Defendants, which
include corporations, trusts, and partnerships.
The 	Trustee 	has 	sufficiently 	alleged 	an 	agency 	relationship 	between 	the 	Entity
Defendants and Stanley Chais, such that Stanley Chais’s alleged bad faith knowledge can be
imputed to the Entity Defendants.16 Based on principles of New York agency law, the fraudulent
15 Many courts, including those in this district, accept the existence of “badges of fraud” as a means of alleging
intent based on circumstantial evidence. See In re Saba Enters., Inc., 421 B.R. at 643; Picard v. Taylor (In re Park
South Sec., LLC), 326 B.R. 505, 518 (Bankr. S.D.N.Y. 2005). The badges include: (1) the lack or inadequacy of
consideration; (2) the family, friendship or close associate relationship between the parties; (3) the retention of
possession, benefit or use of the property in question; (4) the financial condition of the party sought to be charged
both before and after the transaction in question; (5) the existence or cumulative effect of a pattern or series of
transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of
suits by creditors; (6) the general chronology of the event and transactions under inquiry; (7) a questionable transfer
not in the usual course of business; and (8) the secrecy, haste, or unusualness of the transactions. In re Saba Enters.,
421 B.R. at 643. The existence of several badges constitutes “clear and convincing evidence of actual intent.” Id. at
644 (quoting Silverman v. Actrade Capital, Inc. (In re Actrade Fin. Techs. Ltd.), 337 B.R. 791, 809 (Bankr.
S.D.N.Y. 2005)). In addition to the circumstantial evidence of fraudulent intent discussed above, at least badges (1),
(2), and (8) are present here. With respect to the first badge, and as discussed more fully in Section III, the Trustee
has successfully pled that the Transfers lacked “reasonably equivalent value” and “fair consideration.” 	In
connection with the second badge, the Moving Defendants had a close association with Madoff and BLMIS through
Stanley Chais. Last, with regard to the eighth badge, every transfer was unusual and secretive in that the Transfers
were made in the context of a Ponzi scheme. It appears, however, that the badges of fraud are designed to establish
the fraudulent intent of a transferor, rather than a transferee, and thus are not necessarily applicable. In any event,
the Trustee has adequately pled that the Family Defendants (1) had motive and incentive to commit fraud and (2)
displayed conscious misbehavior or recklessness, and thus the Court need not make a finding with respect to these
badges.
16 The Trustee has also adequately pled that the Entity Defendants are plausibly the alter egos of Stanley Chais, who
“dominated” and used them as a mere instrument to facilitate his personal interests and those of his family members.
Compl. at ¶ 92. Accordingly, Stanley Chais and the Entity Defendants may be treated as one unit for purposes of
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knowledge of an officer or director can be imputed to the corporate entity he controls. 	See
S.E.C. v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972) (imputing
individual’s knowledge of securities law violations to corporate entity); Bondi v. Bank of
America (In re Parmalat), 383 F. Supp. 2d 587, 597 (S.D.N.Y. 2005) (“The acts performed and
knowledge acquired by a corporate officer or agent are imputed to the corporation where the
officer or agent was acting within the scope of his or her employment.”). Similarly, a trust can
be attributed with the knowledge of the individual or entity by which it is controlled or
dominated. S.E.C. v. Ballesteros Franco, 253 F. Supp. 2d 720, 730 (S.D.N.Y. 2003) (“The Trust
defendants stand in the same position as those corporations that have been held liable for
securities fraud based on the knowledge attributed to them from those who controlled them.”).
Likewise, the knowledge of a general partner can be imputed to the limited partnership. 	See
N.Y. P’ SHIP LAW § 23 (McKinney 2010) (titled “Partnership Charged With Knowledge Of Or
Notice To Partner”); Franco v. English, 210 A.D.2d 630, 635 (N.Y. App. Div. 1994), rev’d on
other grounds, 620 N.Y.S.2d 156. 	These principles are “consistent with the self-evident
proposition that a corporation [or entity] can act only through the actions . . . 	of its agents.”
Ballesteros Franco, 253 F. Supp. 2d at 729.
Here, the Entity Defendants can be charged with the fraudulent knowledge of Stanley
Chais. 	In addition to properly alleging that Stanley Chais served as trustee, officer, director,
and/or general partner of the Entity Defendants, see, e.g., Compl. at ¶¶ 33, 56, 58, 59, 100, the
Trustee also alleges that Stanley Chais personally established the Entity Defendants for his
benefit and the benefit of his family members and functioned as “principal and/or directed and
controlled the [Entity Defendants]” with “unlimited access to and control of the funds” in the
determining the sufficiency of the Trustee’s allegations. S. New England Tel. Co. v. Global NAPs Inc., 624 F.3d
123, 147 (2d Cir. 2010). (“[O]nce alter ego status is established, ‘the alter egos are treated as one entity’ for
purposes of . . . liability.”).
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Entity Defendants’ IA Accounts, Compl. at ¶¶ 92, 100, 101; see, e.g., Ballesteros Franco, 253 F.
Supp. 2d at 729–30 (imputing defendant’s knowledge of fraud to trust defendants where
defendant established trusts for the benefit of his close relatives and exerted control over trust
defendants). In particular, Stanley Chais reviewed and notated customer statements, directed the
purchase and sale of securities, transferred funds and directed payments to and among various
Entity Defendants, and communicated with, and provided direction to, BLMIS. Compl. at ¶ 101.
In light of Stanley Chais’ connection with the Entity Defendants, it is plausible that an agency
relationship existed such that the Entity Defendants can be charged with Stanley Chais’s intimate
knowledge of the Ponzi scheme. See In re S. African Apartheid Litig., 617 F. Supp. 2d 228, 273
(S.D.N.Y. 2009) (“[T]he question is not whether [the trustee] ha[s] proved the existence of an
agency relationship, merely whether [he] should have the chance to do so.”) (quoting In re
Parmalat Sec. Litig., 375 F. Supp. 2d 278, 294 (S.D.N.Y. 2005)). 	Accordingly, discovery is
warranted to further explore these relationships.17
In light of the foregoing, assuming such is required by the NYDCL, the Trustee has
sufficiently pled the fraudulent intent of the Entity Defendants under Rule 9(b).
II. 	THE TRUSTEE H AS SUFFICIENTLY PLED CONSTRUCTIVE F RAUD PURSUANT TO THE
CODE AND THE NYDCL
The Trustee has sufficiently pled Count Four of the Complaint pursuant to sections
548(a)(1)(B), 550 and 551 of the Code and Counts Six, Seven, and Eight pursuant to sections
17 It is plausible that the Entity Defendants can also be charged with the fraudulent intent of the Family Defendants,
who, alongside Stanley Chais, served as the Entity Defendants’ trustees, officers, directors, and/or general partners.
See Compl. at ¶ 100 (“The [Entity Defendants] are entities controlled or managed by Stanley Chais together with
one or more [Family Defendants],” who were “trustees, officers and/or directors of [the Entity Defendants].”). As
established above, the Court finds that the Trustee sufficiently pled fraudulent intent on the part of the Family
Defendants. See supra Section I, B, i. Based on the agency law principles set forth above, the Entity Defendants
can, in turn, be charged with the fraudulent knowledge held by the Family Defendants, yet another avenue ripe for
exploration through discovery.
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273–275, 278, and/or 279 of the NYDCL, in conjunction with sections 544, 550, 551, and 1107
of the Code, to avoid and recover transfers on the basis that they were constructively fraudulent.
A. The Trustee’s Constructive Fraud Claims Under the Code Are Adequately
Pled
To prevail on a constructive fraud claim, the Trustee must show, inter alia, that the
debtor, BLMIS, did not receive “reasonably equivalent value” for the transfer. 	11 U.S.C. §
548(a)(1)(B)(i). The heightened federal pleading standard for allegations of fraud does not apply
to a complaint to avoid transfers as constructively fraudulent. See Silverman v. Actrade Capital,
Inc. (In re Actrade Fin. Techs. Ltd.), 337 B.R. 791, 801–02 (Bankr. S.D.N.Y. 2005).
The Moving Defendants argue that the Trustee’s constructive fraudulent transfer claims
fail as a matter of law because BLMIS received reasonably equivalent value. 	They base their
argument on caselaw standing for the proposition that each investor in a fraudulent investment
scheme holds a claim for fraudulent inducement against the debtor, entitling the investor to
restitution of its principal investment. 	These restitution claims constitute antecedent debts.
Under the Code, satisfaction of an antecedent debt constitutes value. 	11 U.S.C. § 548(d)(2)(A)
(“‘[V]alue’ means property, or satisfaction or securing of a present or antecedent debt of the
debtor . . . .”). 	Investors’ redemptions up to the amount of their principal satisfy the debtor’s
restitution claim debts, and thus constitute value to the debtor. 	Here, the Moving Defendants
posit that they “have a claim against BLMIS for restitution of the principal sums entrusted to the
scheme,” which constitutes value. 	Defs’ Partial MTD at p. 21. 	In addition, they maintain that
the 	Complaint 	contains 	“no 	allegations 	that 	any 	of 	the 	Defendants’ 	accounts 	received
distributions from BLMIS in excess of that principal sum.” 	Defs’ Partial MTD at p. 22. 	On
these grounds, the Moving Defendants contend that the Trustee’s constructive fraudulent transfer
claims must fail as a matter of law.
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First, the Moving Defendants are not entitled to restitution of their principal, as the
Trustee has sufficiently alleged that they are not “innocent” investors. 	Only innocent investors
who reasonably believed that they were investing in a legitimate enterprise are entitled to claims
for restitution. 	See, e.g., Donell v. Kowell, 533 F.3d 762, 772 (9th Cir. 2008) (concluding that
“good faith” investors in a Ponzi scheme acquired a claim for restitution up to the amount
invested); Sender v. Buchanan (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1286, 1289–90 (10th
Cir. 1996) (holding that an investor who was undisputedly “fraudulently induced” to participate
in a Ponzi scheme had a restitution claim up to the amount invested); Wyle v. C.H. Rider &
Family (In re United Energy Corp.), 944 F.2d 589, 596 n.7 (9th Cir. 1991) (“If investments were
made with culpable knowledge, all subsequent payments made to such investors within one year
of the debtors’ bankruptcy would be avoidable under section 548(a)(2), regardless of the amount
invested, because the debtors would not have exchanged a reasonably equivalent value for the
payments.”); Lustig v. Weisz & Assocs., Inc. (In re Unified Commercial Capital, Inc.), 260 B.R.
343, 351 (Bankr. W.D.N.Y. 2001) (noting a “universally accepted fundamental commercial
principal that, when you loan an entity money for a period of time in good faith, you have given
value and are entitled to a reasonable return”); Fisher v. Sellis (In re Lake States Commodities,
Inc.), 253 B.R. 866, 872 (Bankr. N.D. Ill. 2000) (“[A]n investor having actual knowledge of the
underlying fraud may not have a claim for restitution, and will not be deemed to have given
reasonably equivalent value in exchange for payments from a Ponzi scheme.”). Here, however,
the Moving Defendants cannot benefit from the remedy of restitution because the Trustee has
sufficiently pled that they were not “innocent” investors; rather, as discussed above, it is
plausible that they knew or should have known of the Madoff fraud and helped to perpetuate it.
The Trustee’s assertion that only “innocent” investors are entitled to restitution claims is
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also consistent with the equitable nature of the remedy of restitution. 	It is well settled that
restitution is “a remedy traditionally viewed as ‘equitable.’” Mertens v. Hewitt Assoc., 508 U.S.
248, 255 (1993). 	Thus, investors who have knowledge of, and help perpetuate, a fraud should
not be permitted to benefit in the form of restitution. 	As the Supreme Court pointed out, “one
who has himself participated in a violation of law cannot be permitted to assert in a court of
justice any right founded upon or growing out of the illegal transaction.” Gibbs & Sterrett Mfg.
Co. v. Brucker, 111 U.S. 597, 601 (1884). The Independent Clearing House case, relied upon by
the Moving Defendants, reaches the same conclusion: 	“For a court to lend its aid to a
wrongdo[er] . . . is to lend its sanction to the wrong.” 	Merrill v. Abbott (In re Indep. Clearing
House Co.), 77 B.R. 843, 858 (D. Utah 1987); see also Cruse v. Callwood, Nos. 2006-71, et al.,
2010 WL 438173, at *3 (D. Virgin Is. Feb. 3, 2010) (“[W]e therefore[] cannot support the trial
court’s equitable judgment of restitution where it found that Appellees [w]ere aware of the
glaringly iniquitous mechanics of this transparent get-rich-quick scheme.”). Accordingly, taking
the facts alleged in the Complaint as true, the Moving Defendants are not entitled to restitution
claims, and thus cannot be said to have given reasonably equivalent value in exchange for their
receipt of the relevant Transfers.
Logic dictates the same outcome; if the consideration for a transfer is satisfaction of an
antecedent debt, the debt must be legally enforceable. 	Since investors in a Ponzi scheme are
entitled to only an equitable right of repayment, there can be no legally enforceable debt if the
investors acted in bad faith. Therefore, while innocent investors are entitled to restitution claims
up to the amount of their principal, such is not the case when investors, like the Moving
Defendants, are alleged to have had knowledge of, and played a part in, furthering the fraud.
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Second, in accordance with Rule 8, the Trustee has sufficiently pled that the Transfers
consisted, at least in part, of fictitious profits and therefore lacked reasonably equivalent value.
As courts have consistently held, and the Moving Defendants have conceded, when investors
invest in a Ponzi scheme, any payments that exceed their principal investments are not made for
reasonably equivalent value and can be recovered by the Trustee as fraudulent conveyances.
See, e.g., Donell, 533 F.3d at 770 (“Where causes of action are brought . . . against Ponzi scheme
investors, the general rule is that to the extent innocent investors have received payments in
excess of the amounts of principal that they originally invested, those payments are avoidable as
fraudulent transfers . . . .”); Hedged-Inv. Assoc., Inc., 84 F.3d at 1290; Scholes v. Lehmann, 56
F.3d 750, 757 (7th Cir. 1995); United Energy Corp., 944 F.2d at 595 n.6 (9th Cir. 1991); Terry v.
June, 432 F. Supp. 2d 635, 642–43; Bayou Superfund, LLC v. WAM Long/Short Fund II, L.P.,
362 B.R. 624, 636 (Bankr. S.D.N.Y. 2007) (“Plaintiffs are correct in asserting in their brief that
virtually every court to address the question has held unflinchingly that to the extent that
investors have received payments in excess of the amounts they have invested, those payments
are voidable as fraudulent transfers.”) (internal quotations omitted); Rieser v. Hayslip (In re
Canyon Sys. Corp.), 343 B.R. 615, 643–46 (Bankr. S.D. Ohio 2006); Soulé v. Alliot (In re Tiger
Petroleum Co.), 319 B.R. 225, 239 (Bankr. N.D. Okla. 2004); Lake States Commodities, 253
B.R. at 871. 18 This is because transfers received in a Ponzi scheme in excess of an investor’s
investment are not transferred for reasonably equivalent value. United Energy Corp., 944 F.2d at
595, n.6 (“Such excess amounts would be avoidable because the debtor would not have received
reasonably equivalent value.”); Lake States Commodities, 253 B.R. at 872 (“ ‘[F]alse profits’ are
not paid in exchange for reasonably equivalent value.”).
18 In fact, this Court recently stated in dicta that transfers of fictitious profits are voidable. SIPC v. BLMIS (In re
BLMIS), 424 B.R. 122, 136 (Bankr. S.D.N.Y. 2010).
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Here, the Trustee has alleged in the Complaint that the Moving Defendants collectively
withdrew more than $1 billion from BLMIS since December 1995, which consisted, in part, of
fictitious profits generated by a Ponzi scheme. Compl. at ¶ 102 (“The source of funds in many of
the 	[Entity 	Defendants’ 	IA 	Accounts] 	was 	fictitious 	profits 	received 	by 	Chais 	for 	his
participation in the Ponzi scheme.”); see also Compl. at ¶¶ 25, 27, 106. 	Moreover, Exhibit B
specifically identifies in detail the Transfers to the Moving Defendants, including the date,
transferor, transferee and amount transferred. With respect to transfers of fictitious profits, these
allegations undeniably render the constructive fraud claims plausible, and provide the Moving
Defendants with fair notice of the claims asserted against them. Twombly, 550 U.S. at 555–56;
see also Rule 8(a).
In any event, the Court need not make a finding as to the merits of these issues, as they
are inappropriate for a motion to dismiss. Silverman v. Actrade Capital, Inc. (In re Actrade Fin.
Techs. Ltd.), 337 B.R. 791, 804 (Bankr. S.D.N.Y. 2005). 	(“[T]he question of ‘reasonably
equivalent value’ . . . is fact intensive, and usually cannot be determined on the pleadings.”). At
this early stage, the Trustee has adequately pled a lack of reasonably equivalent value with
regard to both principal and fictitious profits for purposes of section 548(a)(1)(B) of the Code.
Accordingly, the Trustee has adequately stated a claim for constructive fraudulent
transfers under the Code, and the Motion to Dismiss Count Four of the Complaint is denied.
B. The 	Trustee’s 	Constructive 	Fraud 	Claims 	Under 	the 	NYDCL 	Are
Adequately Pled
Under the NYDCL provisions governing constructively fraudulent transfers, the Trustee
may avoid those transfers for which BLMIS did not receive “fair consideration.” 	NYDCL
§§ 273–275. 	“Fair consideration” requires not only “fair equivalent” property, but also that the
transferee receive the transfer in good faith. 	NYDCL § 272; HBE Leasing Corp. v. Frank, 61
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F.3d 1054, 1058–59 (2d Cir. 1995) (holding that “fair consideration” requires not only that the
exchange be for equivalent value, but also that the conveyance be made in good faith); Actrade
Fin. Techs. Ltd., 337 B.R. at 802 (“Under New York law, the party seeking to have the transfer
set aside has the burden of proof on the element of fair consideration and, since it is essential to a
finding of fair consideration, good faith.”) (citing United States v. McCombs, 30 F.3d 310, 326
(2d Cir. 1994)); Mendelsohn v. Jacobowitz (In re Jacobs), 394 B.R. 646, 662 (Bankr. E.D.N.Y.
2008) (holding that “fair consideration” has a good faith component). 	Under the NYDCL, as
under the Code, the heightened requirements of Rule 9(b) do not apply to the Trustee’s
constructive fraud claims. See Actrade Fin. Techs. Ltd., 337 B.R. at 801–02. Rather, “the sole
consideration should be whether, consistent with the requirements of Rule 8(a), the complaint
gives the defendant sufficient notice to prepare an answer, frame discovery and defend against
the charges.” Nisselson v. Drew Indus., Inc., (In re White Metal Rolling & Stamping Corp.), 222
B.R. 417, 429 (Bankr. S.D.N.Y. 1998).
As discussed in depth in Section I, B, the Trustee has enumerated multiple instances of
bad faith, thereby adequately pleading a lack of fair consideration for the Transfers. The Trustee
has pointed to numerous facts demonstrating that the Moving Defendants continued to invest and
profit while, among other things, receiving astronomical and unrealistic returns and receiving
statements with backdated transaction histories, with actual or constructive knowledge that they
were participating in and perpetuating a fraud.19 Accordingly, at this stage, taking the Trustee’s
allegations as true, this Court finds that the Trustee has adequately stated a claim for constructive
fraudulent conveyance under the NYDCL. As such, the Motion to Dismiss Counts Six through
Eight of the Complaint is denied.
19 While the Moving Defendants argue that reasonably equivalent value under the Code and fair consideration under
the NYDCL “have substantially the same meaning,” they do, however, concede in a footnote that the NYDCL
defines fair consideration to include a good faith component. See Defs’ Partial MTD at p. 21 n.3
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C. The Principal Sum Does Not Include “Expected Returns”
In addition to arguing that they are entitled to restitution of the principal amounts
entrusted to BLMIS, the Moving Defendants also contend that they are entitled to retain an
unspecified amount of “expected returns.” 	They assert that when a Ponzi scheme operator is a
broker-dealer, investors’ restitution claims are not limited to the amounts principally invested,
but rather, the amounts they expected to earn on those investments. In the context of this Ponzi
scheme, the Moving Defendants argue that their expectations were reflected on their fictitious
November 30, 2008 BLMIS account statements, which, as a result, requires the Trustee to plead
that the Transfers exceeded the phantom account balances provided therein. 	Although this
argument is rendered moot by the Court’s finding in Section I, B that the Trustee has adequately
pled that the Moving Defendants acted in bad faith and are therefore not entitled to restitution
claims in the amount of even their principal investments, the Court will nonetheless address the
merits of the argument in the interest of completeness.
To support their position, the Moving Defendants cite to a Sixth Circuit unpublished
decision, Visconsi v. Lehman Bros. Inc., 244 Fed. Appx. 708 (6th Cir. 2007). There, the Circuit
affirmed the enforcement of an arbitration award against Lehman Brothers. 	The arbitration
award arose in connection with a fraudulent investment scheme orchestrated by a stockbroker
employed by Lehman Brothers and awarded the plaintiffs expectation damages in excess of their
initial investment. 	Lehman Brothers sought to vacate the award because the plaintiff actually
gained more than $5.2 million in excess of their initial investment. 	The Circuit disagreed and
affirmed the arbitrator’s award. 	The Moving Defendants assert that this Court should likewise
recognize that defrauded investors are entitled to expectation damages above their initial
investment—namely, the fictitious amounts reflected on their last BLMIS account statements.
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The Visconsi case is not controlling here. 	First, in upholding the arbitrator’s award, the
Circuit emphasized that an arbitrator’s ruling will only be vacated if it “manifestly disregarded
the law,” Visconsi, 244 Fed. Appx. at 711, and further stated that “Lehman faces a nearly
impossible burden” because the arbitrators issued the award without an opinion. 	Id. at 712.
Thus, the Circuit did not affirmatively endorse the granting of expectation damages, but instead
merely reinforced the difficulty associated with vacating an arbitrator’s award, particularly when
a written opinion is not present. 	Second, unlike the case at hand, the issue of expectation
damages was not decided in connection with a fraudulent transfer claim where reasonably
equivalent value was at issue. Last, and most importantly, the Visconsi case was not decided in
the context of a liquidation proceeding. Given that Lehman Brothers was solvent and had assets
of its own to satisfy the arbitration award, enforcing the award against Lehman Brothers would
not, unlike here, be to the detriment of other investors. 	Accordingly, because the facts in
Visconsi are entirely different from those before the Court, its holding does not support the
Moving Defendants’ position.20
III. 	THE T RUSTEE H AS PROPERLY ALLEGED T HAT THE RELEVANT D ATE FOR SIX YEAR
FRAUDULENT C ONVEYANCES U NDER THE NYDCL IS THE FILING D ATE OF THE SIPA
PROCEEDING
With respect to the Trustee’s fraudulent conveyance actions under the NYDCL, the Court
finds that the relevant look-back period extends to those Transfers made as early as December
11, 2002, six years before the December 11, 2008 Filing Date of the SIPA liquidation
proceeding. See Compl. at ¶ 108.
The Moving Defendants argue that the statute of limitations for fraudulent conveyance
20 On March 1, 2010, the Court rendered its Net Equity Decision, holding that the value of a customer’s claim in the
SIPA liquidation is the amount he deposited in his BLMIS account, less any amounts withdrawn. See generally
SIPC v. BLMIS (In re BLMIS), 424 B.R. 122 (Bankr. S.D.N.Y. 2010). While the Court did not decide the value of a
hypothetical restitution claim, the Court affirmatively ruled that the net amount invested, and not the amount
reflected on a BLMIS account statement, dictates the value of a customer’s claim.
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actions under section 213 of the New York Civil Procedure Law and Rules (the “NYCPLR”), 21
incorporated by reference in section 544(b) of the Code, looks back six years from the filing of
the Complaint, filed on May 1, 2009, rather than from the Filing Date, December 11, 2008. 	In
effect, the Moving Defendants challenge the Trustee’s attempts to recover those Transfers made
in the period between December 11, 2002 and May 1, 2003.
The issue raised by the Moving Defendants centers on the interplay between the
applicable state statute of limitation period incorporated by section 544(b) and section 546(a) of
the Code. 	Pursuant to section 544(b) of the Code, “the trustee may avoid any transfer of an
interest of the debtor in property or any obligation incurred by the debtor that is voidable under
applicable law by a creditor holding an unsecured claim . . . .” 	11 U.S.C. § 544(b) (emphasis
added). Under this section, a trustee is permitted to step into the shoes of an unsecured creditor
and utilize applicable state law avoidance statutes to recover fraudulently transferred property.
Universal Church v. Geltzer, 463 F.3d 218, 222 n.1 (2d Cir. 2006) (“[T]he Bankruptcy Code
allows the trustee to step into the shoes of a creditor under state law and avoid any transfers such
a creditor could have avoided.”). 	Section 546(a) of the Code, in relevant part, states that an
action or proceeding under section 544 to avoid a transfer must be commenced within “2 years
after the entry of the order for relief.” 	11 U.S.C. § 546(a). 	The combination of these statutes
raises the question, as one court has framed it, “[i]f the applicable non-bankruptcy law
extinguishes a cause of action after the bankruptcy is commenced, but before the limitation
period in § 546(a)(1)(A), which statute of limitation is applicable?” 	Summitt Sec. Inc. v.
Sandifur (In re Metro. Mortg. & Sec. Co., Inc.), 344 B.R. 138, 141 (Bankr. E.D. Wash. 2006).
The Moving Defendants read these two Code provisions together to suggest that “the
21 Section 213(8) of the NYCPLR states, in relevant part, that the statute of limitation for bringing causes of action
sounding in fraud is six years.
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Trustee must bring any claim under § 544(b) within the shorter of i) the limitations period
provided by [NY]CPLR 213 and ii) the two year post-commencement limitation period imposed
by Code § 546(a)(1)(A).” 	Defs’ Partial MTD at p. 24. 	They argue that “[b]ecause the Trustee
has no greater rights under § 544(b) than an actual creditor would have under the NYDCL, he
cannot recover transfers made prior to May 1, 2003 unless New York law tolls the statute of
limitations” at the Filing Date, which it does not. Id. While the Moving Defendants endeavor to
support this position, even they “recognize that a number of district and bankruptcy courts have
[found that the six-year period runs from the Filing Date], including this court, and that the
Collier treatise so states.” 	Id. at p. 25 (citing 6 COLLIER ON BANKRUPTCY ¶ 546.02[1][b] (15th
ed. rev. 2007) (“If the state law limitations period governing a fraudulent transfer action has not
expired at the commencement of a bankruptcy case, the trustee may bring the action pursuant to
Section 544(b), provided that it is commenced within the Section 546(a) limitations period.”).22
The Court is likewise aware of the abundance of case law in support of the Trustee’s position, as
well as the strong policy goals involved, and is thus not prepared to adopt the Moving
Defendants’ construction of the law.
Courts have consistently held that upon the filing of a bankruptcy case, state law statutes
of limitation cease to have any continued effect, and, instead, the provisions of section 546(a) of
the Code govern. 	Although the New York statute of limitations for fraudulent conveyance
actions allows a creditor to recover transfers made six years before the filing of the complaint, it
is well established that once a bankruptcy petition is filed, section 546(a) of the Code is
triggered, allowing a trustee to recover transfers made six years before the petition date. 	See,
e.g., O’Connell v. Shallo (In re Die Fliedermaus LLC), 323 B.R. 101, 107 (Bankr. S.D.N.Y.
22 The Moving Defendants declare that these cases “are not well-reasoned.” Defs’ Partial MTD at p. 25.
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2005) (“This would permit the Trustee to reach back to October 3, 1995, six years before the
Debtor’s bankruptcy petition was filed.”) (emphasis added); Eisenberg v. Feiner (In re Ahead By
A Length, Inc.), 100 B.R. 157, 164 (Bankr. S.D.N.Y. 1989) (declining to dismiss complaint as
untimely where “fraudulent scheme began fewer than six years before the bankruptcy petition
was filed”) (emphasis added); Barnard v. Joffe (In re Inflight Newspapers, Inc.), 423 B.R. 6, 20
(Bankr. E.D.N.Y. 2010) (“[T]he operative date for determining the look-back period for
recovering a transfer is the petition date . . . .”) (emphasis added). In addition, section 546(a) of
the Code separately provides that the trustee must commence such claims under section 544(b)
within two years from “the entry of the order for relief.” 11 U.S.C. § 546(a); see also Randall’s
Island Family Ctrs. v. Acushnet Co. (In re Randall’s Island Family Golf Ctrs.), No. 02-2278,
2002 WL 31496229, at *1 (Bankr. S.D.N.Y. Nov. 8, 2002). Accordingly, as long as the six-year
statute of limitations has not expired as of the petition date, a trustee is permitted to bring New
York fraudulent conveyance actions in accordance with section 544(b) at any point during the
two-year period set out in section 546(a). 	See, e.g., Finkel v. Polichuk (In re Polichuk), Adv.
Proc. No. 10-0031 (ELF), 2010 WL 4878789, at *3 (Bankr. E.D. Pa. Nov. 23, 2010) (“Even
though the state law cause of action may expire after the filing of the petition, but before the two-
year limitation in 546(a), the two-year limit in § 546(a) is applicable.”) (internal citations
omitted); Sears Petroleum & Trans. Co. v. Burgess Constr. Servs., Inc., 417 F. Supp. 2d 212,
225 (D. Mass. 2006) (“Once the bankruptcy petition is filed, 11 U.S.C. § 546 governs the time
for bringing the action, and . . . it is immaterial if the state limitations period accrues during the
pendency of the bankruptcy case.”).
Construing section 546(a) of the Code and the applicable state statute of limitation period
in this manner fosters a trustee’s ability to recover property for the benefit of the estate—a
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congressional goal intended to be achieved by the Code. 	Summitt Sec. Inc. v. Sandifur (In re
Metro. Mortg. & Sec. Co., Inc.), 344 B.R. 138, 141 (Bankr. E.D. Wash. 2006); Princeton – New
York Inv., Inc., 219 B.R. at 65. Section 546(a) advances this goal by providing the trustee with
some “breathing room to determine what claims to assert under § 544.” Gibbons v. First Fidelity
Bank, N.A (In re Princeton–New York Inv., Inc.), 219 B.R. 55, 65 (D.N.J. 1998); see also Smith
v. Am. Founders Fin., Corp., 365 B.R. 647, 677 (Bankr. S.D. Tex. 2007); Bay State Milling Co.
v. Martin (In re Martin), 142 B.R. 260, 266 (Bankr. N.D. Ill. 1992). Absent the additional two-
year period under section 546(a), a trustee could be forever barred from seeking fraudulently
transferred property merely because actions were not commenced immediately upon the filing of
the petition. 	It simply cannot be expected that a newly appointed trustee, with no prior
knowledge of the debtor, could assert causes of action within applicable state statute of limitation
periods that accrue in the very early stages of a case. 	See Metro. Mortg., 344 B.R. at 141
(holding that requiring trustee to comply with state statute of limitation periods “would
contravene the broad powers Congress has granted to the trustee under § 544”); Mancuso v.
Cont’l Bank Nat’l Assoc. Chicago (In re Topcor, Inc.), 132 B.R. 119, 124–25 (Bankr. N.D. Tex.
1991) (“The most evident reason for providing trustees two years to bring avoidance actions is to
ensure that the trustee has ample time to investigate any potential claims . . . .”). As such, courts
have consistently held that that the applicable state’s statute of limitation period is relevant only
to determine whether the claim would have been timely as of the petition date.
Here, the Trustee may avoid those Transfers made as early as December 11, 2002, six
years before the December 11, 2008 Filing Date in accordance with relevant law. 	First, the
claims in Counts Five through Eight asserted under the NYDCL would have been timely because
they seek to avoid only those Transfers that occurred within six years of the petition date, which
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in this case is the Filing Date. 	Second, the Complaint was timely filed under section 546(a) of
the Code, as it was commenced within two years of the “order for relief,” which in this case is
also the Filing Date. 	Accordingly, contrary to the Moving Defendants’ assertions, Counts Five
through Eight of the Complaint seeking Transfers going back six years from the Filing Date are
timely and have been properly pled.23
IV. 	THE TRUSTEE H AS SUFFICIENTLY PLED CLAIMS FOR TRANSFERS PRIOR TO SIX YEARS
BEFORE THE FILING D ATE BASED ON THE D ISCOVERY RULE
The Trustee has sufficiently pled Count Nine of the Complaint under sections 276, 276-a,
278 and/or 279 of the NYDCL, and pursuant to sections 544, 550(a) and 551 of the Code, to
recover actual fraudulent transfers from the Moving Defendants made more than six years before
the Filing Date.
Under New York’s “discovery rule,” causes of action predicated on fraud “must be
commenced within six years after the commission of the fraud or within two years of the date the
fraud was or should have been discovered [with reasonable diligence], [w]hichever is longer.”
Phillips v. Levie, 593 F.2d 459, 462 n.12 (2d Cir. 1979); see also Manning v. Utilities Mut. Ins.
Co., 254 F.3d 387, 401 n.12 (2d Cir. 2001) (“New York’s six year statute of limitations for fraud
claims is a ‘discovery rule.’ ”); N.Y. C.P.L.R. §§ 213(8), 203(g). 	The Trustee seeks to utilize
New York’s discovery rule, in conjunction with his strong arm power under section 544 and
applicable sections of the NYDCL, to avoid “undiscovered transfers” that occurred more than six
years before the Filing Date. 	To do this, the Trustee must show that during the period various
Transfers were made, Madoff’s fraud was either: (1) not discovered, and could not have been
discovered with reasonable diligence, by at least one unsecured creditor; or (2) was only
23 In addition, even if the Moving Defendants’ position were correct, the Trustee may nonetheless avoid the
Transfers that occurred in the disputed period between December 11, 2002 and May 1, 2003 due to New York’s
“discovery rule,” which is discussed in detail in Section IV.
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discovered, and could have only been discovered with reasonable diligence, by at least one
unsecured creditor within two years of the Filing Date. See 11 U.S.C. § 544(b).
The Moving Defendants argue that the “red flags,”24 which purportedly placed the
Moving Defendants on notice of Madoff’s fraud, preclude any inference that an investor exists
who could invoke the discovery rule. Defs’ Partial MTD at p. 34 (“[I]f it was reasonable for the
[Moving Defendants] to have known that they were receiving distributions from a Ponzi scheme
based on [] publicly known facts, it was equally reasonable for any other non-professional
investor to have known the same thing.”). 	In addition, they contend that the Trustee lacks
standing because he has failed to identify a specific unsecured creditor who could invoke the
discovery rule. 	For the reasons set forth below, the Court disagrees and finds that since the
Trustee filed the Complaint within two years of the announcement of the BLMIS Ponzi scheme,
he is entitled to seek recovery for all of the Transfers over the life of the Moving Defendants’
accounts.25
With regard to the Moving Defendants’ first argument, it does not follow that because the
indicia of fraud put the Moving Defendants on notice of the fraud, they were sufficient to put all
investors on notice, as the Moving Defendants and other BLMIS investors are not similarly
situated. 	First, the Trustee has adequately alleged indicia of fraud that pertain solely to the
Moving Defendants and not generally to all Madoff victims, who could not have discovered the
fraud with reasonable diligence. 	For example, the Trustee asserts that the Moving Defendants’
IA Accounts reflected abnormally high annual returns, Compl. at ¶ 103(b), anomalous “losses”
24 These red flags are discussed in Section I, B in connection with the Trustee’s fraudulent transfer claims under the
NYDCL. See Defs’ Partial MTD at pp. 15–16, 33–34; Compl. at ¶ 104.
25 The Moving Defendants also assert that the tolling provisions of sections 213(8) and 203(g) of the NYCPLR do
not apply to constructive fraud claims. Count Nine of the Complaint seeks to avoid only those Transfers predicated
on actual fraud. Accordingly, the Court need not address this argument.
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allegedly manufactured for tax purposes, id. at ¶ 103(d), and backdated trades “with monumental
and patently incredible rates of return that far outpaced the market,” id. at ¶ 103(e). These are
only some of the numerous indicia of fraud setting the Moving Defendants apart from other
BLMIS investors.
Second, in addition to the indicia of fraud particular to them, the Moving Defendants had
means generally unavailable to all Madoff victims to discover the fraud. 	Unlike many BLMIS
investors, the Moving Defendants had the benefit of the management of their accounts by
Stanley Chais, a highly sophisticated and experienced investor who invested in BLMIS over
many decades through more than 60 entity and/or personal accounts. Compl. at ¶ 33; Crigger v.
Fahnestock & Co., 443 F.3d 230, 235 (2d Cir. 2006) (“The law is indulgent of the simple or
untutored; but the greater the sophistication of the investor, the more inquiry that is required.”);
Tab P’ship v. Grantland Fin. Corp., 866 F. Supp. 807, 811 n.3 (S.D.N.Y. 1994) (“It is well
settled that a court may consider the sophistication of a plaintiff investor in evaluating issues of
inquiry notice . . . .”). Additionally, in light of Stanley Chais’s unusually close relationship with
Madoff on both a business and social level that spanned over thirty years, the Moving
Defendants, whose accounts were controlled by Stanley Chais, were privy to information and
dealings of BLMIS not known to other BLMIS investors. 	See Compl. at ¶¶ 92, 99, 100.
Therefore, the sophistication, experience and totality of information available to the Moving
Defendants by way of Stanley Chais should have put them on notice that they were benefiting
from the fraud, differentiating them from other BLMIS investors.
With regard to the Moving Defendants’ second argument, a trustee is not required to
specifically identify a qualifying unsecured creditor in its complaint to assert standing under
section 544 of the Code in accordance with the pleading requirements of Rule 8. See Musicland
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Holding Corp. v. Best Buy Co., (In re Musicland Holding Corp.), 398 B.R. 761, 780 (Bankr.
S.D.N.Y. 2008). At most, a trustee need only identify a category of unsecured creditors in whose
shoes standing is being asserted. 	Global Crossing Estate Rep. v. Winnick, No. 04-CIV-2558
(GEL), 2006 WL 2212776, at *11 (S.D.N.Y. Aug. 3, 2006) (“[T]here is no authority for the
proposition that the Estate Representative must be more specific than to identify the category of
creditors with potentially viable claims.”). However, even such is not required; instead, simply
pleading the existence of an unsecured creditor generally will suffice to satisfy Rule 8(a)(2). In
re RCM Global Long Term Cap. Apprec. Fund, Ltd., 200 B.R. 514, 523–24 (Bankr. S.D.N.Y.
1996) (holding that pleading the existence of an unsecured creditor with an allowable claim is
sufficient); see also In re Musicland, 398 B.R. at 780 (“Thus, RCM supports the proposition that
the plaintiff may plead the existence of the qualifying creditor generally, and prove the existence
of an actual, qualifying creditor at trial.”).
Here, the Trustee has not only adequately pled generally the existence of a qualified
unsecured creditor, but has also satisfied the more stringent standard of pleading the existence of
a category of creditors who could invoke the discovery rule. 	The Trustee asserts that “[a]t all
times relevant to the Transfers, the fraudulent scheme perpetrated by BLMIS was not reasonably
discoverable by at least one unsecured creditor of BLMIS,” Compl. at ¶ 160, and that “[a]t all
times relevant to the Transfers, there have been one or more creditors who have held and still
hold matured or unmatured unsecured claims against BLMIS that were and are allowable . . . .”
Id. at ¶ 161. Such is more than sufficient to satisfy the standard set out by the RCM court, which
requires that the Trustee plead only the existence of a qualifying unsecured creditor generally.
RCM, 200 B.R. at 524. 	In fact, in Musicland, the court observed that it had “not been able to
locate a case in this district supporting the proposition that the plaintiff must name the qualifying
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creditor in the complaint, or suffer dismissal.” In re Musicland, 398 B.R. at 780. Moreover, the
Complaint additionally satisfies the stricter standard set out in Global Crossing.26 The
Complaint provides sufficient notice to the Moving Defendants of at least one category of
creditors on whose claims the Trustee bases his standing: the clearly defrauded BLMIS
customers. 	See Compl. at ¶ 4 (“The Trustee seeks to set aside such transfers and preserve the
property for the benefit of BLMIS’ defrauded customers.”); id. at ¶¶ 14, 17c. 	Accordingly,
based on these allegations, the Complaint more than satisfies the pleading standard under Rule 8.
In any event, while the Trustee has sufficiently alleged the existence of creditors who
could not reasonably have discovered the fraud, adjudication of this issue is premature at the
motion to dismiss stage. 	Schmidt v. McKay, 555 F.2d 30, 37 (2d Cir. 1977) (holding that
whether a plaintiff knew or could have known with reasonable diligence of fraud is a mixed
question of law and fact that “ordinarily should not be disposed of by summary disposition”);
Zahn v. Yucaipa Capital Fund, 218 B.R. 656, 673 (D.R.I. 1998) (“A probing inquiry into who
the creditors are, and what claims they hold, is inappropriate [on a motion to dismiss].”); Trepuk
v. Frank, 44 N.Y.2d 723, 725 (N.Y. 1978) (“Where it does not conclusively appear that a
plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint
should not be dismissed on motion and the question should be left to the trier of the facts.”).
Accordingly, for the reasons discussed above, the Motion to Dismiss with respect to
Count Nine of the Complaint is denied.
V. 	THE TRUSTEE HAS ADEQUATELY PLED C LAIMS TO R ECOVER SUBSEQUENT T RANSFERS
FROM THE M OVING D EFENDANTS
The Trustee has sufficiently pled Count Ten of the Complaint to recover funds
26 It is worth mentioning that the Global Crossing court did not hold that a category of qualifying unsecured
creditors must be pled. Instead, the plaintiff in Global Crossing pled a category of unsecured creditors and the court
held that such was more than sufficient to satisfy Rule 8. Thus, the holding in Global Crossing does not overturn
the more liberal standard set out in RCM.
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subsequently transferred to the Moving Defendants under section 550(a)(2) of the Code and
section 278 of the NYDCL. See 11 U.S.C. § 550(a)(2) (allowing recovery from “any immediate
or mediate transferee of such initial transferee”); NYDCL § 278 (allowing recovery from “any
person”); Farm Stores, Inc. v. Sch. Feeding Corp., 102 A.D.2d 249, 255 (App. Div. 2d Dep’t
1984) (“[E]ach transferee . . . is liable to the creditor to the extent of the value of the money or
property he or she wrongfully received.”) (emphasis added).
In determining whether a claim to recover fraudulent transfers from a subsequent
transferee is adequately pled, the Court need only apply a Rule 8 analysis. 	SIPC v. Stratton
Oakmont, Inc., 234 B.R. 293, 317–18 (Bankr. S.D.N.Y. 1999) (“[R]ecovery under § 550(a) is not
subject to a particularized pleading standard . . . .”). 	As such, the Trustee must provide only a
“short and plain statement of the claim showing that [he] is entitled to relief.” 	FED. R. CIV. P.
8(a)(2). 	The purpose of this pleading requirement is to ensure that the defendant receives “fair
notice of what the . . . claim is and the grounds upon which it rests.” Scheidelman v. Henderson
(In re Hendersen), 423 B.R. 598, 612 (Bankr. N.D.N.Y. 2010) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 545 (2007)) (internal quotations omitted). Consistent with precedent in
this Circuit, a trustee need only demonstrate “sufficient facts to show, if proved, that the funds at
issue originated with the debtor.” Silverman v. K.E.R.U. Realty Corp. (In re Allou Distrib., Inc.),
379 B.R. 5, 30 (Bankr. E.D.N.Y. 2007). However, a “dollar-for-dollar accounting is not required
. . . at the pleading stage.” 	Id. (finding subsequent transfer claim adequately pled where
complaint stated, “at least tens of millions of dollars were fraudulently diverted from [debtor] to
[initial transferees] . . . [and] a portion of these fraudulently diverted funds was transferred from
the [initial transferees] to, or for the benefit of, the [subsequent transferees].”).
Here, the Complaint satisfies Rule 8 by providing “fair notice” to the Moving Defendants
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of the Subsequent Transfers sought to be recovered. 	As discussed previously, the Trustee has
alleged initial Transfers totaling more than $1.1 billion, which are set forth with particularity in
Exhibit B to the Complaint, specifying the dates upon which they took place, the method of
transfer, the transferor, and the specific transferees. 	Compl. at Ex. B. 	The Complaint then
provides that “some or all of the[se] Transfers were subsequently transferred . . . to Defendant
Chais and/or other Defendants in the form of payment of commissions or fees, transfers from one
account to another, or other means.”27 Compl. at ¶ 166. 	The Complaint thus “adequately
apprises” the Moving Defendants of the Subsequent Transfers at issue. Stratton Oakmont, Inc.,
234 B.R. at 318.
Moreover, the Trustee “is an outsider to these transactions and will need discovery to
identify the specific [Subsequent Transfers] . . . by date, amount and the manner in which they
were effected.” See Jalbert v. Zurich Am. Ins. Co. (In re Payton Constr. Corp.), 399 B.R. 352,
365 (Bankr. D. Mass. 2009). The Moving Defendants are a group of interrelated individuals and
entities closely associated with defendant Stanley Chais, all of whom maintained BLMIS
accounts 	and 	received 	direct 	Transfers. 	Whether 	they 	additionally 	received 	Subsequent
Transfers of BLMIS funds from one another is a question to which they, and they alone, have the
requisite information to respond. 	As such, the Trustee has adequately stated a claim for relief
27 The Moving Defendants erroneously argue that “the Trustee is not permitted to rely upon information and belief
pleading” because “he has account records related to the Defendants’ BLMIS accounts.” See Defs’ Partial MTD at
p. 36 n.15. This argument is incorrectly premised upon a general principal, subject to exception, that “Rule 9(b)
pleadings [fraud or mistake] cannot be based upon information and belief.” DiVittorio v. Equidyne Extractive Indus.,
Inc., 822 F.2d 1242, 1247 (2d Cir. 1987) (citing Segal v. Gordon, 467 F.2d 602, 608 (2d Cir. 1972)). As discussed
above, the Trustee’s subsequent transfer claims, which do not depend upon allegations of fraud or mistake, are
subject only to a Rule 8 pleading standard. In any event, the exception to the general principle would apply here, as
“pleadings on information and belief are acceptable as to facts peculiarly within the opposing party’s knowledge.”
Breeden v. Bennett (In re Bennett Funding Group, Inc.), 367 B.R. 269, 298 (Bankr. N.D.N.Y. 2007) (quoting
DiVittorio, 822 F.2d at 1247) (internal quotations omitted). 	Here, the details of subsequent transactions by and
between the Moving Defendants, if any, are uniquely in their possession, and should be made available to the
Trustee through discovery. 	See id. (“[D]espite the Trustee’s post hoc access to BFG's books and records, the
byzantine nature and extensive duration of the alleged fraud necessarily resulted in certain facts remaining peculiarly
within Bennett's knowledge.”).
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entitling him to discovery into his subsequent transfer claims.
Accordingly, the Motion to Dismiss with respect to Count Ten of the Complaint is
denied.
VI. 	THE TRUSTEE H AS NOT SUFFICIENTLY P LED TURNOVER AND ACCOUNTING PURSUANT
TO SECTION 542 OF THE CODE 28
With respect to Count One of the Complaint, the Trustee has not adequately stated a
claim for immediate turnover of transferred funds and accounting under section 542 of the Code.
Section 542 of the Code states, in relevant part, that “an entity . . . in possession, custody,
or control, during the case, of [property of the estate] . . . shall deliver to the trustee, and account
for, such property or the value of such property.” 11 U.S.C. § 542(a). The Defendants argue that
the Trustee may not use section 542 of the Code to recover prepetition transfers because they do
not become “property of the estate” unless and until they are recovered through a successful
avoidance action, which in essence requires a two-step process. FDIC v. Hirsch (In re Colonial
Realty Co.), 980 F.2d 125, 131 (2d Cir. 1992); Savage & Assocs., P.C. v. Mandl (In re Teligent,
Inc.), 325 B.R. 134, 137 (Bankr. S.D.N.Y. 2005) (“[P]roperty that has been fraudulently or
preferentially transferred does not become property of the estate until it has been recovered.”).
In contrast, the Trustee contends that in this hybrid proceeding under both SIPA and the Code,
SIPA section 78fff-2(c)(3) alters the nature of section 542 of the Code to permit a SIPA trustee
to recover prepetition transfers in one step upon a prima facie showing that the transfer is
“voidable or void,” without the need for an avoidance action and separate recovery under section
550 of the Code. SIPA § 78fff-2(c)(3).
As evidenced by the divergent positions of the parties, the plain language of SIPA section
78fff-2(c)(3) is subject to differing interpretations, and there is a dearth of interpretative caselaw.
28 The issue of turnover was recently decided in this Court’s decision, Picard v. Merkin (In re BLMIS), 440 B.R. 243
(Bankr. S.D.N.Y. 2010).
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In fact, this Court has located only nine cases addressing SIPA section 78fff-2(c)(3), three of
which merely cite the statute without analysis or discussion.29 Yet, none of these cases addresses
the instant question as to whether SIPA section 78fff-2(c)(3) makes property that was transferred
prepetition to a third party “property of the debtor” for purposes of turnover under section 542 of
the Code. 	Thus, the Court requested and reviewed supplemental briefing from the parties to
address this issue (the “Supplemental Briefing”) (Dkt. Nos. 78–80).
Consistent with the Trustee’s position and the bankruptcy court’s expansive in rem
jurisdiction,30 the most efficient application of the hybrid SIPA and Code statutes is to bypass the
two-step recovery process and allow the Trustee to expeditiously collect the funds using turnover
under section 542 of the Code. Unfortunately, however, there is nothing in the plain language of
SIPA section 78fff-2(c)(3) or in the limited interpretive caselaw to give such an “in rem spin” to
the Trustee’s one-step turnover quest under section 542 of the Code.31
The plain language of SIPA section 78fff-2(c)(3) creates a fiction that grants the trustee
standing to bring avoidance actions under the Code. The avoidance provisions of the Code allow
a trustee to “avoid any transfer . . . of an interest of the debtor in property.” 11 U.S.C. §§ 547,
548 (emphasis added). In a SIPA proceeding, however, property held by a broker-debtor for the
29 Three of the nine cases merely cite to SIPA section 78fff-2(c)(3) without any analysis or discussion. Togut v.
RBC Dain Correspondent Servs. (In re S.W. Bach & Co.), 435 B.R. 866, 886 (Bankr. S.D.N.Y. 2010); Picard v.
Fox, (In re BLMIS), 429 B.R. 423, 427 n.4 (Bankr. S.D.N.Y. 2010) (Lifland, J.); Sec. Investor Prot. Corp. v. BLMIS
(In re BLMIS), 424 B.R. 122, 136 (Bankr. S.D.N.Y. 2010) (Lifland, J.). The remaining six cases analyze SIPA
section 78fff-2(c)(3) in conjunction with avoidance provisions of the Code, supporting the Moving Defendants’
interpretation. 	Picard v. Taylor (In re Park South Sec., LLC.), 326 B.R. 505, 512–13 (Bankr. S.D.N.Y. 2005);
Trefny v. Bear Stearns Sec. Corp., 243 B.R. 300, 320–23 (S.D. Tex. 1999); Kusch v. Mishkin (In re Adler, Coleman
Clearing Corp.), Nos. 95-08203 (JLG), et al., 1998 WL 551972, at *17 (Bankr. S.D.N.Y. Aug. 24, 1998); Mishkin
v. Ensminger (In re Adler, Coleman Clearing Corp.), 218 B.R. 689, 702 (Bankr. S.D.N.Y. 1998); Hill v. Spencer S
& L Ass’n (In re Bevill, Bresler & Schulman, Inc.), 94 B.R. 817, 825–27 (D.N.J. 1989); Hill v. Spencer S & L Ass’n
(In re Bevill, Bresler & Schulman, Inc.), 83 B.R. 880, 886–88 (D.N.J. 1988) (“Bevill I”).
30 See Cent. Virginia Comm. Coll. v. Katz, 546 U.S. 356, 369 (2006) (supporting the bankruptcy court’s expansive in
rem jurisdiction by upholding a trustee’s avoidance actions against a state agency); State Comp. Ins. Fund v. Zamora
(In re Silverman), 616 F.3d 1001, 1008 (9th Cir. 2010) (holding that a chapter 11 trustee may avoid and recover
criminal restitution payments under section 547(b) of the Code).
31 It is conceivable, however, for the Trustee to find support at law outside of turnover.
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account of a customer is not property of the broker-debtor. 	Thus, a SIPA trustee would lack
standing to utilize these avoidance sections. SIPA section 78fff-2(c)(3) states, in relevant part,
[T]he Trustee may recover any property transferred by the debtor which, except
for such transfer, would have been customer property if and to the extent that such
transfer is voidable or void under the provisions of Title 11. 	Such recovered
property shall be treated as customer property. 	For the purposes of such
recovery, the property so transferred shall be deemed to have been the property of
the debtor and, if such transfer was made to a customer or for his benefit, such
customer shall be deemed to have been a creditor, the laws of any State to the
contrary notwithstanding.
SIPA § 78fff-2(c)(3) (emphasis added). 	SIPA section 78fff-2(c)(3) rectifies this defect by
creating a fiction that such property “shall be deemed to have been the property of the debtor” at
the time of the transfer.32 SIPA § 78fff-2(c)(3) (emphasis added).
Further, the few cases construing SIPA section 78fff-2(c)(3) find that its limited purpose
is to create this legal fiction. 	Bevill I, 83 B.R. at 894 (“This fiction allows the SIPA trustee to
avoid . . . transfers in spite of the fact that a broker-dealer liquidation technically does not
involve the debtor-creditor relationship . . . .”). 	Indeed, the six courts that have analyzed this
provision have done so only in the context of avoidance actions, never in conjunction with
section 542 of the Code. See Picard v. Taylor (In re Park South Sec., LLC.), 326 B.R. 505, 512–
13 (Bankr. S.D.N.Y. 2005) (reading SIPA Section 78fff-2(c)(3) together with sections 544 and
548); Kusch v. Mishkin (In re Adler, Coleman Clearing Corp.), Nos. 95-08203 (JLG), et al.,
1998 WL 551972, at *17 (Bankr. S.D.N.Y. Aug. 24, 1998) (stating that courts have held that
SIPA section 78fff-2(c)(3) authorizes a trustee to avoid a transfer of customer property); Mishkin
v. Ensminger (In re Adler, Coleman Clearing Corp.), 218 B.R. 689, 702 (Bankr. S.D.N.Y. 1998)
(finding that SIPA section 78fff-2(c)(3) does not limit a trustee’s avoidance power under section
32 Similarly, SIPA section 78fff-2(c)(3) provides that a customer in receipt of a preference “shall be deemed to have
been a creditor” at the time of transfer in order to ensure that the SIPA trustee has standing under section 547 of the
Code. See 11 U.S.C. § 547 (“[T]he trustee may avoid any transfer of an interest of the debtor in property – (1) to or
for the benefit of a creditor . . . .”).
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544); Trefny v. Bear Stearns Secs. Corp., 243 B.R. 300, 320–23 (S.D. Tex. 1999) (reading SIPA
Section 78fff-2(c)(3) together with section 548); Hill v. Spencer S & L Ass’n (In re Bevill,
Bresler & Schulman, Inc.), 94 B.R. 817, 825–27 (D.N.J. 1989) (reading SIPA Section 78fff-
2(c)(3) together with section 549); Bevill I, 83 B.R. at 886–88 (same).
Thus, the Court is constrained to find that while the Trustee has stated prima facie claims
for avoidance under the Code and the NYDCL, the current state of the law does not support the
requested expeditious turnover of the funds under section 542 of the Code. 	To hold otherwise
would give the “deemed to have been property of the debtor” language a more expansive
meaning, something that Congress did not address.
In light of the foregoing analysis, the Motions to Dismiss are hereby granted with respect
to Count One of the Complaint.
VII. 	THE T RUSTEE HAS SUFFICIENTLY PLED A B ASIS FOR DISALLOWING THE M OVING
DEFENDANTS ’ SIPA CLAIMS
The Trustee has sufficiently pled Count Eleven of the Complaint to disallow the Moving
Defendants’ SIPA claims. The Trustee alleges that the claims filed by the Moving Defendants
are (1) not supported by the books and records of BLMIS, and (2) should be disallowed under
section 502(d) of the Code because the Moving Defendants received voidable Transfers that
have not been returned to the Trustee. In response, the Moving Defendants declare that the first
allegation is not supported by factual detail and thus does not satisfy Twombly and Iqbal. With
respect to the second allegation, the Moving Defendants argue that section 502(d) of the Code
does not apply to insurance claims that are paid by SIPC.
The Trustee has sufficiently pled that the Moving Defendants’ SIPA claims are not
supported by the books and records of BLMIS. Compl. at ¶ 172. The books and records indicate
that the Transfers to the Moving Defendants, detailed in Exhibit B, “were, in part, false and
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fraudulent payments of nonexistent profits supposedly earned in the Accounts.” 	Compl. at ¶
106. 	Thus, the Moving Defendants allegedly received distributions above the amount of their
principal contribution, precluding them from receiving SIPC advances and distributions from the
pool of assets collected by Trustee. 	See SIPC v. BLMIS (In re BLMIS), 424 B.R. 122, 125
(Bankr. S.D.N.Y. 2010) (defining net equity by reference to amounts invested and withdrawn).
In addition, the Trustee has adequately pled the disallowance of the Moving Defendants’
SIPA claims under section 502(d) of the Code, which states that, “the court shall disallow any
claim of any entity . . . that is a transferee of a [voidable] transfer.” 	11 U.S.C. § 502(d). 	The
purpose of this section is to “preclude entities that have received voidable transfers from sharing
in the distribution of assets unless and until the voidable transfer has been returned to the estate.”
In re Mid Atlantic Fund, Inc., 60 B.R. 604, 609 (Bankr. S.D.N.Y. 1986). 	As discussed, the
Trustee has sufficiently pled his avoidance claims against the Moving Defendants. 	Moreover,
they have not returned to the Trustee the funds purportedly transferred. As a result, the Trustee’s
claim under section 502(d) of the Code is adequately pled.
The Moving Defendants argue unconvincingly that section 502(d) of the Code does not
apply to disallow their claims because a SIPA claim is an “insurance claim” against SIPC, rather
than a claim against the broker-debtor’s estate. In the Net Equity Decision, this Court addressed
similar arguments advanced by certain BLMIS customers. 	Those claimants argued that SIPC
provides an insurance fund, separate and apart from the pool of customer property, against which
claims can be filed. 	In response, the Court found that Madoff customers are not “statutorily
entitled to an additional source of recovery in the form of SIPC insurance, separate and apart
from customer property distributions,” explaining that “[t]his argument finds no support in the
text of the statute, which characterizes SIPC payments as advances inextricably tied to
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distributions of customer property.” 	In re BLMIS, 424 B.R. at 133–34. 	Accordingly, a net
equity claim is not a claim against SIPC, but rather a claim against the pool of customer property
collected by the Trustee. As such, the Court finds no merit to the Moving Defendants’ argument
and finds that the Trustee’s claim under section 502(d) of the Code is appropriate. Accordingly,
the Motion to Dismiss Count Eleven of the Complaint is denied.
CONCLUSION
Accepting as true the facts pled in the Complaint and drawing all inferences that may be
warranted by such facts, the Trustee has pled valid prima facie claims against the Moving
Defendants in Counts Three through Eleven of the Complaint for, inter alia, avoidance of the
redemption payments in their entirety under sections 548(a)(1)(A) and 548(a)(1)(B) of the Code
and corresponding sections of the NYDCL. 	The Trustee may or may not prove the requisite
facts to establish the elements of his claims after discovery and a trial on the merits.
Nevertheless, the Trustee’s claims have been adequately pled, and the Motion to Dismiss under
Rule 12(b)(6) is therefore DENIED as to these counts. 	With respect to Count One of the
Complaint, the Trustee has not adequately stated a claim for immediate turnover of transferred
funds under section 542 of the Code and SIPA section 78fff-2(c)(3), and the Motion to Dismiss
is therefore GRANTED in this limited respect.
IT IS SO ORDERED.
Dated: New York, New York
February 24, 2010
/s/ Burton R. Lifland
UNITED STATES BANKRUPTCY JUDGE
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EXHIBIT A
In re:
BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Debtor.
IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC,
Plaintiff,
v.
ESTATE OF STANLEY CHAIS, individually and as General Partner of Defendants The Brighton
Company, The Lambeth Company, and The Popham Company, and as trustee for The 1994 Trust for
the Children of Stanley and Pamela Chais, the 1996 Trust for the Children of Pamela Chais and
Stanley Chais, the 1999 Trust for the Children of Stanley and Pamela Chais, the 1999 Trust for the
Grandchildren of Stanley and Pamela Chais, the Chais 1991 Family Trust, the Emily Chais 1983
Trust, the Emily Chais Trust, the Emily Chais Issue Trust, the Mark Hugh Chais Trust, the Mark
Chais Issue Trust, the Mark Hugh Chais 1983 Trust, the William Frederick Chais Trust, the William
F. Chais Issue Trust, the William Frederick Chais 1983 Trust, the Ari Chais 1999 Trust, the Ari Chais
Transferee #1 Trust, the Benjamin Paul Chasalow 1999 Trust, the Benjamin Paul Chasalow
Transferee #1 Trust, the Chloe Francis Chais 1994 Trust, the Chloe Francis Chais Transferee #1 Trust,
the Jonathan Wolf Chais Trust, the Jonathan Chais Transferee #1 Trust, the Justin Robert Chasalow
1999 Trust, the Justin Robert Chasalow Transferee #1 Trust, the Madeline Celia Chais 1992 Trust, the
Madeline Chais Transferee #1 Trust, the Rachel Allison Chasalow 1999 Trust, the Rachel Allison
Chasalow Transferee #1 Trust, the Tali Chais 1997 Trust, the Tali Chais Transferee #1 Trust, the
Onondaga, Inc. Defined Benefit Plan, and the Unicycle Corporation Money Purchase Plan;
PAMELA CHAIS, individually, as Executor of the Estate of Stanley Chais, and as trustee for the
Chais 1991 Family Trust, the Appleby Productions Ltd., Defined Contribution Plan, the Appleby
Productions Ltd. Money Purchase Plan, and the Appleby Productions Ltd. Profit Sharing Plan;
EMILY CHASALOW, individually and as trustee for the 1994 Trust for the Children of Stanley and
Pamela Chais, the 1996 Trust for the Children of Pamela Chais and Stanley Chais, the 1999 Trust for
the Children of Stanley and Pamela Chais, the 1999 Trust for the Grandchildren of Stanley and
Pamela Chais, the Chais 1991 Family Trust, the Emily Chais 1983 Trust, the Emily Chais Trust, the
Emily Chais Issue Trust, the Mark Hugh Chais Trust, the Mark Chais Issue Trust, the Mark Hugh
Chais 1983 Trust, the William Frederick Chais Trust, the William F. Chais Issue Trust, the William
Frederick Chais 1983 Trust, the Ari Chais 1999 Trust, the Ari Chais Transferee #1 Trust, the
Benjamin Paul Chasalow 1999 Trust, the Benjamin Paul Chasalow Transferee #1 Trust, the Chloe
Francis Chais 1994 Trust, the Chloe Francis Chais Transferee #1 Trust, the Jonathan Wolf Chais
Trust, the Jonathan Chais Transferee #1 Trust, the Justin Robert Chasalow 1999 Trust, the Justin
Robert Chasalow Transferee #1 Trust, the Madeline Celia Chais 1992 Trust, the Madeline Chais
Transferee #1 Trust, the Rachel Allison Chasalow 1999 Trust, the Rachel Allison Chasalow
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Transferee #1 Trust, the Tali Chais 1997 Trust, and the Tali Chais Transferee #1 Trust;
MARK CHAIS, individually and as trustee for the 1994 Trust for the Children of Stanley and Pamela
Chais, the 1996 Trust for the Children of Pamela Chais and Stanley Chais, the 1999 Trust for the
Children of Stanley and Pamela Chais, the 1999 Trust for the Grandchildren of Stanley and Pamela
Chais, the Chais 1991 Family Trust, the Emily Chais 1983 Trust, the Emily Chais Trust, the Emily
Chais Issue Trust, the Mark Hugh Chais Trust, the Mark Chais Issue Trust, the Mark Hugh Chais
1983 Trust, the William Frederick Chais Trust, the William F. Chais Issue Trust, the William
Frederick Chais 1983 Trust, the Ari Chais 1999 Trust, the Ari Chais Transferee #1 Trust, the
Benjamin Paul Chasalow 1999 Trust, the Benjamin Paul Chasalow Transferee #1 Trust, the Chloe
Francis Chais 1994 Trust, the Chloe Francis Chais Transferee #1 Trust, the Jonathan Wolf Chais
Trust, the Jonathan Chais Transferee #1 Trust, the Justin Robert Chasalow 1999 Trust, the Justin
Robert Chasalow Transferee #1 Trust, the Madeline Celia Chais 1992 Trust, the Madeline Chais
Transferee #1 Trust, the Rachel Allison Chasalow 1999 Trust, the Rachel Allison Chasalow
Transferee #1 Trust, the Tali Chais 1997 Trust, and the Tali Chais Transferee #1 Trust;
WILLIAM CHAIS individually and as trustee for the William Chais and Wrenn Chais 1994 Family
Trust Dated 4/25/95, the 1994 Trust for the Children of Stanley and Pamela Chais, the 1996 Trust for
the Children of Pamela Chais and Stanley Chais, the 1999 Trust for the Children of Stanley and
Pamela Chais, the 1999 Trust for the Grandchildren of Stanley and Pamela Chais, the Chais 1991
Family Trust, the Emily Chais 1983 Trust, the Emily Chais Trust, the Emily Chais Issue Trust, the
Mark Hugh Chais Trust, the Mark Chais Issue Trust, the Mark Hugh Chais 1983 Trust, the William
Frederick Chais Trust, the William F. Chais Issue Trust, the William Frederick Chais 1983 Trust, the
Ari Chais 1999 Trust, the Ari Chais Transferee #1 Trust, the Benjamin Paul Chasalow 1999 Trust, the
Benjamin Paul Chasalow Transferee #1 Trust, the Chloe Francis Chais 1994 Trust, the Chloe Francis
Chais Transferee #1 Trust, the Jonathan Wolf Chais Trust, the Jonathan Chais Transferee #1 Trust, the
Justin Robert Chasalow 1999 Trust, the Justin Robert Chasalow Transferee #1 Trust, the Madeline
Celia Chais 1992 Trust, the Madeline Chais Transferee #1 Trust, the Rachel Allison Chasalow 1999
Trust, the Rachel Allison Chasalow Transferee #1 Trust, the Tali Chais 1997 Trust, the Tali Chais
Transferee #1 Trust, and the Onondaga, Inc. Defined Benefit Plan;
MICHAEL CHASALOW;
MIRIE CHAIS;
WRENN CHAIS, individually and as trustee for the William and Wrenn Chais 1994 Family Trust
Dated 4/25/95;
ALBERT ANGEL, as trustee for The 1994 Trust for the Children of Stanley and Pamela Chais, the
1996 Trust for the Children of Pamela Chais and Stanley Chais, the 1999 Trust for the Children of
Stanley and Pamela Chais, the 1999 Trust for the Grandchildren of Stanley and Pamela Chais, the
Chais 1991 Family Trust, the Emily Chais 1983 Trust, the Emily Chais Trust, the Emily Chais Issue
Trust, the Mark Hugh Chais Trust, the Mark Chais Issue Trust, the Mark Hugh Chais 1983 Trust, the
William Frederick Chais Trust, the William F. Chais Issue Trust, the William Frederick Chais 1983
Trust, the Ari Chais Transferee #1 Trust, the Benjamin Paul Chasalow Transferee #1 Trust, the Chloe
Francis Chais Transferee #1 Trust, the Jonathan Chais Transferee #1 Trust, the Justin Robert
Chasalow Transferee #1 Trust, the Madeline Chais Transferee #1 Trust, the Rachel Allison Chasalow
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Transferee #1 Trust, and the Tali Chais Transferee #1 Trust;
THE BRIGHTON COMPANY;
THE LAMBETH COMPANY;
THE POPHAM COMPANY;
APPLEBY PRODUCTIONS LTD.;
THE APPLEBY PRODUCTIONS LTD. DEFINED CONTRIBUTION PLAN;
THE APPLEBY PRODUCTIONS LTD. MONEY PURCHASE PLAN;
THE APPLEBY PRODUCTIONS LTD. PROFIT SHARING PLAN;
THE UNICYCLE TRADING COMPANY;
UNICYCLE CORP., individually and as the General Partner of The Unicycle Trading Company;
THE UNICYCLE CORPORATION MONEY PURCHASE PLAN;
ONONDAGA, INC., individually and as General Partner of Chais Investments Ltd., a Nevada
Limited Partnership;
THE ONONDAGA, INC. MONEY PURCHASE PLAN;
THE ONONDAGA, INC. DEFINED BENEFIT PENSION PLAN;
CHAIS INVESTMENTS, LTD.;
CHAIS FAMILY FOUNDATION;
CHAIS MANAGEMENT, INC., individually and as General Partner of Chais Management Ltd.;
CHAIS MANAGEMENT, LTD.;
CHAIS VENTURE HOLDINGS;
THE 1994 TRUST FOR THE CHILDREN OF STANLEY AND PAMELA CHAIS;
THE 1996 TRUST FOR THE CHILDREN OF PAMELA CHAIS AND STANLEY CHAIS;
THE 1999 TRUST FOR THE CHILDREN OF STANLEY AND PAMELA CHAIS;
THE 1999 TRUST FOR THE GRANDCHILDREN OF STANLEY AND PAMELA CHAIS;
THE CHAIS 1991 FAMILY TRUST;
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THE EMILY CHAIS 1983 TRUST;
THE EMILY CHAIS TRUST;
THE EMILY CHAIS ISSUE TRUST;
THE MARK HUGH CHAIS TRUST;
THE MARK HUGH CHAIS ISSUE TRUST;
THE MARK HUGH CHAIS 1983 TRUST;
THE WILLIAM FREDERICK CHAIS TRUST;
THE WILLIAM F. CHAIS ISSUE TRUST;
THE WILLIAM FREDERICK CHAIS 1983 TRUST;
THE WILLIAM AND WRENN CHAIS 1994 FAMILY TRUST;
THE ARI CHAIS 1999 TRUST;
THE ARI CHAIS TRANSFEREE #1 TRUST;
THE BENJAMIN PAUL CHASALOW 1999 TRUST;
THE BENJAMIN PAUL CHASALOW TRANSFEREE #1 TRUST;
THE CHLOE FRANCIS CHAIS 1994 TRUST;
THE CHLOE FRANCIS CHAIS TRANSFEREE #1 TRUST;
THE JONATHAN WOLF CHAIS TRUST;
THE JONATHAN CHAIS TRANSFEREE #1 TRUST;
THE JUSTIN ROBERT CHASALOW 1999 TRUST;
THE JUSTIN ROBERT CHASALOW TRANSFEREE #1 TRUST;
THE MADELINE CELIA CHAIS 1992 TRUST;
THE MADELINE CHAIS TRANSFEREE #1 TRUST;
THE RACHEL ALLISON CHASALOW 1999 TRUST;
THE RACHEL ALLISON CHASALOW TRANSFEREE #1 TRUST;
THE TALI CHAIS 1997 TRUST;
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THE TALI CHAIS TRANSFEREE #1 TRUST;
and DOES 1-25;
Defendants.
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