Irving H. Picard, Trustee for the Liquidation of B v. The Sumitomo Trust and Banking Co., Ltd.

Page 1 of 15
NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION
CORPORATION, No. 08-01789 (CGM)
Plaintiff-Applicant, SIPA LIQUIDATION
v. (Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant.
In re:
BERNARD L. MADOFF,
Debtor.
IRVING H. PICARD, Trustee for the Liquidation of
Bernard L. Madoff Investment Securities LLC,
Adv. Pro. No. 11-02573 (CGM)
Plaintiff,
v.
The Sumitomo Trust and Banking Co., Ltd.,
Defendant.
MEMORANDUM DECISION DENYING DEFENDANT’S MOTION TO DISMISS
A P P E A R A N C E S:
Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff Investment Securities LLC and the Chapter 7 Estate of
Bernard L. Madoff
Baker & Hostetler LLP
45 Rockefeller Plaza
New York, NY 10111
By: Brian W. Song (via Zoom)
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 1 of 15

Page 2 of 15
Counsels for Defendant, The Sumitomo Trust and Banking Co., Ltd.,
Becker, Glynn, Muffly, Chassin & Hosinski LLP
299 Park Avenue
New York, NY 10171
By: Michael Zeb Landsman (via Zoom)
CECELIA G. MORRIS
UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is the Sumitomo Trust and Banking Co., Ltd.’s (“Sumitomo
Trust”) motion to dismiss the complaint of Irving Picard, the trustee (“Trustee”) for the
liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) seeking to recover
subsequent transfers allegedly consisting of BLMIS customer property. Sumitomo Trust seeks
dismissal for failure to plead a cause of action due to improper adoption by reference; for failure
to state a claim due to the safe harbor provision of the Bankruptcy Code, and for failure to plead
that the transfers from BLMIS were customer property. For the reasons set forth herein, the
motion to dismiss is denied.
Jurisdiction
This is an adversary proceeding commenced in this Court, in which the main underlying
SIPA proceeding, Adv. Pro. No. 08-01789 (CGM) (the “SIPA Proceeding”), is pending. The
SIPA Proceeding was originally brought in the United States District Court for the Southern
District of New York (the “District Court”) as Securities Exchange Commission v. Bernard L.
Madoff Investment Securities LLC et al., No. 08-CV-10791, and has been referred to this Court.
This Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and (e)(1),
and 15 U.S.C. § 78eee(b)(2)(A) and (b)(4).
This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (F), (H) and (O).
Background
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 2 of 15

Page 3 of 15
The Court assumes familiarity with the background of the BLMIS Ponzi scheme and its
SIPA proceeding. See Picard v. Citibank, N.A. (In re BLMIS), 12 F.4th 171, 178–83 (2d Cir.
2021), cert. denied sub nom. Citibank, N.A. v. Picard, 142 S. Ct. 1209, 212 L. Ed. 2d 217 (2022).
This adversary proceeding was filed on September 1, 2011 and amended on December
20, 2011. Compl., ECF1 No. 8. Sumitomo Trust is a Japanese trust bank located at 5-33
Kitahama 4-chome, Chuo-ku, Osaka. Id. ¶ 21. Via the amended complaint (“Complaint”), the
Trustee seeks to recover subsequent transfers made to Sumino Trust. Id. ¶ 2. The subsequent
transfers were derived from investments with BLMIS made by other funds, including Fairfield
Sentry Limited (“Fairfield Sentry”). Id. These funds are referred to as “feeder funds” because
the intention of the fund was to invest in BLMIS. Id. ¶¶ 2, 6.
Following BLMIS’s collapse, the Trustee filed an adversary proceeding against Fairfield
Sentry and related defendants to avoid and recover fraudulent transfers of customer property in
the amount of approximately $3 billion. Id. ¶ 34. In 2011, the Trustee settled with Fairfield
Sentry. Id. ¶ 39. As part of the settlement, Fairfield Sentry consented to a judgment in the
amount of $3.054 billion (Consent J., 09-01239-cgm, ECF No. 109) but repaid only $70 million
to the BLMIS customer property estate. The Trustee then commenced a number of adversary
proceedings against subsequent transferees like Defendanst to recover the approximately $3
billion in missing customer property. The Trustee alleges that Sumitomo Trust received
$54,253,642 of funds initially transferred from BLMIS to Fairfield Sentry and subsequently from
Fairfield Sentry to Sumitomo Trust. Compl. ¶¶ 43, 44.
Discussion
1 Unless otherwise indicated, all references to “ECF” are references to this Court’s electronic docket in adversary
proceeding 11-02573-cgm.
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 3 of 15

Page 4 of 15
This Court has subject matter jurisdiction over these adversary proceedings pursuant to
28 U.S.C. §§ 1334(b) and 157(a), the District Court’s Standing Order of Reference, dated July
10, 1984, and the Amended Standing Order of Reference, dated January 31, 2012. In addition,
the District Court removed the SIPA liquidation to this Court pursuant to SIPA § 78eee(b)(4),
(see Order, Civ. 08– 01789 (Bankr. S.D.N.Y. Dec. 15, 2008), at ¶ IX (ECF No. 1)), and this
Court has jurisdiction under the latter provision.
12(b)(6) Standard
“To survive a motion to dismiss, the complaint must contain sufficient factual matter,
accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (cleaned up). The claim is facially plausible when a plaintiff pleads facts that
allow the Court to draw a “reasonable inference that the defendant is liable for the misconduct
alleged.” Id. “The plausibility standard is not akin to a ‘probability requirement,’ but it asks for
more than a sheer possibility that a defendant has acted unlawfully.” Id.; see also Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 556 (2007) (“Asking for plausible grounds to infer an agreement does
not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise
a reasonable expectation that discovery will reveal evidence of illegal agreement.”). In deciding
a motion to dismiss, the Court should assume the factual allegations are true and determine
whether, when read together, they plausibly give rise to an entitlement of relief. Iqbal, 556 U.S.
at 679. “And, of course, a well-pl[ed] complaint may proceed even if it strikes a savvy judge
that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.”
Twombly, 550 U.S. at 556.
In deciding the motion, “courts must consider the complaint in its entirety, as well as
other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 4 of 15

Page 5 of 15
particular, documents incorporated into the complaint by reference, and matters of which a court
may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322
(2007). A complaint is “deemed to include any written instrument attached to it as an exhibit[,] .
. . documents incorporated in it by reference[,]” and other documents “integral” to the complaint.
Chambers v. Time Warner, Inc., 282 F.3d 147, 152–53 (2d Cir. 2002) (citations omitted). A
document is “integral” to a complaint when the plaintiff has “actual notice” of the extraneous
information and relied on it in framing the complaint. DeLuca v. AccessIT Grp., Inc., 695 F.
Supp. 2d 54, 60 (S.D.N.Y. 2010) (citing Chambers, 282 F.3d at 153).
The Trustee seeks to $54,353,642 in subsequent transfers that Defendants received from
Fairfield Sentry under section 550 of title 11 of the United States Code.
Count One: Recovery of Subsequent Transfers
Section 550(a) of the Bankruptcy Code states:
Except as otherwise provided in this section, to the extent that a transfer is avoided
under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may
recover, for the benefit of the estate, the property transferred, or, if the court so
orders, the value of such property, from--
(1) the initial transferee of such transfer or the entity for whose benefit such transfer
was made; or
(2) any immediate or mediate transferee of such initial transferee.
“To plead a subsequent transfer claim, the Trustee must plead that the initial transfer is
avoidable, and the defendant is a subsequent transferee of that initial transferee, that is, that the
funds at issue originated with the debtor.” Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R.
167, 195 (Bankr. S.D.N.Y. 2018); see also SIPC v. BLMIS (In re Consolidated Proceedings on
11 U.S.C. § 546(e)), No. 12 MC 115(JSR), 2013 WL 1609154, at *7 (S.D.N.Y. Apr. 15, 2013)
(consolidated proceedings on 11 U.S.C. § 546(e)). “Federal Civil Rule 9(b) governs the portion
of a claim to avoid an initial intentional fraudulent transfer and Rule 8(a) governs the portion of a
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 5 of 15

Page 6 of 15
claim to recover the subsequent transfer. Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R.
167, 195 (Bankr. S.D.N.Y. 2018) (citing Sharp Int’l Corp. v. State St. Bank & Trust Co., (In re
Sharp Int’l Corp.), 403 F.3d 43, 56 (2d Cir. 2005) and Picard v. Legacy Capital Ltd. (In re
BLMIS), 548 B.R. 13, 36 (Bankr. S.D.N.Y. 2016), rev’d on other grounds, Picard v. Citibank,
N.A. (In re BLMIS), 12 F.4th 171 (2d Cir. 2021)).
To properly plead a subsequent transfer claim, the Trustee need only provide “a short and
plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P.
8(a)(2). “The plaintiff must allege the necessary vital statistics—the who, when, and how much–
of the purported transfers to establish an entity as a subsequent transferee of the funds. However,
the plaintiff’s burden at the pleading stage does not require dollar-for-dollar accounting of the
exact funds at issue.” Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167, 195 (Bankr.
S.D.N.Y. 2018). While the Trustee must allege that the initial transfer from BLMIS to Fairfield
Sentry is avoidable, he is not required to avoid the transfer received by the initial transferee
before asserting an action against subsequent transferees. The Trustee is free to pursue any of
the immediate or mediate transferees, and nothing in the statute requires a different result. IBT
Int’l, Inc. v. Northern (In re Int’l Admin. Servs., Inc.), 408 F.3d 689, 706-07 (11th Cir. 2005).
The Trustee pleaded the avoidability of the initial transfer (from BLMIS to Fairfield
Sentry) by adopting by reference the entirety of the Fairfield Amended Complaint filed against
Fairfield Sentry in adversary proceeding 09-1239. Compl. ¶ 34, ECF No. 8 (“The Trustee
incorporates by reference the allegations contained in the Fairfield Amended Complaint as if
fully set forth herein.”). Whether the Fairfield Amended Complaint properly pleads the
avoidability of the initial transfer, is governed by Rule 9(b). Rule 9(b) states: “In alleging fraud
or mistake, a party must state with particularity the circumstances constituting fraud or mistake.
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 6 of 15

Page 7 of 15
Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.”
Fed. R. Civ. P. 9(b). “Where the actual fraudulent transfer claim is asserted by a bankruptcy
trustee, applicable Second Circuit precedent instructs courts to adopt a more liberal view since a
trustee is an outsider to the transaction who must plead fraud from second-hand knowledge.
Moreover, in a case such as this one, where the Trustee’s lack of personal knowledge is
compounded with complicated issues and transactions that extend over lengthy periods of time,
the trustee’s handicap increases, and even greater latitude should be afforded.” Picard v. Cohmad
Secs. Corp., (In re BLMIS), 454 B.R. 317, 329 (Bankr. S.D.N.Y. 2011) (cleaned up).
Adoption by Reference of the Fairfield Amended Complaint
Adoption by reference is governed by Rule 10 of the Federal Rules of Civil Procedure.
Fed. R. Civ. P. 10(c). Rule 10(c) states: “A statement in a pleading may be adopted by reference
elsewhere in the same pleading or in any other pleading or motion.” The district court has
already found that adoption by reference of the entire Fairfield Amended Complaint is proper.
See SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 550(a)), 501 B.R. 26, 36
(S.D.N.Y. 2013) (“The Trustee’s complaint against Standard Chartered Financial Services
incorporates by reference the complaints against Kingate and Fairfield, including the allegations
concerning the avoidability of the initial transfers, and further alleges the avoidability of these
transfers outright. Thus, the avoidability of the transfers from Madoff Securities to Kingate and
Fairfield is sufficiently pleaded for purposes of section 550(a).”) (cleaned up).
The Court will follow the district court’s instruction. As was explained in In re Geiger,
pleadings filed in the “same action” may be properly adopted by reference in other pleadings in
that action. 446 B.R. 670, 679 (Bankr. E.D. Pa. 2010). The Fairfield Amended Complaint was
filed in the “same action” as this adversary proceeding for purposes of Rule 10(c). Id. Cases
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 7 of 15

Page 8 of 15
within this SIPA proceeding are filed in the same “proceeding”—the SIPA proceeding. In re
Terrestar Corp., No. 16 CIV. 1421 (ER), 2017 WL 1040448, at *4 (S.D.N.Y. Mar. 16, 2017)
(“Adversary proceedings filed in the same bankruptcy case do not constitute different cases.”);
see also Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 610 B.R. 197, 237 (Bankr.
S.D.N.Y. 2019) (“The prior decisions within this SIPA proceeding constitute law of the case . . .
. “); Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 603 B.R. 682, 700 (Bankr.
S.D.N.Y. 2019), (citing In re Motors Liquidation Co., 590 B.R. 39, 62 (S.D.N.Y. 2018) (law of
the case doctrine applies across adversary proceedings within the same main case), aff’d, 943
F.3d 125 (2d Cir. 2019)); Perez v. Terrastar Corp. (In re Terrestar Corp.), No. 16 Civ. 1421
(ER), 2017 WL 1040448, at *4 (S.D.N.Y. Mar. 16, 2017) (“Adversary proceedings filed in the
same bankruptcy case do not constitute different cases.”), appeal dismissed, No. 17-1117 (2d
Cir. June 29, 2017); Bourdeau Bros., Inc. v. Montagne (In re Montagne), No. 08-1024 (CAB),
2010 WL 271347, at *6 (Bankr. D. Vt. Jan. 22, 2010) (“[D]ifferent adversary proceedings in the
same main case do not constitute different ‘cases.’”).
Allowing the Trustee to incorporate the Fairfield Amended Complaint by reference, does
not prejudice Sumitomo Trust. On the other hand, dismissing this Complaint and permitting the
Trustee to amend his Complaint to include all of the allegations that are already contained in the
Fairfield Amended Complaint, would prejudice all parties by delaying the already overly
prolonged proceedings. See Picard v. Fairfield Inv. Fund (In re BLMIS), No. 08-01789 (CGM),
Adv. No. 09-01239 (CGM), 2021 WL 3477479, at *4 (Bankr. S.D.N.Y. Aug. 6, 2021) (“Rule 15
places no time bar on making motions to amend pleadings and permits the amending of
pleadings “when justice so requires.”).
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 8 of 15

Page 9 of 15
Through the adoption of the Fairfield Amended Complaint, the Trustee has adequately
pleaded, with particularity, the avoidability of the initial transfer due to Fairfield Sentry’s
knowledge of BLMIS’ fraud. (Fairfield Compl. ¶¶ 314–18, 09-01239, ECF No. 286); see also
SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 550(a)), 501 B.R. 26, 36
(S.D.N.Y. 2013) (“[T]he Court directs that the following adversary proceedings be returned to
the Bankruptcy Court for further proceedings consistent with this Opinion and Order . . . .”).
BLMIS Customer Property
The Trustee has pled that “[b]ased on the Trustee’s investigation to date, approximately
$54,253,642 of the money transferred from BLMIS to Fairfield Sentry was subsequently
transferred by Fairfield Sentry to [Sumitomo Trust].” Compl. ¶ 40.
The exhibits attached to the Complaint provide Sumitomo Trust with the “who, when,
and how much” of each transfer. Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167, 195
(Bankr. S.D.N.Y. 2018); Compl., ECF No. 8, Ex. C–D. The Fairfield Amended Complaint,
which is incorporated by reference into this, alleges that the Fairfield Fund was required to invest
95% of its assets in BLMIS. Fairfield Compl. ¶ 89; see also Fairfield Compl. ¶ 91 (“From the
beginning, to comport with Madoff’s requirement for BLMIS feeder funds, Fairfield Sentry
ceded control of not only its investment decisions, but also the custody of its assets, to
BLMIS.”). The Trustee need not prove the path that each transfer took from BLMIS to Fairfield
Sentry and subsequently to each redeeming shareholder. The Complaint plausibly alleges that
Fairfield Sentry did not have any assets that were not customer property.
Taking all allegations as true and reading them in a light most favorable to the Trustee,
the Complaint plausibly pleads that Sumitomo Trust received customer property because
Fairfield Sentry did not have other property to give. The calculation of Fairfield Sentry’s
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 9 of 15

Page 10 of 15
customer property and what funds it used to make redemption payments are issues of fact better
resolved at a later stage of litigation.
Section 546(e)
Sumitomo Trust has raised the “safe harbor” defense, found in 11 USC § 546(e), to the
Trustee’s allegations. Section 546(e) is referred to as the safe harbor because it protects a
transfer that is a “settlement payment ... made by or to (or for the benefit of) a ... financial
institution [or] financial participant,” or that is “made by or to (or for the benefit of) a ... financial
institution [or] financial participant ... in connection with a securities contract.” 11 U.S.C. §
546(e). “By its terms, the safe harbor is a defense to the avoidance of the initial transfer. Picard
v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167, 197 (Bankr. S.D.N.Y. 2018) (emphasis
added). However, where the initial transferee fails to raise a § 546(e) defense against the
Trustee’s avoidance of certain transfers, as is the case here, the subsequent transferee is entitled
to raise a § 546(e) defense against recovery of those funds. Picard v. Fairfield Inv. Fund (In re
BLMIS), No. 08-01789 (CGM), Adv. No. 09-01239 (CGM), 2021 WL 3477479, at *3 (Bankr.
S.D.N.Y. Aug. 6, 2021).
In light of the safe harbor granted under 11 U.S.C. § 546(e), the Trustee may only avoid
and recover intentional fraudulent transfers under § 548(a)(1)(A) made within two years of the
filing date, unless the transferee had actual knowledge of BLMIS’s Ponzi scheme, or more
generally, “actual knowledge that there were no actual securities transactions being conducted.”
SIPC v. BLMIS (In re Consolidated Proceedings on 11 U.S.C. § 546(e)), No. 12 MC 115(JSR),
2013 WL 1609154, at *4 (S.D.N.Y. Apr. 15, 2013). “The safe harbor was intended, among other
things, to promote the reasonable expectations of legitimate investors. If an investor knew that
BLMIS was not actually trading securities, he had no reasonable expectation that he was signing
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 10 of 15

Page 11 of 15
a contract with BLMIS for the purpose of trading securities for his account. In that event, the
Trustee can avoid and recover preferences and actual and constructive fraudulent transfers to the
full extent permitted under state and federal law.” Picard v. Legacy Capital Ltd. (In re BLMIS),
548 B.R. 13, 28 (Bankr. S.D.N.Y. 2016) (internal citations omitted), vacated and remanded on
other grounds, Picard v. Citibank, N.A. (In re BLMIS), 12 F.4th 171 (2d Cir. 2021)). “In sum, if
the Trustee sufficiently alleges that the [initial] transferee from whom he seeks to recover a
fraudulent transfer knew of [BLMIS ]’[s] fraud, that transferee cannot claim the protections of
Section 546(e)’s safe harbor.” Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, No. 08-
01789 (CGM), 2021 WL 3477479, at *4 (Bankr. S.D.N.Y. Aug. 6, 2021).
This Court has already determined that the Fairfield Amended Complaint contains
sufficient allegations of Fairfield Sentry’s actual knowledge to defeat the safe harbor defense on
a Rule 12(b)(6) motion. See Picard v. Fairfield Inv. Fund (In re BLMIS), No. 08-01789 (CGM),
Adv. No. 09-01239 (CGM), 2021 WL 3477479, at *4 (Bankr. S.D.N.Y. Aug. 6, 2021) (“[T]he
Trustee has alleged that the agents and principals of the Fairfield Funds had actual knowledge of
Madoff's fraud”). In that adversary proceeding, the Court held that “[t]he Trustee has pled
[actual] knowledge in two ways: 1) that certain individuals had actual knowledge of Madoff's
fraud, which is imputed to the Fairfield Funds; and 2) that actual knowledge is imputed to the
Fairfield Funds through ‘FGG,’ an alleged ‘de facto’ partnership.” Id. at *4; see also Fairfield
Compl. ¶ 320 (“Fairfield Sentry had actual knowledge of the fraud at BLMIS”); Fairfield Compl.
¶ 321 (“Greenwich Sentry and Greenwich Sentry Partners had actual knowledge of the fraud at
BLMIS”); Fairfield Compl. ¶ 322 (“FIFL had actual knowledge of the fraud at BLMIS”);
Fairfield Compl. ¶ 323 (“Stable Fund had actual knowledge of the fraud at BLMIS”); Fairfield
Compl. ¶ 324 (“FG Limited had actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 11 of 15

Page 12 of 15
325 (“FG Bermuda had actual knowledge of the fraud at BLMIS”); ¶ 326 (“FG Advisors had
actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶ 327 (“Fairfield International
Managers had actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶ 328 (“FG Capital
had actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶ 329 (“Share Management had
actual knowledge of the fraud at BLMIS”); Fairfield Compl. ¶ 9 (“It is inescapable that FGG
partners knew BLMIS was not trading securities. They knew BLMIS’s returns could not be the
result of the split strike conversion strategy (the “SSC Strategy”). They knew BLMIS’s equities
and options trading volumes were impossible. They knew that BLMIS reported impossible, out-
of-range trades, which almost always were in Madoff’s favor. They knew Madoff’s auditor was
not certified and lacked the ability to audit BLMIS. They knew BLMIS did not use an
independent broker or custodian. They knew Madoff refused to identify any of BLMIS’s options
counterparties. They knew their clients and potential clients raised numerous due diligence
questions they would not and could not satisfactorily answer. They knew Madoff would refuse to
provide them with honest answers to due diligence questions because it would confirm the
details of his fraud. They knew Madoff lied about whether he traded options over the counter or
through the exchange. They knew they lied to clients about BLMIS’s practices in order to keep
the money flowing and their fees growing. And they knowingly misled the SEC at Madoff’s
direction.”).
This Court determined that the Fairfield Amended Complaint is replete with allegations
demonstrating that Fairfield Sentry had actual knowledge that BLMIS was not trading securities.
See Picard v. Fairfield Inv. Fund (In re BLMIS), No. 08-01789(CGM), Adv. No. 09-01239
(CGM), 2021 WL 3477479, at *3–7 (Bankr. S.D.N.Y. Aug. 6, 2021). The district court
determined that “those defendants who claim the protections of Section 546(e) through a Madoff
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 12 of 15

Page 13 of 15
Securities account agreement but who actually knew that Madoff Securities was a Ponzi scheme
are not entitled to the protections of the Section 546(e) safe harbor, and their motions to dismiss
the Trustee’s claims on this ground must be denied. SIPC v. BLMIS (In re Consolidated
Proceedings on 11 U.S.C. § 546(e)), No. 12 MC 115(JSR), 2013 WL 1609154, at *10 (S.D.N.Y.
Apr. 15, 2013).
This Court is powerless to reconsider this issue, agrees with the district court’s reasoning,
and finds its holding consistent with dicta set forth by the Court of Appeals for the Second
Circuit. See Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Inv. Sec. LLC),
773 F.3d 411, 420 (2d Cir. 2014) (“The clawback defendants, having every reason to believe that
BLMIS was actually engaged in the business of effecting securities transactions, have every right
to avail themselves of all the protections afforded to the clients of stockbrokers, including the
protection offered by § 546(e).”). The Trustee’s allegations in the Fairfield Amended Complaint
are sufficient to survive a Rule 12(b)(6) motion on this issue.
The Safe Harbor Cannot be Used to Defeat a Subsequent Transfer
Sumitomo Trust argues that the safe harbor prevents the Trustee from avoiding the
subsequent transfer between Fairfield Sentry and Defendants on account of the securities
contract between Fairfield and the Defendants.
The safe harbor is not applicable to subsequent transfers. “By its terms, the safe harbor is
a defense to the avoidance of the initial transfer.” Picard v. BNP Paribas S.A. (In re BLMIS),
594 B.R. 167, 197 (Bankr. S.D.N.Y. 2018) (emphasis in original); see also 11 U.S.C. § 546(e)
(failing to include § 550 in its protections). Since there must be an initial transfer in order for the
Trustee to collect against a subsequent transferee, a subsequent transferee may raise the safe
harbor as a defense—but only in so far as the avoidance of the initial transfer is concerned. The
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 13 of 15

Page 14 of 15
safe harbor cannot be used as a defense by the subsequent transferee because the Trustee is not
“avoiding” a subsequent transfer, “he recovers the value of the avoided initial transfer from the
subsequent transferee under 11 U.S.C. § 550(a), and the safe harbor does not refer to the
recovery claims under section 550.” Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167,
197 (Bankr. S.D.N.Y. 2018).
Sumitomo Trust argues that this Court applied the safe harbor to redemption payments
made by Fairfield Sentry in In re Fairfield Sentry Ltd., 2020 WL 7345988, at *5 (Dec. 14, 2020)
(“Fairfield III”). Reliance on this case is misplaced. While many facts overlap between this
SIPA liquidation of BLMIS and the foreign liquidation of BLMIS’s largest feeder fund, Fairfield
Sentry, the legal holdings in these liquidations are not interchangeable. In this case, the Court is
analyzing subsequent transfers; in Fairfield III the Court was analyzing initial transfers. The
safe harbor is not available to be raised as defense to subsequent transfer claims.
In Fairfield III, this Court analyzed whether the safe harbor applied to avoidance claims
under BVI law2 to recover “unfair preferences” and “undervalue transactions” and constructive
trust claims against a defendant who allegedly “knew or willfully blinded itself to the fact that
the [Fairfield Sentry’s] BLMIS investments were worthless or virtually worthless.” In re
Fairfield Sentry Ltd., No. 10-13164 (SMB), 2020 WL 7345988, at *1 (Bankr. S.D.N.Y. Dec. 14,
2020), reconsideration denied, No. 10-13164 (SMB), 2021 WL 771677 (Bankr. S.D.N.Y. Feb.
23, 2021). The Court was not considering the safe harbor’s effect on subsequent transfer claims
brought under § 550 of the Bankruptcy Code. In the Fairfield Sentry liquidation, Defendants
would be an initial transferee as redemption payments paid by Fairfield Sentry were paid directly
to the Defendants. Fairfield III is not applicable here.
2 Fairfield Sentry liquidated under the laws of the British Virgin Islands (“BVI”) and this Court’s chapter 15 case is
ancillary to the primary proceeding brought in the BVI.
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 14 of 15

Page 15 of 15
Sumitomo Trust is not permitted to raise the safe harbor defense on its own behalf as
subsequent transferees.
Conclusion
For the foregoing reasons, Sumitomo Trust’s motion to dismiss is denied. The Trustee
shall submit a proposed order within fourteen days of the issuance of this decision, directly to
chambers (via E-Orders), upon not less than two days’ notice to all parties, as required by Local
Bankruptcy Rule 9074-1(a).
Dated: September 21, 2022
Poughkeepsie, New York
/s/ Cecelia G. Morris
_______________________
Hon. Cecelia G. Morris
U.S. Bankruptcy Judge
11-02573-cgm Doc 128 Filed 09/22/22 Entered 09/22/22 08:43:33 Main Document
Pg 15 of 15