Decision Finds That Bankruptcy Code Safe Harbor Applies To Transfers Made to Madoff Customers

On September 27, 2011, in Picard v. Katz, Southern District of New York District Judge Rakoff granted, in part, the defendants’ motion to dismiss the Madoff Trustee’s amended complaint. In dismissing all but two of the Trustee’s claims, the Court ruled that (1) the safe harbor provision in Section 546(e) of the Bankruptcy Code is applicable to transfers made by Bernard L. Madoff Investment Securities (“BLMIS”) to BLMIS customers and thus the only avoidance claims the Trustee may assert are the Section 548(a)(1)(A) intentional fraud claims with a two-year look-back period, (2) disallowance of BLMIS customers’ creditor claims against the BLMIS estate is inconsistent with SIPA, (3) equitable subordination of creditor claims is appropriate only where a creditor acts in bad faith, and (4) bad faith in SIPA proceedings is measured by a “willful blindness” standard. Judge Rakoff’s decision is the first decision in a Madoff-related case to apply the safe harbor provision to Madoff transfers, and likely will have a significant impact on many of the over 1,000 clawback suits brought by the Madoff Trustee.