Dismissal of Madoff Trustee's Claims Clarifies Standards for Fraudulent Conveyance Claims

In the latest turn in the fraudulent conveyance litigation arising out of the liquidation of Bernie Madoff’s securities firm, on March 14, 2016, Judge Bernstein of the U.S. Bankruptcy Court for the Southern District of New York issued a decision on motions to dismiss the intentional fraudulent transfer claims, constructive fraudulent transfer claims, and state-law fraudulent transfer claims brought by Irving H. Picard, the trustee appointed for Bernard L. Madoff Investment Securities LLC, against defendants Legacy Capital Ltd and Khronos LLC. Picard v. Legacy Capital Ltd. (In re BLMIS), No. 08-99000(SMB), Adv. Proc. No. 08–01789 (SMB), Adv. P. No. 10–05286 (SMB), 2016 WL 943773 (Bankr. S.D.N.Y. Mar. 14, 2016). Significantly, the Court dismissed intentional and constructive fraudulent conveyance claims against investors related to redemptions of principal deposits, where the Court found that the Trustee did not adequately plead that the investor (and a related defendant) had actual knowledge of or willfully blinded themselves to BLMIS’s fraudulent business practices, notwithstanding the existence of various alleged “red flags” suggesting that Madoff’s purported trades were not real. Importantly, the Decision dismissed these claims at the pleadings stage, enabling the defendants to avoid potentially protracted discovery regarding their knowledge of Madoff’s historic practices and their investments.