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Innocent Transferees Involved in Ponzi Scheme Must Return Transfers in Excess of Principal Deposits

By: Allison N. Smalley

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

           In Securities Investor Protection Corporation v. Bernie L. Madoff Investment Securities, LLC,[1] the Bankruptcy Court for the Southern District of New York concluded that a recipient should return fictitious profits he gained through the Ponzi scheme operated by Bernard L. Madoff Investment Securities (“BLMIS”).[2] Andrew Cohen withdrew approximately $4 million from his account at BLMIS between January 18, 1996 and December 11, 2008.[3] Of that withdrawal, approximately $1.1 million was fictitious profit.[4] Irving Picard, as the trustee of BLMIS,[5] sought to recover the fictitious profits from several recipients, including Cohen, under Section 548 of the Bankruptcy Code.[6] As a defense, Cohen asserted that he gave “value” to BLMIS when he received the fictitious profits.[7] The bankruptcy court, however, rejected this defense and concluded that the District Court should find in favor of Picard.[8]

           The bankruptcy court found that BLMIS made the transfers of the fictitious profits to Cohen with the “actual intent to hinder, delay, or defraud” its creditors under Section 548(a)(1)(A) of the Bankruptcy Code.[9] Consequently, Picard, as the trustee, could recover the fictitious profit transferred to Cohen.[10] Cohen asserted that he received the fictitious profit in good faith and Picard conceded that Cohen was not aware of Madoff’s Ponzi scheme when he received the avoidable transfers.[11] Therefore, under the Bankruptcy Code, Cohen’s liability is limited to the fictitious profit he received, as opposed to the full amount he withdrew, because it was established that he was a good faith transferee.[12]

           As his principal defense, Cohen asserted that the payment of fictitious profits satisfied value by paying the antecedent debts that BLMIS owed to Cohen.[13] However, the Bankruptcy Court rejected this defense and refused to let Cohen expressly or impliedly reargue the same argument he asserted in In re BLMIS.[14] The District Court in In re BLMIS had already rejected Cohen’s same antecedent debt/value arguments[15] and provided that “value” under Section 548(c) of the Bankruptcy Code is limited to the original amount invested, expanding trustees’ avoidance powers.[16] Additionally, there are later decisions that also reject these arguments and are consistent with the District Court’s decision in In re BLMIS.[17]

           Ultimately, the Bankruptcy Court in SIPC reiterated two rules from the District Court and its prior holdings: (1) transferees do not give value beyond their principal deposits and (2) it cannot be argued that the payment of fictitious profits provided value under Section 548(c) of the Bankruptcy Code because it satisfied an antecedent debt or obligation.[18] Accordingly, recipients of fictitious profits from Ponzi schemes may be required to turnover their profits, regardless of their innocence, because they did not give value for any fictitious profits they received and must return all transfers in excess of their principal deposits.[19]



[1] Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities LLC, Adv. Proc. Nos. 08–01789(SMB), 10–04311(SMB), 2016 WL 1695296, at *1 (Bankr. S.D.N.Y. Apr. 25, 2016) (hereinafter referred to as “SIPC”). 

[2] See id. at *2, *16.  

[3] See id.

[4] See id.

[5] See id. at *1; see 15 U.S.C. § 78eee(b)(3) (stating that under this section, a court can appoint a trustee for the liquidation of a debtor’s business).

[6] See SIPC, Adv. Proc. Nos. 08–01789(SMB), 10–04311(SMB), 2016 WL 1695296, at *4 (noting the need for litigation, such as this, because of the insolvency of the BLMIS estate since December 11, 2002).

[7] See id. at *5; see also 11 U.S.C. § 548(c).

[8] See SIPC, Adv. Proc. Nos. 08–01789(SMB), 10–04311(SMB), 2016 WL 1695296 at *2, *16 (explaining that this Bankruptcy Court cannot enter a final judgment on this matter because Cohen did not consent to it, however, this Court may make a recommendation to the District Court based on proposed findings of fact and conclusions of law); see also Wellness Int’l Network, Ltd. v. Sharif, 135 S.Ct. 1932, 1939–1940 (2015) (holding that all parties to a proceeding must consent to adjudication by a bankruptcy judge in order for that judge to enter a final judgment on the matter).

[9] SIPC, Adv. Proc. Nos. 08–01789(SMB), 10–04311(SMB), 2016 WL 1695296 at *2; see also 11 U.S.C. § 548(a)(1)(A).

[10] See SIPC, Adv. Proc. Nos. 08–01789(SMB), 10–04311(SMB), 2016 WL 1695296, at *5 (stating that this is a presumption made in Ponzi scheme cases).

[11] See id.

[12] See id; see also 11 U.S.C. § 548(a)(1)(A) (stating that a Trustee can recover only fraudulent transfers that are made with actual intent).  

[13] See SIPC, Adv. Proc. Nos. 08–01789(SMB), 10–04311(SMB), 2016 WL 1695296, at *5; see also 11 U.S.C. § 548(c) (stating that transferees can assert a value defense in fraudulent transfer actions to the extent that the transferee received the transfer for value in which he or she gave value to the debtor in exchange for the transfer(s) in question); see also 11 U.S.C. § 548(d)(2)(A) (defining “value” as the satisfaction of a debtor’s antecedent debt).

[14] See SIPC, Adv. Proc. Nos. 08–01789(SMB), 10–04311(SMB), 2016 WL 1695296, at * 5, *12.

[15] See id. at *12. (noting that Cohen was a party to this case at the time it was decided); see also SIPC v. BLMIS (In re BLMIS), 499 B.R. 416 (S.D.N.Y. 2013) (“Antecedent Debt Decision”).

[16]  See SIPC, Adv. Proc. Nos. 08–01789(SMB), 10–04311(SMB), 2016 WL 1695296, at *11.

[17] See id. at *12.

[18] See id. at *10–11.

[19] See id. at *10–14.