MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART TRUSTEE'S MOTION FOR LEAVE TO SERVE AMENDED COMPLAINT
STUART M. BERNSTEIN, United States Bankruptcy Judge.
Plaintiff Irving H. Picard (the "Trustee"), the trustee for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. ("SIPA"), filed his proposed Amended Complaint on August 30, 2017 ("PAC")
Unless otherwise indicated, the background information is taken from the well-pleaded factual allegations of the PAC and other information the Court may consider in determining whether the pleading is legally sufficient.
A. The Ponzi Scheme
At all relevant times, Bernard Madoff operated the investment advisory arm of
The BLMIS Ponzi scheme collapsed when redemption requests overwhelmed the flow of new investments, (¶ 49), and Madoff was arrested by federal agents for criminal violations of federal securities laws on December 11, 2008 (the "Filing Date"). (¶ 18.) The Securities and Exchange Commission ("SEC") contemporaneously commenced an action in the United States District Court for the Southern District of New York, and that action was consolidated with an application by the Securities Investor Protection Corporation ("SIPC") asserting that BLMIS' customers needed the protections afforded by SIPA. (¶¶ 18, 19.) On December 15, 2008, the District Court granted SIPC's application, appointed the Trustee and his counsel, and removed the SIPA liquidation to this Court. (¶ 20.)
At a plea hearing on March 12, 2009, Madoff pleaded guilty to an eleven count criminal information and admitted that he "operated a Ponzi scheme through the investment advisory side of [BLMIS]." (¶¶ 23, 50.)
BNP Bank is a corporation organized under the laws of France. (¶ 52.) It provides banking services in seventy-five countries and has maintained a presence in the United States since the late 1800s. (¶ 58.) Currently, BNP Bank has over 10,000 employees and more than 700 retail branches in the United States. (¶ 58.)
BNP Arbitrage and BNP Securities Services, both French entities, are wholly-owned subsidiaries of BNP Bank, (¶¶ 53, 55), and maintain offices in Paris, France and New York, New York. (¶¶ 53, 55, 59.) BNP Cayman is also a wholly owned subsidiary of BNP Bank that is located in and organized under the laws of the Cayman Islands. (¶ 54.)
C. BNP Bank's Introduction to Madoff and the Creation of a Feeder Fund
1. BNP Bank Made Loans to Madoff
BNP Bank's relationship with Madoff began around November 1988 when it provided a $15 million personal line of credit to Madoff, which increased to $40 million by May 1995, and to $75 million by October 1996. As collateral for the loan, Madoff pledged securities it held on behalf of BLMIS customers. (¶ 84.) BNP Bank conducted due diligence in connection with the extension of credit, which included reviewing BLMIS' Financial Operating and Combined Uniform Single ("FOCUS") Reports and audited financials and meeting with Madoff at BLMIS' office. (¶ 85.) Madoff used the loan proceeds to finance and grow the BLMIS Ponzi scheme. (¶ 88.)
2. BNP Bank Created and Serviced Oreades
In 1997, BNP Bank partnered with Access International Advisors ("Access") to create Oreades SICAV ("Oreades"), a Luxembourg-incorporated "feeder fund" that invested exclusively with BLMIS. (¶ 89.) BNP Bank, through its subsidiaries purported to provide services to Oreades while Access recruited investors. (¶ 90.)
In January and March 1998, a BNP Bank subsidiary opened two investment accounts at BLMIS for Oreades. (¶ 91.) Two BNP Bank subsidiaries served as administrators of Oreades: BNP Paribas Fund Administration S.A. from 1997 to 2002 and BNP Securities Services from 2002 to 2004. (¶ 92.) The administrators were responsible for processing subscriptions into and redemptions from Oreades and frequently corresponded with BLMIS employees to direct transfers in and out of Oreades' BLMIS accounts. (¶ 94.) The administrators received all of the BLMIS account statements and trade confirmations for Oreades, and were responsible for calculating the fund's monthly net asset value based on those numbers. (¶ 95.)
By 2003, BNP Bank's standard practice was to receive account statements and trade confirmations electronically. In May 2003, BNP Securities Services asked BLMIS to adhere to this policy, but BLMIS refused, and continued to send paper statements and confirmations through the mail. BNP Bank exempted BLMIS from this requirement to maintain the business relationship. (¶ 96.)
From the time of Oreades' formation, BNP Bank and Access hid the fact that BLMIS was serving as Oreades' custodian and investment advisor. (¶ 97.) Oreades represented that a BNP Bank subsidiary served as its official custodian (BGL BNP Paribas from 1997 to 2002 and BNP Securities Services from 2002 to 2004), but in reality, the BNP Bank subsidiary delegated all custodial authority to BLMIS through an undisclosed sub-custodian agreement. (¶¶ 98, 99.) Madoff demanded this arrangement as a precondition to investment, (¶ 99), but did not charge a fee for the custodial services performed by BLMIS. (¶ 100.) This allowed the BNP Bank subsidiaries to charge custodial fees to Oreades investors without performing corresponding services. (¶ 100.)
Similarly, Oreades represented to investors and to Luxembourg's financial regulator, the Commission de Surveillance du Secteur Financier ("CSSF"), that a BNP Bank affiliate, Inter Conseil, served as its investment advisor. (¶ 101.) However, Inter Conseil delegated its investment advisory duties to BLMIS in an undisclosed Sub-Advisory and Management Agreement. (¶ 102.) Madoff required the delegation and performed the services free of charge, (¶¶ 102, 105), and Inter Conseil received fees from Oreades investors despite the delegation of duties. (¶ 105.) In addition, BNP Bank's own compliance rules required a "strict separation" between a fund's investment adviser and custodian. (¶ 106; see also ¶¶ 99, 102.) The delegation of custodial and investment advisory duties to BLMIS violated this rule. (¶ 107.)
BNP Bank knew that the delegation to BLMIS of custodial and investment advisory duties violated Luxembourg law. First, only a Luxembourg-regulated entity could act as Oreades' custodian, but BLMIS was not regulated by the CSSF. (¶ 108.) Second, Luxembourg law required that Oreades' investment advisor and custodian be disclosed, but BNP Bank and its affiliates deliberately omitted mention of BLMIS in offering materials. (¶ 109; see also ¶¶ 261-62.) Third, Luxembourg law required the BNP Bank subsidiary purportedly acting as custodian to verify the
3. BNP Bank Recognized BLMIS' Fraud Risk and Closed Oreades
On July 10, 2003, a senior executive at BNP Securities Services, Lionel Trouvain, reviewed a BNP Bank internal audit and compliance report on Oreades and became concerned "that the risk [to] BNP Paribas is very extensive." (¶ 113.) Trouvain noted that BLMIS' practice of sending account documents via mail was problematic:
(¶ 114 (emphasis and ellipsis in PAC); see also ¶¶ 246-49, 253.)
Trouvain also stated that BNP Bank would ultimately be held liable for misrepresenting and omitting the role of BLMIS as Oreades' custodian and investment advisor:
(¶ 116.) He also inquired about where BLMIS was holding U.S. Treasury Bills on Oreades' behalf. (¶ 117.)
In August 2003, Trouvain and other BNP Bank employees met with Access' management to determine whether it was possible to bring their relationship with BLMIS into compliance with BNP Bank's internal rules. According to the meeting minutes, BLMIS' hidden role as Oreades' custodian and investment advisor was an "unconscionable" violation of BNP Bank's rules and Luxembourg law. BNP Bank wanted "to be released from liability it ha[d] incurred as a `sponsor' (initiator of the creation) manager, and custodian of the fund." (¶ 118; see also ¶¶ 241-45.)
Communicating through Access, BNP Bank asked Madoff to permit it to disclose BLMIS to the CSSF, but Madoff refused. Access told BNP Bank that Madoff's refusal was based in part on wanting to avoid U.S. regulatory scrutiny for BLMIS' failure to register as an investment advisor. (¶ 119.) One BNP Bank employee warned
By November 2003, BNP Bank was measuring its potential liability as Oreades' sponsor, administrator and custodian "in the event of a default on the part of Madoff." (¶ 122.) Ultimately, BNP Bank decided to shut down Oreades: BNP Securities Services closed the BLMIS accounts in March 2004, and Inter Conseil placed Oreades into liquidation in Luxembourg in May 2004. (¶¶ 123-25.)
D. Others at BNP Bank were Suspicious of Madoff
Paulo Gianferrara, who from 2000 to 2006 served as the Head of Hedge Funds for BNP Paribas Private Wealth in Paris and Geneva, refused to approve transactions involving BLMIS feeder funds for private banking clients. (¶ 128.) According to employees of Fairfield Greenwich Group — an entity that managed certain BLMIS feeder funds — Gianferrara "always had a problem with Madoff" and would "not even consider" investments in Fairfield's Madoff-related products. (¶ 129.)
Patrick Fauchier of Fauchier Partners — an entity that was involved in a joint venture with a BNP Bank affiliate — told Access in June 2008 that he was concerned that the SEC would not allow BLMIS to continue as a business and found it suspicious that Madoff did not charge customary investment management fees. (¶¶ 131, 133, 134; see also ¶¶ 258-60.) Fauchier also flagged BLMIS' FOCUS Reports in which BLMIS disclosed that it managed only twenty-three investment accounts; Fauchier knew that BLMIS was underreporting that figure. (¶ 135.) The Trustee alleges, upon information and belief, that Fauchier shared his concerns about Madoff to senior officers at BNP Bank. (¶ 136.)
E. BNP Bank Became a Global Leverage Provider to BLMIS Feeder Funds
Despite the circumstances surrounding the closing of Oreades, BNP Bank embarked on a strategy to become a global leverage provider to BLMIS feeder funds and their investors. (¶ 138.) In addition to generating fees for BNP Bank and its subsidiaries, pursuing this business would build BNP Bank's reputation as a leverage provider and allow it to compete with rival bank Société Générale ("SocGen"). It also presented opportunities to cross-sell BNP Bank services to institutional clients. (¶ 139.) Becoming a leverage provider allowed BNP Bank to profit from BLMIS' performance without the risk associated with serving in a fiduciary capacity (as it did with Oreades). (¶¶ 140, 148.)
1. Acquisition of ZCM
In the early 2000s, BNP Bank lacked the infrastructure and personnel necessary to offer credit facilities and structured products at the level of rival banks. (¶ 141.) In 2003, Zurich Financial offered to sell its leverage business unit, Zurich Capital Markets, Inc. ("ZCM"), consisting of sixty employees in New York and a portfolio linked to investment funds. (¶ 142.) In connection with a potential acquisition, BNP Bank conducted due diligence on ZCM's portfolio, including a multi-million dollar credit facility with Santa Barbara Holdings Ltd. ("Santa Barbara") — a fund that was invested solely in BLMIS feeder fund Harley International (Cayman) Limited ("Harley"). (¶ 143.) BNP Bank had a strict policy against transacting with single-manager funds, and Harley was a single-manager
The ZCM acquisition provided BNP Bank with the infrastructure and personnel necessary to create and market credit facilities and structured products to clients, including BLMIS feeder funds. (¶¶ 146-47.) These transactions were highly lucrative and, according to the Trustee, incentivized BNP Bank to turn a blind eye to Madoff's fraud. (¶ 150.)
SocGen had also considered acquiring ZCM but its diligence revealed obvious risks of fraud associated with Harley, including "impossibl[y]" consistent returns, BLMIS' failure to charge customary management or performance fees, and BLMIS acting as its own custodian. (¶¶ 153-59.) SocGen offered to purchase ZCM's assets excluding the Santa Barbara credit facility, but Zurich Financial refused. Thereafter, SocGen blacklisted BLMIS-related investments. (¶ 161.) According to the Trustee, BNP Bank chose to acquire ZCM despite knowing about SocGen's misgivings concerning Madoff. (¶ 162.)
2. The Defendants Deviated from Standard Diligence Practices to Avoid Confirming Madoff's Fraud
Following the ZCM acquisition, customer demand for leverage and credit on BLMIS-related transactions was high and BNP Bank management was eager to profit from the demand. (¶ 168.) This line of business was handled by the "Fund Derivatives Group" — consisting of employees of BNP Bank, BNP Arbitrage, and non-party BNP Paribas Securities Corp. ("BNP Securities Corp."), (¶ 66), — that created, marketed, and serviced credit facilities and derivative financial instruments such as swaps, notes, and other structured products. Such products offered customers "leverage," thereby creating an opportunity to earn multiples of the returns generated by the underlying referenced asset without large up-front outlays of capital. (¶ 64.) BNP Bank provided billions of dollars in capital to fund the credit facilities and structured products. (¶¶ 4, 67.) BNP Arbitrage created and managed the facilities and products, and BNP Securities Corp. marketed and monitored the facilities and products. (¶ 67.) In addition, BNP Securities Corp. served as the calculation agent, which included calculating the amount that BNP Bank should invest or redeem from a BLMIS feeder fund. (¶ 68.)
Typically, the Fund Derivatives Group's due diligence in connection with an ongoing or potential transaction entailed reviewing all relevant public documents including financial documents, offering memoranda, subscription agreements, account statements, trade confirmations and documents relating to the fund manager's investment strategy. (¶ 169.) When a transaction would result in significant exposure to BNP Bank, it was standard procedure for the due diligence team to conduct on-site visits and memorialize findings in a memorandum. (¶ 170.)
Notwithstanding the diligence procedures, the Fund Derivatives Group's due diligence team lacked authority to reject Madoff-related transactions, (¶¶ 165, 167), and such transactions were pre-approved by senior management at BNP Bank. (¶ 168.) Likewise, senior management instructed the due diligence team not to contact Madoff or anyone from BLMIS to arrange on-site diligence visits. (¶ 174.) The due diligence team did make one on-site visit to BLMIS in March 2008, but did not draft a memorandum to memorialize the visit. (¶ 175.)
The due diligence team also ranked fund managers in a periodic report called the "Heat Map" based on a risk score assigned by the team. For purposes of this report,
Moreover, by taking on billions of Madoff-related deals, the Fund Derivatives Group disregarded BNP Bank's policy against taking on exposure from single-manager trades. (¶ 178.) According to the Trustee, BNP Bank deviated from its standard operating procedures because the Fund Derivatives Group would not have been profitable absent the Madoff-related transactions. (¶¶ 166, 179.)
3. BNP Bank Provides Leverage to BLMIS Feeder Funds
a. Santa Barbara
In February 2004, BNP Bank, through its Fund Derivatives Group, entered into another credit facility with Santa Barbara. (¶ 180.) Trouvain (who had previously raised concerns regarding Oreades) worked on this transaction. (¶ 182.) The credit facility called for BNP Bank to make senior secured loans to Santa Barbara for levered investments with Harley; Harley's BLMIS account served as collateral for the credit facility. In exchange, Santa Barbara paid BNP Bank above-market fees and interest, which, as of 2004, was 170 basis points above LIBOR. (¶ 183.) BNP Arbitrage served as calculation agent, (¶ 185), and BNP Securities Corp. served as collateral agent, (¶ 184), for the credit facility. Under the terms of the credit facility, BNP Bank, BNP Arbitrage and BNP Securities Corp. took control over Harley's BLMIS account so that Harley could not make redemptions absent BNP Bank's consent. (¶ 187.) These BNP entities communicated directly with BLMIS and received and reviewed Harley's BLMIS account statements and trade confirmations. (¶ 186.)
In 2007, BNP Bank entered into an option agreement with HSBC Bank USA, N.A. ("HSBC"), with Harley as the underlying reference fund. The option required HSBC to pay BNP Bank for losses sustained by Harley above a certain fixed percentage of the fund's net asset value. The notional amount of the trade was $70 million, and increased to $90 million in 2008. The Trustee alleges that BNP Bank entered into this transaction to protect itself in the event of BLMIS' failure. (¶ 190.) During negotiations over the option, the head of trading at the Fund Derivatives Group told an HSBC employee that he was unable to reconcile the trading statements BNP Bank had received from BLMIS. (¶ 191.)
Between 2003 and 2008, BNP Bank's relationship with Santa Barbara, Harley and Fix Asset Management (the investment manager of Santa Barbara and Harley) grew substantially, as did the size of the credit facility. By the Filing Date, BNP Arbitrage had received transfers of approximately $975 million of customer property from Harley's BLMIS account. (¶ 192.)
In July 2004, BNP Bank entered into a $100 million credit facility with Legacy Capital Ltd. ("Legacy"), an investment company that invested exclusively with BLMIS. (¶ 193.) Under the facility, BNP Arbitrage and BNP Securities Corp. served as calculation agent and collateral agent, respectively, and both were authorized to act on BNP Bank's behalf. (¶ 195.) Legacy pledged all of its capital stock to BNP Securities Corp. and granted a security interest in Legacy's BLMIS account. (¶ 196.) In connection with the Legacy credit facility, BNP Bank, BNP Arbitrage, and/or BNP Securities Corp. communicated directly with BLMIS and received and reviewed Legacy's BLMIS account statements
The PAC also described the circumstances leading to BNP Bank's extension of the Legacy credit facility. In June 1999, Meritage — a sub-fund of Renaissance Technologies Corp. ("Renaissance"), entered into a total return swap through which it received returns equal to those paid on an equivalent amount of the counterparty's own investment with BLMIS via Legacy's BLMIS account. (¶ 201.) In 2003, Renaissance identified red flags at BLMIS analogous to that identified by SocGen in connection with the ZCM acquisition (e.g., returns not correlated to the S & P 100 Index, nearly impossible market timing, impossible options trading volume, failure to charge customary management fees, failure to use a well-known auditor). (¶¶ 200, 203-05.) As a result, Renaissance directed Meritage to begin unwinding its BLMIS investment, and Legacy began looking for an investor to replace Meritage. (¶ 206.) In 2004, Legacy approached BNP Bank about providing it with a line of credit to replace the Meritage investments. (¶ 207.) BNP Bank performed due diligence on Legacy's BLMIS account receiving information similar to that reviewed by Renaissance and thereafter decided to extend the $100 million credit facility to Legacy in July 2004. (¶¶ 208-09.)
In August 2005, BNP Bank entered into a $100 million credit facility with Rye Select Broad Market Insurance Portfolio LDC ("Insurance Portfolio Fund"), a BLMIS feeder fund managed by Tremont Group Holdings, Inc. ("Tremont"). (¶ 212.) As collateral for the credit facility, Insurance Portfolio Fund pledged the assets held in its BLMIS account. (¶ 214.) BNP Bank authorized and directed BNP Securities Corp. to act as the collateral agent and calculation agent for the credit facility, and BNP Bank received and reviewed Insurance Portfolio Fund's BLMIS account statements and trade confirmations. (¶¶ 215-16.)
Prior to entering into a credit facility with BNP Bank, Tremont explored a similar facility with the investment bank Dresdner Kleinwort ("Dresdner"). Dresdner raised a variety of concerns about Madoff with Tremont including whether BLMIS segregated its investment accounts, whether an independent third party verified the assets held by BLMIS, how BLMIS was compensated for its role with respect to Tremont's investment, and Madoff's secrecy regarding BLMIS operations. In light of Dresdner's concerns, Tremont decided to pursue a credit facility with BNP Bank instead. (¶ 218.)
d. Option and Swap Agreements with BLMIS Feeder Funds
In December 2005, BNP Bank entered into an option agreement to provide leverage to Equity Trading Fund, Ltd., a fund that invested exclusively in BLMIS feeder fund Equity Trading Portfolio Limited ("Equity Trading"). (¶¶ 219-20.) The agreement contemplated another transaction (the "Equity Trading Option") wherein BNP Bank sold Equity Trading Fund, Ltd. a structured option to leverage Equity Trading's investments with BLMIS. (¶ 221.) As collateral for the Equity Trading Option, BNP Arbitrage and BNP Cayman acquired a direct ownership interest in Equity Trading. (¶ 222.) Pursuant to the Equity Trading Option, BNP Bank, BNP Arbitrage and BNP Cayman received and reviewed Equity Trading's BLMIS account
In October 2006, BNP Paribas Securities
For some deals, BNP Bank affiliates helped to shield the involvement of Madoff/BLMIS in the transactions. In December 2007, BNP Bank was negotiating an option agreement administered by HSBC, which referenced a BLMIS feeder fund. HSBC told BNP Securities Corp. to delete any reference to Madoff or BLMIS in the option agreement and BNP Securities Corp. complied. (¶ 263.) Similarly, in September 2008, an Access employee asked a BNP Bank subsidiary — FundQuest — to remove BLMIS references in marketing materials for products invested in BLMIS feeder fund Luxalpha SICAV; FundQuest complied with Access' request. (¶¶ 264-65.)
4. BNP Bank Created Structured Products for Clients Referencing BLMIS Feeder Funds
In addition to providing leverage to BLMIS feeder funds, BNP Bank sold BLMIS-related financial products to its customers touting its "extensive experience" with Madoff. (¶ 232.) In 2006, BNP Bank began providing leverage to clients who invested in BLMIS feeder fund Ascot Partners, L.P. ("Ascot") in exchange for fees and interest payments. Through these leveraged transactions, BNP Cayman redeemed shares and ultimately received transfers of customer property from Ascot. (¶ 233.)
BNP Bank also marketed and sold structured products to clients that referenced other large BLMIS feeder funds. For example, BNP Bank sold three-year term notes that paid note purchasers a return based on the performance of Fairfield Sentry Limited ("Fairfield Sentry") — the largest BLMIS feeder fund. However, BNP Bank structured the notes so that it did not have to pay investors in the event Fairfield Sentry lost more than 30% of its value. (¶¶ 234-39.)
Last, BNP Bank sold shares in BLMIS feeder funds directly to its clients earning fees from both the clients and the funds. (¶ 240.)
F. Red Flags
The PAC also includes allegations that the Defendants were aware of various performance
G. The Transfers
The Trustee seeks to recover avoidable transfers from the Defendants as subsequent transferees under section 550(a)(2) of the Bankruptcy Code in the amount of approximately $156 million. (See ¶¶ 423-46.) The subsequent transfers came from two sources: (i) the BLMIS accounts held by four Tremont-managed funds: Prime Fund, Broad Market Fund, Insurance Portfolio Fund, and Portfolio Limited Fund (collectively, the "Tremont Funds") and (ii) the BLMIS account held by Ascot. (See PAC, Ex. B.)
1. Initial Transfers to the Tremont Funds
In a separate adversary proceeding styled Picard v. Tremont Group Holdings, Inc., Adv. Proc. No. 10-05310 (SMB), the Trustee sought to avoid and recover approximately $2,140,297,364 in initial transfers ("Tremont Initial Transfers") from numerous parties including the Tremont Funds.
2. Transfers from Ascot
The PAC sought to recover subsequent transfers totaling $57,190,550 from Ascot to the Defendants ("Ascot Subsequent Transfer Claims"), but these claims are now moot. The Trustee had commenced a separate adversary proceeding styled Picard v. Merkin, Adv. Proc. No. 09-01182 (SMB), seeking, inter alia, to avoid and recover $461 million transferred from BLMIS to Ascot within six years of the Filing Date. By order, dated December 10,
After the Court took the instant matter under advisement, the remaining parties to the Picard v. Merkin adversary proceeding entered into a settlement pursuant to which Ascot and Gabriel Capital Corporation agreed to pay the Trustee $280 million in satisfaction of all claims. (See Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving Settlement Agreement Between the Trustee and Ascot Partners, L.P., Through Its Receiver, Ralph C. Dawson, Ascot Fund Limited, J. Ezra Merkin, and Gabriel Capital Corporation, dated June 13, 2018 (ECF Adv. Proc. No. 09-01182 Doc. # 450).) The settlement was approved by order dated July 3, 2018 (see ECF Adv. Proc. No. 09-01182 Doc. # 454).
In light of the settlement for the full amount of the Trustee's remaining initial transfer claims against Ascot, the Court issued an Order to Show Cause, dated Aug. 29, 2018 (ECF Doc. # 140) in this adversary proceeding requiring the Trustee to explain why his claims to recover subsequent transfers that were sent from Ascot to BNP Cayman should not be dismissed under the "single satisfaction" rule, 11 U.S.C. § 550(d).
H. The Defendants Motion
The Defendants have moved to dismiss the PAC. (See Memorandum of Law in Support of the BNP Paribas Defendants' Motion to Dismiss, dated Oct. 25, 2017 ("BNP Brief") (ECF Doc. # 107).) They argue that the Trustee improperly filed the PAC without their consent or leave of court, (BNP Brief at 12-13), the safe harbor codified in 11 U.S.C. § 546(e) barred the claims, (id. at 14-16), the Defendants took the subsequent transfers for value, in good faith and without knowledge of the voidability of the initial transfer as set forth in 11 U.S.C. § 550(b)(1), (id. at 16-34), certain of the claims are time-barred under 11 U.S.C. § 550(f), (id. at 34-35), and the Court lacks personal jurisdiction over the Defendants. (Id. at 35-38.)
The Trustee filed his Memorandum of Law in Opposition to Defendants' Motion to Dismiss the Amended Complaint on December 20, 2017 ("Trustee Brief") (ECF Doc. # 110) disagreeing with each point made in the BNP Brief. The Defendants filed their Reply Memorandum of Law in Support of the BNP Paribas Defendants' Motion to Dismiss on January 19, 2018 ("Defendants Reply") (ECF Doc. # 116).
A. Personal Jurisdiction
As discussed later, the Court is treating the matter before it as a motion by the Trustee for leave to amend his existing complaint. Before addressing that motion, the Court will initially consider the Defendants' contention that the Court lacks personal jurisdiction over them. Although teed up as a motion to dismiss a proposed complaint which has not technically been filed, the Defendants' motion is directed at the allegations in the PAC, and the Court may consider the allegations in the proposed pleading in deciding whether the Court would lack personal jurisdiction over the Defendants should it grant leave to file the PAC. See, e.g., Meeker v. Ellis, No. 4:08CV04219 (JLH), 2010 WL 749552, at *2 (E.D. Ark. Mar. 2, 2010) (considering jurisdictional allegations in a proposed amended complaint in denying a motion to dismiss under Rule 12(b)(2)).
To survive a motion to dismiss for lack of personal jurisdiction pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure, the Trustee "must make a prima facie showing that jurisdiction exists." SPV Osus Ltd. v. UBS AG, 882 F.3d 333, 342 (2d Cir. 2018) (quoting Penguin Grp. (USA) Inc. v. Am. Buddha, 609 F.3d 30, 34-35 (2d Cir. 2010)). A trial court has considerable procedural leeway when addressing a pretrial dismissal motion under Rule 12(b)(2). It may "determine the motion on the basis of affidavits alone; or it may permit discovery in aid of the motion; or it may conduct an evidentiary hearing on the merits of the motion." Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A., 722 F.3d 81, 84 (2d Cir. 2013) (quoting Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981)). Where a court chooses not to conduct an evidentiary hearing on personal jurisdiction, the plaintiff's prima facie "showing may be made through the plaintiff's `own affidavits and supporting materials, containing an averment of facts that, if credited, would suffice to establish jurisdiction over the defendant.'" S. New Eng. Tel. Co. v. Global NAPs Inc., 624 F.3d 123, 138 (2d Cir. 2010) (quoting Whitaker v. Am. Telecasting, Inc., 261 F.3d 196, 208 (2d. Cir. 2001)); accord In re Braskem S.A. Sec. Litig., 246 F.Supp.3d 731, 751 (S.D.N.Y. 2017) (prima facie showing to defeat pre-discovery challenge to jurisdiction may be made through plaintiff's affidavits and other materials); Wego Chem. & Mineral Corp. v. Magnablend, Inc., 945 F.Supp.2d 377, 381 (E.D.N.Y. 2013) (plaintiff may defeat a pre-discovery challenge to jurisdiction "by way of the complaint's allegations, affidavits, and other supporting evidence"). The pleadings and affidavits are to be construed "in the light most favorable to the plaintiffs, resolving all doubts in their favor." Chloé v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158, 163 (2d Cir. 2010) (quoting Porina v. Marward Shipping Co., 521 F.3d 122, 126 (2d Cir. 2008)); accord Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 732 F.3d 161, 167 (2d Cir. 2013).
In order to exercise personal jurisdiction over a defendant, "due process requires a plaintiff to allege (1) that a defendant has certain minimum contacts with the relevant forum, and (2) that the exercise of jurisdiction is reasonable in the circumstances." SPV Osus, 882 F.3d at 343 (quoting O'Neill v. Asat Trust Reg. (In re Terrorist Attacks on Sept. 11, 2011), 714 F.3d 659, 673 (2d Cir. 2013)). In determining reasonableness, a court considers (1) the burden that the exercise of personal jurisdiction will place on the defendant, (2) the interests of the forum state in adjudicating the dispute, (3) the plaintiff's interest in obtaining convenient and effective relief, (4) the interstate judicial system's
Here, the Trustee asserts that the Court has general jurisdiction over BNP Bank, BNP Arbitrage, and BNP Securities Services (Trustee Brief at 33-34), has specific jurisdiction over all the Defendants (id. at 28-33), and the exercise of personal jurisdiction is reasonable. (Id. at 34-35.)
1. General Jurisdiction
In Daimler AG v. Bauman, the Supreme Court described the "limited set of affiliations" that will subject a defendant to general jurisdiction in a forum:
571 U.S. 117, 137, 134 S.Ct. 746, 187 L.Ed.2d 624 (2014) (quotation marks, citations, and alternations omitted); accord id. at 138-39, 134 S.Ct. 746 (the inquiry is "whether [the] corporation's affiliations with the State are so `continuous and systematic' as to render [it] essentially at home in the forum State") (quoting Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919, 131 S.Ct. 2846, 180 L.Ed.2d 796 (2011)). Except in an "exceptional" case, a corporate defendant may only be subject to general jurisdiction in its place of incorporation or principal place of business. Brown v. Lockheed Martin Corp., 814 F.3d 619, 627 (2d Cir. 2016); accord Daimler, 571 U.S. at 139 n. 19, 134 S.Ct. 746. It is not enough that a foreign corporation conducts a portion of its business through a branch office located in the forum State. SPV Osus, 882 F.3d at 343; Gucci Am., Inc. v. Bank of China, 768 F.3d 122, 135 (2d Cir. 2014).
Although BNP Arbitrage and BNP Securities Services maintain offices in New York, (¶ 59), and BNP Bank has
2. Specific Jurisdiction
"The inquiry whether a forum State may assert specific jurisdiction over a nonresident defendant focuses on the relationship among the defendant, the forum, and the litigation." Walden v. Fiore, 571 U.S. 277, 283-84, 134 S.Ct. 1115, 188 L.Ed.2d 12 (2014) (quotation marks and citations omitted).
SPV Osus, 882 F.3d at 344 (quoting Chew v. Dietrich, 143 F.3d 24, 29 (2d Cir. 1998)).
Here, the Trustee's claims are based on 11 U.S.C. § 550(a)(2), which allows him to recover avoidable transfers from subsequent transferees. Therefore, the jurisdictional analysis focuses on the Defendants' U.S. contacts related to the receipt of the fifty-nine subsequent transfers at issue. Each transfer is a separate claim, cf. Metzeler v. Bouchard Transp. Co., Inc. (In re Metzeler), 66 B.R. 977, 984 (Bankr. S.D.N.Y. 1986) ("Courts have consistently treated preferential transactions as separate and distinct under Rule 15(c).... The same should be true of separate fraudulent transfers.") (citations omitted)), and the Trustee "must establish the court's jurisdiction with respect to each claim asserted." Charles Schwab Corp. v. Bank of Am. Corp., 883 F.3d 68, 83 (2d Cir. 2018) (quoting Sunward Elecs., Inc. v. McDonald, 362 F.3d 17, 24 (2d Cir. 2004)); accord Daniel v. Tootsie Roll Indus., LLC, 17 Civ. 7541 (NRB), 2018 WL 3650015, at *8 (S.D.N.Y. Aug. 1, 2018).
Initially, the subsequent transfers fall into at least two groups. First, the PAC alleges that the leverage and structured products businesses generated by the Fund Derivatives Group accounted for virtually all of the subsequent transfers that are the subject of the Trustee's claims. (¶ 65 ("The fraudulent transfers of customer property received by Defendants were derived from products and investments made possible in large part by the Fund Derivatives Group in New York"), ¶ 408 ("As discussed above, the transfers from the Tremont Funds arise out of levered transactions — credit facilities, swaps, and option agreements with the Tremont Funds — that were created, marketed, operated, and supervised by members of BNP Paribas's Fund Derivatives Group in New York."); see also The Trustee's Proffered Allegations Pertaining to the Extraterritoriality Issue as to the BNP Paribas Defendants, dated June 26, 2015 ("Trustee's Proffer"), at ¶ 83 (ECF Doc. # 64).) Second, the PAC alleges that each of the Defendants were investors that maintained their own accounts with one or more of the Tremont Funds. (See ¶ 393.)
The Trustee has made a prima facie showing of personal jurisdiction with respect to the subsequent transfers at issue. Employees from BNP Bank and BNP Arbitrage comprised the Fund Derivatives Group, (¶ 66), which operated out of New York, (¶¶ 4, 8, 65, 408; Trustee's Proffer ¶¶ 12, 66), and those subsequent transfers arose, for the most part, from the Fund Derivatives Group's New York contacts. Although BNP Securities Services and BNP Cayman were not part of the Fund Derivatives Group, they provided services to that group through their participation in the Securities Services Group. (¶¶ 69-71.) Moreover, the PAC alleges that BNP Securities Services maintained an office in New York, and while the PAC does not allege that BNP Cayman had a New York office, it does allege that the "Defendants
The Trustee has also made a prima facie showing that the Court has personal jurisdiction over any fraudulent transfer claims resulting from redemptions by the Defendants from their accounts with the Tremont Funds. The Tremont Funds were managed from offices in New York, (¶¶ 386-92, 397-99, 405-06), and in their capacity as investors, the Defendants sent subscription agreements to New York, wired funds in U.S. dollars to New York, sent redemption requests to New York and received redemption payments from a Bank of New York account in New York. (¶¶ 393-95, 407; Trustee's Proffer ¶¶ 72-73, 80).) The redemption and any other payments the Defendants received as direct investors in the Tremont Funds arose from the aforementioned New York contacts and were the proximate cause of the injuries that the Trustee seeks to redress.
The Defendants' principal contrary authority, Hill v. HSBC Bank plc, 207 F.Supp.3d 333 (S.D.N.Y. 2016), is distinguishable. In Hill, former BLMIS customers sued multiple HSBC entities that served as custodians and administrators for BLMIS feeder funds alleging that the HSBC entities aided and abetted the BLMIS Ponzi scheme by facilitating investments into BLMIS feeder funds while ignoring red flags and suspicious conduct indicating fraud at BLMIS. Id. at 336-37. Most of the HSBC entities were foreign, and the plaintiffs alleged that these foreign defendants were subject to specific jurisdiction through their contacts with New York, including the transmission of instructions to BLMIS in New York, the receipt of BLMIS accounts statements and trade confirmations sent from New York, contracting with BLMIS to act as sub-administrator or sub-custodian, the facilitation of the transfer of funds from feeder funds to BLMIS in New York and the transmission of false information to customers around the world. Id. at 337-38.
The foreign defendants asserted that the District Court lacked personal jurisdiction over them under New York's long-arm statute, and the District Court agreed. It
In contrast, the PAC alleges that the Fund Derivatives Group operated from New York, and the subsequent transfers were largely the result of those New York activities. (¶ 65.)
To avoid jurisdiction on the basis that it would fail to comport with traditional notions of fair play and substantial justice, the defendant must present a "compelling case that the presence of some other considerations would render jurisdiction unreasonable." Burger King, 471 U.S. at 477, 105 S.Ct. 2174; accord Metro. Life Ins., 84 F.3d at 575 ("dismissals resulting from the application of the reasonableness test should be few and far between"). The Defendants do not suggest that the exercise of personal jurisdiction would be unreasonable, and they are represented by capable New York counsel in this Court.
Accordingly, the Defendants' motion to dismiss for lack of personal jurisdiction is denied.
B. Failure to Seek Leave to Amend
The Defendants argue that the PAC was improperly filed without leave of Court or consent as required under Rule 15(a)(2) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Rule 7015 of the Federal Rules of Bankruptcy Procedure. (Defendants Brief at 12-13.) The Trustee responds that the Court explicitly granted him leave in SIPC v. BLMIS (In re BLMIS), No. 08-01789 (SMB), 2016 WL 6900689 (Bankr. S.D.N.Y. Nov. 22, 2016) ("Bankr. Ct. ET Decision"), consolidated appeal docketed, No. 17-2992 (2d Cir. Sept. 27, 2017). (Trustee Brief at 36-37.)
Upon return to this Court, and because of the adverse District Court rulings, the Trustee filed a Motion for Leave to Replead Pursuant to Fed. R. Civ. P. 15(a) and Court Order Authorizing Limited Discovery Pursuant to Fed. R. Civ. P. 26(d)(1)
This Court resolved the Extraterritoriality Issue in Bankr. Ct. ET Decision. As
Although the PAC is a nullity because it was filed without leave, Shanghai Weiyi Int'l Trade Co. Ltd. v. FOCUS 2000 Corp., No. 15-CV-3533 (CM) (BCM), 2016 WL 5817009, at *3 (S.D.N.Y. Oct. 4, 2016)(report and recommendation); Higgins v. Monsanto Co., 862 F.Supp. 751, 754 (N.D.N.Y. 1994), the Court will treat the pending motion, though made by the Defendants, as one for leave to file the PAC. As discussed immediately below, the same standard governs a motion for leave to amend and a motion to dismiss for failure to state a claim. Furthermore, no party will be prejudiced because they have extensively briefed and argued the common legal principle that governs both motions.
C. Leave to Amend
1. Standards Governing the Motion
Rule 15(a) of the Federal Rules of Civil Procedure governs motions for leave to amend pleadings. Generally, leave should be freely granted, but the court may deny the motion in instances of undue delay, bad faith, dilatory motive, undue prejudice to the opposing party or futility. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). The Defendants do not charge the Trustee with bad faith or an improper motive, assert that they were unduly prejudiced or that the Trustee unduly delayed. Instead, they argue that the PAC is futile. (See BNP Brief at 13-40.) "An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6)." Lucente v. Int'l Bus. Machines Corp., 310 F.3d 243, 258 (2d Cir. 2002).
"To survive a motion to dismiss, a 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation omitted); accord Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937; accord Twombly, 550 U.S. at 556, 127 S.Ct. 1955. Determining whether a complaint states a plausible claim is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679, 129 S.Ct. 1937. The court should assume the veracity of all "well-pleaded factual allegations," and determine whether, together, they plausibly give rise to an entitlement of relief. Id.
In deciding the motion, "courts must consider the complaint in its entirety,
The PAC incorporates by reference the Complaint in Picard v. Tremont Group Holdings, Inc., dated Dec. 7, 2010 ("Tremont Complaint") (ECF Adv. Proc. No. 10-05310 Doc. # 1), in which the Trustee sought to avoid the Tremont Initial Transfers, and the proffered Second Amended Complaint in Picard v. HSBC Bank PLC, dated June 26, 2015 (ECF Adv. Proc. No. 09-01364 Doc. # 399). (See ¶ 343.) The Defendants relied on the Trustee's Complaint, dated December 2, 2010 in Picard v. Oreades SICAV, Adv. Proc. No. 10-05120 (SMB) (the "Oreades Complaint") (ECF Adv. Proc. No. 10-05120 Doc. # 1) and the Trustee's Proffer in support of their dismissal motion, and the Trustee agreed that the Court may consider both pleadings. (See Tr. at 32:13-33:23.)
2. Claims to Recover Subsequent Transfers
Section 550(a)(2) of the Bankruptcy Code allows the Trustee to recover an avoidable transfer from "any immediate or mediate transferee of" the 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. Legacy Capital Ltd. (In re BLMIS), 548 B.R. 13, 36 (Bankr. S.D.N.Y. 2016); accord Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs., Inc.), 379 B.R. 5, 30 (Bankr. E.D.N.Y. 2007). 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. Allou Distribs., 379 B.R. at 32; accord Gowan v. Amaranth LLC (In re Dreier LLP), 452 B.R. 451, 464 (Bankr. S.D.N.Y. 2011). However, the plaintiff's burden at the pleading stage "does not require dollar-for-dollar accounting" of the exact funds at issue. IBT Int'l, Inc. v. Northern (In re Int'l Admin. Servs., Inc.), 408 F.3d 689, 708 (11th Cir. 2005) (citations omitted); accord Legacy Capital, 548 B.R. at 36. Federal Civil Rule 9(b) governs the portion of a claim to avoid an initial intentional fraudulent transfer, 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 Rule 8(a) governs the portion of a claim to recover the subsequent transfer. Legacy Capital, 548 B.R. at 36 (citing cases).
The fraudulent transfer provisions provide an affirmative defense to a good faith purchaser for value. Thus, an initial transferee may defend against or limit his liability to the extent he "takes for value and in good faith." See 11 U.S.C. § 548(c). In a slight variation, Bankruptcy Code § 550(b)(1) limits the Trustee's recovery from a subsequent transferee to the extent the subsequent transferee "[took] for value, ... in good faith, and without
Ordinarily, the transferee must raise the affirmative defense under both sections 548(c) and 550(b). See Good Faith Decision, 516 B.R. at 24. In addition, an objective, reasonable person test usually applies to determine a transferee's good faith. See Marshall v. Picard (In re BLMIS), 740 F.3d 81, 90 n. 11 (2d Cir. 2014) ("The presence of `good faith' depends upon, inter alia, `whether the transferee had information that put it on inquiry notice that the transferor was insolvent or that the transfer might be made with a fraudulent purpose.'") (quoting Christian Bros. High School Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Grp., LLC), 439 B.R. 284, 310 (S.D.N.Y. 2010)). As discussed earlier, however, the District Court has placed the burden of pleading a lack of good faith on the Trustee. Good Faith Decision, 516 B.R. at 24 n. 4; see also BLMIS, 590 B.R. at 205-06 (discussing District Court BLMIS rulings). In addition, the District Court has ruled that a subjective test governs the good faith inquiry under sections 548(c) and 550(b), Good Faith Decision, 516 B.R. at 23; see also Picard v. Avellino, 469 B.R. 408, 412 (S.D.N.Y. 2012) (Lack of objective good faith is not enough "because the securities laws do not ordinarily impose any duty on investors to investigate their brokers, [and] those laws foreclose any interpretation of `good faith' that creates liability for a negligent failure to so inquire."), and in Legacy Capital, this Court concluded that, given the District Court's treatment of the defenses set forth in sections 548(c) and 550(b)(1) of the Bankruptcy Code, the Trustee must also plead that the subsequent transferee lacked knowledge of the voidability of the initial transfer. Legacy Capital, 548 B.R. at 36.
In summary, the Trustee must plead that (1) the initial transfer is avoidable, and either (2) the subsequent transferee lacked good faith or (3) received the subsequent transfer with knowledge that the initial transfer was avoidable. But even if the subsequent transferee received the transfer in good faith and without knowledge of the avoidability of the initial transfer (and assuming a prior transferee did not take for value), the subsequent transferee must still take for value to prevail on its defense. The District Court has not placed the burden of pleading lack of value on the Trustee, and the transferee is in the better position to identify the value he gave for the subsequent transfer. See Legacy Capital, 548 B.R. at 37. Accordingly, the value component remains the transferee's burden to plead and prove.
The PAC did not allege specific facts in support of the avoidability of the Tremont Initial Transfers, but instead, incorporated the Tremont Complaint. The Defendants did not challenge the legal sufficiency of the Tremont Complaint in their initial moving papers. Rather, they asserted that their subsequent transfers were also protected by the safe harbor, 11 U.S.C. § 546(e).
Their invocation of the safe harbor is only partially correct. By its terms, the safe harbor is a defense to the avoidance of the initial transfer. See 11 U.S.C. § 546(e) ("Notwithstanding [enumerated avoidance powers], the trustee may not avoid a transfer....) (emphasis added). Hence, a subsequent transferee is protected indirectly to the extent that the initial transfer is not avoidable because of the safe harbor. See SIPC v. BLMIS (In re BLMIS), 2013 WL 1609154, at *7 (a subsequent transferee may raise the § 546(e) defense even where the initial transferee fails to raise the defense or settles with the trustee). The Trustee does not, however, "avoid" the 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. Moreover, even if the subsequent transferee was unaware of Madoff's Ponzi scheme, it must still prove that it gave value in order to prevail on its defense.
The Defendants did not challenge the legal sufficiency of the Tremont Complaint until their reply, and then only in a half-hearted and conclusory manner. (BNP Reply 4 ("Here, the Trustee incorporates by reference in the Amended Complaint the allegations against the Tremont funds as initial transferees, which plainly fall short of alleging the `actual knowledge' necessary for the safe harbor not to apply).) This belated argument suffers from two problems. First, a court will not ordinarily consider arguments raised for the first time in the reply brief. McBride v. BIC Consumer Prods. Mfg. Co., Inc., 583 F.3d 92, 96 (2d Cir. 2009). Second, the Defendants failed to explain why the Tremont Complaint was legally insufficient. The Tremont Complaint spans 135 pages and consists of 467 separately numbered paragraphs. The Defendants did not identify any defects beyond their conclusory statement, and the Court declines their implicit invitation to hunt for them.
Accordingly, the Trustee has adequately pled the avoidability of the Tremont Initial Transfers.
b. Knowledge and Good Faith
As stated, the Trustee must also plead that the Defendants took the subsequent transfers in good faith and without knowledge of the avoidability of the initial transfer. The two concepts represent separate elements under section 550(b), but they are related. To satisfy his burden of pleading a lack of good faith, the Trustee must allege that each Defendant willfully blinded itself to facts suggesting a high probability of fraud at BLMIS. Good Faith Decision, 516 B.R. at 22-23; Picard v. Merkin (In re BLMIS), 563 B.R. 737, 752 (Bankr. S.D.N.Y. 2017). Willful blindness consists of two elements: "(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact." Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769, 131 S.Ct. 2060, 179 L.Ed.2d 1167 (2011). If a person who is not under an independent duty to investigate
To plead that a Defendant knew that it was receiving the proceeds of an avoidable transfer, the Trustee must plausibly allege that the Defendant "possess[ed] knowledge of facts that suggest a transfer may be fraudulent." Banner v. Kassow, 104 F.3d 352, 1996 WL 680760, at *3 (2d Cir. Nov. 22, 1996) (summary order) (quoting Brown v. Third Nat'l Bank (In re Sherman), 67 F.3d 1348, 1355 (8th Cir. 1995)). Section 550(b)(1) does not impose a duty to investigate or monitor the chain of transfers that preceded the subsequent transfer, but "[s]ome facts strongly suggest the presence of others; a recipient that closes its eyes to the remaining facts may not deny knowledge." Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 898 (7th Cir. 1988) (Easterbrook, J.). This standard "essentially defines willful blindness which, the District Court has held, is synonymous with lack of good faith." Legacy Capital, 548 B.R. at 38; see also id. at 38-39 (noting that some courts and commentators have suggested that the good faith and knowledge elements of 11 U.S.C. § 550(b)(1) are one and the same).
Here, too, the parties have not identified a distinction between the two elements of § 550(b)(1). Therefore, the Court will examine whether the Trustee adequately alleged that the Defendants willfully blinded themselves to Madoff's Ponzi scheme, i.e., that BLMIS was not actually trading securities.
i. First Element: High Probability of Fraud
The Trustee contends that the Defendants were aware of the high probability that BLMIS was not actually trading securities based on so-called red flags, the closing of the Oreades fund because of concerns about Madoff, and information they learned and warnings they received from others. The Court addresses these "triggers" below, but in the end, they do not imply and the Trustee fails to plausibly plead that the Defendants subjectively believed there was a high probability that BLMIS was a Ponzi scheme.
The Trustee alleges that the Defendants became aware of the numerous red flags summarized earlier. (See generally ¶¶ 267-339.) The Court has previously rejected the Trustee's attempt to plead, in hindsight, a defendant's subjective knowledge by showing trading impossibilities in BLMIS account statements. See Legacy Capital, 548 B.R. at 33-34 ("Hindsight is infallible, but connecting the dots in real time may require clairvoyance. In many cases, it requires a regular comparison of information in BLMIS generated trade confirmations and monthly account reports with market information. Even if the comparison is made, many red flags are no more than pale pink especially when they crop up infrequently over a long period."). The Court also observed that the "red flag" theory of scienter has been rejected in Madoff-related securities fraud litigation by numerous courts in the Second Circuit. Id. (listing cases). Instead, the existence of the red flags supports the more compelling inference that Madoff fooled the Defendants as he did individual investors, financial
Servicing and Shutting Down Oreades
The Trustee alleges that the way certain Defendants serviced and ultimately closed Oreades supports an inference that they knew that there was a high probability of fraud at BLMIS. Some of the Defendants' practices with respect to Oreades were undoubtedly questionable. They include representing that BNP Securities Services was Oreades' custodian and receiving fees while delegating those duties to BLMIS, (¶¶ 97-100), allowing BLMIS to act as Oreades' custodian and investment adviser in violation of BNP Bank's "strict separation" rule, (¶ 106), and Luxembourg law, and failing to disclose that BLMIS served as Oreades' investment advisor. (¶¶ 108-111.) Although these allegations raise questions about the propriety of certain of Defendants' actions in servicing Oreades, and imply that they were willing to overlook legal and regulatory violations to make more money, they do not support the inference that those Defendants believed there was a high probability that BLMIS was not actually trading securities on behalf of Oreades and its investors.
The Trustee's allegations relating to Oreades center on the aforementioned email authored by Trouvain, a senior officer at BNP Securities Services, who expressed concern about the antiquated methods of communication used by BLMIS for sending trade documentation. Truncating that email, the PAC attempts to imply that Trouvain thought BLMIS was not actually making the trades it was reporting:
(¶ 114 (emphasis in original).) The Trustee argues that the emphasized portion of the email shows that Trouvain questioned whether BLMIS was actually engaged in trading securities. (Trustee Brief at 9.)
The omitted portion of the email indicated by the ellipsis appeared in the Trustee's 2010 Oreades Complaint and is supplied in italics below. It clearly shows that Trouvain did not question whether BLMIS was actually trading securities — he was satisfied that it was — and instead, pointed out that the lack of real-time trading information made it difficult for auditors to determine how to allocate the BLMIS trades among BLMIS' clients, which included Oreades:
(Oreades Complaint ¶ 56 (emphasis added and omitted from a separate portion).)
The Trustee also asks the Court to infer that BNP Bank and BNP Securities Services subjectively believed that BLMIS was not trading securities based on the circumstances surrounding the closing of Oreades. According to the Trustee's counsel, "[y]ou don't [shut down a successful feeder fund] because you have concerns that ... the bookkeeping isn't being adequately done." (Tr. at 39:1-3.) However, Trouvain's July 2003 email confirmed that Madoff "was audited and it seems that everything was correctly posted." In addition, BLMIS and its auditors confirmed to Trouvain one month later that all securities positions had been segregated. (¶ 59.)
The Defendants closed the Oreades fund nine months later in May 2004, and the PAC does not allege any information that came to the Defendants' attention during that period that turned them from believers to non-believers. The more plausible inference is that the Defendants shut down the Oreades fund because of the risks associated with using the unregistered BLMIS as a sub-custodian and investment advisor in violation of Luxembourg law, (¶¶ 116, 118, 122, 123), questions regarding the location of the U.S. Treasury securities held by BLMIS, (¶ 117), and Madoff's refusal to allow BNP Bank to confirm the trades in real time or disclose his role to the CSSF because BLMIS was not registered as an investment adviser in the United States and wanted to avoid regulatory scrutiny. (¶¶ 119, 121.)
Concerns of Third Parties Regarding BLMIS
The PAC alleges or implies that various third parties expressed concern to one or more of the Defendants about BLMIS or refused to do business with BLMIS or any fund that invested with BLMIS.
First, rival bank SocGen (like BNP Bank) considered purchasing ZCM but was unwilling to take on the credit facility to BLMIS feeder fund Santa Barbara because BLMIS' returns were impossibly consistent, BLMIS failed to charge customary investment management fees and BLMIS acted as its own custodian. (¶¶ 153-61.) The Trustee alleges that a former ZCM employee told BNP Bank executives about SocGen's concerns, (¶ 162), but these concerns involved three of the red flags that were generally known. In addition, a Tremont employee confirmed SocGen's reluctance to do Madoff-related financing to a member of BNP Bank's Fund Derivatives Group, (¶ 162), but the PAC does not indicate what he said or the reason for its reluctance.
Second, Mr. Fauchier, who was involved in a joint venture with a BNP Bank affiliate, became suspicious about Madoff because BLMIS did not charge investment management fees and underreported the number of managed accounts in its FOCUS Reports. Fauchier refused to invest with BLMIS or BLMIS feeder funds and questioned whether the SEC would allow BLMIS to continue as a business. (¶¶ 131-35.) The PAC then alleges "[u]pon information and belief, as a member of BNP Paribas's Asset Management Group, Fauchier
Third, the PAC alleges that BNP Bank extended a $100 million credit facility to Legacy because Renaissance, upon identifying multiple red flags associated with BLMIS, decided to terminate its Legacy investment. (¶¶ 200, 203-05.) The PAC does not allege that the Defendants were privy to the diligence performed by Renaissance or the red flags it identified. In fact, the Trustee represented in connection with the motion to dismiss the Legacy complaint that the Renaissance Report was never shared with BNP Securities Corp., the only BNP defendant in that case. (Memorandum of Law in Opposition to Defendants' Motions to Dismiss the Amended Complaint, dated Aug. 27, 2015, at 32 ("Neither the Renaissance Proposal nor the Meritage Oversight Committee's subsequent findings were disclosed to BNP when Legacy sought to secure its funding.") (ECF Adv. Pro. No. 10-05286 Doc. # 122).)
Fourth, the PAC describes how Dresdner raised a variety of concerns about Madoff with Tremont, (¶ 218), but the Trustee does not allege that these concerns were communicated to the Defendants.
Fifth, the PAC alleges that the head of hedge funds at BNP Paribas Private Wealth, Mr. Gianferrara, would not approve Madoff-related investments for his private banking clients, (¶ 128), "always had a problem with Madoff," and "would `not even consider' investments in FGG's Madoff-related funds." (¶ 129.) The PAC does not, however, identify the problems or imply that Mr. Gianferrara believed that BLMIS was not trading securities.
Sixth, the Trustee alleges that in December 2007, HSBC told non-party BNP Securities Corp. to delete any reference to Madoff and BLMIS in an option agreement, and BNP Securities Corp. complied, (¶ 263), and in September 2008, an Access representative told BNP Bank subsidiary FundQuest to remove any references to Madoff, and FundQuest "deleted all references to Madoff and deliberately destroyed FundQuest's old marketing materials." (¶ 264.) Access stressed that Madoff's role in Luxalpha, another foreign feeder fund, was "very sensitive," and wanted assurances, which FundQuest gave, that no one would be able to find any traces of Madoff in the files or on the internet. (¶ 265.) As in many of the prior instances just discussed, the PAC does not identify the concerns with disclosing Madoff's connection with the fund or option agreement at issue, whether the non-debtor affiliates communicated these concerns to the Defendants or, for that matter, whether the Defendants had any connection to the two transactions.
Third-party concerns that are actually communicated to a defendant may be relevant to the defendant's knowledge. See Merkin, 563 B.R. at 749. However, the "warnings" identified by the Trustee amount, in most cases, to pleading by innuendo.
This brings me to the ultimate question — does the PAC allege a plausible claim, i.e., does it make sense, that the Defendants would have done what the PAC says they did if they subjectively believed that there was a high probability that BLMIS was not trading securities, and the trades it was reporting to its customers, including the Defendants' transaction counterparties, were fictitious. For the reasons that follow, it does not.
The Implausibility of the Trustee's Theory of the Case
The crux of the Trustee's argument is that the Defendants engaged in the leverage business while entertaining a belief that there was a high probability that BLMIS was not actually trading securities, the reported BLMIS trades were fictitious and their collateral was therefore fictitious, and their obligors' sole assets, at least in the case of feeder funds fully invested with BLMIS, were non-existent. The reason: the Defendants wanted to earn fees, "to establish their reputation as a leverage provider in a highly-competitive market, to grow the brand of BNP Paribas's Fund Derivatives Group, to compete with its biggest rival, SocGen, and to cross-sell services to BNP Paribas's institutional clients." (¶ 139.) In other words, BNP Bank made billions of dollars of risky and possibly uncollectible loans to those investing with BLMIS or BLMIS feeder funds in order to make tens of millions of dollars in fees and build its profile.
In Buchwald Capital Advisors LLC v. JP Morgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc.), 480 B.R. 480 (S.D.N.Y. 2012), aff'd, 541 F. App'x 55 (2d Cir. 2013), District Judge Sullivan characterized a near identical argument as "non-sensical" and "bordering on the absurd." Id. at 489. There, the defendant banks (the "Banks") made prepetition secured loans to two entities that operated a jewelry business (the "Debtors"). Id. at 483-84. The Debtors then allegedly transferred the loan proceeds to entities unaffiliated with the Debtors but affiliated with and owned and controlled by the Debtors' owners, the Fortgangs (the "Affiliates"). Id. at 484. Thus, at the end of the day, the Debtors were left with encumbered assets but no loan proceeds.
After the Debtors filed chapter 11 petitions, the unsecured creditors committee commenced an action to avoid the Banks' liens as fraudulent transfers. Id. at 485. The committee sought to collapse the first leg of the transaction (the Banks' loans to the Debtors) with the second leg (the Debtors' transfer of the loan proceeds to the Affiliates) under the collapsing principles discussed in HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995), contending that the Banks knew or should have known that the loans were part of a fraudulent scheme by which the Debtors would transfer the loan proceeds to the Affiliates.
The District Court rejected the plaintiff's theory observing that it "requires an inference that is highly implausible, bordering on the absurd." Id. at 489.
Id. (record citations and corresponding quotation marks omitted) (emphasis added).
The scheme on which the PAC is based is equally implausible. According to the PAC, BNP Bank provided Madoff with a personal line of credit of $75 million, secured by Madoff's pledge of the securities held on behalf of BLMIS customers. (¶ 84.) It extended credit to Santa Barbara in an undisclosed amount to invest in Harley, another BLMIS feeder fund, and collateralized the loan with Harley's BLMIS account. (¶ 183.) It loaned $120 million to Legacy, an entity that invested exclusively with BLMIS, and collateralized that loan with a pledge of Legacy's BLMIS account. (¶¶ 193-98.) It even made a direct loan to Tremont's Insurance Portfolio Fund in the sum of $100 million, and collateralized that loan with a pledge of the assets held in its BLMIS account. (¶¶ 212, 214.) The PAC refers with less detail to many similar transactions by which BNP Bank loaned money to a counterparty for the purpose of investing with BLMIS or a BLMIS feeder fund, and took a pledge of its borrower's account with BLMIS or the BLMIS feeder fund as collateral to secure repayment.
The Defendants' ability to collect on whatever leverage BNP Bank extended to direct investors in BLMIS or investors in BLMIS feeder funds ultimately depended on the value of the BLMIS investments. If BLMIS was a Ponzi scheme, the securities listed in the BLMIS customer statements were non-existent and BNP Bank's collateral was as worthless as its borrowers' investments in BLMIS or a BLMIS feeder fund. According to the PAC, BNP Bank nonetheless engaged in billions of dollars of risky transactions, including loans and extensions of credit that ultimately depended on the value of BLMIS accounts, to earn "tens of millions of dollars in fees and interest payments," (¶ 64), and raise BNP Bank's position as a world leader in
Accordingly, the PAC fails to plausibly allege that the Defendants subjectively believed there was a high probability that BLMIS was not actually trading securities and was, in fact, a Ponzi scheme.
ii. Second Element: Turning a Blind Eye
Since the Court has concluded that the Trustee failed to plead that the Defendants were highly suspicious of BLMIS fraud, it need not address whether the Defendants took deliberate actions to avoid confirming that fraud. But assuming that the Trustee adequately pleaded the knowledge prong of the willful blindness test, he failed to plead that the Defendants turned a blind eye.
The Trustee's pleadings are replete with allegations that the Defendants performed due diligence when dealing with Madoff, BLMIS, BLMIS feeder funds or BLMIS-related securities. BNP Bank performed due diligence on Madoff and BLMIS as early as 1988 and into the mid-1990s when it extended a personal line of credit to Madoff and accepted BLMIS customer securities as collateral. (¶¶ 84-85.) BNP Bank also conducted due diligence of ZCM's portfolio, including the sizeable credit facility with BLMIS feeder fund Santa Barbara, in connection with the acquisition of ZCM in 2003. (¶¶ 143, 163.) After the acquisition, the Defendants continued to perform due diligence when transactions involved BLMIS, (¶ 83 (the Fund Derivatives Group and BNP Bank's "Group Risk Management" department conducted due diligence on transactions involving BLMIS feeder funds); ¶ 208 (BNP Bank conducted due diligence on Legacy's BLMIS account when entering into $100 million credit facility with Legacy); ¶ 230 (the head of the Fund Derivatives Group represented to BNP Bank's risk management department that it would conduct due diligence on BLMIS and BLMIS feeder funds)), and made an on-site diligence visit to BLMIS in March 2008. (¶ 175.).
The Trustee's Proffer also includes several allegations relating to the Defendants' due diligence of BLMIS and Madoff. It alleges that the Defendants "conducted initial and ongoing due diligence on BLMIS and BLMIS feeder funds," (Trustee's Proffer ¶ 13), "[a]s the collateral agent, BNP Securities Corp. conducted due diligence, monitored the [Santa Barbara] facility, and provided operational support to BNP, and as the calculation agent BNP Securities Corp. calculated the facility's interest rates, fees, and loan-to-value ratio," (id. ¶ 61), BNP Securities Corp. "served as the calculation agent for the Tremont credit facility and ... as the collateral agent for the Tremont credit facility ... was responsible for conducting due diligence, monitoring the facility, and providing operational support to BNP," (id. ¶ 86), and requested that the Kingate Funds, large BLMIS
In addition, the Oreades Complaint detailed how Trouvain followed-up with BLMIS after he expressed concerns in July 2003. On August 7, 2003, Trouvain sent a fax attaching a letter written by his colleague to BLMIS requesting periodic verification of the assets in Oreades' BLMIS accounts:
(Oreades Complaint ¶ 57 (emphasis in original and emphasis omitted from other portions).)
Frank DiPascali of BLMIS responded to Trouvain on August 12, 2003. He assured Trouvain that as of June 2002 (when BNP Securities Services became Oreades' administrator and custodian), "all security positions ... have been segregated for the exclusive benefit of [BNP Securities Services]." (Id. ¶ 58.) BLMIS' auditor, Friehling & Horowitz ("F & H"), also wrote back to Trouvain on August 21, 2003 providing an independent verification of the assets in Oreades' BLMIS accounts:
(Id. ¶ 59.)
Rather than turn a blind eye, the above correspondence and other allegations show that the Defendants engaged in ongoing due diligence and received repeated confirmations that the transactions were real. Furthermore, while the Trustee alleges that the Fund Derivatives Group made exceptions to its typical due diligence practices for BLMIS-related transactions, (¶¶ 165, 167, 168, 171-74, 178), these allegations do not undercut the affirmative allegations of due diligence. In short, and not surprisingly, the Defendants did not ignore their BLMIS exposure; the likelihood of repayment of the Defendants' loans and
Although the Trustee has failed to plead the Defendants' lack of good faith or knowledge that the initial transfers were avoidable, the Defendants must still demonstrate that they gave value for the subsequent transfers to prevail on their defense under section 550(b)(1).
Even where the pleading burden rests with the defendant, the Court may dismiss for failure to state a claim when the defense is apparent on the face of the complaint. Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147, 158 (2d Cir. 2003); accord Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 74 (2d Cir. 1998), cert. denied, 525 U.S. 1103, 119 S.Ct. 868, 142 L.Ed.2d 770 (1999). The Defendants assert, (BNP Brief at 33-34; BNP Reply at 15-16), that they provided value because they received subsequent transfers in exchange for the redemption of BLMIS feeder fund shares. See Redmond v. Brooke Holdings, Inc. (In re Brooke Corp.), 515 B.R. 632, 642 (Bankr. D. Kan. 2014) (redemption of stock could provide value); CLC Creditors' Grantor Trust v. Howard Sav. Bank (In re Commercial Loan Corp.), 396 B.R. 730, 744 (Bankr. N.D. Ill. 2008) ("stock was `value' because it constituted consideration sufficient to support a simple contract"). The Trustee counters, (Trustee Brief at 27), that subsequent transfers were not for value because they were distributions made to the Defendants as holders of equity in the BLMIS feeder funds. See Boyer v. Crown Stock Distrib., Inc., 587 F.3d 787, 796 (7th Cir. 2009) (agreeing with the bankruptcy court below that equity distributions to shareholders were not for value); Hayes v. Palm Seedlings Partners-A (In re Agric. Research & Tech. Grp., Inc.), 916 F.2d 528, 540 (9th Cir. 1990) (distributions to limited partners on account of equity interests were not for value).
The PAC identifies fifty-nine subsequent transfers to the Defendants. (PAC, Ex. E, F, H, I.) For the most part, the PAC alleges that the subsequent transfers related to leverage transactions in which the Defendants made loans, extended credit or provided structured products, or rendered support services in connection with the leverage business. However, the PAC also alleges that the Defendants were investors in the Tremont Funds in their own right, and the Trustee provided evidence in connection with the Defendants' jurisdictional objection that BNP Cayman requested redemptions from its own BLMIS account.
3. Statute of Limitations
Claims to recover subsequent transfers must be commenced no later than the earlier of one year after the initial transfer is avoided or the date that the case is closed or dismissed. 11 U.S.C. § 550(f). A settlement of an avoidance claim represents finality and triggers the one-year period set forth in § 550(f). SIPC v. BLMIS (In re BLMIS), 501 B.R. 26, 32 (S.D.N.Y. 2013), denying motion to amend, No. 12 MC 115 (JSR), 2014 WL 465360 (S.D.N.Y. Jan. 14, 2014); Picard v. Bureau of Labor Ins. (In re BLMIS), 480 B.R. 501, 522 (Bankr. S.D.N.Y. 2012). The Court approved the Trustee's settlement with the Tremont Funds on September 22, 2011, and the limitations period set forth in section 550(f) expired on September 22, 2012. An amendment filed after the applicable statute of limitations has run asserting additional claims that do not relate back to the date of an earlier timely pleading is futile. See Rodriguez v. City of N. Y., 10-CIV-1849, 2011 WL 4344057, at *6 (S.D.N.Y. Sept. 7, 2011).
While the Trustee timely commenced this adversary proceeding to recover, inter alia, the value of certain Tremont Initial Transfers from the Defendants, the PAC was filed almost five years after the expiration of the statute of limitations. It added claims under § 550(a)(2) to recover the following forty-one additional subsequent transfers (collectively, the "New Subsequent Transfer Claims") that were not included in the original Complaint, dated May 4, 2012 ("Original Complaint") (ECF Doc. # 1):
Transferor Transferee Date of Amount ($) PAC Transfer Ex.Insurance Portfolio Fund BNP Arbitrage 12/19/08 32,865 F Insurance Portfolio Fund BNP Bank 11/17/05 15,591 F Insurance Portfolio Fund BNP Bank 11/30/05 1,075,822 F Insurance Portfolio Fund BNP Bank 1/18/06 12,500 F Insurance Portfolio Fund BNP Bank 3/1/06 1,178,000 F Insurance Portfolio Fund BNP Bank 5/19/06 12,500 F Insurance Portfolio Fund BNP Bank 5/31/06 1,282,480 F Insurance Portfolio Fund BNP Bank 7/18/06 10,417 F Insurance Portfolio Fund BNP Bank 3/1/07 1,705,000 F Insurance Portfolio Fund BNP Bank 3/21/07 258 F Insurance Portfolio Fund BNP Bank 6/1/07 1,740,333 F Insurance Portfolio Fund BNP Bank 7/2/07 583,833 F Insurance Portfolio Fund BNP Bank 8/1/07 564,167 F Insurance Portfolio Fund BNP Bank 9/4/07 640,333 F Insurance Portfolio Fund BNP Bank 12/3/07 1,760,000 F Insurance Portfolio Fund BNP Bank 3/3/08 1,661,698 F Insurance Portfolio Fund BNP Bank 6/3/08 1,156,550 F Insurance Portfolio Fund BNP Bank 7/31/08 25,000,000 F
Insurance Portfolio Fund BNP Bank 7/31/08 654,111 F Insurance Portfolio Fund BNP Bank 10/1/08 574,792 F Portfolio Limited Fund BNP Cayman 8/4/05 400,000 H Portfolio Limited Fund BNP Cayman 11/1/05 400,000 H Portfolio Limited Fund BNP Cayman 12/1/05 1,250,000 H Portfolio Limited Fund BNP Cayman 4/3/06 750,000 H Portfolio Limited Fund BNP Cayman 12/28/06 2,300,000 H Portfolio Limited Fund BNP Cayman 12/28/06 1,000,000 H Portfolio Limited Fund BNP Cayman 6/13/07 108,420 H Portfolio Limited Fund BNP Securities 10/20/04 2,041,858 H Services Portfolio Limited Fund BNP Securities 12/22/04 2,118,243 H Services Portfolio Limited Fund BNP Securities 1/21/05 1,510,684 H Services Portfolio Limited Fund BNP Securities 7/21/05 2,528,454 H Services Portfolio Limited Fund BNP Securities 1/5/06 5,300,000 H Services Portfolio Limited Fund BNP Securities 1/5/06 900,000 H Services Portfolio Limited Fund BNP Securities 1/5/06 6,040,000 H Services Portfolio Limited Fund BNP Securities 1/24/06 17,137 H Services Portfolio Limited Fund BNP Securities 1/24/06 32,727 H Services Portfolio Limited Fund BNP Securities 1/24/06 42,346 H Services Portfolio Limited Fund BNP Securities 1/25/06 10,000 H Services Portfolio Limited Fund BNP Securities 5/2/06 1,520,000 H Services
Transferor Transferee Date of Amount ($) PAC Transfer Ex.Portfolio Limited Fund BNP Securities 5/26/06 172,359 H Services Portfolio Limited Fund BNP Securities 12/1/06 7,385,000 H Services Total 75,488,478
To relate back, the new claim must arise out of "a common `core of operative facts' uniting the original and newly asserted claims." Mayle v. Felix, 545 U.S. 644, 659, 125 S.Ct. 2562, 162 L.Ed.2d 582 (2005). The "central inquiry is whether adequate notice of the matters raised in the amended pleading has been given to the opposing party within the statute of limitations by the general fact situation alleged in the original pleading." Slayton v. Am. Express Co., 460 F.3d 215, 228 (2d Cir. 2006); accord Stevelman v. Alias Research Inc., 174 F.3d 79, 86 (2d Cir. 1999). "This test does not require that the prior complaint put the defendants on notice of new or additional legal theories ... but it must inform the defendants of the facts that support those new claims." Official Comm. of Unsecured Creditors v. Pirelli Commc'ns Cables & Sys. USA LLC (In re 360networks (USA) Inc.), 367 B.R. 428, 434 (Bankr. S.D.N.Y. 2007) (citation omitted).
In the context of avoidance actions, "each preferential and fraudulent transaction is treated separately and distinctly," Fabrikant, 480 B.R. at 492; accord Metzeler, 66 B.R. at 984, because the "[p]roof offered for one transaction does not govern as to another and, as such, relation back cannot be ordered between different transactions merely for being similar or arising from the same conduct." Fabrikant, 480 B.R. at 492; accord 360networks, 367 B.R. at 434 ("a preference action based on one transfer does not put defendant on notice of claims with respect to any other unidentified transfers"). Furthermore, the "mere allegation" that the previously identified transfers and the newly added transfers are "all ... fraudulent transfers does not make them part of the same conduct." Metzeler, 66 B.R. at 983; see also id. at 984 ("there is no indication that, merely because different transactions bear the same label, relation back is to be ordered on the ground that they arise from similar conduct").
The Trustee contends that the New Subsequent Transfer Claims relate back "because the Trustee's initial pleading (plus years of active litigation in this and related adversary proceedings) provided Defendants with notice that the Trustee intended to recover all fraudulent transfers of BLMIS customer property that Defendants received from BLMIS Feeder Funds." (Trustee Brief 39.) This argument proves too much; it ignores the Rule's requirement that the new claims must "ar[ise] out of the conduct, transaction, or occurrence set out — or attempted to be set out — in the original pleading." FED. R. CIV. P. 15(c)(1)(B). The New Subsequent Transfer Claims arise from different facts and circumstances and depend on different proof. For example, the PAC seeks to recover twenty-one subsequent transfers totaling $39,661,250 made by the Insurance Portfolio Fund, (PAC, Ex. F), but the Original Complaint did not allege any transfers from the Insurance Portfolio Fund. Furthermore, each subsequent transfer, old or new, arose from either separate and distinct loans, credit facilities or derivative transactions with various counterparties while others appear to relate to either redemptions or equity distributions
The Trustees' authorities, Adelphia Recovery Trust v. Bank of Am., N.A., 624 F.Supp.2d 292 (S.D.N.Y. 2009) ("Adelphia"), reconsideration granted in part, No. 05 Civ. 9050 (LMM), 2009 WL 1676077 (S.D.N.Y. June 16, 2009) and Picard v. Peter Madoff (In re BLMIS), 468 B.R. 620 (Bankr. S.D.N.Y. 2012) ("Peter Madoff"), are distinguishable. Adelphia involved the prosecution of numerous claims arising from the Rigas family's borrowing billions of dollars prepetition for personal use using the debtor's assets as collateral (the "Co-Borrowing Facilities"). 624 F.Supp.2d at 297. The Adelphia Recovery Trust, established under the chapter 11 plan, brought intentional fraudulent transfer claims against Salomon Smith Barney ("SSB") for prepetition payments made on account of the Rigas family's margin loan debt. The Trust's amended complaint added $95 million in additional fraudulent transfers, and SSB moved to dismiss the new claims as time-barred. Id. at 333.
The Trust argued that the new transfers related back, and the Court agreed:
Id. at 333-34. The Adelphia Court distinguished Metzeler as a case "involv[ing] fraudulent transfers which arose out of different transactions." Adelphia, 624 F.Supp.2d at 334.
Similarly, in Peter Madoff, the Trustee sought leave to amend his complaint against Bernard Madoff's family members, inter alia, to add new initial fraudulent transfer claims against Bernard Madoff's brother Peter Madoff, and Bernard Madoff's sons or their estates (the "Family Defendants"). 468 B.R. at 623-24. Although the Family Defendants did not object to the assertion of the new claims, id. at 634, the Court nevertheless analyzed whether they related back, and concluded that they did. The original complaint alleged that BLMIS was operated as a "piggy bank" that allowed the Family Defendants to take huge sums of money for their personal use. Id. The proposed new claims relied on the same legal theories as the initial complaint which named the Family Defendants, and gave reasonable notice that the Trustee was still uncovering additional transfers that he would seek to recover. Id. at 633. The Court did not discuss Metzeler.
The subsequent transfers to the Defendants listed in the PAC, old and new, were not part of the common fraudulent scheme or pattern present in Adelphia and Peter Madoff. Each arose out of a separate leverage transaction or redemption, and the facts and circumstances surrounding the value given in exchange for the transfer will differ. Moreover, the Court has concluded that the PAC fails to plead the Defendants' bad faith. Thus, unlike the claims relating to transactions involving the Rigas or Peter Madoff's family, the
For the reasons stated, the Defendants' motion to dismiss for lack of personal jurisdiction is denied. The Trustee's motion for leave to amend his pleading is denied to the extent of the assertion of the New Subsequent Transfer Claims and is otherwise granted except that the only issue regarding each surviving transfer is whether the Defendant subsequent transferee (or a predecessor subsequent transferee) gave value for the transfer. The Court has considered the parties' other arguments and concludes that they are without merit or rendered moot by the disposition of the motion. Settle Order.