12‐2557‐bk(L)
In re: Bernard L. Madoff Investment Securities LLC
In the
United States Court of Appeals
For the Second Circuit
________
August Term, 2013
Nos. 12‐2557‐bk(L), 12‐2497‐bk(con), 12‐2500‐bk(con),
12‐2616‐bk(con), 12‐3422‐bk(con), 12‐3440‐bk(con),
12‐3582‐bk(con), 12‐3585‐bk(con)
________
IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Debtor.
________
IRVING H. PICARD, Trustee for the Liquidation of Bernard L.
Madoff Investment Securities LLC,
Plaintiff‐Appellant,
SECURITIES INVESTOR PROTECTION CORPORATION, Statutory Intervenor
pursuant to Securities Investor Protection Act, 15 U.S.C. § 78eee(d),
Intervenor‐Appellant,
v.
IDA FISHMAN REVOCABLE TRUST, PAUL S. SHURMAN, in his capacity as
co‐trustee of the Ida Fishman Revocable Trust, WILLIAM SHURMAN, in
his capacity as co‐trustee of the Ida Fishman Revocable Trust and as
Executor of the estate of Ida Fishman,
Defendants‐Appellees.
________
2 No. 12‐2557‐bk(L)
Appeal from the United States District Court
for the Southern District of New York.
Nos. 11‐bk‐7603, 12‐mc‐0115 — Jed S. Rakoff, Judge.
________
Argued: March 5, 2014
Decided: December 8, 2014
________
Before: PARKER, LYNCH, and DRONEY, Circuit Judges.
________
Appeal from judgments of the United States District Court for
the Southern District of New York (Rakoff, J.). Irving H. Picard, as
trustee for debtor Bernard L. Madoff Securities LLC, sued to avoid
fictitious profits paid by the debtor to hundreds of customers over
the life of the Ponzi scheme operated by Madoff. The defendant
customers moved to dismiss certain of these avoidance claims
pursuant to 11 U.S.C. § 546(e), which shields from recovery
securities‐related payments made by a stockbroker. The district
court agreed that § 546(e) barred the claims, dismissed them, and
certified the dismissal as a final judgment. The trustee appealed.
Affirmed.
________
DAVID J. SHEEHAN (Oren J. Warshavsky, Tracy L.
Cole, Seanna R. Brown; Howard L. Simon,
Windels Marx Lane & Mittendorf LLP; Matthew
B. Lunn, Young Conaway Stargatt & Taylor LLP,
on the brief), Baker Hostetler LLP, New York, NY,
for Plaintiff‐Appellant Irving H. Picard, Trustee for
3 No. 12‐2557‐bk(L)
the Liquidation of Bernard L. Madoff Investment
Securities LLC.
JOSEPHINE WANG, General Counsel (Kevin H. Bell,
Lauren T. Attard, on the brief), Securities Investor
Protection Corporation, Washington, D.C., for
Intervenor‐Appellant Securities Investor Protection
Corporation, Statutory Intervenor pursuant to
Securities Investor Protection Act, 15 U.S.C. §
78eee(d).
RICHARD LEVY, JR. (David C. Rose, on the brief),
Pryor Cashman LLP, New York, NY, for
Defendants‐Appellees Kara Fishbein Goldman, Steven
Goldman, et al.
P. GREGORY SCHWED (Walter H. Curchack, Daniel
B. Besikof, Michael Barnett, on the brief), Loeb &
Loeb LLP, New York, NY, for Defendants‐Appellees
Jonathan M. Aufzien, Lisa Aufzien, et al.
HELEN DAVIS CHAITMAN, Becker & Poliakoff, LLP,
New York, NY, for Defendants‐Appellees David
Abel, James Greiff, et al.
Deborah A. Skakel, Shaya M. Berger, Dickstein
Shapiro LLP, New York, NY, for Defendant‐
Appellee PetCareRx, Inc.
Carole Neville, Dentons US LLP, New York, NY,
for Defendants‐Appellees Harold J. Hein, Kelman
Partners Limited Partnership, et al.
Jennifer L. Young, Matthew A. Kupillas, Millberg
LLP, New York, NY; Parvin K. Aminolroaya,
4 No. 12‐2557‐bk(L)
SeegerWeiss LLP, New York, NY, for Defendants‐
Appellees Gerald Blumenthal, Harold A. Thau, et al.
David Parker, Matthew J. Gold, Kleinberg,
Kaplan, Wolff & Cohen, P.C., New York, NY, for
Defendants‐Appellees Kenneth Hubbard, Lawrence
Elins, et al.
Parvin K. Aminolroaya, SeegerWeiss LLP, New
York, NY for Defendants‐Appellees David J. Bershad,
Bershad Investment Group LP, et al.
Richard A. Kirby, Laura L. Clinton, Martha
Rodriguez‐Lopez, K&L Gates LLP, Washington
D.C., for Defendants‐Appellees Chesed Congregations
of America, Linda Berger, et al.
Philip Bentley, Elise S. Frejka, Kramer Levin
Naftalis & Frankel LLP, New York, NY, for
Defendants‐Appellees 1096‐1100 River Road
Associates LLC, Fred A. Daibes LLC, et al.
Marcy Ressler Harris, Jennifer M. Opheim, Mark
D. Richardson, Schulte Roth & Zabel LLP, New
York, NY, for Defendants‐Appellees Thomas H. Lee,
HHI Investment Trust #2, et al.
William P. Weintraub, Gregory W. Fox, Stutman,
Treister & Glatt, PC, New York, NY, for
Defendants‐Appellees Jeffrey Hinte, Robert Nystrom,
et al.
Paul Steven Singerman, Ilyse M. Homer, Isaac
Marcushamer, Berger Singerman LLP, for Amicus
Curiae National Association of Bankruptcy Trustees.
5 No. 12‐2557‐bk(L)
Philip D. Anker, Alan E. Schoenfeld, Wilmer
Cutler Pickering Hale and Dorr LLP, New York,
NY; Craig Goldblatt, Danielle Spinelli,
Shivaprasad Nagaraj, Allison Hester‐Haddad,
Wilmer Cutler Pickering Hale and Dorr LLP,
Washington, D.C., for Amicus Curiae Securities
Industry and Financial Markets Association.
Thomas J. Moloney, David E. Brodsky, Lawrence
B. Friedman, Carmine D. Boccuzzi, Jr., Breon S.
Peace, Charles J. Keeley, Shira A. B. Kaufman,
Cleary Gottlieb Steen & Hamilton LLP, NewYork,
NY, for Amici Curiae HSBC Bank plc, HSBC
Holdings plc, et al.
Marco E. Schnabl, Susan L. Saltzstein, Jeremy A.
Berman, Skadden, Arps, Slate, Meagher & Flom
LLP, New York, NY, for Amicus Curiae UniCredit
S.p.A.
Franklin B. Velie, Jonathan G. Kortmansky,
Mitchell C. Stein, Sullivan & Worcester LLP, New
York, NY, for Amicus Curiae UniCredit Bank Austria
AG.
Michael Feldberg, Allen & Overy LLP, for Amicus
Curiae ABN Amro Bank N.V. (presently known as the
Royal Bank of Scotland N.V.).
Joseph Cioffi, James R. Serritella, Davis & Gilbert
LLP, New York, NY, for Amici Curiae Natixis S.A.,
Natixis Financial Products LLC, et al.
6 No. 12‐2557‐bk(L)
Fran M. Jacobs, Duane Morris LLP, for Amicus
Curiae East Star SICAV.
Marshall R. King, Gibson, Dunn & Crutcher LLP,
New York, NY, for Amici Curiae UBS AG and UBS
(Luxembourg) S.A.
Marc J. Gottridge, Andrew M. Behrman, Hogan
Lovells US LLP, New York, NY, for Amici Curiae
Barclays Bank (Suisse) S.A., Barclays Bank S.A., and
Barclays Private Bank & Trust Limited.
Thomas B. Kinzler, Daniel Schimmel, Kelley Drye
& Warren LLP, New York, NY, for Amici Curiae
Caceis Bank France and Caceis Bank Luxembourg.
Jodi Kleinick, Barry Sher, Mor Wetzler, Paul
Hastings LLP, for Amici Curiae FIM Limited and
FIM Advisors LLP.
Eric Fishman, Kerry A. Brennan, Brandon
Johnson, Pillsbury Winthrop Shaw Pittman LLP,
New York, NY, for Amicus Curiae Falcon Private
Bank Ltd.
Richard L. Spinogatti, Proskauer Rose LLP, New
York, NY, for Amici Curiae Grosvenor Investment
Management Ltd., Grosvenor Private Reserve Fund
Limited, et al.
William J. Sushon, Shiva Eftekhari, O’Melveny &
Myers LLP, New York, NY, for Amici Curiae Credit
Suisse AG, Credit Suisse AG, Nassau Branch, et al.
7 No. 12‐2557‐bk(L)
David J. Onorato, Jessica R. Simonoff, Susan A.
Higginsshra, Freshfields Bruckhaus Deringer US
LLP, New York, NY, for Amicus Curiae Tensyr
Limited.
Brian H. Polovoy, Christopher R. Fenton, Andrew
Z. Lipson, Shearman & Sterling LLP, for Amicus
Curiae Nomura International plc.
John Westerman, Mickee Hennessy, Westerman
Ball Ederer Miller & Sharfstein, LLP, Uniondale,
NY, for Amici Curiae DOS BFS Family Partnership
II, L.P. and Donald and Bette Stein Family Trust.
________
BARRINGTON D. PARKER, Circuit Judge:
Bernard L. Madoff orchestrated a massive Ponzi scheme
through the investment advisory unit of Bernard L. Madoff
Investment Securities LLC (“BLMIS”). After the scheme collapsed,
Irving H. Picard (the “Trustee”) was appointed trustee for BLMIS
pursuant to the Securities Investor Protection Act, 15 U.S.C. § 78aaa
et seq. (“SIPA”). Under SIPA, a trustee is empowered to “recover”
(or claw back) money paid out by the debtor, as long as the money
“would have been customer property” had the payment not
occurred, and the transfers could be avoided under the Bankruptcy
Code. Id. § 78fff‐2(c)(3).
Section 546(e) of the Bankruptcy Code, in turn, establishes an
important exception to a trustee’s clawback powers. See 11 U.S.C.
§ 546(e). Section 546(e) provides generally that certain securities‐
related payments, such as transfers made by a stockbroker “in
8 No. 12‐2557‐bk(L)
connection with a securities contract,” or “settlement payment[s]”
cannot be avoided in bankruptcy.
Invoking his clawback powers, the Trustee sued hundreds of
BLMIS customers who withdrew more from their accounts than they
had invested and, as a result, profited (whether knowingly or not)
from Madoff’s scheme. The Trustee contends that, if BLMIS had not
preferentially paid these customers, the money would have been
customer property available to be distributed ratably to all
customers, including those who, over time, had withdrawn less than
they had invested.
Several defendants moved to dismiss the actions on the
ground that the payments received by BLMIS customers were
securities‐related payments that cannot be avoided under § 546(e).
The dispositive issue presented by this appeal is whether the
payments that BLMIS made to its customers are the type of
securities‐related payments that are shielded by § 546(e) from
clawback.
The United States District Court for the Southern District of
New York (Rakoff, J.) concluded that the payments were shielded by
§ 546(e) and dismissed the relevant claims under Federal Rule of
Civil Procedure 12(b)(6). We agree and therefore we affirm.
BACKGROUND
Because this appeal is from dismissals under Rule 12(b)(6), we
assume the truth of all well pleaded facts in the underlying
complaints and draw all reasonable inferences in favor of the
Trustee. See Gibbons v. Malone, 703 F.3d 595, 599 (2d Cir. 2013).1
1
According to the Trustee, the hundreds of complaints in this case are substantially identical
with respect to the issues raised in this appeal. Trustee’s Br. 9 n.4. As a result, when we refer
to the Trustee’s allegations, we cite the complaint in Picard v. Greiff, Adv. Pro. No. 10‐4357
9 No. 12‐2557‐bk(L)
I
BLMIS purported to execute a “split strike conversion
strategy” for customers of its investment advisory unit. This
strategy, had it actually been executed, would have consisted of
timing the market to purchase a basket of stocks on the S&P 100
Index, and then hedging those purchases with related options
contracts. See SIPC v. Bernard L. Madoff Inv. Secs. LLC (In re Bernard L.
Madoff Inv. Secs. LLC), 424 B.R. 122, 129‐30 (Bankr. S.D.N.Y. 2010)
(“SIPC v. BLMIS”).
In reality, however, BLMIS’s investment advisory business
conducted no actual securities or options trading on behalf of its
customers. Instead, BLMIS deposited customer investments into a
single commingled checking account and, for years, fabricated
customer statements to show fictitious securities trading activity and
returns ranging between 10 and 17 percent annually. When
customers sought to withdraw money from their accounts, including
withdrawals of the fictitious profits that BLMIS had attributed to
them, BLMIS sent them cash from the commingled checking
account. The Trustee seeks to claw back funds from customers who,
over time, were able to take out more money than they had invested
with BLMIS.
II
In December 2008, the Madoff scheme was exposed and
liquidation proceedings began in the district court. As a SIPA
trustee, Picard was obligated to collect and set aside a fund of
“customer property” specifically earmarked to repay BLMIS
customers ratably in proportion to each customer’s “net equity.” See
15 U.S.C. §§ 78lll(4), 78fff‐2(c); see also In re Bernard L. Madoff Inv. Secs.
LLC, 654 F.3d 229, 233 (2d Cir. 2011) (“In re BLMIS”). Where, as here,
the customer property fund is not sufficient to pay customers in full,
(Bankr. S.D.N.Y. Nov. 30, 2010), J.A. 594‐623.
10 No. 12‐2557‐bk(L)
SIPA empowers a trustee to claw back any transferred funds “which,
except for such transfer[s], would have been customer property.” 15
U.S.C. § 78fff‐2(c)(3). But a trustee can only claw back those
transferred funds “if and to the extent that [they are] voidable or
void under the provisions of” the Bankruptcy Code. Id.
The Trustee invokes two different theories under the
Bankruptcy Code to avoid transfers of fictitious profits to customers.
The Trustee’s first theory is that certain transfers are voidable as
“fraudulent transfers” under 11 U.S.C. §§ 548(a)(1)(A) and (B).
Section 548(a)(1)(A) applies to transfers made “with actual intent to
hinder, delay, or defraud” creditors (often referred to as “actual
fraud”). Section 548(a)(1)(B) applies to transfers made without “a
reasonably equivalent value in exchange for such transfer” under
certain circumstances. This provision is aimed at “constructive
fraud,” and does not require proof of fraudulent intent.
Importantly, a trustee can invoke these provisions to recover
payments only if the payments were “made . . . within 2 years before
the date of the filing of the petition.” Id. § 548(a)(1).
Because § 544(b) of the Bankruptcy Code permits a trustee to
avoid any transfers that an unsecured creditor could avoid under
applicable state law, the Trustee’s second theory is that the transfers
may be clawed back pursuant to New York’s fraudulent conveyance
law. See N.Y. Debt. & Cred. L. §§ 273‐76. These state law provisions
allow a creditor to avoid a debtor’s improper transfer of property,
including many of the same kinds of actually and constructively
fraudulent transfers covered by §§ 548(a)(1)(A) and (B). But unlike
the Bankruptcy Code, New York’s fraudulent conveyance law has a
six‐year statute of limitations. See N.Y. C.P.L.R. § 213.
Many clawback defendants moved to dismiss the Trustee’s
claims as barred by § 546(e) of the Bankruptcy Code, which prevents
a bankruptcy trustee from avoiding certain securities‐related
payments made by a stockbroker, including payments made in
11 No. 12‐2557‐bk(L)
connection with a securities contract and settlement payments.
Section 546(e) is a very broadly‐worded safe‐harbor provision that
was enacted to “minimiz[e] the displacement caused in the
commodities and securities markets in the event of a major
bankruptcy affecting those industries.” Enron Creditors Recovery Corp.
v. Alfa, S.A.B. de C.V. (In re Enron Creditors Recovery Corp.), 651 F.3d
329, 334 (2d Cir. 2011) (quoting H. R. Rep. No. 97‐420, at 2 (1982),
reprinted in 1982 U.S.C.C.A.N. 583, 583). The theory underlying this
section is that, “[i]f a firm is required to repay amounts received in
settled securities transactions, it could have insufficient capital or
liquidity to meet its current securities trading obligations, placing
other market participants and the securities markets themselves at
risk.” Id. Because § 546(e) is expressly inapplicable to claims of
actual fraud brought under § 548(a)(1)(A), the clawback defendants
invoked § 546(e) to dismiss only the constructive‐fraud claims under
§ 548(a)(1)(B) and all New York state law claims.
The clawback defendants first litigated the applicability of
§ 546(e) in two cases before the bankruptcy court. The bankruptcy
court (Lifland, Bankr. J.) declined to reach the issue, concluding that
the question of whether § 546(e) applies to the transfers at issue
should not be determined at the pleading stage of the litigation.
Picard v. Merkin, 440 B.R. 243, 266‐67 (Bankr. S.D.N.Y. 2010); Picard v.
Madoff, 458 B.R. 87, 115‐16 (Bankr. S.D.N.Y. 2011).
Following the bankruptcy court’s decisions, the district court
withdrew the bankruptcy reference in one clawback action—the Katz
case. After reexamining the issue, Judge Rakoff held that § 546(e)
applied because BLMIS was a stockbroker, the account documents
executed by the defendant customers were securities contracts, and
the various payments BLMIS made to those customers were in
connection with securities contracts, or were settlement payments.
Accordingly, Judge Rakoff dismissed all of the clawback claims,
except claims for actual fraud invoking § 548(a)(1)(A). Picard v. Katz,
12 No. 12‐2557‐bk(L)
462 B.R. 447, 452 (S.D.N.Y. 2011). After the district court refused to
certify the case for interlocutory appeal, Picard v. Katz, 466 B.R. 208
(S.D.N.Y. 2012), the parties settled and stipulated to dismiss the
remaining claims with prejudice, Picard v. Katz, No. 11‐cv‐3605‐JSR,
Doc. Nos. 192‐93 (S.D.N.Y. June 1, 2012).
Judge Rakoff’s decision in Katz represented the first successful
assertion of the § 546(e) defense by any of the clawback defendants.
After the district court issued the Katz opinion, hundreds of other
clawback defendants moved to withdraw the bankruptcy references
and, invoking Katz, sought in the district court to dismiss the
clawback suits on § 546(e) grounds.
In SIPC v. BLMIS, Judge Rakoff granted the motions to
withdraw the bankruptcy reference in 84 additional clawback cases.
476 B.R. 715 (S.D.N.Y. 2012). For substantially the same reasons
articulated in Katz, the district court held that the payments that
BLMIS made to the clawback defendants were in connection with
securities contracts, or were settlement payments, and were
therefore shielded by § 546(e). SIPC v. BLMIS, 476 B.R. at 718‐19.
The district court then dismissed the clawback claims in these 84
suits, again with the exception of actual‐fraud claims invoking
§ 548(a)(1)(A). SIPC v. BLMIS, 476 B.R. at 723‐24.
To streamline this Court’s review, the Trustee agreed to a
limited consolidation of all pending actions brought by the Trustee
raising the § 546(e) issue. See Consent Order, SIPC v. Bernard L.
Madoff Inv. Secs. LLC (In re Madoff Secs.), No. 12‐MC‐0115, Doc. No.
13 (S.D.N.Y. May 16, 2012). The district court certified its dismissals
as final judgments, see Fed. R. Civ. P. 54(b), and the Trustee
appealed.
DISCUSSION
Section 546(e) of the Bankruptcy Code provides that a
bankruptcy trustee
13 No. 12‐2557‐bk(L)
may not avoid a transfer that is a . . . settlement
payment, as defined in section . . . 741 of this title, made
by [a] . . . stockbroker . . . , or that is a transfer made by
[a] . . . stockbroker . . . in connection with a securities
contract, as defined in section 741(7), . . . except under
section 548(a)(1)(A) of this title.
11 U.S.C. § 546(e). It is not disputed that BLMIS was a “stockbroker”
for the purposes of § 546(e). Consequently, this appeal turns on
whether the transfers either were “made in connection with a
securities contract” or were “settlement payment[s].” Id.
The Trustee argues that § 546(e) should not apply because
BLMIS never initiated, executed, completed, or settled the securities
transactions contemplated by the customer agreements. He also
contends that the transfers were not “made in connection with a
securities contract” or “settlement payment[s]” as those terms are
defined in § 741. Finally, the Trustee maintains that permitting the
application of § 546(e) in this case would be tantamount to giving
legal effect to Madoff’s fraud. See In re BLMIS, 654 F.3d 229, 235 (2d
Cir. 2011). For the following reasons, we reject these arguments,
which flow from the premise that § 546(e) would only apply if
Madoff had actually completed the securities transactions he
purported to effectuate. Instead, we conclude that § 546(e) shields
these transfers from avoidance because they were “made in
connection with a securities contract,” and were also “settlement
payment[s].”
I
Section 741(7) of the Bankruptcy Code, to which § 546(e)
refers, defines “securities contract” with extraordinary breadth to
include:
14 No. 12‐2557‐bk(L)
(i) a contract for the purchase, sale or loan of a security
. . . or . . . option to purchase or sell any such security
. . . ; [or]
. . .
(vii) any other agreement or transaction that is similar
to an agreement or transaction referred to in this
subparagraph . . . . [or]
. . .
(x) a master agreement that provides for an agreement
or transaction referred to in clause (i) [or] . . . (vii) . . . ,
except that such master agreement shall be considered
to be a securities contract under this paragraph only
with respect to each agreement or transaction under
such master agreement that is referred to in [clauses (i)
through (ix)]; or
(xi) any security agreement or arrangement . . . related
to any agreement or transaction referred to in this
subparagraph, including any guarantee or
reimbursement obligation by or to a stockbroker . . . .
11 U.S.C. §§ 741(7)(A)(i),(vii),(x), (xi).
Thus, the term ʺsecurities contractʺ expansively includes contracts
for the purchase or sale of securities, as well as any agreements that
are similar or related to contracts for the purchase or sale of securities.
Id. This concept is broadened even farther because § 546(e) also
protects a transfer that is “in connection” with a securities contract.
While neither the Bankruptcy Code nor SIPA defines purchase
or sale, the Securities Exchange Act of 1934 – of which SIPA is a part
– defines the terms to “include any contract to buy, purchase, or
15 No. 12‐2557‐bk(L)
otherwise acquire . . . [or] to sell or otherwise dispose of” a security.
15 U.S.C. § 78c(a)(13)‐(14) (emphasis added). For the reasons that
follow, we conclude that BLMIS and its customers entered into
agreements that satisfy the broad definition of “securities contracts”
under § 741(7)(A).
The clawback defendants argue that a “securities contract”
was created by three of the documents that BLMIS customers were
required to execute when opening their accounts. In the first, a
“Customer Agreement,” each customer authorized BLMIS to
“open[] or maintain[] one or more accounts” for his benefit. J.A.
1257. In a second document, a “Trading Authorization,” each
customer appointed BLMIS to be the customer’s “agent and attorney
in fact to buy, sell and trade in stocks, bonds, and any other
securities in accordance with [BLMIS’s] terms and conditions for the
[customer’s] account.” J.A. 1264. And in a third document, an
“Option Agreement,” each customer authorized BLMIS to engage in
options trading for the customer’s account. J.A. 1261‐62. The
defendants contend that these three account opening documents
(together, the “Account Documents”) authorized BLMIS to engage
in securities transactions on behalf of its customers, although they
did not expressly require BLMIS to conduct any such transactions,
and consequently established a “securities contract.”
We agree. On their face, the Account Documents are
agreements by which BLMIS will “acquire or dispose of securities”
on behalf of its customers. The Customer Agreement established the
broker‐customer relationship, and the Trading Authorization
authorized BLMIS to trade in securities for the customer’s account.
A‐2147‐49, A‐2144. These documents also specify the terms by
which BLMIS will acquire and dispose of securities for the customer.
Were it not for the Account Documents, there would be no basis for
a customer to make deposits or request withdrawals. Thus, the
16 No. 12‐2557‐bk(L)
transfers at issue originated with, and could not have been possible
but for, the relationship created by the Account Documents.
Accordingly, we conclude that they fall within the statute’s broad
definition of “securities contract.” See § 741(7)(A)(i).
The function contemplated for the Account Documents also
satisfies the definition of “securities contract” in § 741(7)(A)(x),
which includes “a master agreement that provides for an agreement
or transaction referred to in clause (i) [i.e., ‘a contract for the
purchase, sale, or loan of a security’]).” As the Trustee
acknowledges in his brief, “master agreement” is a “term of art in
the securities industry” meaning “a contract establishing the mutual
undertakings between two counterparties that anticipate executing
future securities transactions with each other. . . .” Trustee Br. 43
(citing Paul C. Harding, Mastering the ISDA Master Agreements (1992
and 2002) 19‐27 (2d ed. 2004)). Taken together, this is precisely what
the Account Documents contemplate and accomplish. The Trustee’s
own complaints further support this conclusion. He alleges that
“Madoff promised [his] clients that their funds would be invested in a
basket of common stocks within the S&P 100 Index,” and hedged
with corresponding options contracts. J.A. 601 ¶ 21 (emphasis
added). Additionally, because the Account Documents obligate
BLMIS to reimburse its customers upon a request for withdrawal,
they also fit the definition of “securities contract” in § 741(7)(A)(xi),
which includes, again quite expansively, “any security agreement or
arrangement related to any agreement or transaction referred to in
this subparagraph, including any guarantee or reimbursement
obligation by or to a stockbroker.”
Yet another indication that Congress intended § 546(e) to
sweep broadly is supplied by the text of § 741(7)(A)(vii) which
expands the definition of “securities contract” to include “any other
agreement or transaction that is similar to” a “contract for the
17 No. 12‐2557‐bk(L)
purchase, sale or loan of a security[.]” Few words in the English
language are as expansive as “any” and “similar.” See Deravin v.
Kerik, 335 F.3d 195, 204 (2d Cir. 2003) (“[R]ead naturally, the word
“any” has an expansive meaning,’ and . . . so long as ‘Congress did
not add any language limiting the breadth of that word,’ the term
‘any’ must be given literal effect.” (quoting United States v. Gonzales,
520 U.S. 1, 5 (1997)). In ordinary usage, the word “similar” means
“having characteristics in common,” or “alike in substance or
essentials.” Webster’s 3d New Int’l Dictionary 2120 (1993). In light
of these definitions, we conclude that the relationship between
BLMIS and its customers established by the Account Documents
involved “agreement[s]” that are “similar to” “contracts for the
purchase, sale or loan of a security . . . .” 11 U.S.C. §§ 741(7)(A)(i),
(vii).
The Trustee advances several arguments why, in his view,
these agreements do not constitute a “securities contract” and the
transfers at issue should not be shielded from avoidance. None are
persuasive. First, the Trustee argues that § 546(e) does not apply
because BLMIS never initiated, executed, completed or settled the
securities transactions it promised to engage in. Trustee’s Br. 25‐35.
Citing our decision in Enron, the Trustee contends that the purpose
of § 546(e) is to “minimiz[e] the displacement caused in the
commodities and securities markets in the event of a major
bankruptcy affecting those industries.” Id. at 27 (quoting Enron, 651
F.3d at 334). Because “there are no securities transactions to
unwind,” the Trustee argues that no such disruption would occur,
and correspondingly, § 546(e) is inapplicable. Trustee’s Br. 25.
This argument misses the point. It does not engage with the
language Congress chose for § 741(7) and § 546(e). Because those
provisions do not contain a purchase or sale requirement, whether
18 No. 12‐2557‐bk(L)
or not BLMIS actually transacted in securities is not determinative.2
Section 546(e) only requires that a covered transfer be broadly
related to a “securities contract,” not that it be connected to an actual
securities transaction.3 In other words, whether an agreement
satisfies the definition of “securities contract” does not depend on
the broker’s performance, because a breach of a contract neither
changes nor nullifies the nature of the underlying agreement. The
existence of a securities contract is not vitiated because a broker
fails to make good on his commitment. See Beth Israel Med. Ctr. v.
Horizon Blue Cross & Blue Shield of N.J., Inc., 448 F.3d 573, 581 (2d Cir.
2006).
Furthermore, the interpretation pressed by the Trustee risks
the very sort of significant market disruption that Congress was
concerned with. The magnitude of BLMIS’s scheme, which included
thousands of customers and billions of dollars under management,
is unprecedented. Permitting the clawback of millions, if not
billions, of dollars from BLMIS clients – many of whom are
institutional investors and feeder funds – would likely cause the
very “displacement” that Congress hoped to minimize in enacting
§ 546(e). See Enron, 651 F.3d at 339. The clawback defendants,
having every reason to believe that BLMIS was actually engaged in
2
Similarly, the Exchange Act’s inclusion of contracts to “otherwise acquire” or “dispose of”
securities in its definition of “buy” and “sell” necessarily contemplates agreements beyond
those for a simple sale or purchase. See 15 U.S.C. §§ 78c(a)(13)‐(14).
3
This conclusion is congruent with the broad interpretation of the “in connection with a
purchase or sale of any security” requirement of Rule 10b‐5 in the context of federal
securities laws. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85 n.10
(2006) (“[A] broker who accepts payment for securities that he never intends to deliver . . .
violates §10(b) and Rule 10b‐5.”) (citations and quotations omitted); SEC v. Zandford, 535 U.S.
813, 819 (2002) (holding that the SEC may bring a public enforcement action against a broker
who accepted payment for securities that he never delivered); see also Grippo v. Perazzo, 357
F.3d 1218, 1220‐24 (11th Cir. 2004) (“A plaintiff does not need to identify a specific security,
or demonstrate that his money was actually invested in securities” for purposes of Rule 10b‐
5).
19 No. 12‐2557‐bk(L)
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).
Second, the Trustee argues that the Account Documents are
not securities contracts because they do not specifically “identify any
security, issuer, quantity, price, or other terms necessary to describe
a security transaction.”4 See Trustee Br. 38. This argument
constructs a requirement that the law does not contain. The Trading
Authorization identifies a specific category of public securities (S&P
100 stocks) to be traded. A‐1646 ¶ 21. Nothing in our reading of
§ 741(7)(A) indicates that any greater specificity, much less the
degree of detail called for by the Trustee, is required. To the
contrary, if Congress intended to mandate securities contracts to
identify transactions with the precision the Trustee claims is
required, Congress would hardly have included the reference to
“master agreements” in subsection (x) or adopted the broad “similar
to” catch‐all in subsection (vii) or the “any . . . arrangement . . .
related to any agreement . . .” language in subsection (xi). See Penn.
Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552, 562 (1990).
Third, the Trustee argues that the Account Documents merely
authorize BLMIS to conduct securities transactions on behalf of its
customers, but never expressly obligate BLMIS to carry out any such
transactions. Trustee’s Br. 38‐39. Accordingly, the Trustee contends
that even if customers reasonably expected that BLMIS would
conduct securities transactions on their behalf, this would establish
an obligation sounding in “quasi‐contract” at most, but would not
constitute a true contractual obligation. Id. at 39. Alternatively, the
Trustee argues that the Account Documents establish an “agency”
4
The Securities Investor Protection Corporation (“SIPC”), also an appellant in this case,
assumed arguendo for the purposes of its brief that the Account Documents are securities
contracts. See SIPC Br. 2, 14.
20 No. 12‐2557‐bk(L)
relationship between BLMIS and its customers, similar to that
between a real estate broker and a home buyer, and “are no more
contracts for the purchase and sale of a security than a real estate
brokerage agreement is a contract for the purchase or sale of a
house.” Id. at 42.
The Trustee might be correct that the record reflects no written
contract for the purchase or sale of a specific security between
BLMIS and its customers. Further, the Trustee is right that the
Account Documents function by authorizing BLMIS to act as an
agent for the customer in unspecified expected future securities
transactions. The Trustee is also correct that, standing alone, the
Account Documents would not effectuate the purchase or sale of any
particular security.
But, as we have seen, the statutory definition of a “securities
contract” is not limited in the way the Trustee would have us read it,
and to the contrary, encompasses the relationship created by the
Account Documents. As discussed above, the definition includes
“any other agreement . . . that is similar to” a “contract for the
purchase, sale or loan of a security.” 11 U.S.C. §§ 741(7)(A)(i), (vii)
(emphases added). “An agreement is a manifestation of mutual
assent on the part of two or more persons,” and it “has in some
respects a wider meaning than contract, bargain or promise.”
Restatement (Second) of Contracts § 3 (1979), § 3 cmt. a. The
Account Documents established that BLMIS and its customers
“manifest[ed] their mutual assent” that BLMIS would conduct
securities transactions on the customers’ behalf pursuing a specific
investment strategy. See id. § 3. This is, in our view, an agreement
sufficiently “similar to” a contract for the purchase or sale of a
security to fall within the catch‐all provision of § 741(7)(A)(vii). Of
course, BLMIS secretly intended to violate the agreement by using
the deposits to fund the ongoing Ponzi scheme. But this is of no
21 No. 12‐2557‐bk(L)
moment, because “[a]n agreement is a manifestation of mutual
assent,” and “[t]he conduct of a party may manifest assent even
though he does not in fact assent.” Id. §§ 3, 19(3) (emphasis added).
We similarly have little difficulty concluding that the
payments BLMIS made to its customers were made “in connection
with” the securities contracts identified above. In the context of §
546(e), a transfer is “in connection with” a securities contract if it is
“related to” or “associated with” the securities contract. See
Webster’s 3d New Int’l Dictionary 481 (1993) (defining “connection”
as “relationship or association in thought”); cf. Shaw v. Delta Air
Lines, Inc., 463 U.S. 85, 97 (1983) (interpreting “relates to” to mean “a
connection with or reference to”). Here, BLMIS promised its
customers that it would transact securities, and BLMIS’s customers
deposited money relying on that promise. This agreement
constitutes a securities contract as defined in the statute and the
customers’ subsequent withdrawals from their accounts were
therefore related to, and associated with, this securities contract.
SIPC argues that Ponzi scheme payments, by definition, are
not “in connection with” a securities contract. SIPC’s Br. 16. SIPC
contends that in order for the payments to have been made “in
connection with” a securities contract, there must necessarily have
been some relation or connection between the payment and the
contract. Id. at 27‐28. According to SIPC, although the payments of
fictitious profits were purported to have been made in connection
with the agreements, they were not in fact made in connection with
the agreements because the agreements were either irrelevant or the
payments were not authorized by the agreements. Id. at 28‐30.
We are not persuaded. Section 546(e) sets a low bar for the
required relationship between the securities contract and the transfer
sought to be avoided. Congress could have raised the bar by
requiring that the transfer be made “pursuant to,” or “in accordance
22 No. 12‐2557‐bk(L)
with the terms of,” or “as required by,” the securities contract, but it
did not. Instead, Congress merely required that the transfer have a
connection to the securities contract, which these payments do.
Certainly SIPC and the Trustee are correct that these transfers
were also made “in connection with” a Ponzi scheme and, as a
result, were fraudulent. See id. at 29. Indeed, BLMIS’s conduct was
in flagrant breach of the agreements it made with its customers. But
the fact that a payment was made in connection with a Ponzi scheme
does not mean that is was not at the same time made in connection
with a (breached) securities contract. After all, a transfer can be
connected to, and can be made in relation to, multiple documents or
purposes simultaneously.
II
We also conclude that the transfers constituted “settlement
payments,” which provides another basis to shield the transfers
from avoidance under § 546(e). As described above, § 546(e)
provides that a trustee “may not avoid a transfer that is a . . .
settlement payment, as defined in . . . this title, made by [a] . . .
stockbroker.” Section 741(8) defines “settlement payment” as a
“preliminary settlement payment, a partial settlement payment, an
interim settlement payment, a settlement payment on account, a
final settlement payment, or any other similar payment commonly
used in the securities trade.”
The Trustee again contends that these transfers did not
constitute “settlement payment[s]” because BLMIS never engaged in
actual securities trading. But we have held that the statutory
definition should be broadly construed to apply to “the transfer of
cash or securities made to complete [a] securities transaction.” Enron,
651 F.3d at 334 (citations omitted). That is what the BLMIS clients
received. Each time a customer requested a withdrawal from
23 No. 12‐2557‐bk(L)
BLMIS, he or she intended that BLMIS dispose of securities and
remit payment to the customer. See N.Y.U.C.C. § 8‐501(b)(1) & cmt. 2
(broker’s written crediting of securities to a customer’s account
creates an enforceable securities entitlement). The statutory
definition and Enron compel the conclusion that, for example, if I
instruct my broker to sell my shares of ABC Corporation and remit
the cash, that payment is a “settlement” even if the broker may have
failed to execute the trade and sent me cash stolen from another
client. As the district court correctly concluded, because the
customer granted BLMIS discretion to liquidate securities in their
accounts to the extent necessary to implement their sell orders or
withdrawal requests, each transfer in respect of a such an order or
request constituted a settlement payment.
III
Finally, we disagree with the Trustee’s contention that
affirming the district court’s decision would be inconsistent with our
decision in In re BLMIS, 654 F.3d 229 (2d Cir. 2011). There, we faced
the question of how to calculate each BLMIS customer’s “net
equity,” as that term is defined in SIPA. Id. at 233. We said that it
would be “absurd” to calculate customers’ net equity using BLMIS’s
fictitious account statements, because that would “have the . . . effect
of treating fictitious and arbitrarily assigned paper profits as real
and would give legal effect to Madoff’s machinations.” Id. at 235.
According to the Trustee, this case is similar. The Trustee argues
that, to allow customers to retain the fictitious profits Madoff
arbitrarily bestowed on them amounts to giving legal effect to his
fraud. Trustee’s Br. 51‐55.
This argument, albeit compelling, is ultimately not
convincing. In our earlier decision, we interpreted “net equity” in a
manner that would harmonize it with the SIPA statutory framework
as a whole. See In re BLMIS, 654 F.3d at 237. Section 546(e),
24 No. 12‐2557‐bk(L)
however, is part of the Bankruptcy Code, not SIPA, and was not in
issue in In re BLMIS. This is important because, in enacting the
Bankruptcy Code, Congress struck careful balances between the
need for an equitable result for the debtor and its creditors, and the
need for finality. See In re Century Brass Prods., Inc., 22 F.3d 37, 40 (2d
Cir. 1994). For example, a bankruptcy trustee can recover fraudulent
transfers under § 548(a)(1) only when the transfers took place within
two years of the petition date. And avoidance claims must be
brought “two years after the entry of the order for relief” at the
latest. 11 U.S.C. § 546(a). These statutes of limitations reflect that, at
a certain point, the need for finality is paramount even in light of
countervailing equity considerations. Similarly, by enacting § 546(e),
Congress provided that, for a very broad range of securities‐related
transfers, the interest in finality is sufficiently important that they
cannot be avoided by a bankruptcy trustee at all, except as actual
fraudulent transfers under § 548(a)(1)(A). We are obliged to respect
the balance Congress struck among these complex competing
considerations.
CONCLUSION
The judgment of the district court is AFFIRMED.