Irving Picard, the trustee ap-pointed under the Securities Investor Protection Act (SIPA) to liquidate Bernard Madoff’s firm, Bernard L. Madoff Investment Securities LLC (BLMIS), has brought more than 100 lawsuits1 seeking, in the aggregate, billions of dollars in transfers from defendants whom the trustee alleges received transfers of funds that originated with BLMIS.In their motion to dismiss, filed before Judge Jed Rakoff of the Southern District of New York, defendants raised three arguments—two of which involved issues of first impression—with respect to the good-faith defense2 provided by the Bankruptcy Code:
1. In a SIPA liquidation, what is the appropriate standard governing the good faith of an initial transferee?
2. In a SIPA liquidation, what is the appropriate standard governing the good faith of a subsequent transferee? (issue of first impression).
3. In a SIPA liquidation, does the trustee have the burden of pleading facts sufficient to plausibly establish a defendant’s lack of good faith in order to survive a motion to dismiss? (issue of first impression).
In an opinion issued on April 27, 2014, in In re Madoff Securities, 12-MC-115 (JSR), Rakoff concluded that in a SIPA proceeding, the transferees’ good faith is measured by a subjective willful blindness standard. Moreover, Rakoff held that the trustee must allege facts to plausibly support the inference that the defendant took the challenged transfers with a lack of good faith. Accordingly, a defendant can succeed on a dismissal motion if the trustee fails to so allege.3
