The Defendants acknowledge that they are swimming upstream with this motion that both seeks dismissal based on an affirmative defense and is based on an interpretation of Section 546(e) that seemingly has been consistently rejected in prior court decisions. It is the Defendants’ arguments to distinguish the prior, adverse decisions on the applicability of Section 546(e) that especially make this decision noteworthy. In particular, the Defendants attempt to distinguish existing authority because here the Defendants are “not alleged to have any knowledge or participation in the fraudulent activities of Madoff; nor are they alleged to have received any of the transfers in bad faith.”
The Defendants are faced with the prior decision of the Bankruptcy Court in Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC), 440 B.R. 243 (Bankr. S.D.N.Y. 2010). In that decision, the Court ruled that the section 546(e) safe harbor defense cannot be raised on a motion to dismiss and also rejected the application of the section 546(e) safe harbor provision to the transfers at issue. 440 B.R. at 266-68. The Defendants effort to distinguish Merkin hinges on the absence of any allegation of bad faith in these proceedings:
Finally, this Court rejected the application of the section 546(e) safe harbor provision to the transfers at issue in the Merkin Decision as contrary to the purpose of the safe harbor provisions and incompatible with SIPA. 440 B.R. at 267; see also Net Equity Decision, 424 B.R. at 137 n.30. To the extent that this Court’s determination was based on the allegations in the complaint in that case, which were replete with contentions of bad faith against the Merkin defendants, id. at 253; the Merkin Decision is distinguishable, because there is no allegation of bad faith made by the Trustee against the Defendants in this case. To the extent that this Court’s determination was based on the applicability of the 546(e) safe harbor to Ponzi schemes in general, the defendants respectfully submit that this Court relied on cases construing an earlier version of section 546(e) than the one that is applicable to this case. The current version of section 546(e) is the one amended in 2006 by FNIA § 5(b)(1), which added the provision relied upon by the defendants in this case, that the transfer be “in connection with a securities contract.” The cases cited in the Merkin Decision, Mishkin v. Ensminger (In re Adler, Coleman Clearing Corp.), 247 B.R. 51, 105 (Bankr. S.D.N.Y. 1999), aff’d, 263 B.R. 406 (S.D.N.Y. 2001); and Kipperman v. Circle Trust F.B.O. (In re Grafton Partners), 321 B.R. 527, 539 (9th Cir. B.A.P. 2005); predate the FNIA amendment and discuss the version of section 546(e) that required that the transfer be a “margin payment” or a “settlement payment.” The applicable definition of “settlement payment” with respect to securities is found in 11 U.S.C. § 741(8). It is 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.” Id. This ambiguous and circular definition, which contains a reference to “commonly used,” allowed the courts construing it to exclude Ponzi scheme transfers from its operation. Adler Coleman, 247 B.R. at 105; Grafton Partners, 321 B.R. at 539- 40. Although section 546(e) continues to provide a safe harbor for a “settlement payment,” the Defendants do not rely on the definition of “settlement payment” to provide their protection. Consequently, these cases do not provide any authority with respect to the current version of section 546(e) and the provisions on which the defendants in this case rely.
Because the BLMIS liquidation is a being conducted under SIPA, there remains the issue whether any provision of the Bankruptcy Code is applicable. SIPA makes chapters 1, 3 and 5 and parts I and II of chapter 7 applicable in SIPA liquidations to the extent they are consistent with SIPA. 15 U.S.C. § 78fff(b). A provision of the Bankruptcy Code is “inconsistent” with SIPA if conflicts with an explicit provision of SIPA or if its application would substantially impede the fair and effective operation of SIPA without providing significant countervailing benefits. Securities Investors Prot. Corp. v. Charisma Sec. Corp., 506 F.2d 1191, 1195 (2d Cir. 1974). But a provision does not become “inconsistent” simply because it is not absolutely necessary for the operation of the Act. Id. Section 546(e) in its current form does not conflict with any provision of SIPA. Nor does it impede the fair and effective operation of SIPA any more than any other defense to or limitation on an avoiding power under the Bankruptcy Code. Surely, the Trustee would not contend that the statute of limitations contained in section 546(a) or the “for value in good faith” defense contain in section 548(c) impede the fair and effective operation of SIPA. Indeed, as this Court recognized in its Net Equity Decision, the allowance and payment of “customer claims” is not affected by whether the Trustee is unable to avoid a transfer in particular circumstances. 424 B.R. at 136-37. Moreover, since FNIA § 5(b)(2) also amended SIPA, the simultaneous changes by Congress to both the Bankruptcy Code and SIPA strongly imply that Congress viewed the statutes that it was revising as being consistent with each other.
As a result, there is nothing inconsistent with either the Bankruptcy Code or SIPA in applying that portion of the safe harbor provision in section 546(e) to the transfers at issue in the present case. The application of this provision does not immunize these transfers from all scrutiny. They remain subject to avoidance under section 548(a)(1)(A), the actual fraudulent transfer provisions of the Bankruptcy Code. Consequently, all the Counts in the Trustee’s Complaint that seek the avoidance and recovery of fraudulent transfers on a basis other than the actual fraudulent transfers under the Bankruptcy Code, namely, Counts Two, Three, Four, Fix and Six, must be dismissed with prejudice.