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Second Circuit Affirms Protection of the Section 546(e) Safe-Harbor Shield for Certain Madoff Investors

By Steven B. Smith

The answer is no. Irving H. Picard, the trustee (the Trustee) for Bernard L. Madoff Investment Securities LLC (BLMIS), appointed pursuant to the Securities Investor Protection Act (SIPA), may not clawback money paid out by BLMIS to hundreds of its customers. This was the recent decision reached by the United States Court of Appeals for the Second Circuit in Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Investment Seurities LLC), 773 F.3d 411 (2d Cir. 2014), and the decision continues the recent trend of extending the reach of Bankruptcy Code section 546(e)'s safe harbor protections. But, why not? Potentially hundreds of millions of dollars could be recovered and then paid out ratably to all BLMIS customers? Simply put, a SIPA trustee can only avoid and recover transferred funds that are voidable under the Bankruptcy Code, and section 546(e) provides an important exception to a trustee's clawback powers, which was triggered in this case. This article explores the arguments advanced in support of, and in opposition to, avoiding the payments made by BLMIS to its customers.

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