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Bankruptcy Litigation Regulation

Second Circuit Applies Federal Bankruptcy Law, Not Securities Law, In Madoff SIPA Liquidation

The Second Circuit applied federal bankruptcy law when holding that good faith is an affirmative defense.

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“[L]ack of good faith in a SIPA [Securities Investor Protection Act] liquidation applies an inquiry notice, not willful blindness, standard, and that a SIPA trustee does not bear the burden of pleading the transferee’s lack of good faith,” held the U.S. Court of Appeals for the Second Circuit on Aug. 30, 2021 in In re Bernard L. Madoff Investment Securities, LLC, 2021 WL 3854761, 91 (2d Cir. Aug. 30, 2021) (Madoff). Reversing the district court’s imposition of federal securities law in this fraudulent transfer action, the Second Circuit applied federal bankruptcy law when holding that good faith is an affirmative defense under sections 548(c) and 550(b)(1). It rejected the district court’s requiring the trustee to” bear the burden of pleading the transferee’s lack of good faith,” Id. at 17, refusing to depart “from the well-established rule that the defendant bears the burden of pleading an affirmative defense.” Id. at 57.

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