Irving H. Picard, Trustee for the Liquidation of B v. Lustig

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
: 	Adv. Proc. No. 08-01789 (SMB)
SECURITIES INVESTOR PROTECTION 	:
CORPORATION, 	: 	SIPA Liquidation
: 	(Substantively Consolidated)
Plaintiff, 	:
:
‒ against ‒ 	:
:
BERNARD L. MADOFF INVESTMENT 	:
SECURITIES LLC, 	:
:
Defendant. 	:
--------------------------------------------------------X
In re: 	:
:
BERNARD L. MADOFF, 	:
:
Debtor. 	:
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IRVING PICARD, Trustee for the Liquidation 	:
of Bernard L. Madoff Investment Securities 	:
LLC, 	:
:
Plaintiff, 	:
:
‒ against ‒ 	: 	Adv. Proc. No. 10-04417 (SMB)
:
THE LUSTIG FAMILY 1990 TRUST and 	:
DAVID I. LUSTIG, individually and in his 	:
Capacity as Trustee for The Lustig Family 	:
1990 Trust, 	:
:
Defendants. 	:
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IRVING PICARD, Trustee for the Liquidation 	:
of Bernard L. Madoff Investment Securities 	:
LLC, 	:
:
Plaintiff, 	:
:
‒ against ‒ 	: 	Adv. Proc. No. 10-04554 (SMB)
:
DAVID IVAN LUSTIG, 	:
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:
Defendant. 	:
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MEMORANDUM DECISION AND ORDER DENYING
MOTION FOR RECONSIDERATION
A P P E A R A N C E S:
BAKER & HOSTETLER LLP
Attorneys for Plaintiff Irving Picard, Trustee
45 Rockefeller Plaza
New York, NY 10111
David J. Sheehan, Esq.
Nicholas J. Cremona, Esq.
Dean D. Hunt, Esq.
Of Counsel
LAW OFFICE OF RICHARD E. SIGNORELLI
Attorney for Defendants
799 Broadway, Suite 539
New York, NY 10003
Richard E. Signorelli, Esq.
Bryan Ha, Esq.
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
Defendants David I. Lustig (“Lustig”) and The Lustig Family 1990 Trust (the
“Lustig Trust,” and together with Lustig, the “Defendants”) seek reconsideration of the
Order Granting Partial Summary Judgment Striking Affirmative Defenses, dated June
12, 2017 (“Partial Summary Judgment Order”) (ECF Doc. # 83),1 which incorporated
this Court’s memorandum decision in Picard v. Lustig (In re BLMIS), 568 B.R. 481
(Bankr. S.D.N.Y. 2017) (“Lustig”), request for leave to appeal denied, Nos. 17-cv-4952 &
17-cv-4972 (GHW), 2017 WL 4838575 (S.D.N.Y. Oct. 24, 2017), pursuant to Rule 60(b)
1 	The filings in each adversary proceeding are substantially identical, and unless otherwise
indicated, all ECF references are to the docket of Adv. Proc. No. 10-04417.
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of the Federal Rules of Civil Procedure. (See Notice of Motion for Reconsideration,
dated June 27, 2017 (ECF Doc. # 85); and Memorandum of Law in Support of Motion
for Reconsideration, dated June 27, 2017 (“Reconsideration Motion”) (ECF Doc. # 86).)
For the reasons stated, the Reconsideration Motion is denied.
BACKGROUND
A. 	The Prior Proceedings
The Court assumes familiarity with its decision in Lustig, and limits the
background to the facts necessary for the disposition of the Reconsideration Motion.
Irving H. Picard (the “Trustee”), as trustee for the liquidation of Bernard L. Madoff
Investment Securities LLC (“BLMIS”) under the Securities Investor Protection Act, 15
U.S.C. §§ 78aaa, et seq. (“SIPA”), sued the Defendants in separate adversary proceedings
to avoid and recover fictitious profits withdrawn from their BLMIS accounts within two
years of December 11, 2008 as intentional fraudulent transfers under 11 U.S.C. §§
548(a)(1)(A) and 550(a). Lustig, 568 B.R. at 484-85. According to the Complaints, the
Lustig Trust withdrew $5 million of which $4,241,336 constituted fictitious profits, and
Lustig withdrew $ 2 million of which $1,863,225 represented fictitious profits.
In their answers, the Defendants asserted several defenses centered on the notion
that the money they withdrew from BLMIS made a round trip back into BLMIS through
the investment by different BLMIS customers. 	After the Defendants withdrew their
fictitious profits, that invested the money with Lakeview Investment, LP (“Lakeview”),
Lakeview, in turn, invested the Defendants’ fictitious profits in other BLMIS feeder
funds, the feeder funds invested the fictitious profits in BLMIS and these funds lost their
investments when the Madoff Ponzi scheme collapsed. The Defendants asserted
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affirmative defenses based on this “reinvestment” of their fictitious profits. They asked
the Court (i) to use its equitable powers to dismiss the avoidance claims (Eighth
Affirmative Defense), (ii) to grant them an “equitable credit” (Ninth Affirmative
Defense), (iii) to bar the avoidance claims under the single satisfaction rule set forth in
Bankruptcy Code § 550(d) (Tenth Affirmative Defense), and (iv) to provide them with
credit under principles of recoupment (Eleventh Affirmative Defense). Lustig, 568 B.R.
at 485. 2
The Trustee moved to strike these affirmative defenses pursuant to Rule 12(f) of
the Federal Rules of Civil Procedure, and the Defendants supplied substantial evidence
in opposition to the motion. To streamline the Court’s consideration of the legal
viability of the affirmative defenses, the parties agreed to treat the motion as one for
partial summary judgment in which the Court assumed (solely for purposes of the
motion) that the Defendants’ $7 million Lakeview investment was ultimately deposited
back into BLMIS through the BLMIS accounts belonging to two hedge funds (the
“Funds”), and the value of the Funds’ accounts was effectively zero when Madoff’s Ponzi
scheme was revealed. Id.
The Court granted the Trustee’s motion. With respect to the equitable defenses,
the Court observed that the “equitable credit” the Defendants sought had already been
allocated to the Funds under the Bankruptcy Code and the SIPA. The cash deposits
made by the Funds into their BLMIS accounts (including the Defendants’ $7 million)
“gave value” to BLMIS under section 548(c) of the Bankruptcy Code and decreased the
2 	The Defendants also asserted that they were entitled to set off the reinvestment amount pursuant
to 11 U.S.C. § 553, but subsequently withdrew that defense. Lustig, 568 B.R. 485.
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Funds’ fraudulent transfer liability. Id. at 487. Likewise, the cash deposits (including
the Defendants’ $7 million) increased the Funds’ net equity claims against the BLMIS
customer property estate. Id. at 487-88 (citing In re BLMIS, 654 F.3d 229, 239 (2d Cir.
2011), cert. denied, 567 U.S. 934 (2012)). To give the Defendants “equitable credit” for
the same $7 million in deposits would “force the BLMIS estate to give a second round of
credits based on the same deposits.” Id. at 488. Hence, equity did not supply a basis to
give the Defendants a $7 million credit or dismiss the Trustee’s avoidance claims. The
Court also ruled that the single satisfaction rule did not apply because the Trustee sued
the Funds as initial transferees of their own BLMIS accounts and not as subsequent
transferees of the Defendants’ BLMIS accounts, id. at 489, and the doctrine of
recoupment was not available to the Defendants “because the parties’ claims ar[o]se
from different transactions.” Id. at 490.
B. 	The Reconsideration Motion
The Defendants filed a timely notice of appeal on June 26, 2017, 3 and the
Reconsideration Motion the next day. They argue that the Court made several factual
and legal errors largely revolving around the related notions that (i) they never received
the money they withdrew, (Reconsideration Motion at 6, 15), they were “mere
conduits,” (id. at 8-9), and their funds were immediately reinvested in BLMIS through
Lakeview (and others) as part of a single, integrated transaction, (id. at 15), (ii) the
Funds were subsequent transferees of the Defendants’ withdrawals rather than initial
transferees of their own withdrawals, (id. at 9-11), and (iii) the Funds were not entitled
3 	The District Court denied the Defendants’ motion for leave to appeal by order dated October 24,
2017. See Picard v. Lustig Family 1990 Trust, Nos. 17-cv-4952 & 17-cv-4972 (GHW), 2017 WL 4838575,
at *1, *4 (S.D.N.Y. Oct. 24, 2017).
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to any credit for the monies they deposited in BLMIS that could be traced back to the
Defendants’ withdrawals because those deposits consisted of the Defendants’ fictitious
profits. (Id. at 5-6.)
DISCUSSION
The Reconsideration Motion seeks relief under Rule 60(b) of the Federal Rules
of Civil Procedure,4 which provides, in pertinent part, that the “court may relieve a party
. . . from a final judgment, order, or proceeding for the following reasons: (1) mistake,
inadvertence, surprise, or excusable neglect; . . . or (6) any other reason that justifies
relief. Fed. R. Civ. P. 60(b). “Properly applied[,] Rule 60(b) strikes a balance between
serving the ends of justice and preserving the finality of judgments.” Nemaizer v.
Baker, 793 F.2d 58, 61 (2d Cir. 1986) (citations omitted); accord Kotlicky v. United
States Fid. & Guar. Co., 817 F.2d 6, 9 (2d Cir. 1987) (“In deciding a Rule 60(b) motion, a
court must balance the policy in favor of hearing a litigant’s claims on the merits against
the policy in favor of finality.”). However, “since 60(b) allows extraordinary judicial
relief, it is invoked only if the moving party meets its burden of demonstrating
‘exceptional circumstances.’” Paddington Partners v. Bouchard, 34 F.3d 1132, 1142 (2d
Cir. 1994); accord Nemaizer, 793 F.3d at 61. “In addition to demanding that the movant
show ‘exceptional circumstances,’ the courts of this circuit also require that the evidence
in support of the motion be highly convincing, that the movant show good cause for the
failure to act sooner, and that no undue hardship be imposed on the other parties as a
result.” Freedom, N.Y., Inc. v. United States, 438 F. Supp. 2d 457, 462-63 (S.D.N.Y.
4 	Federal Civil Rule 60 is made applicable to this adversary proceeding pursuant to Rule 9024 of
the Federal Rules of Bankruptcy Procedure.
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2006) (quotation and internal quotation marks omitted). Whether to grant a Rule
60(b) is committed to the “sound discretion” of the trial court and reviewed on appeal
for abuse of that discretion. Stevens v. Miller, 676 F.3d 62, 67 (2d Cir. 2012) (quoting
Montco, Inc. v. Barr (In re Emergency Beacon Corp.), 666 F.2d 754, 760 (2d Cir.
1981)).
“Mistake” under Rule 60(b)(1) encompasses both legal and factual mistakes,
including those made by the court. United Airlines, Inc. v. Brien, 588 F.3d 158, 175 (2d
Cir. 2009); Gey Assocs. Gen. P’ship v. 310 Assocs. (In re 310 Assocs.), 346 F.3d 31, 35
(2d Cir. 2003); Schildhaus v. Moe, 335 F.2d 529, 531 (2d Cir. 1964) (Friendly, J.). The
mistake must be “material,” such that it would have “changed the outcome of the court’s
judgment.” Matura v. United States, 189 F.R.D. 86, 89 (S.D.N.Y. 1999). The movant
may not advance new legal arguments, Paddington Partners, 34 F.3d at 1147, or reargue
matters already decided. Niederland v. Chase, 425 F. App’x 10, 12 (2d Cir. 2011) (“[I]t is
well established that a motion to reconsider [under Rule 60(b)(1))] should not be
granted where the moving party seeks solely to relitigate an issue already decided. . . .”)
(internal quotation marks omitted) (summary order); Matura 189 F.R.D. at 90 (“A
motion for reconsideration is an extraordinary remedy, and this Court will not
reconsider issues already examined simply because Petitioner is dissatisfied with the
outcome of his case.”).
Rule 60(b)(6) authorizes relief from a final judgment or order for “any other
reason that justifies relief,” and has been described as a “grand reservoir of equitable
power to do justice in a particular case.” Stevens, 676 F.3d at 67 (quoting Matarese v.
LeFevre, 807 F.2d 98, 106 (2d Cir. 1986)). However, “that reservoir is not bottomless,”
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and the movant must demonstrate that “extraordinary circumstances” warrant relief.
Id. Motions made under Rule 60(b)(6) must “not be premised on one of the grounds for
relief enumerated in clauses (b)(1) through (b)(5).” Liljeberg v. Health Servs.
Acquisition Corp., 486 U.S. 847, 863 (1988) (footnote omitted). In particular, Rule
60(b)(1) and 60(b)(6) are “mutually exclusive,” such “that any conduct which generally
falls under the former cannot stand as a ground for relief under the latter.” Stevens, 676
F.3d at 67 (quoting United States v. Cirami, 535 F.2d 736, 740 (2d Cir. 1976)).
Although the Reconsideration Motion mentions Rule 60(b)(6), (Reconsideration
Motion at 3), the Defendants fail to articulate a ground separate from those made under
Rule 60(b)(1). As a result, the portion of the motion seeking relief under Rule 60(b)(6)
is denied and requires no further consideration. 5
A. 	The Equitable Defenses
The Defendants’ core argument is that they never actually received their
aggregate $7 million withdrawal, and were mere conduits. They argue that they
transferred the withdrawals to Lakeview, Lakeview ultimately reinvested the money
with the Funds, and the Funds reinvested the money with BLMIS. They also argue —
incorrectly — that the Court assumed in deciding the motion for partial summary
5 	The Defendants filed the Reconsideration Motion under Rule 60(b), but the rule only applies to
“a final judgment, order or proceeding,” F ED . R. CIV . P. 60(b) (emphasis added), and the Partial
Summary Judgment Order was not a final order. See Generva Pharm. Tech. Corp. v. Barr Labs. Inc.,
386 F.3d 485, 494-95 (2d Cir. 2004) (a partial summary judgment is not an appealable final judgment
unless a court enters a partial final judgment under Federal Civil Rule 54(b)). The Trustee did not
challenge the Defendants’ reliance on Rule 60(b), and the parties’ briefs focused exclusively on Rule
60(b). Accordingly, the Court will decide the Reconsideration Motion under Rule 60(b)(1), but even if it
decided the Reconsideration Motion under Rule 59 and Local Bankruptcy Rule 9023-1, the result would
be the same.
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judgment that the “Defendants never actually received any of the money,”
(Reconsideration Motion at 2), apparently compounding the Court’s errors.
Their argument is based on a misreading of the Court’s decision and a
misunderstanding of fraudulent transfer law. The Court concluded, based on the
undisputed facts, that the Defendants were the initial transferees of the $7 million
because they exercised dominion and control over their withdrawals. Lustig, 568 B.R.
at 491-92. They made the unilateral decision to withdraw the money and reinvest it in
Lakeview, a fact they have consistently acknowledged during the entire course of these
proceedings. (See Defendants’ Memorandum of Law in Opposition to Trustee’s Motion
to Strike Certain Affirmative Defenses, dated Mar. 31, 2017, at 3-4 (“Mr. Lustig
withdrew the $2,000,000 from the IRA Account solely and specifically for the purpose
of immediately reinvesting the money back into BLMIS through [Lakeview]. . . . On
August 1, 2007, pursuant to Mr. Lustig’s direction, Fiserv transferred the $2,000,000
by wire to Lakeview . . . .”) (emphasis added) (ECF Doc. # 76); id. at 10-11 (“Defendants
withdrew the $5,000,000 from the Trust Account on July 24, 2007, solely and
specifically for the purpose of immediately reinvesting the money back into BLMIS
through Lakeview. . . . On or about July 30, 2007, pursuant to Mr. Lustig’s
authorization and direction, the $5,000,000 was transferred from City National Bank
to Lakeview’s bank account at Wells Fargo.”) (emphasis added); accord Reply
Memorandum of Law In Further Support of Motion for Reconsideration and Stay of
Discovery, dated July 25, 2017 (“Reply”), at 8 (ECF Doc. # 96); see also Declaration of
David Ivan Lustig, dated Apr. 28, 2011, at ¶ 6 (“I specifically made [the $2 million
withdrawal] to make another investment with Madoff.”) (ECF Doc. # 78-1 at pp. 6-10);
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Declaration of David I. Lustig, dated Apr. 28, 2011, at ¶ 6 (“I specifically made [the $5
million withdrawal] to make another investment with Madoff.”) (ECF Doc. # 78-2 at pp.
114-18).) The Defendants’ assertion that they were mere conduits rather than initial
transferees of the $7 million they orchestrated and controlled borders on the frivolous.
See Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir. 1988)
(a “transferee” exercises “dominion over the money or other assets” and has the right to
use such money or other assets for his own purposes); accord Christy v. Alexander &
Alexander of New York Inc. (In re Finley, Kumble, Wagner, Heine, Underberg,
Manley, Myerson & Casey), 130 F.3d 52, 57-58 (2d Cir. 1997) (agreeing with Bonded
Fin.’s “dominion and control test” to determine transferees and ruling that a “mere
conduit” is not a transferee), cert. dismissed, 524 U.S. 912 (1998).
Investing with Lakeview was their choice. To paraphrase Judge Easterbrook,
they were free to reinvest the $7 million in lottery tickets or uranium stocks. Bonded
Fin., 838 F.2d at 894. They decided, instead, to reinvest it with Lakeview. In hindsight,
the decision was the wrong one, but that does not change the fact that they were the
initial transferees of the $7 million because they exercised dominion and control over
the money. They were not mere conduits.
The Defendants reliance on Gropper v. Unitrac, S.A. (In re Fabric Buys of
Jericho, Inc.), 33 B.R. 334 (Bankr. S.D.N.Y. 1983) in support of their “mere conduit”
argument, (Reconsideration Motion at 8), is misplaced. There, the plaintiff’s law firm
received a payment from the defendant to settle a business dispute. Fabric Buys, 33
B.R. at 335. The law firm deposited the settlement into an escrow account maintained
by the firm for its clients, and shortly thereafter, wrote a check for the settlement
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amount to the plaintiff. Id. Approximately two months later, the defendant filed for
bankruptcy and its trustee sued the law firm to avoid and recover the settlement
payment as a preference under sections 547 and 550 of the Bankruptcy Code. Id. The
Court ruled that the law firm was not an initial transferee; rather it acted “as a mere
conduit of funds from” the defendant to the plaintiff. Id. at 337.
The law firm in Fabric Buys held the settlement in trust for its client; it was not
free to use the client’s funds in escrow for its own benefit, and had it done so, the guilty
attorneys undoubtedly would have been disciplined and possibly prosecuted for stealing
client funds. Hence, the law firm was not a transferee. Here, the Defendants, by their
own admission, exercised dominion and control over the $7 million; they withdrew it,
they could have used it for any purpose, and decided to reinvest it in Lakeview. 	Under
well-settled law, the Defendants were the initial transferees of the $7 million. 6
The Court’s conclusion that the equities did not rest with the Defendants was
driven in large part by the fact that the Funds received the $7 million credit for any
deposits traceable to the Defendants’ withdrawals, and crediting the Defendants with
those later deposits would be inconsistent with the Bankruptcy Code and the SIPA.
Lustig, 568 B.R. at 487-89. The Defendants challenge this conclusion. They argue that
most of their $7 million withdrawal and subsequent investment with Lakeview consisted
of fictitious profits, fictitious profits are not considered in calculating the net equity
6 	The Defendants also continue to rely on Dobin v. Presidential Fin. Corp. of Delaware Valley (In
re Cybridge Corp.), 312 B.R. 262 (D.N.J. 2004) and Bakst v. Sawran (In re Sawran), 359 B.R. 348
(Bankr. S.D. Fla. 2007) in support of their equitable theories as well as their arguments relating to the
single satisfaction rule. (Reconsideration Motion at 7, 10, 12-13.) The Court addressed these decisions at
some length in Lustig. See 568 B.R. at 490-92. The Reconsideration Motion merely repeats the
Defendants’ earlier arguments.
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claim of a BLMIS customer, and therefore, the Funds are not entitled to any credit for
depositing the Defendants’ fictitious profits. (Reconsideration Motion at 5-6.)
The Defendants’ argument confuses inter-account transfers with the investment
of actual cash. 	The relevant portions of the Defendants’ authorities — SIPC v. BLMIS
(In re BLMIS), 499 B.R. 416 (S.D.N.Y. 2013) (“Antecedent Debt Decision”), request for
interlocutory appeal denied, 987 F. Supp. 2d 309 (S.D.N.Y. 2013) and SIPC v. BLMIS
(In re BLMIS), 522 B.R. 41 (Bankr. S.D.N.Y. 2014) (“Inter-Account Decision”), aff’d,
Nos. 15 Civ. 1151 et al. (PAE), 2016 WL 183492 (S.D.N.Y. Jan. 14, 2016), aff’d, 697 F.
App’x 708 (2d Cir. 2017) (summary order) — addressed the treatment of the transfers of
fictitious profits between BLMIS accounts. In the Inter-Account Decision, this Court
held that a transferee was not entitled to any credit for the receipt of fictitious profits
from a transferor for purposes of calculating the transferee’s net equity claim against the
BLMIS estate. 522 B.R. at 52-53. Likewise, the District Court in the Antecedent Debt
Decision ruled that the inter-account transfers of fictitious profits did not increase the
principal deposits in a transferee’s account for purposes of determining “value” under
the section 548(c) defense to fraudulent transfer claims. 499 B.R. at 428-29. The
Defendants assert that the rulings in these cases prevent the Funds from receiving
similar credits for the portion of the $7 million constituting fictitious profits.
(Reconsideration Motion at 5.)
The Trustee’s claims against the Defendants do not involve inter-account
transfers, and the Defendants’ argument ignores the Second Circuit’s “Net Equity
Decision,” In re BLMIS, 654 F.3d 229 (2d Cir. 2011), cert. denied, 133 S. Ct. 24 (2012).
In the Net Equity Decision, the Second Circuit approved the Trustee’s method of
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calculating a BLMIS customer’s net equity claims based on cash withdrawals and cash
deposits. Id. at 238. Here, the Funds did not receive the Defendants’ $7 million
through an inter-account transfer of fictitious profits from the Defendants. Instead,
they invested $7 million in cash in their BLMIS accounts. As described at length in
Lustig, the Funds received credit in accordance with the Net Equity Decision for those
cash deposits.
B. 	Bankruptcy Code § 550(d)
Next, the Defendants challenge the ruling that the Trustee’s claims against them
do not violate the single satisfaction rule set forth in Bankruptcy Code § 550(d). They
argue that the Court mistakenly treated the Funds as initial transferees rather than as
the Defendants’ subsequent transferees, the Trustee recovered the subsequent transfers
from the Funds through the settlements described in Lustig, and the Trustee cannot
recover the initial transfer from the Defendants. The Court addressed this argument in
Lustig and rejected it. 568 B.R. at 489. The Defendants and the Funds made separate
cash withdrawals from their respective BLMIS accounts, and each was an initial
transferee within the meaning of fraudulent transfer law.
The Defendants ignore this distinction, and cite two decisions in support of their
interpretation of the single satisfaction rule that are inapposite. In McCord v. Agard (In
re Bean), 252 F.3d 113 (2d Cir. 2001), a trustee sued the post-petition purchaser of the
debtor’s home after the debtor had remitted his equity in the sale proceeds,
approximately $60,000, to the trustee. The Second Circuit held that Bankruptcy Code §
549 only allowed the trustee to recover post-petition transfers of “property of the
estate,” “property of the estate” was limited to the debtor’s equity in the property on the
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petition date, and under Bankruptcy Code § 550, the trustee is entitled to recover the
debtor’s equity in the property as of the petition date. Id. at 117. The trustee had
already recovered the equity directly from the debtor who had turned over the
approximate $60,000, and the District Court correctly reversed the Bankruptcy Court
and dismissed the complaint. Id.
In Terry v. Meredith (In re Stephen S. Meredith CPA, P.C.), 367 B.R. 558 (E.D.
Va. 2007), aff’d, 527 F.3d 372 (4th Cir. 2008), the debtor transferred his accounting
practice to a corporation owned by his wife, but after the institution of divorce
proceedings, the debtor resurrected his practice, id. at 560, and following bankruptcy,
his trustee took possession of his practice. Id. at 563. The trustee nonetheless sued the
debtor’s wife under several theories to recover the value of the transferred accounting
practice. Citing Bankruptcy Code § 550(d), the Court ruled that the trustee had already
taken possession of and liquidated the accounting practice, and could not, therefore,
recover the value of that same transfer from the debtor’s wife. 	Id. at 563-64.
Bean and Meredith involved efforts by a trustee to recover the value of a single
initial transfer after the estate had already recovered the value of that transfer from
someone else. Here, there were two initial transfers, not a single initial transfer and a
subsequent transfer. The Trustee separately sued the Funds and the Defendants to
recover the distinct initial transfers. While the Defendants argue that there was really
only one initial transfer by BLMIS (to them), they ignore the undisputed fact that
BLMIS made separate transfers to both the Defendants and the Funds, and the Trustee
is entitled under Bankruptcy Code § 548(a)(1)(A) to avoid the transfers to the
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Defendants and recover their value under Bankruptcy Code § 550(a), without regard to
whether he could or did recover the separate initial transfers from the Funds.
C. 	Recoupment
Finally, the Defendants urge the Court to reconsider the dismissal of their
recoupment defense. They argue that the BLMIS transfer to them, their transfer to
Lakeview, Lakeview’s indirect transfer to the Funds, and the Funds deposits with BLMIS
were all part of a single, integrated transaction. (Reconsideration Motion at 14-15.)
They add that the Court viewed recoupment too narrowly, considering only whether the
recoupment defense arose out of “a single contract,” but failing to consider whether it
arose from a “single set of transactions” or “a single integrated transaction.” (Reply at
12.)
In Lustig, the Court observed that the Trustee’s avoidance claims arose out of the
Defendants withdrawal of fictitious profits, while the Defendants’ recoupment defense
arose from their investment in Lakeview. 568 B.R. at 490. Even if, as the Defendants
argue, the Funds’ reinvestment of money was traceable to those withdrawals, the
reinvestment was “still a separate transaction governed by whatever account agreements
the Funds had with BLMIS.” Lustig, 568 B.R. at 490. All of the transactions were
distinct, and the Defendants’ assertions that the transactions constituted a “single set”
or were “integrated” is legally untenable.
Merrill v. Abbott (In re Indep. Clearing House Co.), 77 B.R. 843 (D. Utah 1987),
which the Defendants cite, illustrates why. In Merrill, the bankruptcy trustee of a Ponzi
scheme debtor sued numerous investors to avoid and recover withdrawals. Id. at 848-
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49. One of the defendants—Ruby Van Sant—asserted a recoupment defense based on
her withdrawal and subsequent reinvestment of the same withdrawn funds with the
debtor. The Merrill Court ruled that Van Sant may be entitled to a recoupment credit:
If Van Sant can prove that her total investment with the debtors was one
transaction and that she did not retain payments made to her by the
debtors but rather reinvested those funds with the debtors, she is entitled
to either a reduction in or an abatement of the damages. In other words,
Van Sant should not have to return more than she actually received from
the debtors. For example, if she ostensibly received $100,000 but
$50,000 of that amount went to purchase other investment contracts from
which she received nothing, she should only be liable for at most the
$50,000 she received and not the whole $100,000.
Id. at 878.
Critical to the Merrill Court’s decision was that Van Sant withdrew the money
and directly reinvested it with the same entity. Here, the Defendants did not reinvest
their $7 million withdrawal with BLMIS; they invested it with Lakeview. They
repeatedly argue that their funds were reinvested with BLMIS but ignore the critical
distinction that they did not reinvest the withdrawn funds with BLMIS. Accordingly,
the Defendants cannot claim a recoupment credit.
CONCLUSION
For the reasons stated, the Reconsideration Motion is denied, and their separate
request to stay discovery pending the disposition of the Reconsideration Motion is
denied as moot. So ordered.
Dated: 	New York, New York
December 6, 2017
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
10-04554-smb Doc 98 Filed 12/06/17 Entered 12/06/17 12:22:40 Main Document
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