Vol 18 (2021) - Issue 6

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Second Circuit Rejects Willful Blindness Standard in Madoff Fraudulent Conveyance Litigation: In re Bernard L. Madoff Securities LLC, 2021 WL 3854761 (2d Cir)

Synopsis
The US Court of Appeals for the Second Circuit (the 'Second Circuit' or 'Court') recently reversed a 2014 ruling of the US District Court for the Southern District of New York (the 'District Court') and held that 'willfulblindness' is not the correct standard for determining whether a recipient of an alleged fraudulent transfer can establish 'good faith' as a defence in a SIPA liquidation proceeding.
The Second Circuit held that a defendant in a SIPA fraudulent transfer action bears the burden of establishing good faith as an affirmative defence, and that a good faith defence can be defeated if (i) the transferee was aware of facts sufficient to put a reasonable person on inquiry notice that the transfer was fraudulent, and (ii) diligent inquiry would have revealed the fraudulent purpose of the transfer. In so doing, the Second Circuit reversed a District Court ruling that had placed the burden on the party seeking to avoid the transfer to prove that the defendant took 'deliberate actions to avoid confirming a high probability of wrongdoing.'
The Second Circuit concluded that adoption of an 'inquiry notice' standard – and rejection of the 'willful blindness' standard – would advance the purpose of SIPA by making it easier for a trustee to recover customer property.