The Supreme Court recently denied certiorari in Picard v. Citibank, in which the petitioner sought review of a Second Circuit decision on a seemingly obscure point of law: the pleading burden for “good faith” under Section 550 of the Bankruptcy Code. The Second Circuit’s decision is part of, and highlights, a larger, systemic problem in the evolution of bankruptcy law over the last decade—the multiplication of trustee-friendly interpretations of the Bankruptcy Code that, when combined, leave innocent subsequent transferees unfairly vulnerable to meritless clawback suits. Many of these rulings have emerged in the Second Circuit in the context of Bernard Madoff’s collapsed $20 billion investment company, but the decisions may have broader ramifications for subsequent transferees in more modest bankruptcy proceedings.
Good Faith and the Madoff Litigations
The Bankruptcy Code provides a trustee with numerous tools to ensure that a debtor has not transferred its property to third parties in a way that unfairly favors certain creditors or fraudulently enriches others. Under Section 548 of the Bankruptcy Code, a trustee may “avoid,” or unwind, transfers from a debtor that were made with fraudulent intent or that were constructively fraudulent because the transfer was not made in exchange for fair consideration at a time when the debtor was insolvent or undercapitalized. Under Section 550 of the Bankruptcy Code, the trustee may recover property that is subject to…
