New York Bankruptcy Court: Setoff and Unjust Enrichment Cannot Be Asserted as Affirmative Defenses in Bankruptcy Avoidance Litigation

By Daniel J. Merrett (Jones Day)

In a 2021 ruling, the U.S. Court of Appeals for the Second Circuit revived nearly 100 lawsuits seeking to recover fraudulent transfers made as part of the Madoff Ponzi scheme. In one of the latest chapters in that resurrected litigation, the U.S. Bankruptcy Court for the Southern District of New York held in Picard v. ABN AMRO Bank NV (In re Bernard L. Madoff Investment Securities LLC), 654 B.R. 224 (Bankr. S.D.N.Y. 2023), that a defendant in fraudulent transfer litigation cannot offset its fraudulent transfer liability against a claim the creditor asserts against the debtor because there is no mutuality between the two claims. The court also ruled that, depending on the specific facts and equities of the case, recoupment might be asserted as an affirmative defense in avoidance litigation. Finally, it held that unjust enrichment cannot ordinarily be raised as an affirmative defense and is particularly disfavored in bankruptcy because it undermines the Bankruptcy Code’s priority scheme.

The full article can be accessed here.