Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC

• Decision Date: 12 October 2011
• Docket Number: 10–05342 (BRL).,Adversary Nos. 08–01789 (BRL)
• Citation: 55 Bankr.Ct.Dec. 160,460 B.R. 106
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, v. BERNARD L. MADOFF INVESTMENT SECURITIES, LLC, Defendant.Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. Maxam Absolute Return Fund, L.P.; Maxam Absolute Return Fund, Ltd.; Maxam Capital Management LLC; Maxam Capital GP LLC; Sandra L. Manzke Revocable Trust; Sandra L. Manzke, as trustee and individually; Suzanne Hammond; Walker Manzke; and April Bukofser Manzke, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

460 B.R. 106

55 Bankr.Ct.Dec. 160

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

v.BERNARD L. MADOFF INVESTMENT SECURITIES, LLC, Defendant.Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,

v.Maxam Absolute Return Fund, L.P.; Maxam Absolute Return Fund, Ltd.; Maxam Capital Management LLC; Maxam Capital GP LLC; Sandra L. Manzke Revocable Trust; Sandra L. Manzke, as trustee and individually; Suzanne Hammond; Walker Manzke; and April Bukofser Manzke, Defendants.

Adversary Nos. 08–01789 (BRL)

10–05342 (BRL).

United States Bankruptcy Court, S.D. New York.

Oct. 12, 2011.

Baker & Hostetler LLP, By: David Sheehan, Marc D. Powers, Deborah H. Renner, Loura L. Alaverdi, S. Jeanine Conley, Keith R. Murphy, James W. Day, New York, NY, for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.

Kobre & Kim LLP, By: Jonathan D. Cogan, Michael S. Kim, Carrie A. Tendler, New York, NY, By: Maggie Sklar, Washington, D.C., for Maxam Absolute Return Fund Limited.

BENCH MEMORANDUM DETERMINING TRUSTEE'S MOTION FOR ENTRY OF AN INJUNCTION

BURTON R. LIFLAND, Bankruptcy Judge.

Before the Court is the motion (the “Motion”) of Irving H. Picard, Esq. (the “Trustee” or “Picard”), trustee for the substantively consolidated Securities Investor Protection Act ¹ (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff (“Madoff”), pursuant to sections 362(a) and 105(a) of title 11 of the United States Code, 11 U.S.C. § 101 et. seq. (the “Code”), Rule 7065 of the Federal Rules of Bankruptcy Procedure (the “Rules”), and SIPA § 78eee(b)(2), seeking (i) entry of an order enforcing the automatic stay of the Code, the provisions of SIPA prohibiting suits against the Trustee, and the Stay Orders (as defined below) of the United States District Court for the Southern District of New York (the “District Court”), and declaring that the action filed by Maxam Absolute Return Fund, LTD (“Maxam Limited” or the “Defendant”) against the Trustee in the Grand Court of the Cayman Islands on or about July 11, 2011 (the “Cayman Action”) violates the automatic stay and is void ab initio and (ii) the issuance of an injunction prohibiting Maxam Limited from pursuing the Cayman Action.

The Cayman Action is a clear attack on this Court's exclusive jurisdiction and a blatant attempt to hijack the key issues to another court for determination. It is a thinly-veiled effort to forum-shop and ultimately wrest control over the Trustee's claims from this Court. Upon review of the papers and after oral argument, the Trustee's motion is therefore GRANTED.

BACKGROUND

On December 8, 2010, the Trustee filed a complaint (the “Complaint”) against several Maxam funds seeking the avoidance of certain transfers, including the recovery of subsequent transfers to Maxam Limited. Two of the other funds named in the Trustee's Complaint are central to the matter at hand—Maxam Capital Management, LLC (“Maxam Capital”) and Maxam Absolute Return Fund, L.P. (“Maxim Fund”). The former acted as Maxam Limited's “Investment Manager” and the latter as its “Master Fund.” That is, Maxam Capital was authorized through an Investment Management Agreement dated July 1, 2006, (the “Investment Management Agreement”) to provide investment advice to Maxam Limited, which deposited all of its assets with Maxam Fund.²

Between 2006 and 2008, nearly $100 million was transferred from BLMIS to Maxam Fund in the form of withdrawals. During the 90 days prior to December 11, 2008 (the “Filing Date”), three transfers totaling approximately $25 million were made to Maxam Fund (the “Preference Period Transfers”). Compl. ¶ 153, ¶ 156. And based on correspondence from Maxam Fund's counsel to the Trustee, the latter has determined that some or all of the Preference Period Transfers were subsequently transferred to Maxam Limited. Compl. ¶ 157. In the Complaint, the Trustee seeks the return of these funds.

On May 20, 2011 Maxam Limited entered into a stipulation (the “Stipulation”) that extended the time for all Defendants to answer the Trustee's Complaint. The Stipulation was so ordered by this Court on May 20, 2011 and there is no dispute that it benefitted Maxam Limited and the other Defendants.

On July 11, 2011, Maxam Limited filed its Answer to the Trustee's Complaint. On or about the same day, Maxam Limited filed the Cayman Action seeking (i) a declaration that Maxam Limited is not liable to the Trustee for either the $25 million Maxam Limited received from Maxam Fund within the period of 90 days prior to the Filing Date or any amounts in excess of the $25 million that Maxam Limited received from Maxam Fund within the period of two years prior to December 11, 2008, as well as (ii) costs and any other relief the Court deems proper.

DISCUSSION

I. The Cayman Action Violates the Automatic Stay, the Stay Orders, the Barton Doctrine, and SIPAA. The Automatic Stay

The commencement of a SIPA liquidation operates as an automatic stay of, inter alia, “the commencement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor,” or “any act to obtain possession of ... or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(1), (3); SIPA § 78fff(b) (applying chapter 3 of Title 11). Property of the estate, in turn, includes “all legal or equitable interests of the debtor in property as of the commencement of the case,” 11 U.S.C. § 541(a)(1), “wherever located and by whomever held,” 11 U.S.C. § 541(a). “The term ‘all legal and equitable interests of the debtor in property’ is all-encompassing and includes rights of action as bestowed by either federal or state law.” Cadle Co. v. Mims (In re Moore), 608 F.3d 253, 257–58 (5th Cir.2010). Property of the estate therefore includes any cause of action the debtor had on the petition date, see Jackson v. Novak (In re Jackson), 593 F.3d 171, 176 (2d Cir.2010), as well as avoidance actions created on the petition date, see Delgado Oil, Inc. v. Torres, 785 F.2d 857 (10th Cir.1986) (holding creditor has no standing to assert post-petition preference action because such action is property of the estate); In re Chrysler LLC, No. 09–50002, 2009 WL 1360863, at *1 (Bankr.S.D.N.Y. May 04, 2009) (granting security interests in “all property of the estates of each of the [d]ebtors within the meaning of section 541 of the Bankruptcy Code ( including avoidance actions arising under chapter 5 of the Bankruptcy Code and applicable state law”)) (emphasis added); Peltz v. Gulfcoast Workstation Group (In re Bridge Information Systems, Inc.), 293 B.R. 479, 486 (Bankr.E.D.Mo.2003) (“Thus, both Debtor's counterclaim ... and the [p]reference [a]ction are property of the estate under § 541(a).”).

Maxam Limited therefore violated the stay by usurping causes of action belonging to the estate under sections 362(a)(3) and 541 of the Code. As property of the estate, the Trustee has discretion whether to bring the cause of action and, if not statutorily limited to a specific jurisdiction, to choose forum to bring it in. Here, the Trustee commenced the Avoidance Action in this Court; by starting the Cayman action, Maxam Limited has thus interfered with the Trustee's chosen forum for litigation and unlawfully attempted to exercise control over the Avoidance Action.

As discussed previously by this Court, the automatic stay is one of the most fundamental bankruptcy protections and applies broadly to “give[ ] the debtor a breathing spell” and to prevent creditors from “obtain [ing] payment of the[ir] claims in preference to and to the detriment of other creditors.” Picard v. Fox (In re BLMIS), 429 B.R. 423, 430 (quoting H.R. Rep. No. 595, 95th Cong. 1st Sess. (1977); S.Rep. No. 989, 95th Cong.2d Sess. 49 (1978), as reprinted in 1978 U.S.C.C.A.N., 5835, 5963, 6010, 6296–97). In this SIPA proceeding, the stay protects customers of BLMIS by fostering fair, uniform, and efficient distribution of customer property. If the Cayman Action continues, the Trustee will be required to expend duplicative time and resources to essentially re-litigate the merits of the Avoidance Action in the Cayman Action. This type of activity is precisely what the stay intends to prevent. See Henkel v. Lickman (In re Lickman), 297 B.R. 162, 170–71 (Bankr.M.D.Fla.2003) (finding debtor making telephone calls, writing letters, filing disciplinary complaints with The Florida Bar, and seeking legal relief in Pennsylvania state and federal courts in order to convince the trustee to release estate property violative of the stay because “[t]he stay applies to attempts to obtain control over tangible and intangible property. It also protects causes of action that are vested in the trustee.”) (internal citation and quotations omitted).

Relying on an unreported decision, AW Treuhand GmbH Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft v. Peregrine Systems, Inc. (In re Peregrine Systems, Inc.) (“Peregrine”), Maxam Limited argues unconvincingly that the Cayman Action does not violate the automatic stay. Nos. 02–12740, et al., 2005 WL 2401955 (D.Del. September 29, 2005). In that case, the court found that the defendant's action in Germany seeking a declaration that it was not liable to the debtor for breach of contract action brought by the debtor in a California court did not violate the automatic stay. However, Peregrine only analyzed section 362(a)(1) of the Code, which stays any “action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy] case,” and found that the German suit did not violate that section because it could not have been brought prepetition. In re Peregrine Systems, Inc., 2005 WL 2401955 at *3. Peregrine never discussed the issue this Court is deciding: whether a foreign action seeking declaratory relief from a...