Irving H. Picard, Tr. for the Liquidation of Bernard L. Madoff Inv. Sec. LLC v. Fairfield Greenwich Ltd.

• Citation: 762 F.3d 199
• Decision Date: 08 August 2014
• Docket Number: 13–1785.,13–1392,Docket Nos. 13–1289
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Parties: Irving H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Appellant, v. FAIRFIELD GREENWICH LIMITED, et al., Defendants–Appellees, Securities & Investment Co. Bahrain, Harel Insurance Co., Ltd., AXA Private Management, St. Stephen's School, Pacific West Health Medical Center, Inc. Employee's Retirement Trust, Lead Plaintiffs–Appellees. Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff, Appellant, Securities Investor Protection Corporation, Intervenor, v. Eric T. Schneiderman, Bart M. Schwartz, Ralph C. Dawson, J. Ezra Merkin, and Gabriel Capital Corporation, Appellees.

762 F.3d 199

Irving H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Appellant,
v.
FAIRFIELD GREENWICH LIMITED, et al., Defendants–Appellees,
Securities & Investment Co. Bahrain, Harel Insurance Co., Ltd., AXA Private Management, St. Stephen's School, Pacific West Health Medical Center, Inc. Employee's Retirement Trust, Lead Plaintiffs–Appellees.
Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff, Appellant,
Securities Investor Protection Corporation, Intervenor,
v.
Eric T. Schneiderman, Bart M. Schwartz, Ralph C. Dawson, J. Ezra Merkin, and Gabriel Capital Corporation, Appellees.

Docket Nos. 13–1289, 13–1392, 13–1785.

United States Court of Appeals,
Second Circuit.

Argued: Oct. 10, 2013.
Decided: Aug. 8, 2014.

[762 F.3d 202]

David J. Sheehan, Baker & Hostetler LLP, New York, NY (Deborah H. Renner, Tracy L. Cole, Keith R. Murphy, Baker & Hostetler LLP, New York, NY; David B. Rivkin, Jr., Lee A. Casey, Mark W. DeLaquil, Andrew M. Grossman, Baker & Hostetler LLP, Washington, DC, of counsel), for Appellant Irving H. Picard.

Stuart H. Singer, Boies, Schiller & Flexner LLP, Ft. Lauderdale, FL (David A. Barrett, Howard L. Vickery, II, Boies, Schiller & Flexner LLP, New York, NY; Robert C. Finkel, Wolf Popper LLP, New York, NY; Victor E. Stewart, Lovell Stewart Halebian Jacobson LLP, New York, NY, of counsel), for Lead Plaintiffs–Appellees Representative Anwar Plaintiffs.

Marc G. Cunha, Simpson Thacher & Bartlett LLP, New York, NY (Peter E. Kazanoff, Jeffrey L. Roether, Jeffrey E. Baldwin, Nicholas S. Davis, of counsel), for Defendants–Appellees Fairfield Greenwich Limited, et al.

Brian Sutherland, for Eric T. Schneiderman, Attorney General of the State of New York, New York, NY (James C. McCarroll, Jordan W. Siev, Michael J. Venditto, Reed Smith LLP, New York, NY; Judith A. Archer, David L. Barrack, Jami Mills Vibbert, Fulbright & Jaworski LLP, New York, NY, of counsel), for Appellees Eric T. Schneiderman, Bart M. Schwartz, Ralph C. Dawson.

Andrew J. Levander, Dechert LLP, New York, NY (Neil A. Steiner, of counsel), for Defendants–Appellees J. Ezra Merkin and Gabriel Capital Corporation.

Nathanael S. Kelly, Washington, DC (Josephine Wang, Kevin H. Bell, of counsel), for Intervenor Securities Investor Protection Corporation.

Before SACK, CHIN, and DRONEY, Circuit Judges.

SACK, Circuit Judge:

Irving H. Picard (the “Trustee”), trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and of the bankruptcy estate of Bernard L. Madoff, initiated adversary proceedings seeking to block the settlement of three lawsuits, none of which involved BLMIS or the Madoff estate as a party. The suits in question were brought by and on behalf of investors in so-called “feeder funds”—funds that channeled investments to Madoff's Ponzi scheme—against the funds themselves and other persons and entities affiliated with them. The Trustee asserts that the settlements in these cases would hinder his ability to recoup fraudulent transfers he alleges BLMIS made to the settling defendants. In two separate proceedings, which we review in tandem on appeal, the district court (Victor Marrero and Jed S. Rakoff, Judges ) dismissed the Trustee's claims for declaratory and injunctive relief. Picard v. Fairfield Greenwich Ltd., 490 B.R. 59 (S.D.N.Y.2013) (Victor Marrero, J.); Picard v. Schneiderman, 491 B.R. 27 (S.D.N.Y.2013) (Jed S. Rakoff, J.). Because we conclude that the Trustee is not entitled to declaratory relief and that the district court did not abuse its

[762 F.3d 203]

discretion in denying his requests for injunctive relief, we affirm.

BACKGROUND

The facts of the infamous Ponzi scheme orchestrated by Bernard Madoff have been set forth in detail elsewhere. See, e.g., Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122, 125–33 (Bankr.S.D.N.Y.2010). We repeat them here only insofar as we think necessary to explain our decision in this appeal. The scheme's success depended in part on the efforts of independent investment managers who channeled billions of dollars through financial vehicles—so-called “feeder funds”—that invested largely or exclusively in BLMIS. While the money flowed from BLMIS, feeder fund investors enjoyed strong (albeit illusory ¹) returns, and the funds' managers collected substantial fees as a result. After the discovery of the fraud and Madoff's December 2008 arrest by federal authorities in connection with it, the funds collapsed, leaving their investors with the specter of huge losses and precipitating litigation against the funds and their managers, auditors, custodians, and others. While investors pursued causes of action for, among other things, fraud and breach of fiduciary duty, the Trustee filed his own legal actions on behalf of the BLMIS estate, seeking to “claw back” ² (i.e., obtain the return of) money Madoff had paid out as “returns” to the funds. Where, as in the cases here on appeal, feeder fund investors sought assets from the same entities or individuals as did the Trustee, the risk arose that their claims might conflict.

The Feeder Fund Litigationa. The Anwar Action

In December 2008, a group of investors including Pasha S. Anwar (the “Anwar Plaintiffs”) filed a class action on behalf of individuals and entities who invested in four feeder funds founded and operated by the Fairfield Greenwich Group (the “Anwar Action”). These funds had, in turn, invested most of the Anwar Plaintiffs' money with BLMIS. In their Second Consolidated Amended Complaint, filed on September 29, 2009, the Anwar Plaintiffs alleged various federal securities law violations, as well as common law tort, breach of contract, and quasi-contract causes of action against the funds, Fairfield Greenwich Group, and a number of affiliated individuals (collectively, the “Fairfield Defendants”).³See Second Consolidated Amended Compl., Anwar v. Fairfield Greenwich Ltd., No. 09–cv–118 (VM) (S.D.N.Y. filed Sep. 29, 2009), ECF No. 273. These defendants filed a motion to dismiss, which the district court denied in two separate opinions. See

[762 F.3d 204]

Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 354, 356–57, 372 (S.D.N.Y.2010) (Marrero, J.) (holding that New York's Martin Act, N.Y. Gen. Bus. Law §§ 352– 359, did not preempt common law causes of action); Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 372, 401–02 (S.D.N.Y.2010) (Marrero, J.) (concluding that the plaintiffs had standing to pursue individual, direct claims against the Fairfield Defendants on various legal theories).

Sometime in 2010, the plaintiffs and the defendants in the Anwar Action began settlement talks. These negotiations intensified in May 2012 while the parties proceeded with discovery, and culminated several months later with an agreement in principle among the parties. The parties then presented a proposed settlement agreement to the district court, which preliminarily approved it on November 30, 2012. The agreement contemplated a $50.25 million payment to the Anwar Plaintiffs by the Fairfield Defendants, and a $30 million escrow fund funded by the Fairfield defendants to support any future settlement or judgment amounts the Fairfield Defendants might pay the Trustee.

On November 29, 2012, the eve of the district court's preliminary approval of the parties' proposed agreement, the Trustee instituted an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York seeking to block the settlement (the “Anwar Stay Application”). Picard v. Fairfield Greenwich Ltd., Adv. Pro. No. 12–2047 (Bankr.S.D.N.Y. filed Nov. 29, 2012). The Anwar Stay Application sought a declaration that the settlement and the Anwar Action itself violated the automatic stay provisions of the Bankruptcy Code and the Securities Investor Protection Act (“SIPA”), as well as one or more of the stay orders issued by the district court in connection with the Madoff liquidation,⁴ and that the Anwar Action was therefore void ab initio. Id. ¶ 105. The Stay Application also contained a request that the bankruptcy court exercise its powers under section 105(a) of the Bankruptcy Code, 11 U.S.C. § 105(a),⁵ to preliminarily enjoin the Anwar Action until the Trustee had completed his efforts to recoup the proceeds of specified alleged fraudulent transfers from the Fairfield Defendants. Anwar Stay Application, ¶¶ 108,110. On February 6, 2013, the district court granted the Anwar Plaintiffs' motion to withdraw the reference to the bankruptcy court in the stay action. Picard v. Fairfield Greenwich Ltd., 486 B.R. 579 (S.D.N.Y.2013); see28 U.S.C. § 157(d).

Pursuing a parallel strategy, the Trustee's counsel wrote to the court seeking to intervene in the Anwar Action directly. On March 7, treating this letter as a motion to intervene, the court denied it. The court also denied the Trustee's subsequent request to supplement the record.

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On March 20, 2013, the district court issued one of the two decisions now before us on appeal, denying the Anwar Stay Application in its entirety and directing that the adversary proceeding be closed. See Picard v. Fairfield Greenwich Ltd., 490 B.R. 59 (S.D.N.Y.2013) (Marrero, J.) (the “ Anwar Stay Ruling ”). Shortly thereafter, the court issued a final judgment and order accepting the settlement of the Anwar Action and dismissing the claims against the Fairfield Defendants with prejudice.

b. People v. Merkin and Schwartz v. Merkin

In April 2009, New York's Attorney General (the “NYAG”) brought suit in New York state court claiming that Ezra Merkin and his investment company, Gabriel Capital Corp.—together, the “Merkin Defendants”—had violated New York's Martin Act, its Executive Law, and its Not for Profit Corporation Law by making material misrepresentations and omissions to investors in several feeder funds. See ...