In re Bernard L. Madoff Investment Securities LLC, Bankruptcy No. 08-01789 (BRL).

Citation413 B.R. 137
Decision Date10 September 2009
Docket NumberAdversary No. 09-01272 (BRL).,Bankruptcy No. 08-01789 (BRL).
PartiesIn re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. Diane Peskin, et al., Plaintiffs, v. Irving H. Picard, as Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Defendant.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

Baker & Hostetler LLP by David J. Sheehan, Marc E. Hirschfield, Oren J. Warshavsky, Seanna R. Brown, New York, NY, for Defendant Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.

Securities Investor Protection Corporation by Josephine Wang, General Counsel, Kevin H. Bell, Hemant Sharma, Washington, DC, for the Securities Investor Protection Corporation.

Phillips Nizer LLP by Helen Davis Chaitman, New York, NY, for Plaintiffs Diane and Roger Peskin and Maureen Ebel.

Milberg LLP by Jonathan M. Landers, Matthew Gluck, Lois F. Dix, Joshua E. Keller, New York, NY, for Intervenors Dr. Gerald Blumenthal, Robert Horowitz, Lester Kolodny, and Paul J. Robinson.

Before: Hon. Burton R. Lifland, United States Bankruptcy Judge.

MEMORANDUM DECISION AND ORDER GRANTING TRUSTEE'S MOTION TO DISMISS PLAINTIFFS' COMPLAINT

BURTON R. LIFLAND, Bankruptcy Judge.

With more than 15,000 claims filed in the Madoff proceeding and multi-billions of dollars at stake, the issue of how the Trustee determines claimants' "net equity" for distribution purposes is a central question to be determined in this SIPA liquidation.

Before this Court is the motion ("Motion to Dismiss") brought by defendant Irving H. Picard, trustee ("Trustee" or "Defendant") for the substantively consolidated Securities Investor Protection Act ("SIPA"), 15 U.S.C. § 78aaa et seq.,1 liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff (collectively, "Debtors") seeking to dismiss the complaint (the "Complaint") filed by plaintiffs Diane Peskin, Roger Peskin, and Maureen Ebel (collectively, "Plaintiffs") pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable herein by Rule 7012 of the Federal Rules of Bankruptcy Procedure, or in the alternative, to strike certain portions of the Complaint. Trustee asserts that the Complaint should be dismissed because 1) it violates this Court's order of December 23, 2008 (the "Claims Procedure Order" or the "Order");2 2) Plaintiffs lack standing to bring the current application; 3) Plaintiffs' claims with regard to preferences and breach of fiduciary duty fail as a matter of law and are currently moot; and 4) Plaintiffs' counsel is operating under a conflict of interest.3 Significantly, the Trustee's Motion to Dismiss did not seek to resolve the issue of how net equity should be determined. In addition to the Securities Investor Protection Corporation ("SIPC"), a number of customers of Bernard L. Madoff Investment Securities LLC ("BLMIS"), who were also victims of Madoff's Ponzi scheme and whose interests are aligned in many ways with the Plaintiffs, fully support the Trustee's Motion to Dismiss,4 and generally express a preference to have the issues determined in accordance with the procedures established in the pending scheduling motion5 (see infra at Section III, subsection a, "The Scheduling Motion").

The Complaint seeks declaratory relief and damages for breach of fiduciary duty. Plaintiffs seeks declarations that 1) Trustee is obligated to recognize Plaintiffs' claims based on their November 30, 2008 account balances (the "Net Equity Issue"); 2) Trustee has no right to seek recovery of preferences received within 90 days of the institution of this proceeding; and 3) the Court must void the Partial Assignment and Release executed by Mrs. Ebel. Plaintiffs seek compensatory damages against the Trustee for the losses Plaintiffs have suffered due to the Trustee's alleged failure to promptly pay their claims in breach of his fiduciary duty.

At bottom, the Complaint is essentially seeking an accelerated resolution of the Net Equity Issue and more specifically, seeking a declaration that net equity should be determined by looking at customers' account balances as of November 30, 2008. The thrust of the Trustee's Motion to Dismiss is that the Complaint violates the Claims Procedure Order, which has been established to address the exact issues and provide the same relief as that sought in the adversary proceeding. In response to Plaintiffs' assertion that customer claims should be allowed in the amount shown on the November 30, 2008 BLMIS statements, the Trustee contends that the "cash in/cash out" approach6 should be employed instead because fictitious profits should not compete with claims based on real money invested with BLMIS. Upon a complete review of the record, the Trustee's Motion to Dismiss is hereby granted.

BACKGROUND
I. Procedural History

The Complaint arises in connection with the infamous Ponzi scheme perpetrated by Bernard L. Madoff through his investment company, BLMIS. On December 11, 2008, Madoff was arrested by federal agents and charged with securities fraud in violation of 15 U.S.C. §§ 78j(b), 78ff and 17 C.F.R. § 240.10b-5, in the United States District Court for the Southern District of New York ("District Court"). United States v. Madoff, No. 08-MJ-02735. That same day, the Securities and Exchange Commission (the "SEC") filed a civil complaint in the District Court, alleging, inter alia, that Madoff and BLMIS were operating a Ponzi scheme through BLMIS's investment advisor activities. S.E.C. v. Madoff, et al., No. 08-CV-10791 (the "Civil Action").

On December 15, 2008, SIPC filed an application in the Civil Action seeking a decree that the customers of BLMIS are in need of the protections afforded under SIPA. The District Court granted SIPC's application and entered an order on December 15, 2008, placing BLMIS's customers under the protections of SIPA (the "Protective Order"). The Protective Order appointed Defendant as trustee for the liquidation of the business of BLMIS and removed the SIPA liquidation proceeding to this Court pursuant to SIPA § 78eee(b)(3) and (b)(4), respectively.

On March 12, 2009, Madoff pled guilty to an 11-count criminal indictment filed against him and admitted that he "operated a Ponzi scheme through the investment advisory side of [BLMIS]." See United States v. Madoff, No. 09 CR 213(DC), Docket NO. 57, Plea Hr'g Tr. at 23:14-17. On June 29, 2009, Madoff was sentenced to 150 years in prison.

II. Plaintiffs' Customer Claims Filed with the Trustee

Diane and Roger Peskin and Maureen Ebel are customers of BLMIS and have filed the current application, seeking declaratory judgment and compensatory damages, in connection with customer claims that they have already filed with the Trustee. The following Plaintiffs' "account" background is essentially undisputed.

a. The Peskin Account

Diane and Roger Peskin are investors in BLMIS. On or about October 18, 2005, the Peskins invested $2,586,412.99 into a BLMIS account. In early May 2008, the Peskins invested approximately $181,000 therein. In the ordinary course, the Peskins regularly withdrew funds from that account.

On or about September 15, 2008, the Peskins received a check from BLMIS for $50,000, which cleared their account on or about September 17, 2008. On or about October 1, 2008, the Peskins received a check from BLMIS for $33,000. On or about November 6, 2008, the Peskins received a check from BLMIS for $30,000. On or about November 12, 2008, the Peskins invested $470,265.98 into their BLMIS account.

The Peskins filed a SIPC claim in February 2009. Plaintiffs allege that they were contacted on June 3, 2009 by one of the Trustee's attorneys who informed them that they were entitled to receive $387,000 as their full SIPC payment because the Trustee was entitled to deduct the $113,000 that they withdrew from their BLMIS account in the 90-day preference period. Plaintiffs assert that they pointed out to the attorney that although they had withdrawn $113,000 from their BLMIS account during the preference period, they had also invested $470,265.98 with BLMIS on November 12, 2008, constituting the infusion of new value. As such, their net position in the last 90 days before the SIPA liquidation was positive $357,265.98. They asked the attorney if they weren't entitled to the full $500,000 SIPC payment since they had invested more than they withdrew in the last 90 days. Plaintiffs claim that they were told that the law was clear that they were not entitled to credit for the money they deposited.

By letter dated June 26, 2009, the Trustee acknowledged that the Peskins did not receive any preference payments and were therefore entitled to the full $500,000 SIPC payment. As a result, on or about July 16, 2009, the Trustee sent the Peskins a Notice of Trustee's Determination of Claim (the "Notice") and a Partial Assignment and Release in the amount of $2,310,191.25, which reflected the amount of money deposited with BLMIS, less subsequent withdrawals. The Notice informed the Peskins that upon execution of the Assignment and Release, the Trustee would make a partial satisfaction of the allowed claim by sending the Peskins a check for $500,000, with the funds advanced by SIPC. On August 8, 2009, the Peskins received the check for $500,000.7

b. Mrs. Ebel's Accounts

Maureen Ebel is a Madoff investor who opened two BLMIS accounts. The first account she opened was a direct IRA account. On or about February 24, 2003, Mrs. Ebel invested $1,348,877.12 therein. Mrs. Ebel never withdrew any money from this account. On November 30, 2008, it reflected a balance of $2,532,140.66.

The second account Mrs. Ebel opened was a direct investment account in which she invested a total of $3,831,387.49 beginning on or about March 17, 2003 and ending on or about July 23, 2004. Mrs. Ebel regularly withdrew funds from this account. On...

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3 cases
  • Sec. Investor Prot. Corp..
    • United States
    • U.S. Bankruptcy Court — Southern District of New York
    • 9 Febrero 2011
    ...files an opposition, the Trustee must obtain a hearing date and notify the claimant thereof. See Peskin v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), 413 B.R. 137 (Bankr.S.D.N.Y.2009), aff'd, 440 B.R. 579 (S.D.N.Y.2010) (expounding generally on the claims administration process). These......
  • In re Bernard L. Madoff Inv. Securities LLC
    • United States
    • U.S. Bankruptcy Court — Southern District of New York
    • 1 Marzo 2010
    ...Adjudication of `Net Equity' Issue" (the "Scheduling Order") entered on September 16, 2009. See Peskin v. Picard (In re Bernard L. Madoff Inv. Secs. LLC), 413 B.R. 137 (Bankr.S.D.N.Y.2009) (expounding generally on the Claims Procedure Order and the Scheduling The Madoff proceeding and its a......
  • Securities Investor Protection Corporation
    • United States
    • U.S. Bankruptcy Court — Southern District of New York
    • 3 Mayo 2010
    ...files an opposition, the Trustee must obtain a hearing date and notify the claimant thereof. See Peskin v. Picard (In re Bernard L. Madoff Inv. Secs. LLC), 413 B.R. 137 (Bankr.S.D.N.Y.2009) (expounding generally on the claims administration process).III. The Satisfaction of Customer Claims ......

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