In re Bernard L. Madoff Inv. Sec. Llc

Citation445 B.R. 206
Decision Date24 February 2011
Docket NumberBankruptcy No. 08–01789 (BRL).,Adversary No. 09–1172 (BRL).
PartiesIn re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.Irving H. Picard, as Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,v.Estate of Stanley Chais, et al.,1 Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

445 B.R. 206

In re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.Irving H. Picard, as Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,
v.
Estate of Stanley Chais, et al.,1 Defendants.

Bankruptcy No. 08–01789 (BRL).

Adversary No. 09–1172 (BRL).

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

Feb. 24, 2011.


[445 B.R. 214]

Baker & Hostetler LLP, By: David J. Sheehan, John Moscow, Marc E. Hirschfield, Oren J. Warshavsky, Seanna R. Brown, New York, N.Y., for Plaintiff, Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.Sills Cummis & Gross P.C., By: Philip R. White, Andrew H. Sherman, New York, NY, for Defendants, Emily Chasalow, Mark Chais, Wrenn Chais, William Chais, Miri Chais and the Entities Identified on Exhibit 1 to the Notice of Motion to Dismiss.

MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' PARTIAL MOTION TO DISMISS TRUSTEE'S COMPLAINT
BURTON R. LIFLAND, Bankruptcy Judge.

Before the Court is the motion (the “Motion to Dismiss”) of defendants Emily Chasalow, Mark Chais, Wrenn Chais, William Chais, Miri Chais, and other related entities (collectively, the “Moving Defendants”) seeking to partially dismiss the complaint (the “Complaint”) of Irving H. Picard, Esq. (the “Trustee” or “Plaintiff”), trustee for the substantively consolidated Securities Investor Protection Act 2

[445 B.R. 215]

(“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff (“Madoff”), filed pursuant to SIPA sections 78fff(b) and 78fff–2(c)(3), sections 105(a), 502(d), 542, 544, 547, 548(a), 550(a) and 551 of the Bankruptcy Code (the “Code”), various sections of New York Debtor and Creditor Law 3 (the “NYDCL”) and other applicable law for turnover, accounting, preferences, fraudulent conveyances, damages, and objections to SIPA claims.

The Moving Defendants assert that the Complaint fails to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6), made applicable herein by Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 7012, with respect to ten of the eleven counts asserted, and it should therefore be partially dismissed. The Moving Defendants do not seek to dismiss Count Two of the Complaint, which seeks the return of $46 million in allegedly preferential transfers.

For the reasons set forth below and at oral argument, the Motion to Dismiss is GRANTED in part and DENIED in part. Specifically, the Motion to Dismiss is GRANTED with respect to Count One of the Complaint, seeking immediate turnover under section 542 of the Code and SIPA section 78fff–2(c)(3). The Motion to Dismiss is DENIED with respect to Counts Three through Eleven of the Complaint.

BACKGROUND 4

The Complaint arises in connection with the infamous Ponzi scheme perpetrated by Bernard L. Madoff for decades through his investment company, BLMIS. As recognized by the Securities Investor Protection Corporation (“SIPC”), and as relayed in this Court's recent decision in Picard v. Merkin,5 “this is not a typical SIPC proceeding in which securities or cash were on hand at the time of the failure of the brokerage house.” Letter from Stephen P. Harbeck, President of SIPC to the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises at p. 6 (dated Sept. 7, 2010) [hereinafter “SIPC Letter”]. Rather, it was a fraud of unparalleled magnitude “in which the only assets were other people's money or assets derived from such funds.” Id. During the course of this fraud, there were approximately 90,000 disbursements of fictitious profits to Madoff investors totaling $18.5 billion. Id. at p. 5. Due to the longstanding nature of the Ponzi scheme, many of the customer accounts presented multiple generational investments, requiring the Trustee to conduct a full forensic analysis of all of BLMIS's books and records, dating back to at least the early 1980s. Id. at p. 7. As of February 18, 2011, the Trustee has determined 16,267 claims, denied 2,740 claims (and 10,731 third party claims), and allowed 2,403 claims in the amount of $6,854,549,449.81. Moreover, SIPC has committed $791,149,690.14 in SIPC advances. See http:// www. madofftrustee. com (last visited Feb. 23, 2011). The Trustee has reviewed, and continues to review, millions of documents to determine the thousands of customer claims filed in this SIPA liquidation. SIPC Letter at p. 7.

[445 B.R. 216]

I. The Moving Defendants

In the instant Complaint, the Trustee seeks to recover over $1 billion in preferential payments and fraudulent transfers from the Moving Defendants, Stanley Chais, and other non-moving defendants (collectively, the “Defendants”).

Each of the Moving Defendants is connected with defendant Stanley Chais, 6 a sophisticated investment advisor who has been closely associated with Madoff since the 1970s. Prior to Madoff's arrest, Stanley Chais invested in BLMIS for over three decades through more than 60 entity and/or personal accounts. From his investments with BLMIS, Stanley Chais purportedly withdrew hundreds of millions of dollars of other investors' money, funneling much of it to his children and their spouses, his grandchildren, and various entities he created for the benefit of his family. He is the settlor and trustee for many of the trust defendants named in the Complaint, as well as the general partner and investment advisor to defendants The Brighton Company, The Lambeth Company, and The Popham Company (the “Chais Funds”), who have not moved to dismiss the Complaint. As the general partner of the Chais Funds, which invested heavily in BLMIS, Stanley Chais collected management fees equal to 25% of each Chais Funds' entire net profit for every calendar year in which profits exceeded 10%, which has occurred every calendar year since at least 1996. The Trustee asserts that by virtue of, inter alia, his close and personal relationship with Madoff and expertise as an investment advisor, Stanley Chais knew or should have known that BLMIS was predicated on fraud.

The Moving Defendants consist of two groups, all of whom held accounts allegedly directed and controlled by Stanley Chais: (1) family members of Stanley Chais and (2) related entities of Stanley Chais. The family members include Stanley Chais's daughter, Emily Chasalow,7 his two sons, Mark Chais and William Chais, and their wives, Miri Chais 8 and Wren Chais, respectively (the “Family Defendants”). The related entities include trusts and other entities that Stanley Chais purportedly created for the benefit of his family (the “Entity Defendants”).9

[445 B.R. 217]

Aside from Miri Chais, the Family Defendants are trustees and/or directors of these Entity Defendants. The Trustee asserts that all of the Moving Defendants were clients of the investment advisory business (the “IA Business”) and maintained the BLMIS accounts highlighted in Exhibit A to the Complaint (the “IA Accounts”). Compl. at ¶ 93; see also id. at Ex. A.

II. The Complaint

The Complaint, filed on May 1, 2009, seeks to avoid and recover preferential and fraudulent transfers made to or for the benefit of the Defendants as initial or subsequent transferees pursuant to sections 544, 547, 548, 550, and 551 of the Bankruptcy Code (the “Code”) and various sections of New York Debtor and Creditor Law (the “NYDCL”). The Complaint additionally seeks turnover and accounting under section 542 of the Code and SIPA section 78fff–2(c)(3) and objects to Defendants' SIPA claims, which the Trustee asserts should be disallowed under section 502(d) of the Code and because they are not supported by the books and records of BLMIS.

The following facts alleged in the Complaint, presented in the light most favorable to the Trustee, are assumed to be true for purposes of the Motion to Dismiss. Between December 1, 1995 and December 11, 2008 (the “Filing Date”),10 BLMIS allegedly made transfers to the Defendants in excess of $1 billion (the “Transfers”). Of these Transfers, $804 million was transferred within six years of the Filing Date (the “Six Year Transfers”); $377 million was transferred within two years of the Filing Date (the “Two Year Transfers”); and $46 million was transferred within ninety days of the Filing Date (the “Ninety Day Transfers”). The particular details of these transactions from BLMIS to the Defendants as initial transferees—including the date, transferee, and amount transferred—are highlighted in Exhibit B to the Complaint (“Exhibit B”). The Complaint then provides that “some or all of the [se] Transfers were subsequently transferred ... to Defendant Chais and/or other Defendants in the form of payment of commissions or fees, transfers from one account to another, or other means” (collectively, the “Subsequent Transfers”). See Compl. at ¶ 166.

The Trustee asserts that the Moving Defendants, independently or through Stanley Chais, knew or should have known that BLMIS was predicated on fraud and failed to exercise reasonable due diligence into BLMIS. In support of this assertion, the Trustee alleges that the Moving Defendants were on notice of, inter alia, the following indicia of irregularity and fraud: (1) the Moving Defendants' accounts, directed and controlled by Stanley Chais, received fantastical rates of return from 1996 through 2007, including 125 instances

[445 B.R. 218]

of returns exceeding 50%, more than 35 instances of returns exceeding 100%, and one instance of returns exceeding 300%; (2) losses were manufactured after the dates when the subject transactions purportedly took place, including a purchase and sale of 125,000 shares of Micron Technology Inc. for a loss of more than $1 million appearing for the first time on a date 150 days after the purported purchase; (3) purported losses were generally remedied in subsequent periods with monumental rates of return that far outpaced the...

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  • Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC
    • United States
    • U.S. District Court — Southern District of New York
    • 24 d3 Março d3 2021
    ...presumption to the facts of this case, particularly in light of Madoff's criminal admission." In re Bernard L. Madoff Inv. Sec. LLC ("Chais"), 445 B.R. 206, 220 (Bankr. S.D.N.Y. 2011) ; see also Picard v. Katz, 462 B.R. 447, 453 (S.D.N.Y. 2011) ("[I]t is patent that all of Madoff Securities......
  • In re Bernard L. Madoff Inv. Sec. LLC
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    • U.S. Bankruptcy Court — District of Minnesota
    • 19 d3 Junho d3 2013
    ...Trustee insists they are strongly persuasive. E.g., In re Antex, Inc., 397 B.R. 168 (1st Cir. BAP 2008); In re Bernard L. Madoff Inv. Secs. LLC, 445 B.R. 206 (Bankr.S.D.N.Y.2011); In re American Energy Trading, Inc., 291 B.R. 159 (Bankr.W.D.Mo.2003). The Trustee urges that § 546(a)(1) be co......
  • Wiand v. Cloud
    • United States
    • U.S. District Court — Middle District of Florida
    • 23 d3 Janeiro d3 2013
    ...guilty plea agreement and found that he operated a ponzi scheme with actual intent to defraud creditors under UFTA); In re Madoff, 445 B.R. 206 (S.D. N.Y 2011) quoting In re Slatkin, supra, 525 F.3d at 814 (“A debtor's admission, through guilty pleas and a plea agreement admissible under th......
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1 books & journal articles
  • Article
    • United States
    • Utah State Bar Utah Bar Journal No. 35-5, October 2022
    • 1 d6 Outubro d6 2022
    ...disbursements of fictitious profits totaled $18.5 billion. Picard v. Estate of Stanley Chais (In re Bernard L. Madoff Inv. Sec. LLC), 445 B.R. 206, 215 (Bankr. S.D.N.Y. 2011). Despite its overwhelming acceptance, close examination of the principal-only rule reveals significant cracks in its......

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