Irving H. Picard, Tr. for the Liquidation of Bernard L. Madoff Inv. Sec. LLC v. J. Ezra Merkin, Gabriel Capital, L.P. (In re Bernard L. Madoff Inv. Sec. LLC)
| Decision Date | 04 December 2014 |
| Docket Number | Adv. Proc. No. 09-01182,Case No. 08-99000 (SMB),Adv. Proc. No. 08-01789 |
| Court | U.S. Bankruptcy Court — Southern District of New York |
| Parties | In re: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. J. EZRA MERKIN, GABRIEL CAPITAL, L.P., ARIEL FUND LTD., ASCOT PARTNERS, L.P., ASCOT FUND LTD., GABRIEL CAPITAL CORPORATION, Defendants. |
SIPA LIQUIDATION
Trustee for the Liquidation of
45 Rockefeller Plaza
New York, NY 10111
David J. Sheehan, Esq.
Lan Hoang, Esq.
Brian W. Song, Esq.
Seanna R. Brown, Esq.
Of Counsel
SECURITIES INVESTOR PROTECTION CORPORATION
805 Fifteenth Street, N.W., Suite 800
Washington, DC 20005
Josephine Wang, Esq.
Kevin H. Bell, Esq.
Lauren T. Attard, Esq.
Of Counsel
DECHERT LLP
Attorneys for Defendants J. Ezra Merkin
1095 Avenue of the Americas
New York, NY 10036
Andrew J. Levander, Esq.
Neil A. Steiner, Esq.
Of Counsel
REED SMITH LLP
Attorneys for Bart M. Schwartz, As Receiver of
Defendants Gabriel Capital, L.P. & Ariel Fund Ltd.
599 Lexington Avenue
New York, NY 10022
James C. McCarroll, Esq.
Jordan W. Siev, Esq.
Michael J. Venditto, Esq.
Casey D. Laffey, Esq.
Of Counsel
FULBRIGHT & JAWORSKI LLP
Attorneys for Ralph C. Dawson, as Receiver for
Defendant Ascot Partners, L.P.
666 Fifth Avenue
New York, NY 10103
Judith A. Archer, Esq.
David L. Barrack, Esq.
Jami Mills Vibbert, Esq.
Of Counsel
United States Bankruptcy Judge:
In Picard v. Merkin (In re BLMIS), 515 B.R. 117 (Bankr. S.D.N.Y. 2014) ("Merkin Decision"), the Court dismissed several avoidance claims brought by Irving H. Picard ("Trustee"), as trustee for the substantively consolidated liquidation of Bernard L. MadoffInvestment Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. ("SIPA") and the estate of Bernard L. Madoff. The basis for dismissal was that the Trustee had failed to plead that the defendants had actual knowledge of Madoff's Ponzi scheme, and accordingly, the "safe harbor" under 11 U.S.C. § 546(e) shielded them from all avoidance claims other than intentional fraudulent transfer claims under 11 U.S.C. § 548(a)(1)(A). The requirement to plead actual knowledge was imposed by the District Court in SIPC v. BLMIS (In re BLMIS), No. 12 MC 115 (JSR), 2013 WL 1609154, at *4 (S.D.N.Y. Apr. 15, 2013) ("Actual Knowledge Decision").
The Trustee now seeks the entry of a final judgment dismissing the avoidance claims under Rule 54(b) of the Federal Rules of Civil Procedure (the "54(b) Judgment"), and the certification of the 54(b) Judgment for direct appeal to the United States Court of Appeals for the Second Circuit pursuant to 28 U.S.C. § 158(d) (the "Motion"). (See Trustee's Memorandum of Law in Support of Motion to Direct Entry of Final Judgment Under Federal Rule of Civil Procedure 54(b) and to Certify Judgment for Immediate Appeal Under 28 U.S.C. § 158(d), dated Sept. 5, 2014 (ECF Doc. # 2271).) The Motion is opposed by J. Ezra Merkin ("Merkin") and Gabriel Capital Corporation ("GCC," and collectively with Merkin, the "Merkin Defendants") and Gabriel Capital, L.P. ("Gabriel"), Ariel Fund Ltd. ("Ariel") and Ascot Partners, L.P. ("Ascot," and collectively with Gabriel and Ariel, the "Fund Defendants"). For the reasons that follow, the Motion is denied.
The Trustee commenced this adversary proceeding on May 7, 2009 to avoid and recover initial and subsequent transfers made to the Merkin Defendants and the Fund Defendants under the fraudulent conveyance provisions of the New York Debtor & Creditor Law ("NYDCL"), §§ 270, et seq. and the fraudulent transfer provisions of Bankruptcy Code § 548. (See Complaint, dated May 7, 2009 (ECF Doc. # 1).) His Third Amended Complaint, dated Aug. 30, 2013 ("TAC"), included thirteen counts or claims for relief. Count One sought to avoid and recover preferential transfers to Ascot; Counts Two and Three, respectively, alleged claims against the Fund Defendants to avoid and recover intentional fraudulent transfers under 11 U.S.C. § 548(a)(1)(A) and constructive fraudulent transfers under 11 U.S.C. § 548(a)(1)(B) made within two years of the December 11, 2008 filing date (the "Filing Date"); and Counts Four through Eight asserted claims to avoid and recover intentional and constructive fraudulent transfers under the NYDCL against the Fund Defendants made within six years of the Filing Date. Each Count also sought to disallow any claims filed by the Fund Defendants pursuant to 11 U.S.C. § 502(d).2
Counts Nine and Ten were directly related to the avoidance claims alleged in the previous Counts. Count Nine asserted claims for subsequent transfer liability against the Merkin Defendants, the Fund Defendants and Ascot Fund under 11 U.S.C. § 550(a)(2). The subsequent transfer claims depended on the Trustee's ability to avoid the initial transfers that were the subject of Counts One through Eight. Count Ten asserted liability against Merkin as the generalpartner of Ascot and Gabriel. Thus, it sought a judgment against Merkin based on the initial and subsequent transfers received by Ascot and Gabriel as alleged in Counts One through Nine.
As a result of a series of decisions by the District Court identified in the Merkin Decision, the Trustee's ability to avoid and recover preferential and fraudulent transfers is limited by 11 U.S.C. § 546(e). The latter provides in pertinent part that "the trustee may not avoid a transfer that is a ... settlement payment ... made by or to (or for the benefit of) a stockbroker [or] financial institution ... or that is a transfer made by or to (or for the benefit of) a ... stockbroker [or] financial institution ... in connection with a securities contract," but expressly excepts actual fraudulent transfer claims from its protection. The Merkin Decision summarized the District Court rulings as follows:
The Trustee's ability to avoid and recover transfers has been limited by several decisions issued by the District Court. In light of the "safe harbor" provision of Bankruptcy Code § 546(e), the Trustee can only avoid and recover intentional fraudulent transfers under Bankruptcy Code § 548(a)(1)(A) that were made within two years of the filing date. See Picard v. Greiff, 476 B.R. 715, 718 (S.D.N.Y. 2012); Picard v. Katz, 462 B.R. 447, 452 (S.D.N.Y. 2011) ("Katz"). If, however, an initial (or subsequent) transferee had actual knowledge of Madoff's Ponzi scheme, he cannot avail himself of the § 546(e) safe harbor, and the Trustee can avoid and recover preferences and actual and constructive fraudulent transfers to the full extent permitted by state and federal bankruptcy law. See SIPC v. BLMIS, No. 12 Misc. 115 (JSR), 2013 WL 1609154, at *6 (S.D.N.Y. Apr. 15, 2013) ("Cohmad").
. . . .
[I]n order to meet his burden under Counts One through Eight, the Trustee must plead and prove that BLMIS made an avoidable transfer and the transferee had actual knowledge of Madoff's scheme. If the TAC does not plead actual knowledge, the Trustee can still recover intentional fraudulent transfers pursuant to Bankruptcy Code § 548(a)(1) under Count Two if he can plead and prove that the Remaining Funds willfully blinded themselves to the fact that Madoff was conducting a Ponzi scheme. See Good Faith Decision, 2014 WL 1651952, at *4; Katz, 462 B.R. at 454, 455-56.
Merkin Decision, 515 B.R. at 138-39.
The Merkin Decision concluded that the TAC had failed to allege that Merkin, and hence the Defendant Funds, had actual knowledge of Madoff's Ponzi scheme, 515 B.R. at 141, but also concluded that the TAC adequately alleged that Merkin willfully blinded himself to the fraud. Id. at 141-46. Consequently, the Court dismissed Count One and Counts Three through Eight (collectively, the "Dismissed Claims") but declined to dismiss Count Two. The Court also denied the motion to dismiss Counts Nine and Ten.3
The Motion, ostensibly directed at the Merkin Decision, actually seeks review of Judge Rakoff's Actual Knowledge Decision in the Court of Appeals. At oral argument, the Trustee's counsel stated that the Trustee could not seek leave to appeal Judge Rakoff's interlocutory order at the time because he had prevailed; the District Court concluded that the Trustee had adequately pleaded actual knowledge on the part of the principal Cohmad defendants. Actual Knowledge Decision, 2013 WL 1609154, at *5-6. For this reason, the Motion seeks the entry of a final judgment as to the Dismissed Claims pursuant to Federal Rule of Civil Procedure 54(b) and the certification for direct appeal of the 54(b) Judgment to the Second Circuit Court of Appeals under 28 U.S.C. § 158(d). According to the Trustee, the entry of the 54(b) Judgment and the certification will provide the opportunity for the Court of Appeals to identify the correct standard governing the application of the § 546(e) safe harbor and permit the trial of all avoidance claims at one time. In addition, there are many other pending adversary proceedingsbrought against similarly-situated defendants.4 Accordingly, the Second Circuit's delineation of the correct standard for pleading and proving the applicability of the § 546(e) safe harbor will promote the efficient administration of these many other suits within the BLMIS liquidation.5
The Fund Defendants object to the Motion. (See Memorandum of Law of Bart M. Schwartz, as Receiver for Defendants Ariel Fund Limited and Gabriel Capital, L.P., and Ralph C. Dawson, as Receiver for Defendant Ascot Partners, L.P., in Opposition to Trustee's Motion to Direct Entry of Final Judgment Under Fed. R. Civ. P. 54(b) and to Certify...
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