Irving H. Picard v. Jaba Assocs. LP

• Citation: 49 F.4th 170
• Decision Date: 20 September 2022
• Docket Number: Docket No. 21-872,August Term, 2021
• Parties: Irving H. PICARD, TRUSTEE FOR the Substantively Consolidated SIPA LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES LLC, and Bernard L. Madoff, Plaintiff-Appellee, Securities Investor Protection Corporation, Plaintiff-Applicant-Appellee, v. JABA ASSOCIATES LP, the Estate of James Goodman, Andrew Goodman, in His Capacity as a General Partner of JABA Associates LP, Audrey M. Goodman, in Her Capacity as a General and Limited Partner of JABA Associates LP, and in Her Capacity as Personal Representative of the Estate of James Goodman, Bruce Goodman, in His Capacity as a General Partner of JABA Associates LP, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

49 F.4th 170

Irving H. PICARD, TRUSTEE FOR the Substantively Consolidated SIPA LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES LLC, and Bernard L. Madoff, Plaintiff-Appellee,Securities Investor Protection Corporation, Plaintiff-Applicant-Appellee,

v.JABA ASSOCIATES LP, the Estate of James Goodman, Andrew Goodman, in His Capacity as a General Partner of JABA Associates LP, Audrey M. Goodman, in Her Capacity as a General and Limited Partner of JABA Associates LP, and in Her Capacity as Personal Representative of the Estate of James Goodman, Bruce Goodman, in His Capacity as a General Partner of JABA Associates LP, Defendants-Appellants.¹

Docket No. 21-872

August Term, 2021

United States Court of Appeals, Second Circuit.

Argued: March 16, 2022

Decided: September 20, 2022

LANCE GOTTHOFFER, Chaitman LLP, (Helen Chaitman, on the brief) New York, N.Y., for Defendants-Appellants.

AMY E. VANDERWAL, Baker & Hostetler LLP, (David J. Sheehan, Seanna R. Brown, Tracy Cole, on the brief) New York, N.Y., for Plaintiff-Appellee Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC, and Bernard L. Madoff.

NATHANAEL KELLEY, Associate General Counsel, Securities Investor Protection Corporation, (Kevin H. Bell, Senior Associate General Counsel, Kenneth G. Caputo, General Counsel, on the brief) Washington, D.C., for Plaintiff-Appellee Securities Investor Protection Corporation.

Before: POOLER, WESLEY, and MENASHI, Circuit Judges.

POOLER, Circuit Judge:

Defendants JABA Associates LP and its general partners—Estate of James Goodman; Audrey Goodman (as General Partner and Personal Representative); Bruce Goodman; and Andrew Goodman—appeal from the March 24, 2021 judgment of the United States District Court for the Southern District of New York (Koeltl, J. ) granting summary judgment to the plaintiff, Irving H. Picard ("Trustee"), pursuant to the Securities Investor Protection Act of 1970, 15 U.S.C. §§ 78aaa - 78lll ("SIPA"). JABA was a good faith customer of Bernard L. Madoff Investment Securities LLC ("BLMIS") and held BLMIS Account Number 1EM357 (the "JABA Account"). The Trustee brought this action to recover the allegedly fictitious profits transferred from BLMIS to the defendants in the two years prior to BLMIS's filing for bankruptcy. The district court granted recovery of $2,925,000 that BLMIS transferred to defendants in the two years prior to BLMIS's filing for bankruptcy, which made it recoverable property under SIPA. Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC , 528 F. Supp. 3d 219 (S.D.N.Y. 2021) (" SIPC "). The district court also awarded 4 percent prejudgment interest. Id. at 245-47.

The defendants first argue that the district court improperly granted summary judgment. They contend that there is a dispute of material fact as to whether Bernard L. Madoff transferred the assets of his sole proprietorship to the defendants, which determines whether the property is recoverable under SIPA. Defendants question some of the Trustee's evidence, particularly the Amended Form BD. As detailed further below, when Madoff reorganized his broker-dealer business from a sole proprietorship to a limited liability company in 2001, he filed an Amended Form BD with the Securities Exchange Commission to reflect the change. Defendants argue that the Amended Form BD is inadmissible hearsay and that an expert opinion the district court purportedly relied upon in admitting the Amended Form BD was not credible. We find plaintiffs waived that argument by not objecting to the admission of the Amended Form BD and by relying upon the form in their own motion for summary judgment.

Defendants also argue that certain evidence, including (1) the name used on JPMorgan Chase & Co. accounts which were in Madoff's personal name and were not changed to BLMIS ownership until September 2002, (2) the endorsement stamp used on one account which was in Madoff's personal name, and (3) the use of Madoff's personal name on checks emanating from another bank account (collectively, the "Account Evidence"), is sufficient to create a dispute of material fact that all assets of the sole proprietorship, including the funds in the JPMorgan accounts at issue here, were transferred to BLMIS.

Yet the Amended Form BD, plus other evidence, indicates that BLMIS took ownership of all the property used in the sole proprietorship and that, therefore, the district court properly concluded that the funds in the JPMorgan accounts are recoverable customer property. The Account Evidence that defendants cite is insufficient to create a dispute of material fact in the face of overwhelming evidence to the contrary.

Defendants finally argue that the district court erred in awarding prejudgment interest. The 4 percent interest the district court imposed was not unduly harsh or punitive, and the district court properly justified the amount. We affirm.

BACKGROUND

The litigation stemming from the Ponzi scheme Madoff ran through BLMIS, his broker-dealer firm, is well-known to this Court. See, e.g. , In re Bernard L. Madoff Inv. Sec. LLC , 773 F.3d 411 (2d Cir. 2014) ; In re Bernard L. Madoff Inv. Sec. LLC ("Gettinger "), 976 F.3d 184 (2d Cir. 2020) ; In re Bernard L. Madoff Inv. Sec. LLC , 721 F.3d 54 (2d Cir. 2013) ; In re Bernard L. Madoff Inv. Sec. LLC , 654 F.3d 229 (2d Cir. 2011). BLMIS was a securities broker-dealer through which Madoff operated three business units: (1) a proprietary trading business; (2) a market-making business; and (3) an investment advisory business (the "IA Business"). BLMIS collected funds from brokerage customers and purported to invest those funds on behalf of the customers, but it did not actually invest the money. Instead, it sent its customers fabricated statements using historical trading activity and returns that had never been generated, and therefore were reflecting fictitious trades and gains. When customers sought to withdraw money from their accounts, BLMIS satisfied those requests with the proceeds of other customers’ investments that were held in a commingled checking account. See, e.g. , In re Bernard L. Madoff Inv. Sec. LLC , 773 F.3d at 415. The scheme collapsed in December 2008, when there was not enough new capital to support the withdrawals that customers sought. Gettinger , 976 F.3d at 188. Madoff was subsequently arrested on criminal charges, and, on the day of his arrest, the SEC filed a civil action in the United States District Court for the Southern District of New York alleging that Madoff and BLMIS had operated an unlawful Ponzi scheme. Id.

The Securities Investor Protection Corporation ("SIPC") then became involved and applied for an order granting BLMIS customers protection under SIPA. Id. After the scheme collapsed, Picard was appointed trustee for BLMIS pursuant to SIPA, and liquidation proceedings began in the district court. 15 U.S.C. § 78aaa et seq. ; In re Bernard L. Madoff Inv. Sec. LLC , 773 F.3d at 414. Under SIPA, "[w]henever customer property is not sufficient to pay in full [customers’ net equity claims], the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of [the Bankruptcy Code]." 15 U.S.C. § 78fff–2(c)(3). Recovered property is treated as customer property and distributed ratably among customers based on their net equity. Id.

I. The Underlying Transfers at Issue

This appeal pertains to the bank accounts BLMIS used for customer cash that were acquired through the operation of the Ponzi scheme. BLMIS used two bank accounts held with JPMorgan that commingled customer money: a commercial checking account (the "703 Account") and a controlled disbursement account (the "509 Account") that was funded by the 703 Account. The 703 Account was the primary bank account used for BLMIS customer deposits, with 97 percent of the money coming into the account being customer deposits. Customer withdrawals were sent from both the 703 and 509 Accounts.

Madoff's firm operated as a sole proprietorship for over 40 years before he converted it to a single member limited liability company, with Madoff as the sole member, in the early 2000s. On January 12, 2001, using the same SEC Registrant Number Madoff was originally assigned in 1960 (8-8132), Madoff reorganized his firm to an LLC. Madoff informed the SEC of the change in corporate form by filing an Amended Form BD.² On the Amended Form BD, Madoff attested that, "[e]ffective January 1, 2001, predecessor will transfer to successor all of predecessor's assets and liabilities, related to predecessor's business. The transfer will not result in any change in ownership or control." Supp. App'x at 57-58.³ After filing this form with the SEC, BLMIS succeeded to the sole proprietorship's SEC Registrant Number, and, as far as the SEC was concerned, the sole proprietorship no longer operated as a broker-dealer or in any other capacity. The Amended Form BD asked the applicant to check a box next to the type of business in which it was engaged, and Madoff checked the boxes next to "market-making" and "proprietary trading activities," but did not check the box next to investment advisory ("IA") services.⁴ Supp. App'x at 55-56. Also in 2001, BLMIS entered into an Amended and Restated Operating Agreement wherein on the form Madoff stated that he transferred all assets, including bank accounts, held by the sole proprietorship to BLMIS, effective January 1, 2001. See SIPC v. BLMIS , Adv. No. 08-01789 (CGM) (Bankr. S.D.N.Y.), ECF Nos. 20429-4, 20467-4, 20571-4, 20578-4, 20649-4. Other documentary evidence that suggests that BLMIS subsumed all parts of the sole proprietorship includes a change in letterhead that listed the firm as "Bernard L. Madoff Investment Securities LLC," letters from BLMIS, account opening agreements, and trading documents that were sent to customers that had...