Marshall v. Irving H. Picard, Tr. for the Liquidation of Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC)

• Decision Date: 13 January 2014
• Docket Number: Nos. 12–1645–bk(L), 12–1646–bk(CON), 12–1651–bk(CON), 12–1669–bk(CON), 12–1703–bk(CON).,s. 12–1645–bk(L), 12–1646–bk(CON), 12–1651–bk(CON), 12–1669–bk(CON), 12–1703–bk(CON).
• Citation: 740 F.3d 81
• Parties: In re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. Susanne Stone Marshall, individually and to the extent she purports to represent a class of those similarly situated, Adele Fox, individually and to the extent she purports to represent a class of those similarly situated, Claimants–Appellants, v. Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Appellee, Securities Investor Protection Corporation, Intervenor.
• Court: U.S. Court of Appeals — Second Circuit

740 F.3d 81

In re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.

Susanne Stone Marshall, individually and to the extent she purports to represent a class of those similarly situated, Adele Fox, individually and to the extent she purports to represent a class of those similarly situated, Claimants–Appellants,

v.Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Appellee,Securities Investor Protection Corporation, Intervenor.^*

Nos. 12–1645–bk(L), 12–1646–bk(CON), 12–1651–bk(CON), 12–1669–bk(CON), 12–1703–bk(CON).

United States Court of Appeals,Second Circuit.

Argued: Dec. 6, 2012.

Decided: Jan. 13, 2014.

Helen Davis Chaitman (Peter W. Smith, on the brief), Becker & Poliakoff, LLP, New York, NY, for Claimant–Appellant Susanne Stone Marshall.

Lisa S. Blatt (Michael L. Bernstein, Charles A. Malloy, Isaac B. Rosenberg, on the brief), Arnold & Porter LLP, Washington, DC; (Richard L. Stone, on the brief), Palm Beach, FL; (James W. Beasley, Jr., Joseph G. Galardi, on the brief), Beasley Hauser Kramer & Galardi, P.A., West Palm Beach, FL, for Claimant–Appellant Adele Fox.

David J. Sheehan (Deborah H. Renner, Tracy L. Cole, Keith R. Murphy, Thomas D. Warren, on the brief), Baker & Hostetler LLP, New York, NY, for Appellee.

Josephine Wang, General Counsel, Kevin H. Bell, Senior Associate General Counsel for Dispute Resolution, Lauren Attard, Assistant General Counsel, Securities Investor

Protection Corporation, Washington, DC, for Intervenor.

Before: CABRANES, RAGGI, and CARNEY, Circuit Judges.

JOSÉ A. CABRANES, Circuit Judge:

Once again, we are asked to review the liquidation proceedings involving Bernard L. Madoff Investment Securities LLC (“BLMIS”)—the investment enterprise created by Bernard L. Madoff to effect his now-infamous Ponzi scheme. These consolidated appeals arise out of a permanent injunction entered by the United States Bankruptcy Court for the Southern District of New York (Burton R. Lifland, Bankruptcy Judge ) and affirmed by the United States District Court for the Southern District of New York (John G. Koeltl, Judge ), enjoining state law tort actions asserted by appellants, two of Madoff's defrauded “investors,” against the estate of Jeffry M. Picower, one of Madoff's alleged co-conspirators, and related defendants (collectively, “Picower defendants”). We consider two questions: (1) whether the Bankruptcy Court had the authority under the Bankruptcy Code to enjoin appellants' actions as “derivative” of adversary proceedings brought by the trustee for the BLMIS estate, Irving Picard (“Picard” or the “Trustee”), against the Picower defendants; and, if indeed authorized by the Bankruptcy Code, (2) whether the Bankruptcy Court transgressed the limitations on its authority imposed by Article III of the United States Constitution.

First, we conclude that appellants' complaints impermissibly attempt to “plead around” the Bankruptcy Court's injunction barring all claims “derivative” of those asserted by the Trustee. Although appellants seek damages that are not recoverable in an avoidance action, their complaints allege nothing more than steps necessary to effect the Picower defendants' fraudulent withdrawals of money from BLMIS, instead of “particularized” conduct directed at BLMIS customers. Second, we conclude that the Bankruptcy Court operated within the confines of Article III of the United States Constitution, as recently interpreted by the Supreme Court in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Accordingly, we hold that the Bankruptcy Court did not exceed the bounds of its authority under the Bankruptcy Code or run afoul of Article III.

BACKGROUND

Following Madoff's arrest in December 2008, the Securities and Exchange Commission filed a civil complaint against Madoff and BLMIS in the United States District Court for the Southern District of New York, alleging that they had operated a Ponzi scheme through BLMIS's investment-advisor activities. On December 15, 2008, upon an application filed by the Securities Investment Protection Corporation (“SIPC”),¹ the District Court entered a protective order placing BLMIS in liquidation under the Securities Investor Protection Act (“SIPA”), appointing Picard as the Trustee, and referring the case to the United States Bankruptcy Court for the Southern District of New York.²See Order, SEC v. Bernard L. Madoff and Bernard L. Madoff Inv. Sec. LLC, No. 08 Civ. 10791(LLS) (S.D.N.Y. Dec. 15, 2008), ECF No. 4.

A

SIPA establishes procedures for the expeditious and orderly liquidation of failed broker-dealers, and provides special protections to their customers. A trustee's primary duty under SIPA is to liquidate the broker-dealer and, in so doing, satisfy claims made by or on behalf of the broker-dealer's customers for cash balances. In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 233 (2d Cir.2011). In a SIPA liquidation, a fund of “customer property” is established—consisting of cash and securities held by the broker-dealer for the account of a customer, or proceeds therefrom, 15 U.S.C. § 78 lll(4)—for priority distribution exclusively among customers, id. § 78fff–2(c)(1). The Trustee allocates the customer property so that customers “share ratably in such customer property ... to the extent of their respective net equities.” Id. § 78fff–2(c)(1)(B).

In order to calculate a customer's “net equity,” Picard chose the “net investment method,” under which the amount owed to each customer by BLMIS was “the amount of cash deposited by the customer into his BLMIS customer account less any amounts already withdrawn by him.” Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC ( In re Bernard L. Madoff Inv. Sec. LLC ), 424 B.R. 122, 125 (Bankr.S.D.N.Y.2010). In other words, BLMIS customers had net equity only to the extent that their total cash deposits exceeded their total cash withdrawals. Id. at 142. On March 1, 2010, the Bankruptcy Court entered an order approving the “net investment method” (the “Net Equity Decision”), which we subsequently affirmed. See id. at 135, 140,aff'd,654 F.3d 229 (2d Cir.2011).

Following these proceedings, appellants each filed claims in the liquidation proceeding against the BLMIS estate. Picard allowed appellant Marshall's claim for $30,000, but he denied two claims filed by Fox on the grounds that she was a so-called “net winner,” meaning that she had already withdrawn more than she deposited.

B

On May 12, 2009, Picard commenced an adversary proceeding against the Picower defendants in the United States Bankruptcy Court for the Southern District of New York (the “New York action”), alleging that they had made hundreds of improper withdrawals from BLMIS totaling $6.7 billion.³ The complaint asserted claims for fraudulent transfers, avoidable preferences, and turnover under the Bankruptcy Code and New York's Uniform Fraudulent Conveyance Act, N.Y. Debt. & Cred. Law §§ 270– 281.

While settlement talks were ongoing in the New York action, appellants filed complaints in the United States District Court for the Southern District of Florida on behalf of putative classes allegedly adversely affected by the Trustee's method for calculating net equity (the “Florida actions”). Marshall purported to represent the interests of BLMIS account holders who had not filed SIPA claims with the Trustee or whose SIPA claims were disallowed either in whole or in part. In her parallel suit, Fox allegedly represented the interests of BLMIS customers designated “net winners” and thus not entitled to any compensation in the SIPA litigation. Their complaints asserted claims for civil conspiracy, conversion, and conspiracy to violate the Florida Civil Remedies for Criminal Practices Act, seeFla. Stat. § 772.101 et seq.

On May 3, 2010, the Bankruptcy Court in New York granted the Trustee's application for a preliminary injunction, thereby enjoining the Florida actions. The Court held that the Florida actions violated the District Court's December 15, 2008 Protective Order, usurped causes of action belonging to the estate in violation of the Bankruptcy Code's automatic stay provision, see11 U.S.C. § 362(a),⁴ and undermined the Bankruptcy Court's jurisdiction over administration of the BLMIS estate, see11 U.S.C. § 105(a).⁵See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC ( In re Bernard L. Madoff Inv. Sec. LLC ), 429 B.R. 423, 430, 433–37 (Bankr.S.D.N.Y.2010).

C

On December 17, 2010, the Trustee and the Picower defendants entered into a settlement agreement (the “Settlement Agreement”), whereby the Picower defendants agreed to return $5 billion to the BLMIS estate, out of the proceeds of a $7.2 billion civil forfeiture they simultaneously agreed to make to the U.S. Attorney's Office.⁶ In return, the Trustee agreed to release any other claims he might have had against the Picower defendants relating to BLMIS. The Trustee further agreed as part of the settlement to seek a narrowly-tailored permanent injunction from the Bankruptcy Court barring any BLMIS customer from suing the Picower defendants for certain claims arising from or related to Madoff's Ponzi scheme.

On December 17, 2010, the Trustee filed his motion for approval of the Settlement Agreement and for a permanent injunction pursuant to Rules 2002 and 9019 of the Bankruptcy Rules and section 105(a) of the Bankruptcy Code. SIPC and the government filed a statement in support of the Trustee's motion. On January 13, 2011, the Bankruptcy Court approved the Settlement Agreement, and issued the permanent injunction as follows:

[A]ny BLMIS customer or creditor of the BLMIS estate who filed or could have filed a claim in the liquidation, anyone acting on their behalf or in concertor participation with them, or anyone whose claim in any way arises from or is related to BLMIS or the Madoff Ponzi scheme, is hereby permanently enjoined from asserting any claim against the Picower BLMIS Accounts or the Picower...