Picard v. Avellino (In re Bernard L. Madoff Inv. Sec. LLC)

Decision Date21 July 2016
Docket NumberAdv. Proc. No. 08–01789(SMB), Adv. Proc. No. 10–05421(SMB)
Citation557 B.R. 89
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. Frank J. Avellino, et al., Defendants.
CourtU.S. Bankruptcy Court — Southern District of New York

557 B.R. 89

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.
Frank J. Avellino, et al., Defendants.

Adv. Proc. No. 08–01789(SMB)
Adv. Proc.
No. 10–05421(SMB)

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

July 21, 2016


557 B.R. 94

BAKER & HOSTETLER LLP, Attorneys for Plaintiff, Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, 45 Rockefeller Plaza, New York, N.Y. 10111, David J. Sheehan, Esq., Jimmy Fokas, Esq., Kathryn M. Zunno, Esq., Elizabeth Urda, Esq., Joshua B. Rog, Esq., Of Counsel

HAILE, SHAW & PFAFFENBERGER, P.A., Attorneys for the Moving Defendants 660 U.S. Highway One, Third Floor, Gary A. Woodfield, Esq., Of Counsel.

BROAD AND CASSEL, Attorneys for the Adopting Defendants, One Biscayne Tower, 2 South Biscayne Blvd., 21st Floor, Miami, FL 33131, Jonathan Etra, Esq., Of Counsel.

SIPA LIQUIDATION

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

STUART M. BERNSTEIN, United States Bankruptcy Judge:

Irving H. Picard, the trustee (the “Trustee”) for the liquidation of the estate of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and the estate of Bernard

557 B.R. 95

L. Madoff, commenced this adversary proceeding to avoid and recover preferential and fraudulent transfers from the defendants and disallow and/or subordinate certain of the defendants' claims. His “short and plain statement” runs on for 145 pages. All but one of the defendants moved to dismiss the Trustee's amended complaint, dated November 24, 2014 (“Amended Complaint”) (ECF Doc. # 86). For the reasons that follow, all avoidance and related liability claims arising from initial transfers that occurred prior to January 1, 2001, including subsequent transfer and general partner claims, are dismissed, and the motion is otherwise denied.

BACKGROUND

A. Nature of the Proceeding1

The background information is derived from the well-pleaded factual allegations of the Amended Complaint and other information that the Court may consider on a motion to dismiss for failure to state a claim. This adversary proceeding arose from the massive Ponzi scheme masterminded by Bernard L. Madoff and executed through BLMIS. (¶ 1.)2 On December 11, 2008 (the “Filing Date”), Madoff was arrested by federal agents for criminal violations of federal securities law, and the SEC commenced a fraud action against Madoff in the United States District Court for the Southern District of New York. (¶ 89.) Upon the application of the Securities Investor Protection Corporation (“SIPC”), the District Court entered an order appointing Irving Picard as Trustee for the liquidation of BLMIS and removing the case to this Court. (¶ 91.) On March 12, 2009, Madoff pleaded guilty to an 11–count criminal complaint. Madoff admitted that he “operated a Ponzi scheme through the investment advisory side of [BLMIS].” (¶ 94.)

One important fact omitted from the Amended Complaint but subject to judicial notice concerns the date that BLMIS began operating. BLMIS, the SIPA debtor in this case, commenced operations on January 1, 2001. Prior to that date, Madoff operated his financial business as a sole proprietorship. In re BLMIS, 522 B.R. 41, 60 (Bankr.S.D.N.Y.2014) (“Inter–Account Transfer Decision ”), aff'd sub nom. Diana Melton Trust v. Picard (In re BLMIS ), 15 Civ. 1151(PAE), 2016 WL 183492 (S.D.N.Y. Jan. 14, 2016). Although BLMIS did not exist as an operating entity prior to January 1, 2001, this decision generally refers to Madoff's business as BLMIS regardless of when the transactions described herein occurred and makes the distinction between his sole proprietorship and BLMIS, the SIPA debtor, when necessary.

B. The Defendants

1. The Individual Defendants

At all relevant times, Frank J. Avellino (“Avellino”) and Michael Bienes (“Bienes”), both certified public accountants, were partners in Avellino & Bienes (“A & B”). Nancy Avellino (“Mrs.Avellino”) is Avellino's wife. (¶ 42.) Dianne K. Bienes (“Mrs.Bienes”) is Bienes' wife, (¶ 48), and was also a partner in A & B. (¶ 58.) Thomas G. Avellino (“Thomas Avellino”) is Avellino's son. (¶ 54.)

2. The Entity Defendants

a. Avellino & Bienes

A & B was a Florida general partnership formed to practice accounting. The general partners included Avellino, Bienes

557 B.R. 96

and later, Mrs. Bienes. (¶ 58.) By 1984, A & B ceased operating as an accounting firm and focused exclusively on investing in BLMIS. Avellino and Bienes maintained at least six different IA (defined below) accounts with BLMIS in A & B's name during its existence, which ended with its liquidation in 1992. (¶ 59.)

b. Avellino Family Trust

The Avellino Family Trust was a trust, and Avellino was the trustee. The Avellino Family Trust had an IA account with BLMIS in its name, and it and/or Avellino received transfers from its IA account. (¶ 60.)

c. Avellino & Bienes Pension Plan & Trust

Avellino & Bienes Pension Plan & Trust (“A & B Pension Plan”) was a pension plan created by Avellino and Bienes, who were the trustees. The A & B Pension Plan had an IA account with BLMIS and received transfers from that account. It was a predecessor of the Avellino & Bienes Profit Sharing Plan and the Mayfair Pension Plan, which were profit sharing and/or pension plans established for the benefit of Avellino, Bienes, Mrs. Bienes and, later, Mrs. Avellino. (¶ 61.)

d. The Post–1992 Entities

The following table, derived from Exhibit F to the Amended Complaint, lists the general partnerships3 (the “Post–1992 Entities”) formed for the purposes of investing with BLMIS following the liquidation of A & B in 1992:

Post-1992 Feeder Entity General Partners IA Account
Grosvenor Partners, Ltd. (“Grosvenor Partners”) ¶ 62 Avellino, Bienes, Mrs. Avellino, Mrs. Bienes and Mayfair Ventures 1ZB046
Mayfair Ventures, GP (“Mayfair Ventures”) ¶ 63 Avellino, Bienes, Mrs. Avellino and Mrs. Bienes 1ZB032
Aster Associates (“Aster”) ¶ 64 Avellino, Mrs. Avellino, Thomas Avellino, and subsequent transferee defendants identified in Exhibit F 1ZB509
St. James Associates (“St. James”) ¶ 65 Bienes and Mrs. Bienes 1ZB510
Strattham Partners (“Strattham”) ¶ 66 Thomas Avellino and Ascent, Inc. 1ZB262
Kenn Jordan Associates (“KJA”) ¶ 67 Avellino 1ZA879

3. Subsequent Transferee Defendants

Exhibits D and E to the Amended Complaint identify the subsequent transfers and defendants that are the subject of Count Nine. All of the Defendants, except for A & B, the Avellino Family Trust, A & B Pension Plan, Mayfair Ventures and St. James, are identified as defendants under Count Nine and, according to Exhibit D, all of the Count Nine defendants received subsequent transfers after January 1, 2001. These defendants overlap to some extent with the initial transferees but will

557 B.R. 97

nevertheless sometimes collectively be referred to in this capacity as the “Subsequent Transferees.”

C. The Transfers

1. The Initial Transfers

Exhibit B to the Amended Complaint provides a detailed itemization of the various BLMIS accounts, including all of the withdrawals. In many cases, the account activity ceased prior to January 1, 2001. This category includes the accounts in the names of A & B (1A0045, 1A0047, 1A0048,4 1A0049, 1A0050 and 1A0053), Avellino Family Trust (1A100126), Avellino Group (1A100127), A & B Pension Plan (1A0046), Frank J. Avellino, Trustee (1A0051), Diane Bienes (1B0018) and Mayfair Bookkeeping Serving Mayfair Pension Plan (1ZB249).5 This group of initial transferees is referred to collectively as the “Pre–2000 Initial...

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