Picard v. Estate of Mendelow (In re Bernard L. Madoff Inv. Sec. LLC), Case No. 08-99000 (SMB)

• Decision Date: 28 September 2016
• Docket Number: Adv. Proc. No. 10-04283 (SMB),Adv. Proc. No. 08-01789 (SMB),Case No. 08-99000 (SMB)
• Citation: 560 B.R. 208
• 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. The Estate of Steven Mendelow; Nancy Mendelow, in her capacity as the Executrix of the Estate of Steven Mendelow; Nancy Mendelow; Cara Mendelow; Pamela Christian; C & P Associates, Ltd. ; and C & P Associates, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

560 B.R. 208

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.The Estate of Steven Mendelow; Nancy Mendelow, in her capacity as the Executrix of the Estate of Steven Mendelow; Nancy Mendelow; Cara Mendelow; Pamela Christian; C & P Associates, Ltd. ; and C & P Associates, Inc., Defendants.

Case No. 08-99000 (SMB)

Adv. Proc. No. 08-01789 (SMB)

Adv. Proc. No. 10-04283 (SMB)

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

Signed September 28, 2016

BAKER & HOSTETLER LLP, 45 Rockefeller Plaza, New York, NY 10111, David J. Sheehan, Esq., Jonathan B. New, Esq., Robertson D. Beckerlegge, Esq., Of Counsel, Attorneys for Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff

ARKIN SOLBAKKEN LLP, 750 Lexington Avenue, 25th Floor, New York, NY 10022, Stanley S. Arkin, Esq., Lisa C. Solbakken, Esq., Alex Reisen, Esq., Of Counsel, Attorneys for Defendants

SIPA LIQUIDATION

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART TRUSTEE'S MOTION FOR LEAVE TO AMEND COMPLAINT

STUART M. BERNSTEIN, United States Bankruptcy Judge:

Irving H. Picard ("Trustee"), as trustee for the substantively consolidated liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor Protection Act ("SIPA"), 15 U.S.C. § 78aaa et seq. , and the estate of Bernard L. Madoff, commenced this adversary proceeding on November 23, 2010 to avoid and recover prepetition transfers made to Steven B. Mendelow ("Mendelow") and related defendants as fraudulent transfers, and to recover subsequent transfers made among the defendants. The Trustee now seeks to amend his complaint over the defendants' objections. For the reasons that follow, the Trustee's motion is granted except to the extent that the amended complaint seeks to avoid and recover transfers that occurred prior to January 1, 2001.

BACKGROUND

The facts are taken from the Trustee's Proposed Amended Complaint ("PAC")¹ which are accepted as true for the purpose of determining whether the Trustee alleges legally sufficient, non-futile, claims. Some of the pertinent facts in this case overlap with those described by the Court in Picard v. Avellino (In re BLMIS ), 557 B.R. 89 (Bankr. S.D.N.Y. 2016) (" Avellino ").

A. The BLMIS Ponzi Scheme

Madoff founded his financial advisory business in 1960 as a sole proprietorship, and organized BLMIS in January 1, 2001 as a New York limited liability company with Madoff serving as its sole member.² (PAC ¶ 36.) BLMIS, among other things, operated an investment advisory ("IA") business through which it purported to manage customer investments. Beginning in the 1990s, Madoff outwardly ascribed the consistent investment success of BLMIS' IA business to the "split-strike conversion" investment strategy. Under this strategy, Madoff told investors that he would invest their funds in a basket of common stocks within the S & P 100 Index and sell call options and buy put options on the S & P 100 Index to control the downside risk of price changes in the basket of stocks. (PAC ¶ 38.) In fact, BLMIS did not engage in any trading and sent monthly statements listing false trades that made it appear that customers' IA accounts were realizing substantial gains. The money invested by IA customers was used primarily to fund the withdrawals by other IA customers. (PAC ¶¶ 41–42.)

On December 11, 2008 (the "Filing Date") Madoff was arrested by federal agents for criminal violations of federal securities laws, and the Securities Exchange Commission ("SEC") commenced a fraud action against Madoff in the United States District Court for the Southern District of New York. (PAC ¶ 24.) 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 liquidation to this Court. (PAC ¶¶ 25–26.) At his March 12, 2009 plea hearing, Madoff admitted that he "operated a Ponzi scheme through [BLMIS' IA division]." (PAC ¶ 29.) On April 13, 2009, an involuntary bankruptcy petition was filed against Madoff, and on June 9, 2009, the Court entered a consent order substantively consolidating Madoff's chapter 7 estate with the BLMIS SIPA liquidation. (PAC ¶ 28; Case No. 09–11893 ECF Doc. # 28.)

B. The Defendants

Mendelow was an accountant, financial advisor and New York resident. (PAC ¶ 16.) He died on June 7, 2016, and his estate and Nancy Mendelow (Mendelow's wife), in her capacity as executrix of the estate, have been substituted for Mendelow as defendant.³ Nancy Mendelow is also a defendant in her individual capacity. (PAC ¶ 18.) In addition, Cara Mendelow and Pamela Christian, Mendelow's daughters, are defendants. (PAC ¶¶ 19, 20.)

C & P Associates, Inc. is a Florida corporation. Mendelow was the president and a director until his death, and Nancy Mendelow is the secretary and a director. (PAC ¶ 21.)

C & P Associates, Ltd. ("C & P Associates") is a Florida limited liability partnership. C & P Associates, Inc. is the general partner of C & P Associates, and Cara Mendelow and Pamela Christian are limited partners. (PAC ¶ 22.)

C. Mendelow

1. Mendelow was a Trained Accountant and Sophisticated Investor⁴

Mendelow had been a principal at Glantz & Levey, P.C. ("G & L"), an accounting firm operated by Edward Glantz ("Glantz") and Aaron Levey ("Levey"), from 1972 to 1983, at which time it merged with Konigsberg Wolf & Co. P.C. ("Konigsberg Wolf"). (PAC ¶ 50.) For over 20 years, G & L shared an office and expenses with Avellino & Bienes ("A & B"), whose predecessor operated BLMIS' first "feeder fund." (PAC ¶¶ 51, 52.) Konigsberg Wolf's website described Mendelow as an accountant who "specializes in unique transactions, family wealth building, and generational matters and financial restructuring." (PAC ¶ 53.)

Mendelow opened accounts at BLMIS for himself, his wife, his two daughters, and two funds that he formed, but received the account statements for all of the accounts. (PAC ¶ 54.) Mendelow also received BLMIS account statements for several of his accounting clients that invested with BLMIS. (PAC ¶ 55.)

2. Mendelow Took Advantage of His Longstanding Relationship with Madoff

Mendelow's name and phone number were in Madoff's address book, and there were records of numerous calls between Mendelow and BLMIS. (PAC ¶ 57.) BLMIS did not provide its customers with the customary year-end reporting necessary for tax preparation, and as a result, many accountants had difficulty completing tax returns for BLMIS customers. Konigsberg Wolf promoted its expertise in preparing tax returns for BLMIS customers. (PAC ¶ 58.)

Mendelow's relationship with Madoff allowed him to help friends, colleagues, and co-workers open BLMIS accounts when they otherwise would have been unable to do so, (PAC ¶ 59), and Mendelow fielded questions from and gave assistance to business associates and clients regarding their BLMIS investments. (PAC ¶¶ 56, 58, 63, 64.) According to the Trustee, Mendelow was close enough to Madoff to know when Madoff would not accept new "investors" and was able to obtain exceptions from Madoff for his family, friends, and colleagues. (PAC ¶ 60.)

3. Mendelow Owned and Operated Telfran, One of the Earliest Feeder Funds

Mendelow's relationship with A & B went back to the 1970s or 1980s when he opened accounts at A & B in his name, his wife's name, and/or in the name of C & P Associates. (PAC ¶ 66.) A & B raised hundreds of millions to invest in BLMIS by issuing debt instruments to investors promising a guaranteed return in the range of 13% to 18%. (PAC ¶¶ 67–68.) BLMIS, in turn, promised a return to A & B that exceeded the return A & B had promised to its investors. A & B retained the difference between the returns as profit. (PAC ¶ 69.)

Mendelow, along with Glantz, Levey, and Joel Levey, operated Telfran Associates Ltd. ("Telfran") as a sub-feeder to A & B's feeder fund, (PAC ¶ 71), and Telfran operated in a manner similar to A & B. Telfran solicited approximately 800 clients, who "invested" approximately $89 million, promising them a guaranteed return. Through Telfran, Mendelow and his partners invested that money in A & B. (PAC ¶ 72.) Like A & B, Telfran termed these investments "loans" and issued letters to investors that specified the rate of return. (PAC ¶ 73.) Telfran profited by retaining the difference between the return Telfran received from A & B and the return Telfran paid to its investors. (PAC ¶ 74.) Mendelow profited in amounts between $200,000 and $400,000 per year through this scheme. (PAC ¶ 79.)

4. The SEC Shut Down Telfran for Violating Securities Laws

The SEC began investigating A & B, Frank Avellino and Michael Bienes in 1992. On November 18, 1992, the District Court issued a preliminary injunction against Avellino, Bienes and A & B, appointing a trustee⁵ to oversee the liquidation of A & B and directing that funds be returned to the A & B investors. On September 7, 1993, the District Court issued a permanent injunction against Avellino, Bienes and A & B ordering, among other things, that they be enjoined from violating §§ 5(a) and (c) of the Securities Act of 1933 [§§ 77e(a) and (c) ] by selling unregistered securities and § 7 of the Investment Company Act of 1940 [§ 80a-7], by operating an unregistered investment advisory company. (PAC ¶ 81.)

The SEC investigation of A & B led to an investigation of Telfran for selling unregistered securities and operating an unregistered investment advisory company. On November 25, 1992, the District Court issued a preliminary injunction against Telfran, Mendelow and Glantz that, among other things, appointed a trustee to oversee the liquidation of Telfran and directed the return of all funds to investors. (PAC ¶ 82.) Ultimately, Telfran and Mendelow entered into a consent decree with the SEC which enjoined them to the same extent as A...