Picard v. HSBC Bank PLC (In re Bernard L. Madoff Inv. Sec. LLC), Adv. Pro. No. 08–01789 (SMB)
| Decision Date | 14 December 2016 |
| Docket Number | Adv. Pro. No. 09–01364 (SMB),Adv. Pro. No. 08–01789 (SMB) |
| 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. HSBC Bank PLC, et al., Defendants. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
CLEARY GOTTLIEB STEEN & HAMILTON LLP, Attorneys for HSBC Defendants, One Liberty Plaza, New York, NY 10006, Thomas J. Moloney, Esq., David E. Brodsky, Esq., Joaquin N. Terceño, Esq., Carolyn Chu, Esq., Shira A. Kaufman, Esq., Of Counsel
DUFFY AMEDEO LLP, Attorneys for Alpha Prime Fund Limited and Senator Fund SPC, 275 Seventh Avenue, 7th Floor, New York, NY 10001, Todd E. Duffy, Esq., Douglas A. Amedeo, Esq., Of Counsel
SIPA LIQUIDATION
Irving H. Picard (the "Trustee"), as trustee of the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor Protection Act of 1970 ("SIPA"), 15 U.S.C. §§ 78aaa, et seq ., brought this adversary proceeding to avoid and recover initial transfers made to numerous feeder funds, including Alpha Prime Fund Limited ("Alpha") and Senator Fund SPC ("Senator," and with Alpha, the "Funds"), and subsequent transfers made to, inter alia , the HSBC Securities Services (Bermuda) Limited ("HSSB"), HSBC Institutional Trust Services (Bermuda) Limited ("HITSB"), HSBC Bank Bermuda Limited ("HBB"), HSBC Securities Services (Luxembourg) S.A. ("HSSL"), and HSBC Bank plc ("HSBC Bank," and together with HSSB, HITSB, HBB, and HSSL, the "HSBC Defendants").1 The Funds asserted numerous cross-claims against the HSBC Defendants sounding in fraud, negligence and gross negligence, breach of contract, breach of fiduciary duty, violations of Luxembourg law and aiding and abetting for, among other things, failing to properly monitor and manage the Funds' investments in BLMIS, and in particular, appointing BLMIS as a sub-custodian of their investments with BLMIS.
The HSBC Defendants have moved to dismiss the Funds' cross-claims on numerous grounds. (The HSBC Defendants' Motion to Dismiss the Amended Cross–Claims of Alpha Prime Fund Limited and Senator Fund SPC , dated Feb. 17, 2015 ("HSBC Motion ") (ECF Doc. # 369).) For the reasons that follow, the HSBC Motion is granted based upon the lack of subject matter jurisdiction and the Court's determination not to exercise supplemental jurisdiction.
The Funds were BLMIS feeder funds. (Answer, Affirmative Defenses and Amended Cross–Claim of Alpha Prime Fund Limited and Senator Fund SPC , dated Dec. 8, 2014 ("Cross–Claim "), at ¶¶ 9, 17, 62 (ECF Doc. # 347).)2 Alpha was formed under the laws of Bermuda on March 12, 2003. (Id. at ¶ 19.) On that date, Alpha entered into two agreements that bear directly on its cross-claims. First, it entered into a Custodian Agreement with BOB (the "Alpha Custodian Agreement" ) for the purposes, inter alia , of holding and safeguarding Alpha's cash and securities.3 The parties' addresses were listed as being in Hamilton, Bermuda, (Alpha Custodian Agreement at § 19), the agreement was governed by Bermuda law, (id. at § 27), and the parties submitted to the non-exclusive jurisdiction of the Bermuda courts to resolve any disputes relating to its terms. (Id. ) BOB was authorized to appoint sub-custodians as it thought necessary to perform its duties, but with certain exceptions, remained responsible for any acts or omissions of the sub-custodian. (Id. at § 15(B).) Simultaneously with the execution of the Alpha Custodian Agreement, BOB entered into a sub-custodian agreement with HSSL.4 (Cross–Claim at ¶ 28.)
Second, Alpha entered into an Administration and Registrar Agreement with Management International (Bermuda) Limited ("Alpha Administration Agreement" and together with the Alpha Custodian Agreement, the "Alpha Agreements"). (See Moloney Declaration , Ex. 5.)5 The Administrator could delegate its "functions, powers, discretions, privileges and duties ... to such person, firm or company on such terms and conditions as are agreed between the Administrator and the Company." (Id. at § 8(b).) The Alpha Administration Agreement was governed by Bermuda law, and the parties submitted to the non-exclusive jurisdiction of the Bermuda courts to resolve any disputes relating to its terms. (Id. at § 20.) As in the case of the Alpha Custodian Agreement, the parties listed their addresses as being in Bermuda. (Alpha Administration Agreement § 14.) Simultaneously with the execution of the Alpha Administration Agreement, BOB entered into a sub-administration agreement with HSSL. (Cross–Claim at ¶ 30.)6
By separate Novation Agreements dated Jan. 2, 2007, HITSB replaced BOB as the Custodian,7 and HSSB replaced BOB as Administrator. (See Fischer Declaration , Ex. B.) The new Custodian and Administrator were also Bermuda entities. On or about September 8, 2004, and allegedly without Alpha's knowledge or consent, BOBL, the sub-custodian, entered into a sub-sub-custody agreement with BLMIS (the "BLMIS Sub–Custody Agreement"). (Cross–Claim at ¶ 32.)
Senator was formed under the laws of the Cayman Islands in July 2006. (Cross–Claim at ¶ 62.) On August 4, 2006, Senator and HSSL entered into a Custodian Agreement, (the "Senator Custodian Agreement") (Moloney Declaration , Ex. 2), and an Administration Agreement (the "Senator Administration Agreement" (id. , Ex. 3), and together with the Senator Custodian Agreement, the "Senator Agreements"). The custodial and administrative duties were substantially the same as those under the Alpha Agreements with one significant exception. The Senator Agreements were governed by Luxembourg law, and the parties agreed that "the courts of Luxembourg will have exclusive jurisdiction to resolve any disputes relating to the terms of this Agreement." (Senator Custodian Agreement at § 35; Senator Administration Agreement at § 26.) The Cross–Claim further alleges that Senator also became a party to or beneficiary of the BLMIS Sub–Custody Agreement, (Cross–Claim at ¶ 34), without Senator's knowledge or consent. (Id. at ¶ 101.)
With BOB and BOBL out of the picture after their acquisition by HSBC, the following table reflects the relationships between the Funds and the HSBC Defendants:
Alpha Senator
Administrator HSSB HSSL
Sub-Administrator HSSL None
Custodian HITSB HSSL
Sub-Custodian HSSL BLMIS
Sub-Sub-Custodian BLMIS None
Notably, Alpha had no direct contractual relationship with HSSL, and Senator had a direct contractual relationship only with HSSL.
In addition, Alpha and HSBC Bank, a U.K. bank located in London, entered into a foreign exchange facility, an overdraft facility and a currency swap agreement secured by a pledge of the securities in Alpha's BLMIS account. (Fischer Declaration at ¶ 17 & Ex. E.) These agreements were governed by the laws of England and Wales, and the parties irrevocably submitted to the non-exclusive jurisdiction of the courts of England and Wales. Senator implies that it was a party to similar agreements. (See id. at ¶ 17.)
Finally, "[i]n August 2007, the HSBC Defendants commenced a leverage program enabling potential investors to invest with Senator. Throughout August 2007 and September 2007 investors invested in Senator using this leverage program, thereby making HSBC Bank an investor in Senator. "The HSBC Defendants used this as additional comfort argument, asserting essentially that it had 'skin in the game'." (Cross–Claim at ¶ 63.)
The Trustee commenced this adversary proceeding by filing a complaint on July 15, 2009, (ECF Doc. # 1), and he thereafter filed an amended complaint on December 5, 2010. (See "Amended Complaint ," dated Dec. 5, 2010 (ECF Doc. # 170).) His "short and plain statement" of his claims runs on for 564 paragraphs and 182 pages. The claims fall into two categories. First, the Trustee seeks to avoid and recover over $2 billion on account of fraudulent and preferential initial transfers made to various feeder funds by BLMIS, (id. at Counts 1, 3–9) and subsequent transfers made by the feeder funds to the HSBC Defendants in the form of fees.8 (Id. at 2, 13–19.) Alpha and Senator are among the initial transferees named in the Amended Complaint, and the Trustee alleges that they received the following approximate amount of initial transfers within six years, two years and ninety days of the BLMIS filing date, December 11, 2008:9
6 Yr. Transfers 2 Yr. Transfers 90 Day Transfers
Alpha $ 85.8 million (¶ 334) $ 78.2 million (¶ 323) $ 49 million (¶ 344)
Senator $ 95.4 million (¶ 336) $ 95.4 million (¶ 325) $ 95.2 million (¶ 346)
All of these transfers involved the return of principal; neither Alpha nor Senator received fictitious profits, and they are net losers among BLMIS' investors.
The Amended Complaint did not identify any subsequent transfers, and instead, alleged upon information and belief that the HSBC Defendants and others "received subsequent transfers of the avoidable transfers referenced above." (Amended Complaint at ¶ 352.) However, the Trustee amplified this claim in a proposed Second Amended Complaint , dated June 26, 2015 ("Proposed SAC ") (ECF Doc. # 399) proffered in connection with the HSBC Defendants' motion to dismiss based on extraterritoriality and comity. The Trustee alleged that Alpha transferred the aggregate approximate amount of $1,090,669 to HBB, HSSB, HITSB and/or HSSL, in monthly fees for the services they rendered as Alpha's custodian, administrator, registrar, sub-custodian, sub-administrator, sub-registrar, and payment bank from March 2003 to December 2008. (Proposed SAC at 384(b)(i).) The Court dismissed these subsequent transfer claims. SIPC v. BLMIS (In re BLMIS ), Adv. Pro. No. 08–01789 (SMB), slip op. at 60–61 (Bankr....
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