Picard v. JPMorgan Chase & Co.
| Decision Date | 01 November 2011 |
| Docket Number | 11 civ. 4212(CM).,Nos. 11 civ. 913(CM),s. 11 civ. 913(CM) |
| Citation | 55 Bankr.Ct.Dec. 201,460 B.R. 84,66 Collier Bankr.Cas.2d 1208 |
| Parties | Irving H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. JPMORGAN CHASE & CO., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd., Defendants.Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. UBS AG, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
OPINION TEXT STARTS HERE
Timothy J. Burke, James E. Lahm, Patrick K. Slyne, Stull, Stull & Brody, Los Angeles, CA, for Repex Ventures S.A.
Helen Davis Chaitman, Becker & Poliakoff, P.A., New York, NY, for Marhsa Peshkin.
Lindsay D'Andrea, Lauren M. Hilsheimer, Deborah H. Renner, Jennifer A. Vessells, Thomas D. Warren, Baker & Hostetler LLP, Columbus, OH, for Irving H. Picard.Joseph R. DeMatteo, Bernfeld, DeMatteo & Bernfeld, LLP, New York, NY for Network for Investor Action and Protection.Stephen R. DiPrima, Emil Kleinhaus, Douglas K. Mayer, John F. Savarese, Meredith Lewis Turner, Wachtell, Lipton, Rosen & Katz, New York, NY, for J.P. Morgan Securities LLC, JPMorgan Chase & Co. and JPMorgan Chase Bank, N.A.Christopher H. LaRosa, Securities Investor Protection Corp., Washington, DC, for Securities Investor Protection Corp.
DECISION AND ORDER GRANTING DEFENDANTS' MOTION TO DISMISS CERTAIN COMMON LAW CLAIMS
Bernard Madoff conducted a massive Ponzi scheme through his investment firm, Bernard L. Madoff Investment Securities, LLC (“BMIS”). After it was uncovered in December 2008, Madoff was arrested, BMIS went into bankruptcy, and the Securities Investor Protection Corporation (“SIPC”) applied to this Court (Stanton, J.) to commence a liquidation proceeding under the Securities Investor Protection Act (“SIPA”).1 The application was granted, the Court appointed a trustee, and the case was removed to Bankruptcy Court pursuant to SIPA. (Am. Compl. ¶¶ 53–57.). See 15 U.S.C. § 78eee(a), (b)(3), (b)(4).
SIPA was enacted in 1970 to restore confidence to the securities market by providing additional protections for the customers of failed securities brokers. See Sec. Investor Protection Corp. v. Barbour, 421 U.S. 412, 95 S.Ct. 1733, 44 L.Ed.2d 263 (1975). In essence, SIPA authorizes a trustee to create and fund a pool of assets within the failed broker's bankruptcy estate that is intended solely to compensate the customers for their “net equity” held by the broker. The funds collected by the trustee are then paid ratably (or, where possible, in full) to the customers before any distribution is made to other creditors. The effect is to prioritize those customers and to provide them a speedier alternative to a traditional bankruptcy claim. See 15 U.S.C. §§ 78fff, 78fff–1 and 78fff–2.
The SIPA trustee appointed to administer the customer fund for the BMIS customers is Irving Picard (the “Trustee”). He has worked relentlessly over nearly three years to bring assets that passed through BMIS back into the customer fund, in order to restore nearly $20 billion in customer losses. See generally Trustee's Fifth Interim Report (May 16, 2011). The efforts with which we are concerned are directed at several banks and investment funds that the Trustee alleges facilitated or willfully failed to uncover Madoff's scheme.
In Picard v. JPMorgan Chase & Co., No. 11 civ. 913—commenced as an adversary proceeding in the BMIS liquidation—the Trustee seeks billions of dollars in avoidance and common law damages claims against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd. (together, the “JPMorgan Defendants”). Madoff maintained a bank account with JPMorgan, referred to as the “703 Account,” through which he funneled the money coming into and going out of BMIS over the life of his scheme. See In re BLMIS, 424 B.R. at 128–29.
The Amended Complaint asserts common law damages claims for aiding and abetting fraud and breach of fiduciary duty, “fraud on the regulator,” unjust enrichment, conversion, aiding and abetting conversion, knowing participation in a breach of trust, and contribution. (JPM Am. Compl. ¶¶ 490–589 (Counts 21–28).) These common law claims are premised on the Trustee's allegation that the JPMorgan Defendants, as Madoff and BMIS's primary banker, knew, should have known, or consciously avoided discovering, that BMIS was not engaged in lawful securities trading, but was illegally misappropriating customer funds. ( Id.). The Trustee alleges that by this failure the JPMorgan Defendants substantially assisted, or knowingly participated in the scheme, breaching duties they owed to BMIS's customers, and aiding and abetting BMIS's breach of such duties. The Trustee seeks damages on those customers' behalf, in the amount of approximately $19 billion. ( Id. (Prayer for Relief).) Importantly, the Trustee's claim for contribution (Count 28) is the only one that seeks redress for an injury to BMIS itself, rather than BMIS's thousands of customers. ( Id. ¶¶ 584–89.)
In Picard v. UBS AG, No. 11 civ. 4212—likewise commenced as an adversary proceeding in the BMIS liquidation—the Trustee seeks, in addition to avoidance claims, billions of dollars in damages against UBS AG and several of its affiliates (together, the “UBS Defendants”),2 two so-called “feeder funds” for BMIS that were allegedly sponsored and serviced by the UBS Defendants,3 and Access International Advisers LLC and several of its affiliates (the “Access Defendants”).4 I refer to these Defendants together as the “UBS and Feeder Fund Defendants,” and refer to the JP Morgan and UBS and Feeder Fund Defendants collectively as “Defendants.”
The Trustee alleges that the UBS and Feeder Fund Defendants were aware that BMIS was likely engaged in fraud, but despite that knowledge sponsored two “feeder funds” that invested heavily BMIS. UBS thereby lent the prestige of its name to the funds, and created the appearance of overseeing them. In reality, however, UBS delegated custodial and supervision functions to Madoff himself, ultimately helping Madoff attract additional European investors in BMIS, and willfully turning a blind eye in order to collect lucrative fees for servicing the funds. The Access Defendants are alleged to have joined in this scheme by marketing the feeder funds to investors, despite knowing, or consciously avoiding knowing, that BMIS was a fraud, and misrepresenting to investors that Access performed rigorous due diligence.
The Amended Complaint asserts common law causes of action for aiding and abetting BMIS's fraud, breach of fiduciary duty, and conversion; knowing participation in a breach of trust; conversion; unjust enrichment; money had and received; and contribution. (UBS Am. Compl. ¶¶ 349–466 (Counts 12–28).) The Trustee seeks approximately $2 billion. ( Id. (Prayer for Relief).) As in the JPMorgan action, with respect to all causes of action except contribution, the Trustee seeks damages on behalf of BMIS's customers, rather than BMIS itself.
The JPMorgan Defendants moved to withdraw the bankruptcy reference; I granted that motion this May. Sec. Investor Protection Corp. v. Bernard L. Madoff Inv. Sec. LLC, 454 B.R. 307 (S.D.N.Y.2011). The non-bankruptcy claims in the UBS case have likewise been withdrawn. ( See Case No. 11 civ. 4212, Docket No. 14.) The basis for withdrawal was to consider substantial issues of non-bankruptcy federal law, in particular whether: (1) the Trustee has standing to pursue common law claims against third parties, like the Banks, on behalf of BMIS's customers; and, (2) if so, whether the Securities Litigation Uniform Standards Act (“SLUSA”) nevertheless precludes those claims. Id.; see also Picard v. HSBC Bank PLC, 450 B.R. 406 (S.D.N.Y.2011).
On June 1, 2011, the JPMorgan Defendants moved to dismiss the Trustee's original complaint. In lieu of responding, the Trustee filed the Amended Complaint, the allegations of which are set out above. The JPMorgan Defendants moved to dismiss again on August 1, 2011. The UBS and Feeder Fund Defendants moved as well, joining the JPMorgan Defendants' arguments. The Trustee filed an Amended Complaint in the UBS case on August 17, 2011, and the UBS Defendants' arguments are deemed directed to that, rather than the original complaint. ( See Case No. 11 civ. 4212, Docket No. 28.) Defendants argue that the Trustee lacks standing to bring common law claims on behalf of BMIS's customers because he is limited under Chapter 11 of the Bankruptcy Code and SIPA to vindicating the interests of BMIS only. They therefore seek dismissal of all common law claims.5
While these motions were being briefed, substantially identical arguments persuaded Judge Rakoff to dismiss the Trustee's common law claims against HSBC and several of its affiliates for lack of standing. Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y.2011). For the reasons discussed below, I am persuaded as well. The motions to dismiss the Trustee's common law claims are therefore GRANTED in the JPMorgan and UBS cases.
The standing requirement assures that an Article III “case or controversy” exists by allowing only those with actual legal injury to bring suit in federal court; moreover, judge-made “prudential” limitations on standing foster appropriate judicial restraint. “Foremost among the prudential requirements is the rule that a party must ‘assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.’ ” Wight v. BankAmerica Corp., 219 F.3d 79, 86 (2d Cir.2000) (quoting Warth v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)). “Because standing is jurisdictional under Article III of the United States Constitution, it is a threshold issue in all cases since putative plaintiffs lacking standing are not entitled to have their claims litigated in ...
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