Picard v. Plc

Decision Date28 July 2011
Docket NumberNos. 11 Civ. 763 (JSR),11 Civ. 836 (JSR).,s. 11 Civ. 763 (JSR)
Citation55 Bankr.Ct.Dec. 58,454 B.R. 25
PartiesIrving H. PICARD, Plaintiff,v.HSBC BANK PLC, Alpha Prime Fund Limited, HSBC Securities Services (Luxembourg) S.A., HSBC Bank Bermuda Limited, HSBC Fund Services (Luxembourg) S.A., HSBC Private Bank (Suisse) S.A., HSBC Private Banking Holdings (Suisse) S.A., HSBC Bank (Cayman) Limited, HSBC Securities Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC Institutional Trust Services (Bermuda) Limited, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Ireland) Limited, HSBC Holdings PLC, Defendants.Irving H. Picard, Plaintiff,v.Alpha Prime Fund Limited, HSBC Bank PLC, HSBC Securities Services (Luxembourg) S.A., HSBC Bank Bermuda Limited, HSBC Fund Services (Luxembourg) S.A., HSBC Private Bank (Suisse) S.A., HSBC Private Banking Holdings (Suisse) S.A., HSBC Bank (Cayman) Limited, HSBC Securities Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC Institutional Trust Services (Bermuda) Limited, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Ireland) Limited, HSBC Holdings PLC, UniCredit S.p.A., Pioneer Alternative Investment Management Limited, Defendants.
CourtU.S. District Court — Southern District of New York

OPINION TEXT STARTS HERE

Oren J. Warshavsky, Marc E. Hirschfield, Baker & Hostetler LLP, New York City, NY, for Plaintiff.Evan A. Davis, Cleary Gottlieb Steen & Hamilton, LLP, Todd E. Duffy, Anderson Kill & Olick, P.C., James Elliot Lahm, Patrick Kevin Slyne, Stull Stull & Brody, New York, NY, Timothy Joseph Burke, Stull, Stull & Brody, Los Angeles, CA, Helen Davis Chaitman, Phillips Nizer LLP, New York, NY, for Defendants.

OPINION AND ORDER

JED S. RAKOFF, District Judge.

Though it sometimes seems otherwise, not every litigant has the right to appear in federal court. A would-be litigant must first establish “standing” to pursue his or her claims, by demonstrating, among other things, the existence of a “case or controversy” and a personal stake in the outcome of the case. In this particular case, the Court is called upon to determine whether Irving Picard (the Trustee), the trustee appointed pursuant to the Securities Investor Protection Act for the consolidated liquidation of Bernard L. Madoff Investment Securities (“Madoff Securities”), has standing to pursue common law claims against third parties who allegedly violated a duty to Madoff Securities' customers by failing to detect Madoff's fraud. For the reasons stated herein, the Court answers this question in the negative and thus dismisses the Trustee's common law claims against the “HSBC Defendants 1 and the “UCG/PAI Defendants.” 2

By way of background, after it was revealed in December 2008 that Madoff Securities was “a giant Ponzi scheme,” SEC v. Madoff, 08 Civ. 7891 (S.D.N.Y. Dec. 11, 2008), the company went into bankruptcy. See Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities, LLC., Adv. Pro. No. 08–01789 (S.D.N.Y.Bankr.Dec. 11, 2008). Shortly thereafter, on December 15, 2008, the Trustee was appointed to manage the consolidated liquidation of Madoff Securities. On July 15, 2009, the Trustee commenced adversary proceeding No. 09–1364A (BRL) (the Trustee's Action”) in the Bankruptcy Court. The 165–page Amended Complaint in that action, filed on December 5, 2010, in addition to seeking to recover some $2 billion in preferential or fraudulent transfers (Counts 1–19), seeks to recover under various common law theories such as unjust enrichment, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty (Counts 20–24), no less than $6.6 billion in damages from the HSBC Defendants and approximately $2 billion in damages from a group of thirty-six other defendants, including the UCG/PAI Defendants—all premised on their alleged failure to adequately investigate Madoff Securities despite being confronted with “myriad red flags and indicia of fraud.” Am. Compl. ¶¶ 1, 318, 332, 557.

The question of whether the Trustee can pursue such common law claims, either on behalf of customers or on behalf of the estate, raises substantial, unresolved issues of federal non-bankruptcy law.3 Accordingly, on April 12, 2011, the Court withdrew the reference of this action to the Bankruptcy Court for the limited purpose of addressing two threshold issues of non-bankruptcy federal law: (1) whether the Trustee has standing to bring his common law claims against the HSBC Defendants and the UCG/PAI Defendants, and (2) whether the common law claims against these defendants are preempted by the Securities Litigation Uniform Standards Act (“SLUSA”). See Order, April 13, 2011 (confirming April 12 ruling from the bench); Picard v. HSBC Bank PLC, 450 B.R. 406 (S.D.N.Y.2011) (elaborating the reasons for the withdrawal of the reference).

Both the HSBC Defendants and the UCG/PAI Defendants subsequently moved to dismiss the common law claims, contending that the Trustee lacks standing to bring these claims and that these claims are barred by SLUSA. Because the Court concludes that the Trustee lacks standing to assert the common law claims, the Court need not address whether these claims are preempted by SLUSA.

Standing under Article III of the United States Constitution “is a threshold issue in all cases, since putative plaintiffs lacking standing are not entitled to have their claims litigated in federal court.” Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir.1991). To meet Article III requirements, the Trustee must demonstrate (i) a concrete and particularized “injury in fact,” (ii) that can be fairly traced to the defendants' conduct, and (iii) that can be redressed by a favorable decision. Bogart v. Israel Aerospace Indus. Ltd., No. 09 Civ. 4783(LAP), 2010 WL 517582, at *3–4 (S.D.N.Y. Feb. 5, 2010) (citing Denney v. Deutsche Bank AG, 443 F.3d 253, 263 (2d Cir.2006)). Moreover, to satisfy “prudential” limitations on standing, “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)).

Accordingly, even though a bankruptcy trustee can seek to recover monies on behalf of the debtor's estate that will ultimately be used to help satisfy creditors' claims, it is settled law that the federal Bankruptcy Code (Title 11, United States Code) does not itself confer standing on a bankruptcy trustee to assert claims against third parties on behalf of the estate's creditors themselves, because the trustee stands in the shoes of the debtor, not the creditors. See Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 434, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972).

When it comes to common law claims, moreover, a bankruptcy trustee is often barred from bringing claims on behalf of the debtor's estate because of the common law doctrine of in pari delicto, which generally precludes a wrongdoer like Madoff Securities from recovering from another wrongdoer. Although, under New York State law, in pari delicto is an affirmative defense, see Kirschner v. KPMG LLP, 15 N.Y.3d 446, 912 N.Y.S.2d 508, 938 N.E.2d 941, 960 (2010), in federal court prudential considerations deprive a bankruptcy trustee of standing to even bring a claim that would be barred by in pari delicto. Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir.1991).

The Trustee, seeking to overcome these two obstacles, asserts of number of convoluted theories, none of which is ultimately persuasive. The Trustee first asserts that he has standing to bring common law claims against third parties as bailee of the property of Madoff Securities' customers. On its face, this theory encounters the objection that, because the Trustee is seeking to recover on behalf of customers and the fund of customer property, rather than the estate itself, he is thus not asserting “his own legal rights and interests,” Warth, 422 U.S. at 499, 95 S.Ct. 2197, because, as noted, Title 11 does not confer standing on the Trustee to bring claims on behalf of the bankrupt estate's creditors, see id. at 428–34. The Trustee, however, contends that his power to bring these claims is derived from laws other than Title 11. In particular, he argues that he derives such authority from the statute pursuant to which he was appointed, the Securities Investor Protection Act (SIPA), 15 U.S.C. § 78aaa et seq.See Am. Compl. ¶¶ 48, 50.

Yet SIPA generally provides that a SIPA trustee is only “vested with the same powers ... as a trustee in a case under title 11,” see 15 U.S.C. § 78fff–1(a), and further prescribes that [t]o the extent consistent with the provisions of this chapter a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under ... title 11.” 15 U.S.C. § 78fff(b). Nevertheless, the Trustee argues that other provisions of SIPA somehow implicitly afford the Trustee authority, beyond that afforded to a bankruptcy trustee, to bring common law claims against third parties on behalf of Madoff Securities' customers.

Neither the language nor the structure of SIPA supports this conjecture. To be sure, the focus of SIPA is on protecting securities customers. Specifically, the purpose of a SIPA liquidation proceeding is “to deliver customer name securities to or on behalf of the customers of the debtor entitled thereto” and “to distribute customer property and (in advance thereof or concurrently therewith) otherwise satisfy net equity claims of customers.” 15 U.S.C. § 78fff(a)(1).4 But the powers of a SIPA trustee are still, as indicated, cabined by Title 11. Thus, for example, SIPA permits the trustee “to recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void...

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