Picard v. Plc

• Decision Date: 25 April 2011
• Docket Number: 11 Civ. 836 (JSR).,Nos. 11 Civ. 763 (JSR),s. 11 Civ. 763 (JSR)
• Citation: 450 B.R. 406
• Parties: Irving 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.
• Court: U.S. District Court — Southern District of New York

450 B.R. 406

Irving 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.

Nos. 11 Civ. 763 (JSR)

11 Civ. 836 (JSR).

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

April 25, 2011.

Oren J. Warshavsky, Marc E. Hirschfield, Baker & Hostefler LLP, New York, NY, for Plaintiff.Evan A. Davis, Cleary Gottlieb Steen & Hamilton, LLP, Todd E. Duffy, Anderson Kill & Olick, P.C., Mark Alan McDermott, Skadden, Arps, Slate, Meagher & Flom LLP, Helen Davis Chaitman, Phillips Nizer LLP, New York, NY, for Defendants.

OPINION

JED S. RAKOFF, District Judge.

In this case, the Court was called upon to determine whether an adversary proceeding commenced in the Bankruptcy Court in connection with the liquidation of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) belonged instead, in whole or part, in the District Court. Following briefing and oral argument, the Court, ruling from the bench on April 12, 2011, answered this question in the affirmative and withdrew the reference to the Bankruptcy Court of adversary proceeding No. 09–1364A (BRL) (the “Trustee's Action”) for the limited purpose of addressing two threshold issues of non-bankruptcy federal law. This Opinion sets forth the reasons for that ruling.

By way of background, on July 15, 2009 Irving H. Picard (the “Trustee”), appointed as trustee pursuant to the Securities Investor Protection Act (“SIPA”) for the consolidated liquidation of Madoff Securities, commenced the Trustee's Action in Bankruptcy Court. On December 5, 2010, the Trustee filed an amended complaint, which names as defendants several Madoff Securities feeder funds and various service providers to the funds. The amended complaint alleges both bankruptcy law claims (Counts 1–19), seeking to avoid about $2 billion in payments and service fees allegedly received by the defendants from the feeder funds, and common law claims (Counts 20–24), seeking $6.6 billion in damages from the “HSBC Defendants” ¹ and approximately $2 billion in damages from a group of thirty-six other defendants, including the “UCG/PAI Defendants,” ² for failing to adequately investigate Madoff Securities despite being confronted with “myriad red flags and indicia of fraud.” Am. Compl. ¶ 557.

On February 2, 2011, the HSBC Defendants filed a motion to withdraw the reference of the Trustee's Action to the Bankruptcy Court, and on February 7, 2011, the UCG/PAI Defendants filed a similar motion. Since both motions sought the same relief, the Court set a joint briefing schedule and heard oral argument on April 12, 2011. Following the argument, the Court orally granted the motions to withdraw the bankruptcy reference for the limited purpose of addressing two threshold issues: (1) whether the Trustee has standing to bring the claims set forth in the amended complaint; and (2) whether the claims in the Trustee's Action are preempted by the Securities Litigation Uniform Standards Act (“SLUSA”). The Court confirmed these rulings in a written order issued April 13, 2011. The reasons for these rulings now follow:

While District Courts have original jurisdiction over bankruptcy cases and all civil proceedings “arising under title 11, or raising in or related to cases under title 11,” see 28 U.S.C. § 1334, the District Court may refer actions within its bankruptcy jurisdiction to the bankruptcy judges of the district pursuant to 28 U.S.C. § 157(a). The Southern District of New York has a standing order in place that provides for automatic reference of such matters to the Bankruptcy Court.

Notwithstanding the automatic reference, a judge of the District Court, in his or her discretion, may sua sponte withdraw the reference in a given case, for any of a wide variety of reasons, such as that it is inextricably intertwined with a non-bankruptcy case before the district judge, or that it threatens to interfere with the District Court's rulings in a related matter, or that judicial efficiency can better be achieved by removing the case to the District Court, or any other “cause shown.” 28 U.S.C. § 157(d). A litigant, however, may only seek withdrawal of the reference pursuant to 28 U.S.C. § 157(d) if certain conditions are satisfied.

Specifically, a litigant can mandate withdrawal of the bankruptcy reference where the movant shows that, absent the withdrawal, the bankruptcy judge would be obliged “to engage in significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes.” City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir.1991). See also In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 (2d Cir.1990) (withdrawal of the reference is required “where substantial and material consideration of non-Bankruptcy Code federal statutes is necessary for the resolution of the proceeding”). Alternatively, a litigant may move for permissive withdrawal in the district court's discretion.³

Turning first to mandatory withdrawal, the Court concludes that two threshold issues in this case will, in fact, require substantial and material interpretation of non-bankruptcy federal law and that the Court is thus required to withdraw the reference to address these two issues.

The first issue concerns whether the Trustee has standing to bring the common law claims in the amended complaint. Since it is well-established that title 11 generally confers no standing to bring claims on behalf of the bankrupt estate's creditors, see Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 428–34, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972), the Trustee contends that his power to bring these claims is principally derived from SIPA. See Am. Compl. ¶¶ 48, 50; 15 U.S.C. § 78aaa et seq. However, the Trustee and the Securities Investment Protection Corporation (“SIPC”), which also submitted briefing on the motions, argue that SIPA is effectively a bankruptcy statute and thus that, even if substantial interpretation of SIPA were required, it is entirely appropriate for the bankruptcy court to engage in such interpretation. But while it is certainly true that SIPA liquidation proceedings may be brought in the bankruptcy court and that SIPA incorporates provisions of title 11 to the extent that they are consistent with SIPA, SIPA expressly provides that it shall be considered an amendment to, and section of, the Securities Exchange Act of 1934, and for this reason is codified in Title 15 (where securities laws are placed), rather than in Title 11 (where bankruptcy laws are placed). See 15 U.S.C. § 78bbb (“Except as otherwise provided in this chapter, the provisions of the Securities Exchange Act of 1934 ... apply as if this chapter constituted an amendment to, and was included as a section of, such Act.”). The reason for this language and placement is that SIPA is, first and foremost, concerned with the protection of securities investors (as its very title states), whether in or outside the bankruptcy context. A substantial issue under SIPA is therefore, almost by definition, an issue “the resolution of [which] requires consideration of both title 11 and other laws of the United States.” 28 U.S.C. § 157(d).

The Trustee has advanced four other grounds for standing to bring his common law claims: bailee of customer property, representative of SIPC's subrogation rights, assignee of customers' claims, and successor of a joint tortfeasor. But each of these theories presents difficult questions under non-bankruptcy federal law.

For example, the Trustee's fourth theory of standing, “as successor of a joint tortfeasor,” may well be precluded by the so-called “ Wagoner ” doctrine—but not necessarily. In Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir.1991), the Second Circuit indicated that the common law defense of in pari delicto might in many instances preclude joint tortfeasors from standing to bring claims in federal court premised on the torts. As the New York Court of Appeals recently clarified in Kirschner v. KPMG LLP, 15 N.Y.3d 446, 459 n. 3, 912 N.Y.S.2d 508, 938 N.E.2d 941 (2010), while the perimeters of the in pari delicto defense are a matter of state law, the degree to which such a defense may deprive a plaintiff of standing is a matter of federal law and largely undeveloped federal law at that. See also Krys v. Sugrue, Nos. 08 Civ. 3065, 08 Civ. 3086 (S.D.N.Y. April 25, 2011).

The Trustee also argues that he has standing to bring the common law claims as a subrogee of SIPC's rights and as a bailee of customer property. In arguing that he has standing as bailee and subrogee, the Trustee principally relies upon Redington v. Touche Ross & Co., 592 F.2d 617, 624 (2d Cir.1978), rev'd on other grounds, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979). In Redington, the Second Circuit first held that § 17(a) of the Securities Exchange Act of 1934 created a private cause of action so that customers of a failed brokerage firm could...