Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. (In re Madoff)

Decision Date28 October 2022
Docket Number08-01789 CGM,Adv. Pro. 11-02493 (CGM)
PartiesSECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: BERNARD L. MADOFF, Debtor. IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. Abu Dhabi Investment Authority, Defendant.
CourtU.S. Bankruptcy Court — Southern District of New York

NOT FOR PUBLICATION

SIPA LIQUIDATION

(Substantively Consolidated)

APPEARANCES:

Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Chapter 7 Estate of Bernard L. Madoff Baker & Hostetler LLP

David J. Sheehan (on the papers) Attorneys for the Defendant, Abu Dhabi Investment Authority Quinn Emanuel Urquhart &amp Sullivan, LLP 51 Madison Ave, 22nd Floor New York, New York 10010-1601 By: Marc L. Greenwald (on the papers)

MEMORANDUM DECISION DENYING DEFENDANT'S MOTION TO DISMISS

CECELIA G. MORRIS UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is the motion by the Defendant, Abu Dhabi Investment Authority ("ADIA") to dismiss the complaint of Irving Picard, the trustee ("Trustee") for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") seeking to recover subsequent transfers allegedly consisting of BLMIS customer property. The Defendant seeks dismissal for lack of subject matter jurisdiction, lack of personal jurisdiction, failure to state a claim due to the safe harbor provision of the Bankruptcy Code, failure to allege that it received BLMIS customer property, and failure to plead a claim for relief under Rule 8 of the Federal Rules of Civil Procedure. The Defendant further argues that the Court should dismiss the complaint due to the affirmative defense of good faith under Section 550(b). For the reasons set forth herein, the motion to dismiss is denied in its entirety.

Jurisdiction

This is an adversary proceeding commenced in this Court, in which the main underlying SIPA proceeding, Adv. Pro. No. 08-01789 (CGM) (the "SIPA Proceeding"), is pending. The SIPA Proceeding was originally brought in the United States District Court for the Southern District of New York (the "District Court") as Securities Exchange Commission v. Bernard L. Madoff Investment Securities LLC et al., No. 08-CV-10791, and has been referred to this Court. This Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and (e)(1) and 15 U.S.C. § 78eee(b)(2)(A) and (b)(4). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (F), (H) and (O).

Subject matter jurisdiction and personal jurisdiction have been contested by the Defendant and will be discussed below.

Background

The Court assumes familiarity with the background of the BLMIS Ponzi scheme and its SIPA proceeding. See Picard v. Citibank, N.A. (In re BLMIS), 12 F.4th 171, 178-83 (2d Cir. 2021), cert. denied sub nom. Citibank, N.A. v. Picard, 142 S.Ct. 1209, 212 L.Ed.2d 217 (2022).

This adversary proceeding was filed on August 11, 2011. Compl., ECF[1] No. 1. The Defendant is a sovereign wealth fund responsible for investing assets of the Emirate of Abu Dhabi. Id. ¶ 2-4. Via the complaint ("Complaint"), the Trustee seeks to recover $300,000,000 in subsequent transfers made to the Defendant. Id. ¶ 2. The subsequent transfers were derived from investments with BLMIS made by Fairfield Sentry Limited ("Fairfield Sentry"). Id. This fund is referred to as "feeder fund" because the intention of the fund was to invest in BLMIS. Id. ¶¶ 2, 7.

Following BLMIS's collapse, the Trustee filed an adversary proceeding against Fairfield Sentry and related defendants to avoid and recover fraudulent transfers of customer property in the amount of approximately $3 billion. Id. ¶¶ 35, 36. In 2011, the Trustee settled with Fairfield Sentry. Id. ¶ 40. As part of the settlement, Fairfield Sentry consented to a judgment in the amount of $3.054 billion (Consent J., 09-01239-cgm, ECF No. 109) but repaid only $70 million to the BLMIS customer property estate. The Trustee then commenced a number of adversary proceedings against subsequent transferees like ADIA to recover the approximately $3 billion in missing customer property. The Trustee alleges that ADIA received approximately $300,000,000 of funds initially transferred from BLMIS to Fairfield Sentry and subsequently from Fairfield Sentry to the ADIA. Compl. ¶ 41, ECF No. 1.

Discussion
Subject Matter Jurisdiction

This Court has subject matter jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 1334(b) and 157(a), the District Court's Standing Order of Reference, dated July 10, 1984, and the Amended Standing Order of Reference, dated January 31, 2012. In addition, the District Court removed the SIPA liquidation to this Court pursuant to SIPA § 78eee(b)(4), (see Order, Civ. 08- 01789 (Bankr. S.D.N.Y. Dec. 15, 2008), at ¶ IX (ECF No. 1)), and this Court has jurisdiction under the latter provision. Personal jurisdiction has been contested by this Defendant and will be discussed infra.

The Defendant objects to the Court's subject matter jurisdiction, arguing that it is immune from liability under the Foreign Sovereign Immunities Act (the "FSIA"). Mot., ECF No. 112. The FSIA, 28 U.S.C. §§ 1602-1611, determines whether a federal court may exercise jurisdiction over a foreign state. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 443, 109 S.Ct. 683, 693, 102 L.Ed.2d 818 (1989) ("[T]he FSIA provides the sole basis for obtaining jurisdiction over a foreign state in the courts of this country."). A foreign state is "presumptively immune from the jurisdiction of United States courts; unless a specified exception applies." Saudi Arabia v. Nelson, 507 U.S. 349, 355, 113 S.Ct. 1471, 1476, 123 L.Ed.2d 47 (1993). Where no exception applies, "federal courts lack subject-matter jurisdiction over claims against foreign states." Picard v. Bureau of Labor Ins. (In re Bernard L. Madoff), 480 B.R. 501, 510 (Bankr. S.D.N.Y. 2012) ("BLI"). After the Defendant has made a prima facie case that it is a foreign state, the "burden shifts to the plaintiff, who must then produce evidence to demonstrate that immunity should not be granted under exceptions to the FSIA." Id. (citing Cargill Int'l S.A. v. M/T Pavel Dybenko, 991 F.2d 1012, 1016 (2d Cir.1993)).

The Defendant is a Foreign State Under the FSIA

The FSIA defines "foreign state" to include "a political subdivision of a foreign state or an "agency or instrumentality of a foreign state as defined in subsection (b)." 28 U.S.C. § 1603(a). The Trustee has conceded that the Defendant is a foreign state under the FSIA. Opp'n 7, ECF No. 114. The Defendant is presumptively immune from the jurisdiction of this Court. The Trustee argues that the Defendant is nevertheless exempt from immunity under the FSIA's commercial activity exception. The Commercial Activities Exception to the FSIA Applies

Under 28 U.S.C.A. § 1605, a foreign state is not immune from jurisdiction of the federal courts in cases

in which the action is based upon a commercial activity carried on in the United States by the foreign state; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.

28 U.S.C. § 1605(a)(2). The Defendant argues that "the first two clauses of the commercial activity exception are, on their face, not applicable." Mot. at 9, ECF No. 112. The Defendant believes that the third and final clause is not satisfied as "the sole count is not based on ADIA's acts at all. Rather, the only legally significant acts alleged as the basis of the Trustee's claim are acts of Sentry." Id. at 10. The final clause of the commercial activities exception,

consists of three elements: (1) the operative act (i.e., the gravamen of the complaint) must have occurred outside the United States, (2) the act must have occurred in connection with a commercial activity of the foreign state elsewhere and (3) the act [must have] cause[d] a direct effect in the United States. MMA Consultants 1, Inc. v. Republic of Peru, 719 Fed.Appx. 47, 54 (2d Cir. 2017) (cleaned up).

The gravamen of the complaint is the basis or foundation of a claim, that is, those elements that, if proven, would entitle a plaintiff to relief. Atlantica Holdings v. Sovereign Wealth Fund Samruk-Kazyna JSC, 813 F.3d 98, 107 (2d Cir. 2016). The Defendant and the Trustee agree that the gravamen of the Complaint is ADIA's receipt of funds from Fairfield Sentry due to its subscription into Fairfield Sentry and its redemption requests. Mot. at 10, ECF No. 118; Opp'n at 8, ECF No. 122. This conduct occurred outside of the territory of the United States. Id. The Trustee has met the first prong of the final clause of the commercial activities exception.

The Defendant disputes that the actions are commercial activity as it is used in the FSIA. ADIA characterizes its actions as mere "passive receipt of the Redemption Payments." Mot. at 10, ECF No. 112. In order to satisfy the final clause, the act must have occurred in connection with a commercial activity. The FSIA defines "commercial activity" as "a regular course of commercial conduct or a particular commercial transaction or act." 28 U.S.C. § 1603(d). The activity of a foreign state is "commercial" within the meaning of the FSIA "if the sovereign undertakes the act 'not as regulator of a market, but in the manner of a private player within it.'" MMA Consultants 1, Inc., 719 Fed.Appx. at 52 (quoting Republic of Argentina v....

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