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

• Decision Date: 17 August 2022
• Docket Number: 08-01789 (CGM),Adv. Pro. 12-01002 (CGM)
• Parties: SECURITIES 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. The Public Institution for Social Security, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

SECURITIES 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.
The Public Institution for Social Security, Defendant.

No. 08-01789 (CGM)

Adv. Pro. No. 12-01002 (CGM)

United States Bankruptcy Court, S.D. New York

August 17, 2022

NOT FOR PUBLICATION

SIPA LIQUIDATION

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 By: Brian Song (via Zoom)

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Counsels for Defendant, The Public Institution for Social Security Leo Muchnik GREENBERG TRAURIG, LLP By: Joseph P. Davis (via Zoom) Alison T. Holdway (via Zoom)

MEMORANDUM DECISION DENYING DEFENDANT'S MOTION TO DISMISS AND MOTION TO STRIKE

CECELIA G. MORRIS, UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is the motion by the Defendant, the Public Institution for Social Security ("PIFSS"), 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. PIFSS seeks dismissal for lack of subject matter jurisdiction, for lack of personal jurisdiction, for failure to plead a cause of action due to improper adoption by reference; for failure to state a claim due to the safe harbor provision of the Bankruptcy Code, and for failure to plead that the transfers from BLMIS were customer property. The Defendants further moves to strike the declaration of Brian W. Song (the "Song Declaration") and all attached exhibits, numbered 1 through 13. For the reasons set forth herein, the motion to dismiss and motion to strike are denied in their 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).

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This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (F), (H) and (O). Submit matter jurisdiction and personal jurisdiction have been contested by the Defendant and will be discussed infra.

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 January 5, 2012. Compl., ECF^[1] No. 1. The Defendant was a government agency of the State of Kuwait responsible for investing the assets of and administering the Kuwaiti social security system. Id. ¶ 3. Via the complaint ("Complaint"), the Trustee seeks to recover subsequent transfers made to the Defendant. Id. ¶ 2. The subsequent transfers were derived from investments with BLMIS made by other funds, including Fairfield Sentry Limited ("Fairfield Sentry"). Id. These funds are referred to as "feeder funds" because the intention of the fund was to invest in BLMIS. Id. ¶ 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 Defendant to recover the approximately $3 billion in missing customer property. The Trustee alleges that the Defendant received

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approximately $20,000,000 of funds initially transferred from BLMIS to Fairfield Sentry and subsequently from Fairfield Sentry to the Defendant. Compl. ¶ 41, ECF No. 1; Stip., ECF 111 (amending Count One of the Complaint to recovery of one transfer in the amount of $20,000,000).

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. to Dismiss, ECF No. 118. 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),

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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. Compl. ¶ 22; Reply 7, ECF No. 122. 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 only the third and final clause of the exception could apply as it is "undisputed that PIFSS is a foreign governmental agency and that its conduct occurred outside the United States". Mot. to Dismiss, ECF No. 118. 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.

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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 PIFSS's receipt of funds due to its subscription into Fairfield Sentry. 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 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. Weltover, Inc. 504 U.S. 607, 614, 112 S.Ct. 2160, 2166, 119 L.Ed.2d 394 (1992)). Judge Lifland found a foreign state agency's investment in Fairfield Sentry to be a commercial activity as it "did not involve the use of powers peculiar to sovereigns." BLI, 480 B.R. at 512.

The Complaint has alleged that PIFSS entered into...