Sec. Investor Prot. Corp..

• Decision Date: 28 June 2011
• Docket Number: Adversary No. 08–01789 (BRL).
• Citation: 55 Bankr.Ct.Dec. 16,454 B.R. 285
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,v.BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.In re Bernard L. Madoff, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

454 B.R. 285

55 Bankr.Ct.Dec. 16

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

v.BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.In re Bernard L. Madoff, Debtor.

Adversary No. 08–01789 (BRL).

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

June 28, 2011.

Baker & Hostetler LLP, By: David Sheehan, Seanna R. Brown, Bik Cheema, New York, NY, for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.Securities Investor Protection Corporation, By: Josephine Wang, Kevin H. Bell, Christopher H. LaRosa, Washington, DC, for the Securities Investor Protection Corporation.Securities and Exchange Commission, By: Katharine B. Gresham, Washington, DC, for the Securities and Exchange Commission.Barger & Wolen LLP, Los Angeles, By: John C. Holmes, CA, for the Jewish Community Foundation of the Jewish Federation Council of Greater Los Angeles.Becker, Glynn, Melamed & Muffly LLP, By: Chester B. Salomon, New York, NY, for Black River Associates, L.P. and its Members.Becker & Poliakoff LLP, By: Helen Davis Chaitman, New York, NY, for Diane and Roger Peskin, Maureen Ebel, and a large group of other customers.Blitman & King LLP, By: Jennifer A. Clark, Charles E. Blitman, Bernard T. King, James R. LaVaute, Syracuse, NY, for Bricklayers and Allied Craftsmen Local 2 Annuity Fund, Bricklayers and Allied Craftworkers Local 2, Albany, New York, Health Benefit Fund, Bricklayers & Allied Craftworkers, Local No. 2, AFL–CIO Building Trade Employees Insurance Fund, Central New York Laborers' Pension Fund, Central New York Laborers' Training Fund, Construction Employers Association of CNY, Inc., Construction and General Laborers' Local No. 633, AFL–CIO, Engineers Joint Welfare Fund, Engineers Joint Training Fund, International Brotherhood of Electrical Workers Local Union No. 43 and Electrical Contractors Pension Fund, International Brotherhood of Electrical Workers Local No. 43 and Electrical Contractors Welfare Annuity Fund, Laborers' Local 103 Welfare Fund, New York State Lineman's Safety Training Fund, Oswego Roofers' Local 195 Annuity Fund, Roofers' Local 195 Health & Accident Fund, Syracuse Builders Exchange, Inc./CEA Pension Plan, Service Employees Benefit Fund, Service Employees Pension Fund of Upstate New York, S.E.I.U. Local 200 United, AFL–CIO, Syrabex, Inc., Syracuse Builders Exchange, Inc., U.A. Local 73, Plumbers & Fitters, AFL–CIO, Local 73 Retirement Fund, Upstate New York Bakery Drivers and Industry Pension Fund and Upstate Union Health and Welfare Fund.King & Spalding LLP, By: Richard A. Cirillo, Lauren W. Mitchell, New York, NY, for the NBK Investors.

MEMORANDUM DECISION AND ORDER GRANTING, TO THE EXTENT SET FORTH HEREIN, TRUSTEE'S MOTION TO AFFIRM TRUSTEE'S DETERMINATIONS DENYING CLAIMS OF CLAIMANTS WITHOUT BLMIS ACCOUNTS IN THEIR NAMES, NAMELY, INVESTORS IN FEEDER FUNDS

Query: Is every investor whose funds find their way directly or indirectly into the nefarious clutches of Madoff deemed a “customer” for SIPA purposes?

BURTON R. LIFLAND, Bankruptcy Judge.

Before the Court is the motion (the “Customer Motion”) of Irving H. Picard, Esq. (the “Trustee” or “Picard”), trustee for the substantively consolidated Securities Investor Protection Act ¹ (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff (“Madoff”) seeking to affirm the Trustee's denial of the claims of certain claimants that invested, directly or indirectly, in various “feeder funds” that invested with BLMIS, filed pursuant to this Court's April 13, 2010 order setting a briefing schedule and scheduling a hearing on the Customer Motion (the “Scheduling Order”) (Dkt. No. 2205). For the purposes of this decision, the Court has considered all papers filed in response to the Scheduling Order, including approximately 180 briefs and pro se submissions. ² The Securities Investor Protection Corporation (“SIPC”) and the Securities and Exchange Commission (the “SEC”) submitted briefs in support of the Customer Motion.

Thousands of investors worldwide lost significant sums of money in the Madoff fraud without ever having set up an account or directly investing with BLMIS. Rather, they invested directly or indirectly in feeder funds, which, in turn, invested with BLMIS. As the majority of claims in this SIPA liquidation have been denied by the Trustee on the basis that claimants invested only indirectly with BLMIS and lacked an account in their names,³ the dispute concerning the definition of “customer” under SIPA is of utmost importance.

The parties sharply contest whether claimants (the “Objecting Claimants”) ⁴ who invested in one or more of the sixteen feeder funds named in the Trustee's Customer Motion (the “Feeder Funds”),⁵ which, in turn, invested with BLMIS, are “customers” as statutorily defined by SIPA, eligible to receive individual payments from the SIPC fund of up to $500,000.⁶

In essence, the question is whether the Objecting Claimants, who had no securities accounts at BLMIS, were not known to BLMIS, lacked privity and any financial relationship with BLMIS, lacked property interests in any Feeder Fund account assets at BLMIS, entrusted no cash or securities to BLMIS, had no investment discretion over Feeder Fund assets invested with BLMIS, received no accounts statements or other communications from BLMIS and had no transactions reflected on the books and records of BLMIS, nevertheless qualify as “customers” of BLMIS, simply on account of their ownership interests in the Feeder Funds.

In light of the plain language of SIPA and relevant case law, the Objecting Claimants do not qualify as “customers” under SIPA, “no matter how far that word is stretched in service to the equitable ends of SIPA.” SIPC v. Morgan Kennedy & Co., 533 F.2d 1314, 1317 (2d Cir.1976). The Objecting Claimants lack any of the typical traits of a customer relationship with BLMIS since they “made no purchases, transacted no business, and had no dealings whatsoever with the broker-dealer in question.... Indeed, they could not have any such dealings since the broker-dealer held no property belonging to any individual [Objecting Claimant], in which such [Objecting Claimant] could trade or invest.” Id. at 1318. Therefore, due to their “ complete anonymity and total incapacity to have dealings with the broker-debtor,” the Objecting Claimants cannot be “customers” of BLMIS under SIPA. Id. (emphasis added). Bestowing customer status on the Objecting Claimants would “stretch[ ] that term wholly beyond its limits.” Id. Accordingly, for the reasons set forth below and at oral argument, the Trustee's Customer Motion is GRANTED to the extent set forth herein.⁷

BACKGROUND

I. PROCEDURAL HISTORY

On December 11, 2008, Madoff was arrested by federal agents and charged with securities fraud in violation of SIPA sections 78j (b), 78ff and 17 C.F.R. section 240.10b–5, in the United States District Court for the Southern District of New York (the “District Court”). That same day, the SEC filed a civil complaint in the District Court, alleging, inter alia, that Madoff and BLMIS were operating a Ponzi scheme through BLMIS's investment advisor activities. S.E.C. v. Madoff, et al., No. 08–CV–10791, 2008 WL 5197070 (the “Civil Action”).

On December 15, 2008, SIPC filed an application in the Civil Action seeking a decree that the customers of BLMIS are in need of the protections afforded by SIPA. The District Court granted SIPC's application and entered an order on December 15, 2008, placing BLMIS's customers under the protections of SIPA (the “Protective Order”). The Protective Order appointed Picard as trustee for the liquidation of the business of BLMIS, appointed Baker and Hostetler LLP as counsel to the Trustee, and removed the SIPA liquidation proceeding to this Court pursuant to SIPA sections 78eee(b)(3) and (b)(4).

On December 23, 2008, this Court approved an order, which sets forth a systematic framework for the filing, determination, and adjudication of claims in the BLMIS liquidation proceeding (the “Claims Procedure Order”) (Dkt. No. 12). Pursuant to this order, all customer claims must be filed with the Trustee, who then determines the claims in writing. If the claimant does not object to the determination, it is deemed approved by this Court and binding on the claimant. If the claimant objects and files an opposition, the Trustee must obtain a hearing date and notify the claimant thereof.

Since then, the sixteen Feeder Funds all filed customer claims with the Trustee for each of the nineteen accounts at issue, which have yet to be determined by the Trustee since litigation is currently pending against the majority of them.⁸See Sheehan Decl., Exs. 4, 7, 10, 12, 15, 17, 19, 22, 25, 27, 29, 31, 33, 35, 37, 39, 41, 44, 47. The Objecting Claimants also filed claims in accordance with the Claims Procedure Order based on their direct or indirect investments in one or more of the Feeder Funds. Id. at Exs. 2, 3. The Trustee denied their claims on the basis that they were not “customers” as defined by SIPA. See id. at Ex. 3. The Objecting Claimants then objected to the Trustee's determinations of their claims.

The Trustee filed a motion requesting that this Court establish a briefing schedule and hearing date regarding the “customer” issue. See Dkt. No. 2052. The Court granted the motion on April 13, 2010, and entered the Scheduling Order that same day. The instant Customer Motion was subsequently filed by the Trustee.

II. THE FEEDER FUNDS⁹

The sixteen Feeder Funds, whose investors are the subject of the instant Customer Motion, consist of limited partnerships organized in Delaware or New York, a limited liability company organized in New York, and companies organized in either the Cayman Islands or the British Virgin Islands (“BVI”). More specifically, the Feeder Funds include (i) seven limited partnerships organized under Delaware law; (ii)...