Sec. Investor Prot. Corp..

• Citation: 454 B.R. 307
• Decision Date: 23 May 2011
• Docket Number: No. 11 Civ. 0913 (CM).,11 Civ. 0913 (CM).
• 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.JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd., Defendants.
• Court: U.S. District Court — Southern District of New York

454 B.R. 307

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.JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd., Defendants.

No. 11 Civ. 0913 (CM).

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

May 23, 2011.

OPINION TEXT STARTS HERETimothy J. Burke, James E. Lahm, Patrick K. Slyne, Stull, Stull & Brody, Los Angeles, CA, for Repex Ventures S.A.Helen Davis Chaitman, Becker & Poliakoff, P.A., New York, NY, for Marhsa Peshkin.Lindsay D'Andrea, Lauren M. Hilsheimer, Deborah H. Renner, Jennifer A. Vessells, Thomas D. Warren, Baker & Hostetler LLP, Columbus, OH, for Irving H. Picard.Joseph R. DeMatteo, Bernfeld, DeMatteo & Bernfeld, LLP, New York, NY for Network for Investor Action and Protection.Stephen R. DiPrima, Emil Kleinhaus, Douglas K. Mayer, John F. Savarese, Meredith Lewis Turner, Wachtell, Lipton, Rosen & Katz, New York, NY, for J.P. Morgan Securities LLC, JPMorgan Chase & Co. and JPMorgan Chase Bank, N.A.Christopher H. LaRosa, Securities Investor Protection Corp., Washington, DC, for Securities Investor Protection Corp.

MEMORANDUM DECISION AND ORDER GRANTING DEFENDANTS' MOTION TO WITHDRAW THE REFERENCE FROM THE BANKRUPTCY COURT.

McMAHON, District Judge.

JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd. (collectively, “JPMorgan”) have moved for an order under 28 U.S.C. § 157(d) withdrawing the reference of this action to the bankruptcy court. Irving H. Picard (“Trustee”), as trustee for the substantively consolidated liquidation of Bernard L. Madoff Investment Securities LLC (“BMIS”) and the estate of Bernard L. Madoff, opposes JPMorgan's motion. For the reasons discussed, JPMorgan's motion is granted and the reference of this action to the bankruptcy court is withdrawn.

I. BACKGROUND

This action arises from the now-infamous Ponzi scheme orchestrated by Bernard L. Madoff. JPMorgan was BMIS's primary banker for over twenty years and, in essence, the Trustee's action alleges that JPMorgan turned a “blind eye” to evidence of Madoff's fraud and was complicit in that fraud. (Compl. ¶¶ 1–2.) The Trustee seeks to recover approximately $5.4 billion in damages suffered by BMIS's customers and approximately $500 million in fees and profits collected by JPMorgan. ( Id. ¶¶ 277–78, 443, 458, 482.)

A. Madoff's Ponzi scheme and the SIPA liquidation

On December 11, 2008, Madoff was charged with operating a multi-billion-dollar securities fraud scheme in violation of 15 U.S.C. §§ 78j(b), 78ff, and 17 C.F.R. § 240.10b–5. ( Id. ¶ 48; see also United States v. Madoff, Case No. 09–CR–213.) On the same day, the Securities and Exchange Commission (“SEC”) also filed a civil complaint in this Court against Madoff and BMIS, alleging that Madoff had engaged in fraud through one of BMIS's business units—the investment advisory unit. (Compl. ¶ 48.)

On December 15, 2008, the Securities Investor Protection Corporation (“SIPC”) filed an application in this Court seeking to commence a liquidation proceeding for BMIS under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. § 78eee(a)(4)(B). ( Id. ¶ 49.) This Court granted SIPC's application, and an order was entered removing the case to the Bankruptcy Court for the Southern District of New York and appointing Picard as the Trustee for the liquidation proceeding of BMIS. ( Id. ¶ 50.) The SIPA liquidation of BMIS is being administered in the bankruptcy court by the Honorable Burton R. Lifland. ( See SIPC v. Bernard L. Madoff Inv. Sec. LLC, Case No. 08–01789.)

B. JPMorgan's involvement with Madoff

Since 1986, BMIS maintained bank accounts at JPMorgan or its predecessor banks. (Compl.¶ 178.) BMIS deposited customer investments into a so-called “703 Account” at JPMorgan and transferred money out of that account as part of the scheme. ( Id. ¶¶ 2, 173, 178.) JPMorgan also made loans to BMIS and received fees for providing its commercial banking services to BMIS. In 2005 and 2006, JPMorgan made two secured loans totaling $145 million to BMIS and collected $3.48 million in interest before the loans were repaid. ( Id. ¶¶ 256–66.) The Trustee also alleges that during the six-year period prior to BMIS's bankruptcy, JPMorgan received $597,000 in fee payments from BMIS. ( Id. ¶¶ 292–347, Ex. A.)

The Trustee also alleges that in 2006, J.P., Morgan Securities Ltd. invested approximately $338 million in four Madoff “feeder funds.” According to the Trustee, JPMorgan redeemed most of its BMIS-related investments, approximately $276 million, before Madoff's arrest on December 11, 2008. ( Id. ¶ 169.) On that day, JPMorgan had only $35 million in “risk exposure” to BMIS funds. ( Id.)

C. The Trustee's lawsuit against JPMorgan

On December 2, 2010, Irving H. Picard, as Trustee for the liquidation of BMIS, commenced this action against JPMorgan in the United States Bankruptcy Court for the Southern District of New York. The complaint asserts twenty-one causes of action against JPMorgan. The first sixteen causes of action are “clawback” claims that seek to recover payments made by BMIS to JPMorgan before the fraud was revealed. (Compl. ¶¶ 292–429 (Counts I–XVI).) These claims seek to recover $145 million in loan repayments, $3.48 million in interest payments on the loan, $597,000 in banking fees, and $276 million in redemptions made by JPMorgan from Madoff feeder funds—for a total of $425 million. The Trustee alleges that this money is “customer property” as defined by SIPA, 15 U.S.C. § 78lll(4). ( Id. ¶ 17.) The remaining five causes of action allege non-bankruptcy claims based on theories of aiding and abetting fraud (Count Seventeen), aiding and abetting breach of fiduciary duty (Count Eighteen), conversion (Count Nineteen), unjust enrichment (Count Twenty) and fraud on the regulator (Count Twenty–One). Based on these claims, the Trustee seeks to recover an additional $5.4 billion in damages.

The Trustee's complaint alleges that JPMorgan was “at the center of [Madoff s] fraud, and thoroughly complicit in it.” ( Id. ¶ 1.) According to the Trustee, JPMorgan stood idly by as billions of dollars flowed between BMIS's “703 Account” and various investors, feeder funds and banks, and JPMorgan suppressed warnings triggered by the large transactions occurring in the 703 Account. ( Id. ¶ 2.) Specifically, the Trustee provides numerous examples of “red flags” that JPMorgan, as BMIS's long-time banker, allegedly ignored: (1) JPMorgan could not identify, and Madoff would not provide any information, about BMIS's purported over-the-counter options counterparties ( id. ¶¶ 5, 101–02, 134, 146); (2) Madoff would not provide details with regards to his split strike conversion strategy ( id. ¶¶ 5, 9, 84, 133, 140, 146); (3) transactions taking place in the 703 Account did not coincide with a legitimate enterprise, and could only be explained by fraud ( id. ¶¶ 224–37, 434); and (4) highly suspicious activity was occurring in the 703 Account, such as large repetitive transactions, up and down spikes in the value and volume of transactions, frequent transactions with offshore entities, regular use of hand-written checks for millions of dollars, and suspicious activity between the 703 Account and clients of JPMorgan's private bank ( id. ¶¶ 224–37, 251–73, 434).

JPMorgan filed a motion on February 9, 2011, seeking to withdraw the reference of the Trustee's action to the bankruptcy court. The Trustee filed its opposition on March 30, 2011. The Court heard oral argument on May 4, 2011. At the May 4 oral argument, the Court announced its decision to grant JPMorgan's motion and withdraw the reference from the bankruptcy court. The reasons for the Court's ruling are explained below.

II. DISCUSSION

A. The standard for withdrawal of the reference.

JPMorgan moves this Court under 28 U.S.C. § 157(d) for withdrawal of the reference from the bankruptcy court. Section 157(d) provides for withdrawal of the reference in two instances:

The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.

28 U.S.C. § 157(d). The first sentence in Section 157(d) provides for “permissive” withdrawal, or withdrawal for cause, while the second sentence provides for “mandatory” withdrawal. 1. Mandatory withdrawal

The mandatory withdrawal provision of Section 157(d) has been construed “narrowly” to apply only in cases “where substantial and material consideration of non-Bankruptcy Code federal statutes is necessary for the resolution of the proceeding.” In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 (2d Cir.1990); see also Bear. Stearns Secs. Corp. v. Gredd, 2001 WL 840187, at *2 (S.D.N.Y. July 25, 2001). Consideration is “substantial and material” when the case requires the bankruptcy judge to make a “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); In re Dana Corp., 379 B.R. 449, 453 (S.D.N.Y.2007). Section 157(d) is meant to “assure that an Article III judge decides issues calling for more than routine application of [federal laws] outside the Bankruptcy Code.” Enron Power Mktg., Inc. v. Cal. Power Exch. Corp. (In re Enron Corp.), 2004 WL 2711101, at *2 (S.D.N.Y. Nov. 23, 2004) (quoting Eastern Airlines, Inc. v. Air Line Pilots Ass'n (In re Ionosphere Clubs, Inc.), 1990 WL 5203, at *5 (S.D.N.Y. Jan. 24, 1990)).

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