Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

• Decision Date: 02 June 2015
• Docket Number: Adv. Pro. No. 08–01789 SMB
• Citation: 531 B.R. 439
• 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

531 B.R. 439

Securities Investor Protection Corporation, Plaintiff

v.Bernard L. Madoff Investment Securities LLC, Defendant.

In re: Bernard L. Madoff, Debtor.

Adv. Pro. No. 08–01789 SMB

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

Signed June 2, 2015

BAKER & HOSTETLER LLP, 45 Rockefeller Plaza, New York, N.Y. 10111, David J. Sheehan, Esq.,

Nicholas J. Cremona, Esq., Keith R. Murphy, Esq., Amy E. Vanderwal, Esq., Anat Maytal, Esq. Of Counsel, WINDELS MARX LANE & MITTENDORF, LLP, 156 West 56th Street, New York, N.Y. 10019, Howard L. Simon, Esq., Kim M. Longo, Esq., Of Counsel, Attorneys for Plaintiff, Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC

SECURITIES INVESTOR PROTECTION CORPORATION, 805 Fifteenth Street, N.W., Suite 800, Washington, DC 20005, Josephine Wang, Esq., Kevin H. Bell, Esq., Lauren T. Attard, Esq. Of Counsel, Attorneys for the Securities Investor Protection Corporation

Attorneys for Defendants (See Appendix)

SIPA LIQUIDATION

(Substantively Consolidated)

MEMORANDUM DECISION REGARDING OMNIBUS MOTIONS TO DISMISS

STUART M. BERNSTEIN, United States Bankruptcy Judge:

Defendants in 233 adversary proceedings identified in an appendix to this opinion have moved pursuant to Rules 12(b)(1), (2) and (6) of the Federal Rules of Civil Procedure to dismiss complaints filed by Irving H. Picard (“Trustee”), as trustee for the substantively consolidated liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”) and the estate of Bernard L. Madoff.¹ The complaints seek to recover fictitious profits allegedly withdrawn by the defendants from their BLMIS accounts. In addition, many non-moving defendants have stipulated with the Trustee to be bound by this decision.

The defendants in 128 adversary proceedings represented by the law firm Becker & Poliakoff LLP² filed motions to dismiss (the “B & P Motions ”) supported by Defendants' Omnibus Memorandum of Law in Support of Motions to Dismiss, dated Nov. 1, 2013 (“B & P Memo ”) (ECF Adv. P. No. 10–04292 Doc. # 36),³ and the Trustee and the Securities Investor Protection Corporation (“SIPC”) filed opposition.⁴ Prior to the return date of the B & P Motions, defense counsel representing former BLMIS customers in another 105 adversary proceedings involving common legal issues requested consolidation of the B & P Motions with their own pending motions to dismiss (“Non–B & P Motions, ” and together with the B & P Motions, the “Motions ”).⁵ (See Letter, dated Feb. 6, 2014 (ECF Doc. # 5641).) The Court held a status conference on February 14, 2014 in response to the letter request and outlined a process whereby the Trustee and SIPC would respond to the Non–B & P Motions on an omnibus basis. The Trustee and SIPC filed their opposition,⁶ and following the completion of briefing, the Court heard argument on September 17, 2014.

The Motions raise many of the same issues, and those issues are dealt with on an omnibus basis. Issues specific to a particular defendant, such as insufficient service of process, lack of personal jurisdiction or defenses under state-specific non-claim statutes are not addressed in this decision, and will be heard separately upon a scheduling request by the parties. (See Order Scheduling Hearing on Becker & Poliakoff LLP Motions to Dismiss and Motions to Dismiss Listed on Appendix A to the Trustee's February 20 Letter to the Court, as Amended, dated July 24, 2014 (ECF Doc. # 7513).) For the reasons that follow, the Motions are granted in part and denied in part, and the parties are directed to settle orders or submit consent orders in each adversary proceeding in accordance with this opinion.

BACKGROUND

The facts underlying the Ponzi scheme perpetrated by Bernard Madoff have been recounted in multiple reported opinions. See, e.g., SIPC v. Ida Fishman Revocable Trust (In re BLMIS ), 773 F.3d 411, 415 (2d Cir.2014) (“Ida Fishman ”), pet. for cert. pending, 83 U.S.L.W. 3746 (U.S. Mar. 17, 2015) (Nos.14–1128, 1129); Picard v. JPMorgan Chase & Co. (In re BLMIS ), 721 F.3d 54, 58–59 (2d Cir.2013), cert. denied, ––– U.S. ––––, 134 S.Ct. 2895, 189 L.Ed.2d 832 (2014) ; SIPC v. BLMIS (In re BLMIS ), 424 B.R. 122, 125–32 (Bankr.S.D.N.Y.2010), aff'd, 654 F.3d 229 (2d Cir.2011), cert. denied, ––– U.S. ––––, 133 S.Ct. 24, 183 L.Ed.2d 675 (2012). The complaints allege the background in substantially the same language, and these facts will not be repeated except to the extent necessary in the body of this opinion. For present purposes, it is enough to say that the complaints allege that the defendants who received initial transfers from BLMIS withdrew more than they deposited, and are net winners. In the main, the Trustee seeks to avoid and recover these net winnings, or fictitious profits, from the initial transferees and the defendant subsequent transferees. In many cases, the Trustee also seeks to avoid obligations owed by BLMIS to the defendants.

The Trustee concedes that the defendants lacked knowledge of Madoff's Ponzi scheme. Accordingly, his claims to avoid transfers are limited to intentional fraudulent transfers made within two years of December 11, 2008 (the Filing Date) under 11 U.S.C. §§ 546(e) and 548(a)(1)(A). See Ida Fishman, 773 F.3d at 423. Subject to the grant of the Trustee's petition for a writ of certiorari and reversal of the judgment in Ida Fishman by the Supreme Court, all other claims to avoid transfers asserted by the Trustee are dismissed. The balance of the Discussion deals solely with intentional fraudulent transfers made within two years of the Filing Date (the “Two–Year Period”) and the subsequent transfers of those initial transfers. One portion also addresses the Trustee's claims to avoid fraudulent obligations.

The Discussion is organized in a manner that corresponds to the various arguments raised by many or all of the defendants. The headings are intended to assist in the organization of the opinion and are descriptive of the particular argument.

DISCUSSION

A. Standing, Jurisdiction, Authority and Related Issues

1. The Trustee lacks Article III standing.

The Trustee is seeking to recover property that belonged to BLMIS customers, not BLMIS, at the time of each transfer. Many defendants contend that the Trustee has failed to demonstrate Article III standing because the BLMIS estate never had an interest in the customer property that Madoff transferred, and because in pari delicto bars his claims. The Court disagrees.

A SIPA trustee administers two distinct estates, a general estate consisting of the property of the estate of BLMIS as defined in 11 U.S.C. § 541(a) and an estate consisting of customer property. SIPC v. BLMIS, 499 B.R. 416, 420 (S.D.N.Y.2013) (“Antecedent Debt Decision ”) (“SIPA superimposes on the Bankruptcy Code a separate customer property estate that takes priority over the debtor's general estate.”). “Customer property” includes “cash and securities (except customer name securities delivered to the customer) at any time received, acquired, or held by or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such property transferred by the debtor, including property unlawfully converted, SIPA 78lll(4), and property recovered by the Trustee pursuant to SIPA § 78fff–2(c)(3), quoted below. If the customer property exceeds the customer property claims, the excess becomes part of the general estate. SIPA § 78fff–2(c)(1) (Any customer property remaining after allocation in accordance with this paragraph shall become part of the general estate of the debtor.). Conversely, if the customer property is insufficient to fully satisfy the customers' net equity claims, such customers shall be entitled, to the extent only of their respective unsatisfied net equities, to participate in the general estate as unsecured creditors.” Id.

To the extent consistent with SIPA, the liquidation is conducted in accordance with chapters 1, 3 and 5 and subchapters I and II of chapter 7 of the Bankruptcy Code, SIPA § 78fff(b), and the trustee is vested with the same powers and title with respect to the property of the debtor, including the right to avoid preferences, as any ordinary bankruptcy trustee. SIPA § 78fff–1(b). These powers are sufficient to avoid and recover transfers of the debtor's property, but not customer property. Money held by the broker on behalf of its customers is not property of the broker under state law, and in an ordinary bankruptcy, a trustee cannot avoid and recover a transfer of non-debtor property. Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 213 (2d Cir.2014).

“SIPA circumvents this problem through a statutorily created legal fiction that confers standing on a SIPA trustee by treating customer property as though it were ‘property of the debtor’ in an ordinary liquidation.” Id. ; accordPicard v. Chais (In re BLMIS ), 445 B.R. 206, 238 (Bankr.S.D.N.Y.2011). SIPA § 78fff–2(c)(3) provides:

Whenever customer property is not sufficient to pay in full the claims set forth in subparagraphs (A) through (D) of paragraph (1), the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of Title 11. Such recovered property shall be treated as customer property. For purposes of such recovery, the property so transferred shall be deemed to have been the property of the debtor and, if such transfer was made to a customer or for his benefit, such customer shall be deemed to have been a creditor, the laws of any State to the contrary notwithstanding.

With this fiction, the Trustee may exercise an ordinary trustee's powers under the Bankruptcy Code to avoid and recover preferential and fraudulent transfers of customer property for the benefit of the customer property estate. Hence, the trustee comes within the statute...