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

• Decision Date: 18 January 2019
• Docket Number: Adv. Pro. No. 08-01789 (SMB)(Substantively Consolidated), Adv. Pro. No. 10-04390 (SMB)
• Citation: 597 B.R. 466
• Parties: In re: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: Bernard L. Madoff, Debtor. Irving Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. BAM L.P., Michael Mann and Meryl Mann, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

597 B.R. 466

In re: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant,

v.BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.

In re: Bernard L. Madoff, Debtor.

Irving Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,

v.BAM L.P., Michael Mann and Meryl Mann, Defendants.

Adv. Pro. No. 08-01789 (SMB)(Substantively Consolidated)

Adv. Pro. No. 10-04390 (SMB)

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

Signed January 18, 2019

BAKER & HOSTETLER LLP, 45 Rockefeller Plaza, New York, New York 10111, David J. Sheehan, Esq., Dean D. Hunt, Esq., Lan Hoang, Esq., Nicholas J. Cremona, Esq., Seanna R. Brown, Esq., Of Counsel, Attorneys for Plaintiff

SECURITIES INVESTOR PROTECTION CORPORATION, 1667 K St., NW, Suite 1000, Washington, D.C. 20006, Josephine Wang, Esq., General Counsel, Kevin H. Bell, Esq., Senior Associate General Counsel, For Dispute Resolution, Nathanael S. Kelley, Esq., Associate General Counsel, Of Counsel, Attorneys for Securities Investor Protection Corporation

DENTONS US LLP, 1221 Avenue of the Americas, New York, New York 10016, Carole Neville, Esq., Of Counsel, Attorneys for Defendants

SIPA Liquidation

MEMORANDUM DECISION AND ORDER UPHOLDING COURT'S EQUITABLE JURISDICTION

STUART M. BERNSTEIN, United States Bankruptcy Judge:

The Defendants filed proofs of claim and the Trustee responded with a fraudulent transfer action. The Defendants subsequently withdrew their claims with prejudice, moved in the District Court to withdraw the reference and moved in this Court to stay a previously scheduled trial of this adversary proceeding. The latter motion raises the question of whether a bankruptcy court loses its equitable jurisdiction over a fraudulent transfer action because the defendant-creditor withdraws his proof of claim after the adversary proceeding was filed but before the bankruptcy court has tried the matter. The Court concludes that it acquired equitable jurisdiction over the Trustee's fraudulent transfer action when it was commenced under the time-of-filing rule, and the Defendants' withdrawal of their claims did not destroy it. Accordingly, the Defendants' motion to stay the trial on that basis is denied.¹

BACKGROUND²

This adversary proceeding arises out of the Ponzi scheme perpetrated by Bernard Madoff through Bernard L. Madoff Investment Securities LLC ("BLMIS"). The background to Madoff's scheme has been recounted in numerous reported opinions, see, e.g. , Picard v. Ida Fishman Revocable Trust (In re BLMIS ), 773 F.3d 411, 415 (2d Cir. 2014), cert. denied , ––– U.S. ––––, 135 S.Ct. 2859, 192 L.Ed.2d 910 (2015) ; Picard v. JPMorgan Chase & Co. (In re BLMIS ), 721 F.3d 54, 58-59 (2d Cir. 2013), cert. denied , 573 U.S. 945, 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) (" Net Equity Decision "), cert. denied , 567 U.S. 934, 133 S.Ct. 24, 25, 183 L.Ed.2d 675 (2012), and the Court limits the discussion to the facts necessary to explain this decision.

On December 15, 2008, the Securities Investor Protection Corporation ("SIPC") commenced a liquidation against BLMIS under the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. ("SIPA").³ The District Court appointed Irving H. Picard, Esq. as trustee ("Trustee"), see SIPA § 78eee(b)(3), and removed the liquidation to this Court, SIPA § 78eee(b)(4), where it is to be conducted, to the extent consistent with SIPA, in accordance with chapters 1, 3 and 5 and subchapters I and II of chapter 7 of title 11. See SIPA § 78fff(b).

A. Claims Allowance Process

SIPA § 78fff-2 sets out the general parameters of the claims procedure in a SIPA liquidation. Following his or her appointment, the SIPA trustee must publish notice of the proceedings and mail notice to each customer. SIPA imposes two time limits for filing a statement of claim keyed to the notice of publication – an initial time limit of sixty days or less and an outer time limit of six-months. A customer who files the claim during the initial period has greater rights regarding the satisfaction of his net equity claim than the customer who files after the initial period but before the six-month deadline, see Camp v. Morey (In re Gov't Sec. Corp. ), 107 B.R. 1012, 1018-1019 (S.D. Fla. 1989), but the distinction is irrelevant in this case. After receipt of the written statement of claim, the SIPA trustee is required to promptly discharge the obligations or net equity claims owed to the customer "insofar as such obligations are ascertainable from the books and records of the debtor or are otherwise established to the satisfaction of the trustee." SIPA § 78fff-2(b). SIPA does not set out a claims objection or claims resolution procedure.

Accordingly, the Court established a thorough procedure for resolving claims, see Peskin v. Picard , 440 B.R. 579, 585 (S.D.N.Y. 2010), in the Order on Application for an Entry of an Order Approving Form and Manner of Publication and Mailing of Notices, Specifying Procedures for Filing, Determination, and Adjudication of Claims; and Providing Other Relief , dated Dec. 23, 2008 ("Claims Procedure Order ") (ECF Main Case Doc. # 12). The Claims Procedure Order tracked the time limits under SIPA. (See Claims Procedure Order at 7.) In the event the Trustee determined that the customer's statement of claim was not supported by BLMIS' books and records, the following procedures governed the resolution of the dispute: (i) the Trustee notified the customer in writing of his determination to disallow the claim, in whole or in part, and his reasons, (id. at 6); (ii) if the customer disagreed with the Trustee's determination, he had thirty days to file a written statement of his opposition along with supporting documentation, failing which "the Trustee's determination shall be deemed approved by the Court and binding on the claimant," (id. at 7); and (iii) upon receipt of the customer's opposition, the Trustee would obtain a hearing date from the Court and notify the customer. (Id. )

B. The Defendants' Claims and the Trustee's Determinations

Per the Claims Procedure Order , Michael Mann and Meryl Mann served the Trustee with a statement of claim, dated June 16, 2009, for BLMIS Account No. 1CM363 (the "Mann Claim"), in the amount $ 7,192,467.45.⁴ The Mann Claim was based on the handwritten, corrected balance shown on the Manns' last customer statement, dated November 30, 2008. BAM L.P. ("BAM") served the Trustee with the BAM Claim, dated June 16, 2009, regarding Account No. 1CM579, in the amount of $ 714,333.85. The BAM Claim was also based on the handwritten, corrected balance shown on BAM's last customer statement, dated November 30, 2008.

The Trustee denied the Defendants' Claims. (See Determinations.) He explained that no securities were ever purchased for their BLMIS accounts, and the Defendants withdrew more than they deposited into their accounts over the lives of the accounts.⁵ The Manns withdrew $ 5.8 million more than they deposited, and BAM withdrew $ 1,135,993.39 more than it deposited. Each Determination included a chart showing all deposits into and withdrawals from the account.

The Defendants filed the same Objections to the Determinations.⁶ For the most part, the Objections raised purely legal issues. They primarily argued that the Last Statement Method, under which net equity was determined by the balance shown in the November 30, 2008 monthly customer statement, rather than the Trustee's Net Investment Method, which offset withdrawals against deposits, should control. They further argued that the Trustee's net equity calculation was barred by the statute of limitations on avoidance actions and should include interest or a similar adjustment to reflect the passage of time. In paragraph 10 of the Objections, the Defendants also asserted that the Determinations violated the Claims Procedure Order because they failed to state the reason for the disallowance of the claims and the relevant facts and legal theories on which the Determination was based (citing relevant bankruptcy law), (Mann Objection ¶ 10(a), (c) ), failed to rebut the prima facie validity of the claims (citing Bankruptcy Code § 502(a) and FED. R. BANKR. P. 3001(f) ) (Mann Objection ¶ 10(b) ), and as a factual matter, "includes an exhibit which purportedly calculates the money deposited less subsequent withdrawals, but is completely unsubstantiated and incorrect." (Mann Objection ¶ 10(d) ) (collectively, the "Paragraph 10 Objections"). Finally, the Defendants reserved "the right to revise, supplement, or amend" their Objections. (Mann Objection ¶ 24.)

C. This Adversary Proceeding

The Trustee filed his original complaint commencing this adversary proceeding on November 30, 2010 (the "Complaint ") (ECF Doc. # 1) and filed an amended complaint (the "Amended Complaint ") in the District Court while a motion to withdraw the reference was pending. (See Amended Complaint , dated Jan. 25, 2012 (ECF Dist. Ct. No. 11 Civ. 07667 Doc. # 9).) As noted in the Determinations, the Defendants were "net winners" because they withdrew more than they deposited. The Trustee sought, inter alia , to avoid and recover the excess transfers to the Defendants, i.e. , the negative net equity, made during the six years and two years (the "Two-Year Transfers") prior to the Filing Date under bankruptcy and state fraudulent transfer law.⁷

Both the Complaint and the Amended Complaint included, as Exhibit B, the Trustee's calculation of all deposits into and withdrawals from the Defendants' BLMIS accounts. The calculations in Exhibit B were identical to the calculations evidencing the Defendants' negative net equity included in the Determinations. Exhibit B showed that the Manns and BAM had received $ 2.25 million and $ 563,000, respectively, within two years of the Filing Date. Neither pleading included a count to disallow the Defendants' Claims under 11 U.S.C. § 502(d) or for any...