Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff)

• Decision Date: 25 June 2019
• Docket Number: Adv. Pro. No. 10-05286 (SMB),Adv. Pro. No. 08-01789 (SMB) (Substantively Consolidated)
• Citation: 603 B.R. 682
• 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. Legacy Capital Ltd., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

603 B.R. 682

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.Legacy Capital Ltd., Defendant.

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

Adv. Pro. No. 10-05286 (SMB)

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

Signed June 25, 2019

BAKER & HOSTETLER LLP, 45 Rockefeller Plaza, New York, New York 10111, David J. Sheehan, Esq., Oren J. Warshavsky, Esq., Jason S. Oliver, 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

STEVENS & LEE, P.C., 485 Madison Avenue, 20th Floor, New York, New York 10022, Nicholas F. Kajon, Esq., Attorneys for Defendant

SIPA Liquidation

MEMORANDUM DECISION AND ORDER GRANTING RELIEF UNDER FEDERAL CIVIL RULE 56(g)

STUART M. BERNSTEIN United States Bankruptcy Court:

Plaintiff Irving H. Picard, as trustee (the "Trustee") for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq. ("SIPA"), commenced this adversary proceeding, inter alia , to avoid and recover intentional fraudulent transfers from the BLMIS account held by Legacy Capital Ltd. ("Legacy") pursuant to 11 U.S.C. §§ 548(a)(1)(A) and 550(a)(1). The Trustee now moves for summary judgment. For the reasons that follow, the Trustee's motion is denied but certain facts are deemed either immaterial or undisputed for the purposes of this adversary proceeding.

BACKGROUND

A. Madoff's Arrest and the BLMIS SIPA Liquidation

On December 11, 2008 (the "Filing Date"), Bernard L. Madoff was arrested for securities fraud, see United States v. Madoff , 586 F. Supp. 2d 240, 244 (S.D.N.Y. 2009), and the Securities and Exchange Commission ("SEC") commenced an action against Madoff and BLMIS alleging various violations of the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934. (See Complaint , dated Dec. 11, 2008 (ECF Dist. Ct. No. 1:08-cv-10791-LLS Doc. # 1).) Four days later, the Securities Investor Protection Corporation ("SIPC") filed an application for a protective decree pursuant to SIPA § 78eee(a)(3) maintaining that BLMIS was unable to meet its obligations to its customers and the customers needed the protections afforded by SIPA. (See Application of the Securities Investor Protection Corporation , dated Dec. 15, 2008 (ECF Dist. Ct. No. 1:08-cv-10791-LLS Doc. # 5).) The District Court granted SIPC's application, appointed the Trustee and his counsel pursuant to SIPA § 78eee(b)(3), and removed the SIPA proceeding to this Court pursuant to SIPA § 78eee(b)(4). (See Order , dated Dec. 15, 2008 (ECF Main Case¹ Doc. # 1).)

On March 12, 2009, Madoff pleaded guilty to an eleven-count criminal information including charges of securities fraud, investment adviser fraud, mail fraud, wire fraud, money laundering, making false statements, perjury, making false filings with the SEC, and theft from an employee benefit plan. (See Transcript of March 12, 2009 Hr'g in United States v. Madoff , No. 09 CR 213 (DC) ("Madoff Allocution")² at 7:23-8:12.) On June 29, 2009, Madoff was sentenced to a prison term of 150 years. (See Judgment , dated June 29, 2009 (ECF Dist. Ct. No. 1:09-cr-00213-DC-1 Doc. # 100).)

B. This Adversary Proceeding

The Trustee commenced this adversary proceeding on December 6, 2010 and filed an Amended Complaint on July 2, 2015 ("Amended Complaint ") (ECF Doc. # 112) asserting actual and constructive fraudulent transfer claims under the Bankruptcy Code and New York law to avoid and recover over $213 million from Legacy as initial transferee and $6.6 million from Khronos LLC as subsequent transferee. (See Amended Complaint , ¶ 2.) Legacy and Khronos each moved to dismiss the Amended Complaint for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. (See ECF Doc. ## 115, 120.) As set forth in Picard v. Legacy Capital Ltd. (In re BLMIS ), 548 B.R. 13 (Bankr. S.D.N.Y. 2016) (" Dismissal Decision "), the Court dismissed the claims against Khronos and dismissed the claims against Legacy except for the actual fraudulent transfer claim under 11 U.S.C. § 548(a)(1)(A) to avoid and recover transfers from Legacy's BLMIS account within two years of the Filing Date. (See Order Granting Legacy Capital Ltd.'s and Khronos LLC's Motions to Dismiss the Amended Complaint under Bankruptcy Rule 7012(b) and Federal Rule of Civil Procedure 12(b)(6) , dated Apr. 12, 2016 (ECF Doc. # 137).) Legacy answered the Amended Complaint on May 16, 2016 ("Answer ") (ECF Doc. # 139).

The Trustee now moves for summary judgment on the remaining claim, (see Trustee's Memorandum of Law in Support of Motion for Summary Judgment , dated Dec. 21, 2018 ("Trustee Brief ") (ECF Doc. # 191)), and Legacy opposes the motion. (See Memorandum of Law in Opposition to Trustee's Motion for Summary Judgment , dated Mar. 1, 2019 ("Legacy Brief ") (ECF Doc. # 199).)

DISCUSSION

Rule 56 of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure, governs motions for summary judgment. The moving party bears the initial burden of showing that no genuine factual issue exists and that the undisputed facts establish its right to judgment as a matter of law. Rodriguez v. City of N.Y. , 72 F.3d 1051, 1060-61 (2d Cir. 1995) ; accord Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In making that determination, a court must view the evidence "in the light most favorable to the opposing party." Tolan v. Cotton , 572 U.S. 650, 657, 134 S.Ct. 1861, 188 L.Ed.2d 895 (2014) (quoting Adickes v. S.H. Kress & Co. , 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970) ). If the movant carries his initial burden, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Id. at 587, 106 S.Ct. 1348 (citation and internal quotation marks omitted); accord Scott v. Harris , 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007). The court's function at the summary judgment stage is not to resolve disputed issues of fact, but only to determine whether there is a genuine issue to be tried. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Where the Court does not grant all the relief sought by the movant, it may nonetheless enter an order stating any material fact, including any item of damages or other relief, not in genuine dispute and treat that fact as established in the case. FED. R. CIV. P. 56(g) ; see 11 JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE § 56.123 (3d ed. 2018).

A. The Trustee's Prima Facie Case

Under section 548(a)(1)(A) of the Bankruptcy Code, a bankruptcy trustee "may avoid any transfer ... of an interest of the debtor in property ... that was made ... on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily ... made such transfer ... with actual intent to hinder, delay, or defraud any [creditor]."³ Thus, the elements of an intentional fraudulent transfer claim under section 548(a)(1)(A) are: (i) a transfer of an interest of the debtor in property;⁴ (ii) made within two years of the petition date;⁵ (iii) with "actual intent to hinder, delay, or defraud" a creditor. Adelphia Recovery Tr. v. Bank of Am., N.A. , No. 05 Civ. 9050 (LMM), 2011 WL 1419617, at *2 (S.D.N.Y. Apr. 7, 2011), aff'd , 748 F.3d 110 (2d Cir. 2014) ; McHale v. Boulder Capital LLC (In re 1031 Tax Grp., LLC ), 439 B.R. 47, 68 (Bankr. S.D.N.Y. 2010), supplemented by 439 B.R. 78 (Bankr. S.D.N.Y. 2010).

1. The Transfers

Legacy has admitted that BLMIS transferred $174 million from its BLMIS account within two years of the Filing Date (the "Two-Year Transfers"). (Legacy Capital Ltd.'s Response to Trustee's Statement of Material Facts Pursuant to Local Bankruptcy Rule 7056-1 , dated Mar. 1, 2019 ("Legacy 7056-1 Statement "), ¶ 35 (ECF Doc. # 199-47); see Amended Complaint , ¶ 37 and Answer , ¶ 37; see also Stipulation and Order as to Undisputed Transfers , dated Jan. 12, 2017 ("Transfers Stipulation "), ¶ 4 ("Exhibit A to this stipulation accurately sets forth the cash deposits and cash withdrawals from the ... BLMIS accounts.") (ECF Doc. # 155).)⁶ Legacy argues that the aggregate of $87 million was actually transferred from its BLMIS account to BNP Paribas – Dublin Branch, a registered branch of BNP Paribas S.A. (together, "BNP Paribas") as repayment for a $100 million line of credit. (Amended Complaint , ¶¶ 139, 140; Answer , ¶¶ 139, 140, 142.) It suggests that the Court should ignore these transfers in computing its liability. (Legacy Brief at 16-17.)

The argument lacks merit. The payment to BNP Paribas does not affect the amount of the transfers. At most, it makes BNP Paribas rather than Legacy the initial transferee of transfers that are otherwise fraudulent. Liability is not, however, limited to recovery from the initial transferee. A trustee may also recover an avoided fraudulent transfer from the entity for whose benefit the transfer was made, 11 U.S.C. § 550(a)(1), and any subsequent transferee. 11 U.S.C. § 550(a)(2). Since the transfers made to BNP Paribas satisfied Legacy's...