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

• Decision Date: 23 June 2014
• Docket Number: Adv. Pro. No. 08–01789 (SMB),Adv. Pro. No. 14–01840 (SMB),Case No. 09–11893 (SMB)
• Citation: 511 B.R. 375
• Court: U.S. Bankruptcy Court — Southern District of New York
• Parties: Securities Investor Protection Corporation, Plaintiff, 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, Capital Growth Company; Decisions, Inc.; Favorite Funds; JA Primary Limited Partnership; JA Special Limited Partnership; JAB Partnership; JEMW Partnership; JF Partnership; JFM Investment Companies; JLN Partnership; JMP Limited Partnership; Jeffry M. Picower Special Company; Jeffry M. Picower, P.C.; the Picower Foundation; the Picower Institute of Medical Research; the Trust f/b/o Gabrielle H. Picower; Barbara Picower, individually and as Executor of the Estate of Jeffry M. Picower, and as Trustee for the Picower Foundation and for the Trust f/b/o Gabriel H. Picower, Intervenors, v. Susanne Stone Marshall; Adele Fox; Marsha Peshkin; Russell Oasis; A & G Goldman Partnership; and Pamela Goldman, Defendants.

511 B.R. 375

Securities Investor Protection Corporation, Plaintiff,

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,

Capital Growth Company; Decisions, Inc.; Favorite Funds; JA Primary Limited Partnership; JA Special Limited Partnership; JAB Partnership; JEMW Partnership; JF Partnership; JFM Investment Companies; JLN Partnership; JMP Limited Partnership; Jeffry M. Picower Special Company; Jeffry M. Picower, P.C.; the Picower Foundation; the Picower Institute of Medical Research; the Trust f/b/o Gabrielle H. Picower; Barbara Picower, individually and as Executor of the Estate of Jeffry M. Picower, and as Trustee for the Picower Foundation and for the Trust f/b/o Gabriel H. Picower, Intervenors,

v.Susanne Stone Marshall; Adele Fox; Marsha Peshkin; Russell Oasis; A & G Goldman Partnership; and Pamela Goldman, Defendants.

Adv. Pro. No. 08–01789 (SMB)

Case No. 09–11893 (SMB)

Adv. Pro. No. 14–01840 (SMB)

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

Signed June 23, 2014

Baker & Hostetler LLP, 45 Rockefeller Plaza, New York, New York 10111, David J. Sheehan, Esq., Deborah H. Renner, Esq., Tracy L. Cole, Esq., Keith R. Murphy, Esq., Amy Vanderwal, Esq., Ferve Ozturk, Esq., Matt Moody, Esq., Of Counsel, Attorneys for Plaintiff.

Schulte Roth Zabel LLP, 919 Third Avenue, New York, New York 10022, William D. Zabel, Esq., Marcy Ressler Harris, Esq., Michael Kwon, Esq., Jennifer M. Opheim, Esq., Of Counsel, Attorneys for Intervenors.

Herrick, Feinstein LLP, Two Park Avenue, New York, New York 10016, Joshua J. Angel, Esq., Frederick E. Schmidt, Jr., Esq., Of Counsel, Beasley Hauser Kramer & Galardi, P.A., 505 South Flagler Drive, Suite 1500, West Palm Beach, Florida 33401, Blackner, Stone & Associates, 123 Australian Avenue, Palm Beach, Florida 33480, Richard Lee Stone, Esq., Of Counsel, Attorneys for Defendants A & G Goldman Partnership and Pamela Goldman.

Becker & Poliakoff LLP, 45 Broadway, New York, New York 10006, Helen Davis Chaitman, Esq., Peter W. Smith, Esq., Attorneys for Defendants Susanne Stone Marshall, Adele Fox, Marsha Peshkin, and Russell Oasis.

SIPA LIQUIDATION (Substantively Consolidated)

MEMORANDUM DECISION GRANTING PLAINTIFF'S MOTION FOR AN INJUNCTION AND DENYING MOTION FOR A STAY AND CROSS–MOTION TO DISMISS

STUART M. BERNSTEIN, United States Bankruptcy Judge:

This long-running saga has thus far involved this Court, four District Court judges in two District Courts and two Circuit Courts of Appeal. The matter presently before the Court concerns the motion (the “Motion”) by Irving H. Picard, Esq. (“Trustee”), trustee for the Securities Investor Protection Act (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”), to enjoin the defendants from prosecuting two class action lawsuits pending in the United States District Court for the Southern District of Florida. ( See Memorandum of Law in Support of Trustee's Application for Enforcement of Permanent Injunction and Automatic Stay, dated Mar. 11, 2014 (ECF Doc. # 3).) ¹ The Trustee contends that the prosecution of these lawsuits violates a permanent injunction issued by this Court on January 13, 2011 as well as the automatic stay.

The defendants, the plaintiffs in the Florida lawsuits, oppose the Motion, and the Fox Plaintiffs, defined below, have moved to stay this adversary proceeding until the Eleventh Circuit Court of Appeals decides a related appeal. The Fox Plaintiffs have also cross-moved to dismiss the complaint arguing that it violates the Second Circuit Mandate, also defined below. For the reasons that follow, the Motion is granted and the motion for a stay and the cross-motion are denied.

BACKGROUND

A. The Trustee's Settlement with the Picower Defendants²

The Court assumes familiarity with the notorious BLMIS Ponzi scheme RUN BY Bernard L. Madoff which has been detailed in numerous opinions of this Court, the District Court and the Second Circuit Court of Appeals. The instant proceedings concern a settlement reached between the Trustee and the Picower Defendants, investors in BLMIS, and we begin there. On May 12, 2009, the Trustee filed a complaint against the Picower Defendants alleging that they had received more than $6.7 billion in fictitious profits from BLMIS.³ The Trustee later identified additionaltransfers to the Picower Defendants, bringing the total amount of their net withdrawals to $7.2 billion. The Trustee entered into settlement discussions with the Picower Defendants who were also discussing a settlement with the Government regarding a potential civil forfeiture under 18 U.S.C. § 981(a)(1)(C). The parties ultimately reached a settlement under which the estate of Jeffry M. Picower agreed to pay $5 billion to the BLMIS estate and forfeit $2.2 billion to the Government. These combined amounts represented 100% of the net withdrawals received by the Picower Defendants over the life of their investments with BLMIS.

On December 17, 2010, the Trustee moved for an order approving the settlement agreement. The settlement included the Permanent Injunction, detailed below, which was designed to protect the Picower Defendants against certain future litigation. Susanne Stone Marshall and Adele Fox objected to the settlement. The Bankruptcy Court overruled their objections, approved the settlement and issued the following Permanent Injunction:

[A]ny BLMIS customer or creditor of the BLMIS estate ... or anyone whose claim in any way arises from or is related to BLMIS or the Madoff Ponzi scheme, is hereby permanently enjoined from asserting any claim against the Picower BLMIS Accounts or the Picower Releasees that is duplicative or derivative of the claims brought by the Trustee, or which could have been brought by the Trustee against the Picower BLMIS Accounts or the Picower Releasees....

( Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and Among the Trustee and the Picower BLMIS Account Holders and Issuing a Permanent Injunction, dated Jan. 13, 2011 (“ Permanent Injunction ”) at 7.) ⁴ Under paragraph 7 of the settlement agreement, the Trustee agreed to “use his reasonable best efforts to oppose challenges, if any, to the scope, applicability or enforceability of the Permanent Injunction.” ( Id., Ex. A thereto ¶ 7.) Finally, the Court retained jurisdiction “over any and all disputes arising under or otherwise relating to this Order.” ( Permanent Injunction at 8.)

B. The Fox and Marshall Action1. The Initial Florida Actions

On February 16 and 17, 2010, while the Trustee and the Government were discussing settlement with the Picower Defendants, Fox and Marshall filed putative class actions against the Picower Defendants in Florida District Court (the “Initial Florida Actions”). ( See Murphy Dec., Ex. E (“ Initial Fox Complaint”); Ex. F (“ Initial Marshall Complaint”).) ⁵ Fox sought to certify a class of net winners, and Marshall sought to certify a class of “all SIPA Payees, but only with respect to claims, or portions thereof, not assigned to the Trustee.” ( Initial Marshall Complaint at ¶ 74.) Neither putative class was ever certified.

Both complaints alleged that the Picower Defendants had withdrawn billions of dollars from Madoff's Ponzi scheme under circumstances that suggested that the Picower Defendants were aware of and complicit in the Ponzi scheme. They alleged that BLMIS and the Picower Defendants engaged in a conspiracy to “steal the funds” of other customers—specifically, that “Picower and Defendants converted the cash in other innocent BLMIS customers' accounts for their own personal benefit with the acquiescence and assistance of Madoff and BLMIS.” ( Initial Fox Complaint at ¶ 9; Initial Marshall Complaint at ¶ 9.) The complaints asserted claims for conspiracy, unjust enrichment, conversion, and conspiracy to violate the Florida RICO statute. They sought, among other things, disgorgement of the profits that the Picower Defendants received from BLMIS and the imposition of a constructive trust over the Picower Defendants' assets.

On March 31, 2010 the Trustee filed a motion in this Court seeking to enforce the automatic stay and to preliminarily enjoin Fox and Marshall from litigating against the Picower Defendants, pending the completion of the Trustee's settlement with the Picower Defendants. ( See Murphy Dec., Ex. I.) On May 3, 2010, the Court held that the Initial Florida Actions violated the automatic stay and at least one stay order of the District Court. See Picard v. Fox (In re Bernard L. Madoff Inv. Sec. LLC), 429 B.R. 423, 430–34 (Bankr.S.D.N.Y.2010), aff'd sub nom. Fox v. Picard (In re Bernard L. Madoff) (“ Fox ”), 848 F.Supp.2d 469 (S.D.N.Y.2012), aff'd sub nom. Marshall v. Picard (In re Bernard L. Madoff Inv. Sec. LLC) (“ Marshall”), 740 F.3d 81 (2d Cir.2014). The Court declared the Initial Florida Actions void ab initio and issued a preliminary injunction under section 105(a) of the Bankruptcy Code. Id. at 433–34. The Court further found that the Initial Florida Actions posed an imminent threat to the BLMIS estate and held that an extension of the stay was appropriate and necessary to “preserve the integrity of the SIPA proceedings and the Trustee's settlement negotiations....” Id. at 436. ⁶

Fox and Marshall appealed the approval of the Picower settlement and preliminary injunction, and the District Court affirmed. District Judge Koeltl explained that the question hinged on whether the Initial Florida Complaints alleged direct claims or claims that were derivative of the claims asserted against the Picower Defendants by the Trustee. Fox, 848 F.Supp.2d at 478. He observed that the Initial Florida Complaints explicitly relied on the Trustee's complaint against Picower Defendants, were based on the same conduct, and did not contain any...