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

• Decision Date: 20 March 2013
• Docket Number: District Court No. 12–CIV–9408 (VM).,Adversary Nos. 08–1789 (BRL), 12–02047 (BRL).
• Citation: 490 B.R. 59
• 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, v. Fairfield Greenwich Limited, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

490 B.R. 59

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,

v.Fairfield Greenwich Limited, et al., Defendants.

Adversary Nos. 08–1789 (BRL), 12–02047 (BRL). District Court No. 12–CIV–9408 (VM).

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

March 20, 2013.

Jeffrey Edward Baldwin, Mark Geoffrey Cunha, Peter Eric Kazanoff, Jeffrey Lawrence Roether, Simpson Thacher & Bartlett LLP, New York, NY, for Defendants.

David A. Barrett, Howard L. Vickery, II, Boies, Schiller & Flexner, LLP, New York, NY, for Defendants.

Lee A Casey, Andrew M. Grossman, David B. Rivkin, Baker & Hostetler LLP, Washington, DC, Tracy Lynn Cole, Nicholas J. Cremona, Marc E. Hirschfield, Thomas Leslie Long, Deborah Hilarie Renner, David J. Sheehan, Baker & Hostetler LLP, New York, NY, Mark Allen Kornfeld, Hogan & Hartson L.L.P., New York, NY, Keith R. Murphy, United States Attorney's Office, for Plaintiff.

Daniel J. Fetterman, Marc E. Kasowitz, Kasowitz, Benson, Torres & Friedman, LLP, New York, NY, for Jeffrey H. Tucker, Defendant.

DECISION AND ORDER

VICTOR MARRERO, District Judge.

On November 29, 2012, Irving Picard (the “Trustee”), 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”), instituted adversary proceeding No. 12–02047 requesting an Application for Enforcement of Automatic Stay and Related Stay Orders and Issuance of a Preliminary Injunction (the “Stay Application”). (Dkt. No. 40, Ex. C.) The Stay Application seeks to (1) enforce the automatic stay of the Bankruptcy Code and the related stay orders issued by the Court on December 15, 2008, December 18, 2008, and February 9, 2009 (the “Stay Orders”); ¹ (2) declare the matter of Anwar v. Fairfield Greenwich Ltd., No. 09 Civ. 118 (S.D.N.Y.) (the “ Anwar Action”) void ab initio as against the various Fairfield Greenwich entities and individuals (collectively, the “Fairfield Defendants”); ² and (3) to enjoin the preliminary class action settlement (the “Proposed Settlement”) reached between Plaintiffs in the Anwar Action (the “Anwar Plaintiffs”) ³ and the Fairfield Defendants (collectively the “Injunction Defendants”). The Anwar Plaintiffs and the Fairfield Defendants both filed oppositions to the Trustee's Stay Application. (Dkt. Nos. 32 and 33.)

On February 6, 2013, the Court granted the Anwar Plaintiffs' motion to withdraw the bankruptcy reference relating to the Trustee's Stay Application pursuant to 28 U.S.C. § 157(d). Following the withdrawal of the reference, the Trustee and the Securities Investor Corporation (“SIPC”) filed reply submissions. (Dkt. Nos. 37 and 38.) The Anwar Plaintiffs filed a supplemental opposition memorandum in response. (Dkt. No. 49.)

The Trustee asserts that a preliminary injunction should be issued enjoining the Proposed Settlement because (1) the ProposedSettlement violates 11 U.S.C. § 362 and the Stay Orders; (2) to allow for the fair and equitable administration of the BLMIS estate pursuant to 11 U.S.C. § 105(a); and (3) because SIPA preempts the Anwar Plaintiffs' federal and state law claims.

For the reasons stated below, the Court DENIES the Trustee's Stay Application in its entirety.

I. BACKGROUND

A. THE ANWAR ACTION

The first constituent case in Anwar was filed in December 2008. The Anwar Plaintiffs brought the Anwar Action as a class action on behalf of individuals and entities who invested large sums of money in four investment funds (the “Funds”) created and operated by the Fairfield Defendants. The overwhelming majority of the Anwar Plaintiffs' money was in turn invested by the Fairfield Defendants in the Ponzi scheme operated by Bernard Madoff (“Madoff”) under the auspices of BLMIS, the same scheme for which Madoff was sentenced to 150 years in prison following his guilty plea. SeeUnited States v. Madoff, No. 09 Cr. 0213 (S.D.N.Y. June 29, 2009).

The Anwar Plaintiffs are suing the Fairfield Defendants in addition to other professional service providers who audited, administered, or served as custodians of the Funds. In the Second Consolidated Amended Complaint (the “SCAC”), filed September 29, 2009, the Anwar Plaintiffs allege violations of federal securities law and common law tort, breach of contract, and quasi-contract causes of action against the Fairfield Defendants and other administrators, custodians and auditors of the Funds. The Anwar Plaintiffs' allegations are detailed more fully in the Court's prior opinions in this action. Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 354 (S.D.N.Y.2010) (“Anwar I”) and Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 372 (S.D.N.Y.2010) (“Anwar II”).

Following motions to dismiss the SCAC, the Court held that the Anwar Plaintiffs had standing to pursue individual direct claims for securities fraud, fraud, gross negligence, negligent misrepresentation, breach of fiduciary duty, mutual mistake, third party breach of contract, and unjust enrichment. SeeAnwar II, 728 F.Supp.2d at 401–02. On November 30, 2012, the Court granted preliminary approval to the Proposed Settlement between the Anwar Plaintiffs and the Fairfield Defendants. A final fairness hearing on the Proposed Settlement is scheduled for March 22, 2013.

B. THE MADOFF PONZI SCHEME

The facts and procedural history relevant to the Madoff Ponzi scheme have been set forth numerous times and need not be repeated here. See, e.g.,Securities Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122, 125–33 (Bankr.S.D.N.Y.2010). On December 15, 2008, the Court issued the first of the Stay Orders, granting SIPC's application to place BLMIS customers under the protections of SIPA. ( See Decl. of Jessie Morgan Gabriel in Support of Tr.'s App., dated Nov. 29, 2012, (“Gabriel Decl.”) Exs. 8–10.) The Stay Orders essentially reinforce the automatic stay under SIPA and provide, in relevant part, that “all persons and entities are stayed, enjoined and restrained from directly or indirectly ... interfering with any assets or property owned, controlled or in the possession of [BLMIS].” (Gabriel Decl. Ex. 8 ¶ IV.)

C. THE TRUSTEE'S FRAUDULENT CONVEYANCE ACTION

On July 20, 2010, the Trustee filed the Amended Complaint in Picard v. Fairfield Sentry Limited, No. 09–01239 (Bankr. S.D.N.Y. filed May 18, 2009) (the “Trustee's Action”) seeking, among other things, the return of certain fraudulent conveyances allegedly transferred from BLMIS to the Fairfield Defendants.

II. LEGAL STANDARD

A. PRELIMINARY INJUNCTION

“A party seeking a preliminary injunction ordinarily must show: (1) a likelihood of irreparable harm in the absence of the injunction; and (2) either a likelihood of success on the merits or sufficiently serious questions going to the merits to make them a fair ground for litigation, with a balance of hardships tipping decidedly in the movant's favor.” Doninger v. Niehoff, 527 F.3d 41, 47 (2d Cir.2008).

B. THE AUTOMATIC STAY

The filing of a petition pursuant to § 5(a)(3) of SIPA operates as an automatic stay of certain actions that arose pre-petition including, as relevant here, actions (1) “against the debtor” or to “recover a claim against the debtor,” (2) to “collect, assess, or recover a claim against the debtor,” and (3) to “obtain possession of property of the estate.” 11 U.S.C. § 362(a). It is well established that the automatic stay generally “ ‘protects only the debtor, property of the debtor or property of the estate. It does not protect non-debtor parties or their property.’ ” Gross Found., Inc. v. Goldner, 12 Civ. 1496, 2012 WL 6021441, at *7 (E.D.N.Y. Dec. 4, 2012) ( quotingIn re Advanced Ribbons & Office Prods., Inc., 125 B.R. 259, 263 (9th Cir. BAP 1991)).

C. 11 U.S.C. § 105(a)

Section 105(a) of the Bankruptcy Code further authorizes a court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].” 11 U.S.C. § 105(a). “[Section] 105(a) is properly used to enjoin creditors' lawsuits against third parties where ‘the injunction plays an important part in the debtor's reorganization plan.’ SEC v. Drexel Burnham Lambert Grp., Inc. (In re Drexel Burnham Lambert Grp., Inc.), 960 F.2d 285, 293 (2d Cir.1992), or where the action to be enjoined ‘will have an immediate adverse economic consequence for the debtor's estate,’ Queenie, Ltd. v. Nygard Int'l, 321 F.3d 282, 287 (2d Cir.2003).” Stahl v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), No. 11–5421, ––– Fed.Appx. ––––, ––––, 2013 WL 616269, at *2 (2d Cir. Feb. 20, 2013). The most common examples of such situations include claims “to establish an obligation of which the debtor is a guarantor, a claim against the debtor's insurer, and actions where there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant.” Queenie, 321 F.3d at 287 (internal citations and quotation marks omitted). However, § 105 “does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law.” Solow v. Kalikow (In re Kalikow), 602 F.3d 82, 95–96 (2d Cir.2010) (internal quotation marks omitted).

III. ANALYSIS

A. THE PROPOSED SETTLEMENT DOES NOT VIOLATE THE AUTOMATIC STAY OR THE STAY ORDERS

1. The Pending Claims in the Anwar Action Are Direct Claims Independent of the Trustee's Claims

To begin with, the Trustee repeatedly and erroneously claims that the Anwar Plaintiffs' causes of action are derivative of those of the Trustee. However, the Court has already held that the claims currently pending in the Anwar Action are separate and distinct from those possessed by creditors of the BLMIS estate and therefore are not property of the BLMIS estate. SeeAnwar II, 728 F.Supp.2d...