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

• Decision Date: 11 December 2020
• Docket Number: Adv. Pro. No. 10-04390 (SMB),No. 08-01789 (SMB) (Substantively Consolidated),08-01789 (SMB) (Substantively Consolidated)
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: Bernard L. Madoff, Debtor. Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff, Plaintiff, v. Bam L.P., Michael Mann, and Meryl Mann, Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

624 B.R. 55

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant,

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

In re: Bernard L. Madoff, Debtor.

Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff, Plaintiff,

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

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

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

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

Signed December 11, 2020

BAKER HOSTETLER LLP, Attorneys for the Plaintiff, 45 Rockefeller Plaza, New York, N.Y. 10111, BY: NICHOLAS J. CREMONA (TELEPHONICALLY), AMY E. VANDERWAL (TELEPHONICALLY), LAN HOANG (TELEPHONICALLY).

DENTONS US LLP, Attorneys for the Defendants, 1221 Avenue of the Americas, New York, N.Y. 10020, BY: CAROLE NEVILLE (TELEPHONICALLY), ARTHUR H. RUEGGER (TELEPHONICALLY).

SIPA LIQUIDATION

MEMORANDUM DECISION DETERMINING FUNDS HELD IN THE BANK ACCOUNTS ARE CUSTOMER PROPERTY AND AWARDING PREJUDGMENT INTEREST

CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE

Irving H. Picard ("Trustee"), Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS¹ ") and Bernard L. Madoff ("Madoff"), brings this adversary proceeding to avoid and recover fictitious profits received by the Defendants on account of their investment in the infamous Ponzi scheme of BLMIS. For the reasons set forth in this memorandum decision, the Court finds the transfers were, in fact, transfers of BLMIS' customer property, and must be turned over to the Trustee. The Court holds that an award of prejudgment interest on those monies at the prime rate is justified.

Jurisdiction

The Court has subject matter jurisdiction over this adversary proceeding under SIPA § 78eee(b)(4), 28 U.S.C. §§ 1334(b), 157(a) & (b), and Order No. M 10-450 (S.D.N.Y. July 10, 1984), as amended by Amended Standing Order of Reference No. M 10-468, 12 Misc. 00032 (S.D.N.Y. Jan. 31, 2012). The Court held that it has equitable jurisdiction over this adversary proceeding. See Picard v. BAM L.P. (In re Bernard L. Madoff) , 597 B.R. 466, 482 n.15 (Bankr. S.D.N.Y. 2019).

Background ²

The Court assumes familiarity with this SIPA liquidation. This adversary proceeding arises from a fraud perpetrated by Madoff through his investment advisory business ("IA Business"). JPTO ¶ 1. On December 11, 2008 (the "Filing Date"), Madoff was arrested by federal agents for violating criminal securities statutes. Id. On the same day, the United States Securities and Exchange Commission (the "SEC") filed a complaint in the United States District Court for the Southern District of New York (the "District Court") against BLMIS and Madoff. Id. On December 15, 2008, the SEC consented to a combination of its action with an application of the Securities Investor Protection Corporation ("SIPC"), the Trustee was appointed as trustee for the liquidation of the business of BLMIS under the Securities Investor Protection Act ("SIPA"), and the District Court removed the combined action (the "Liquidation Proceeding") to this Court. Id.

On November 30, 2010, the Trustee brought this adversary proceeding against Defendants seeking to avoid and recover fraudulent transfers allegedly received by Defendants from BLMIS. Id. ¶ 2. As a result of the decision in SIPC v. BLMIS, (In re Madoff Sec.) , No. 12 MC 115 (JSR), 2013 WL 1609154 (S.D.N.Y. Apr. 15, 2013), aff'd , 773 F.3d 411 (2d Cir. 2014), cert. denied , 576 U.S. 1044, 135 S.Ct. 2858, 192 L.Ed.2d 910 (2015), the Trustee is limited to recovering the two-year transfers from BLMIS solely pursuant to §§ 548(a)(1)(A) and 550(a) of the Bankruptcy Code. Id. At present, the Trustee seeks to avoid and recover transfers in the amount of $563,000 from BAM L.P. and $2,250,000 from Michael and Meryl Mann made within two years of the Filing Date (the "Two-Year Transfers"). Id.

In September of 2019, the Court granted in part and denied in part the Trustee's Summary Judgment Motion under Federal Rule of Civil Procedure 56(g). Id. ¶ 3; see also Picard v. BAM L.P. (In re BLMIS) , 608 B.R. 165 (Bankr. S.D.N.Y. 2019) ("MSJ Decision"). The MSJ Decision determined that: The Trustee has established there is no genuine disputed issue of fact that Madoff operated BLMIS as a Ponzi scheme; The Trustee is entitled to rely on the Ponzi scheme presumption and has demonstrated the Two-Year Transfers were made with the actual intent to hinder delay or defraud creditors within the meaning of 11 U.S.C. §§ 548(a)(1)(A) and 550(a) ; The Parties have stipulated to the amount of the deposits into and withdrawals from their respective accounts, and to the amounts of the transfers made during the Two-Year Period. Id. The Court affirmed its prior rulings as a matter of law; the Antecedent Debt Defense does not provide a defense under Section 548(c) to the Trustee's claims. Id.

In August of 2020, this adversary proceeding was reassigned from Judge Bernstein to Chief Judge Morris. On September 14, 2020, the Court held a trial to determine: whether the Two-Year Transfers were transfers "by the debtor" within the meaning of SIPA § 78fff-2(c)(3) and 11 U.S.C. § 548 (a)(1)(A) ; and whether the Trustee should be awarded prejudgment interest and if so, at what rate and from what date based on establishing the factors emphasized by courts in this District.

Parties Contentions

The factual dispute at issue is whether the Two-Year Transfers were made by BLMIS or by Madoff, individually, as part of his sole proprietorship business. Madoff registered as a broker-dealer with the SEC in January of 1960. JPTO ¶ 11. Through that registration, he became a member of SIPC when SIPA was enacted in 1970. Id. Madoff continued in the broker-dealer business as a sole proprietorship under the names Bernard L. Madoff and Bernard L. Madoff Investment Securities until 2001. Id. ¶ 12. On January 1, 2001, BLMIS registered in New York as a limited liability company and on January 12, 2001, amended its SEC Form BD ("2001 SEC Amended Form BD") to reflect the change to corporate ownership. Id. ¶ 14.

The Trustee contends that all of the assets and liabilities of the sole proprietorship were also transferred to the limited liability company, BLMIS. Id. ¶ 17. Included in that transfer, according to the Trustee, were the three commercial business accounts that Madoff used for customer deposits and withdrawals: JPMorgan Chase Bank, N.A. ("Chase") account #xxxxxxxxx (the "703 Account"); Chase account #xxxxxxxxxxxxx (the "509 Account"); and Bankers Trust account #xx-xxx-xxx (the "BT Account")³ (collectively the "Bank Accounts"). Id. As such, the Trustee contends that all transfers from these Bank Accounts were transfers "by the debtor" within the meaning of SIPA § 78fff-2(c)(3) and 11 U.S.C. § 548 (a)(1)(A). The Trustee also argues that because the Defendants received "customer property," it is recoverable under SIPA regardless of what name is on the Bank Account statements and checks. Id. ¶ 34.

Defendants contend that the sole proprietorship and its assets were not transferred to BLMIS in January of 2001. Id. ¶ 42. Only the market-making and proprietary businesses were moved into the newly formed limited liability company, BLMIS. Id. The IA Business remained property of Madoff and his sole proprietorship and so did the Bank Accounts and the customer accounts. Id. Defendants opened their customer accounts with Madoff Securities prior to 2001. Id. ¶ 63. It is the Defendants' contention that because Madoff never transferred his IA Business nor the Bank Accounts to BLMIS, the withdrawals from those Bank Accounts were not transfers "by the debtor" within the meaning of SIPA § 78fff-2(c)(3) and 11 U.S.C. § 548 (a)(1)(A). Id. ¶ 67.

Findings of Fact

From 1960 to 2008 BLMIS was continuously registered with the SEC as a broker-dealer under Section 15(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(b). Trial Tr. 39:9–46:23 (Dubinsky); TX-001 (SEC Form BD Attestation); TX-002 (hereafter referred to as "1959 SEC Form BD"); TX-003 (2001 SEC Amended Form BD). From 1960 until 2001, BLMIS operated as a sole proprietorship. JPTO ¶ 12; Trial Tr. 38:16–39:8 (Dubinsky); TX-002 (1959 SEC Form BD); TX-003 (2001 SEC Amended Form BD). The 1959 Form BD was signed by Madoff in his capacity as the sole proprietor and indicated that his business had made no prior registration with the SEC. Trial Tr. 41:9–42:6 (Dubinsky); TX-002 (1959 SEC Form BD).

In December 1995, Defendants Michael Mann and Meryl Mann opened their account with the investment advisory business of Madoff Securities, which was assigned account number 1CM363 in the name of "Michael Mann and Meryl Mann J/T Wros." During the ten-year period between 1998 and 2008, Michael Mann made deposits into and received withdrawal payments for the Mann Account from the 703 Account and the 509 Account. In March 1999, Michael Mann opened another account with Madoff Securities, in the name of "BAM L.P.," which was assigned account number 1CM379. During the period between 1999 and 2008, Michael Mann made deposits into and received withdrawal payments for the BAM Account from the 703 Account and the 509 Account.

At the time of the filing of the 1959 Form BD, SEC filing number 8-8132 was assigned to the sole proprietorship. Trial Tr. 43:4–43:12 (Dubinsky); TX-002 (1959 SEC Form BD). Effective as of January 1, 2001, BLMIS was registered as a New York single member limited liability company. JPTO ¶ 14; TX-004 (Articles of Organization). On January 12, 2001, BLMIS amended its SEC Form BD to reflect its change in corporate form from a sole proprietorship to a single member limited liability company. Trial Tr. 43:23–44:15 (Dubinsky); TX-003 (2001 SEC Amended Form BD). The same SEC file number, 8-8132, that appeared in the 1959 SEC Form BD appeared on the 2001 SEC Amended Form BD. Trial Tr. 44:16–45:8 (Dubinsky); TX-003 (2001 SEC Amended Form BD). Under "BD...