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

• Decision Date: 11 September 2019
• Docket Number: Adv. Pro. No. 08-01789 (SMB), Adv. Pro. No. 10-04390 (SMB)
• Citation: 608 B.R. 165
• 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

608 B.R. 165

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)

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

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

Signed September 11, 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, Arthur H. Ruegger, Esq., Attorneys for Defendants

SIPA Liquidation

(Substantively Consolidated)

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

STUART M. BERNSTEIN, United States Bankruptcy Judge:

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"), moves for summary judgment (the "Motion ")¹ on his claim to avoid and recover $2,813,000 transferred to defendants Michael Mann, Meryl Mann and BAM L.P. (collectively, the "Defendants") as intentional fraudulent transfers under 11 U.S.C. §§ 548(a)(1)(A) and 550(a) (the "Avoidance Action"). Among other things, the Trustee asserts that the arguments raised by the Defendants in opposition to his Motion are barred by res judicata based on the parties' prior litigation relating to the allowability of the Defendants' net equity claims (the "Claims Litigation"). For the reasons that follow, the Motion is denied but certain facts are deemed either immaterial or undisputed for purposes of this Avoidance Action.

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 Complaint as to Bernard L. Madoff , dated Dec. 11, 2008 (ECF Dist. Ct. No. 1:08-mj-02735-UA-1 Doc. # 1)),² and the Securities and Exchange Commission ("SEC") commenced an action against Madoff and BLMIS alleging 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") petitioned for a protective decree placing BLMIS into liquidation, appointing the Trustee, and removing the SIPA liquidation to this Court.³ (Joint Pretrial Order ("JTPO ")⁴ at 15, ¶¶ 1-2.) The District Court granted SIPC's application. (See Order , dated Dec. 15, 2008 (ECF Main Case 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")⁵ 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).)

Madoff's creditors filed an involuntary bankruptcy petition against him individually on April 13, 2009. (ECF Bankr. Ct. No. 09-11893 Doc. #1.) The Court directed the appointment of an interim trustee pursuant to 11 U.S.C. § 303(g) (ECF Bankr. Ct. No. 09-11893 Doc. # 10), the United States Trustee appointed Alan Nisselson, Esq. as interim trustee (ECF Bankr. Ct. No. 09-11893 Doc. # 13), the Court entered an order for relief under chapter 7 of the Bankruptcy Code on May 7, 2009 (ECF Bankr. Ct. No. 09-11893 Doc. # 21), and Mr. Nisselson has continued to serve as Madoff's chapter 7 trustee. On June 9, 2009, the Court entered an order substantively consolidating Madoff's estate with the BLMIS SIPA estate. (Consent Order Substantively Consolidating the Estate of Bernard L. Madoff into the SIPA Proceeding of Bernard L. Madoff Investment Securities LLC and Expressly Preserving All Rights Claims and Powers of Both Estates ("Consolidation Order "), dated June 9, 2009 (ECF Bankr. Ct. No. 09-11893 Doc. # 28).) However, the Consolidation Order expressly preserved the right of Madoff's chapter 7 trustee to bring avoidance actions on behalf of Madoff's bankruptcy estate upon consultation with the Trustee and SIPC. (Consolidation Order , ¶ 4.)

B. The Defendants' BLMIS Accounts and the Claims Litigation

Prior to 2001, Madoff operated his brokerage as a sole proprietorship. (See Defendants' Objections, Responses and Counterstatement of Material Facts Pursuant to Fed. R. Civ. P. 56, Fed. R. Bankr. P. 7056 and Local Rule 7056-1 to Trustee's Statement of Material Facts , dated Feb. 22, 2019, ¶ 4 (ECF Doc. # 158), and Reply to Defendants' Objections, Responses and Counterstatement of Material Facts Pursuant to Fed. R. Civ. P. 56, Fed. R. Bankr. P. 7056 and Local Rule 7056-1 to Trustee's Statement of Material Facts , dated Mar. 27, 2019 at 14 (ECF Doc. # 166).) I refer to the sole proprietorship as "Madoff Securities." Thereafter, Madoff Securities was reorganized as a single-member limited liability company (i.e. , BLMIS) with Madoff as the sole member. (JTPO at 17, ¶ 6.) At that point, all of Madoff Securities' assets and liabilities were transferred to BLMIS. SIPC v. BLMIS (In re BLMIS ), 522 B.R. 41, 60 (Bankr. S.D.N.Y. 2014), aff'd , 15 Civ. 1151 (PAE), 2016 WL 183492 (S.D.N.Y. Jan. 14, 2016), aff'd , 697 F. App'x 708 (2d Cir. 2017).

In December 1995, Defendants Michael and Meryl Mann opened account number 1CM363 as joint tenants at Madoff Securities (the "Mann Account"). (JPTO at 17, ¶ 5.) In March 1999, Michael Mann opened account 1CM579 with Madoff Securities in the name of BAM L.P. (the "BAM Account," and together with the Mann Account, the "Accounts"). (JPTO at 17, ¶ 5.) Over the life of the Mann Account, Michael Mann deposited a total of $14,850,000 and withdrew a total of $20,650,000 from the account, of which $2,250,000 (the "Mann Two-Year Transfers") was withdrawn within two years of the Filing Date (the "Two-Year Period"). (JPTO at 18, ¶ 8.) Over the life of the BAM Account, BAM L.P. deposited a total of $1,920,007 and withdrew a total of $3,551,000 from the account, of which $563,000 was withdrawn within the Two-Year Period (the "BAM Two-Year Transfers," and together with the Mann Two-Year Transfers, the "Two-Year Transfers"). (JPTO at 18, ¶ 9.)

Shortly after the Filing Date, the Court established a procedure for resolving the net equity claims of former BLMIS customers. (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).) See Picard v. BAM L.P. (In re BLMIS ), 597 B.R. 466, 471-72 (Bankr. S.D.N.Y. 2019) ("Jurisdiction Decision ") (describing the Claims Procedure Order ). Pursuant to the Claims Procedure Order , Michael and Meryl Mann submitted a customer claim (the "Mann Customer Claim")⁶ on June 16, 2009 in the amount of $7,192,467.45 representing the amount listed on the final BLMIS monthly statement for the Mann Account less a handwritten correction. Similarly, BAM L.P. submitted a customer claim (the "BAM Customer Claim,"⁷ and together with the Mann Customer Claim, the "Customer Claims") in the amount of $714,333.85, which adjusted the amount listed on its final BLMIS statement.

On August 28 and October 19, 2009, the Trustee sent notices to the Defendants denying the Mann Customer Claim (the "Mann Determination") and the BAM Customer Claim (the "BAM Determination," and together with the Mann Determination, the "Determinations"), respectively.⁸ The Trustee's denial was based on his determination that (i) no securities were ever purchased by BLMIS for the Accounts, (ii) the Accounts were overdrawn, (iii) the profits reported on the BLMIS Account statements were fictitious, and (iv) the withdrawal of fictitious profits from the Accounts came from principal deposits of other BLMIS customers. (Mann Determination at MWPTAP01100141-42.) Each Determination was accompanied by a schedule which set forth the deposits into and withdrawals from the Accounts to support the Trustee's determination that the Accounts were overdrawn. (See Mann Determination at MWPTAP01100144.)

On September 25 and November 16, 2009, the Defendants objected to the Mann Determination (the "Mann Objection") and the BAM Determination (the "BAM Objection," and together with the Mann Objection, the "Objections"), respectively.⁹ The Objections mostly raised legal arguments including that the net equity claims should be determined by reference to the amount listed on the final BLMIS customer statement instead of the Trustee's "Net Investment Method," which offset withdrawals against deposits, (Mann Objection, ¶¶ 9, 11-19), that the Trustee's net equity calculation was barred by the statute of limitations on avoidance actions, (Mann Objection, ¶ 21), and that net equity claims should include interest or a similar adjustment to reflect the passage of time. (Mann Objection, ¶ 23.) In addition, paragraph 10 of the Objections argued that the Determinations failed to provide a basis for the disallowance of the Customer Claims and did not rebut the...