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Peskin v. Picard

October 25, 2010

DIANE AND ROGER PESKIN, AND MAUREEN EBEL, APPELLANTS,
v.
IRVING H. PICARD, AS TRUSTEE FOR THE LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES LLC, APPELLEE.



The opinion of the court was delivered by: John G. Koeltl, District Judge

MEMORANDUM OPINION AND ORDER

The plaintiff-appellants, Diane and Roger Peskin and Maureen Ebel, appeal from an order of the United States Bankruptcy Court for the Southern District of New York (Lifland, J.) dated September 10, 2009, granting the defendant-appellee's motion to dismiss their complaint. The appellants were customers of Bernard L. Madoff Investment Securities, LLC ("BLMIS"). The appellee is the trustee for the substantively consolidated Securities Investor Protection Act ("SIPA") liquidation of BLMIS and Bernard L. Madoff ("Madoff").

I.

A.

On December 11, 2008, Madoff was arrested and criminally charged with a multi-billion-dollar securities fraud scheme in the United States District Court for the Southern District of New York (the "District Court"). On the same date, the Securities and Exchange Commission ("SEC") filed a complaint against Madoff and BLMIS in the District Court. On December 15, 2008, under section 78eee(a)(4)(A) of SIPA, 15 U.S.C. § 78eee(a)(4)(A), the SEC consented to a combination of the SEC action with an application filed by the Securities Investor Protection Corporation ("SIPC"), alleging that BLMIS was not able to meet its obligations to securities customers as they came due. On the same date, the District Court entered an order placing BLMIS in liquidation under SIPA, appointing the appellee as trustee, and removing the liquidation proceeding to the bankruptcy court.

On December 23, 2008, the bankruptcy court entered an order (the "Claims Procedures Order") specifying the procedures for the filing, determination, and adjudication of claims by BLMIS customers for relief under section 78fff-2(a)(2) of SIPA, 15 U.S.C. § 78fff-2(a)(2). Under the Claims Procedures Order, all claims against BLMIS must be filed with the trustee, who then determines customer claims in writing. (Claims Procedures Order at 3, 6.) A claimant may object to the trustee's determination, and upon such objection, the bankruptcy court will hear the matter. (Claims Procedures Order at 6-7.)

B.

SIPA was enacted with the goals of preventing brokerage house failures, restoring investor confidence in capital markets, and upgrading the financial responsibility requirements for registered brokers and dealers. See Secs. Investor Prot. Corp. v. Barbour, 421 U.S. 412, 415 (1975) (internal citations omitted). With SIPA, Congress created SIPC, a nonprofit corporation designed to provide financial protection to the customers of member broker-dealers in the event that such a broker-dealer failed. SIPA created a new, bankruptcy-like liquidation proceeding applicable to SIPC member firms and designed to accomplish the expeditious return of customer property.

In a SIPA liquidation proceeding, customers share pro rata in customer property to the extent of their "net equity," as defined in section 78lll(11) of SIPA, 15 U.S.C. § 78lll(11). SIPC advances funds to the trustee for a customer with a valid net equity claim, up to the lesser of the amount of the customer's claim or $500,000.

In proceedings in the bankruptcy court, the trustee took the position that a customer's "net equity" is the aggregate amount invested by the customer less the aggregate amount of any withdrawals by and distributions to the customer from the account. Under the trustee's definition of net equity, therefore, customers would not be entitled to recover any fictitious profits reflected in their BLMIS account statements. At the request of the trustee, after the appellants and others objected to this calculation, the bankruptcy court held a hearing on the propriety of the trustee's position. On March 1, 2010, the bankruptcy court rendered a decision adopting the trustee's definition of net equity. That decision was certified for immediate appeal to the Second Circuit Court of Appeals, pursuant to 28 U.S.C. § 158(d)(2). Oral argument on the issue was heard in that court on September 15, 2010.

C.

On February 17, 2009, plaintiff-appellant Maureen Ebel filed a claim with the trustee for the amount of her deposit, $1,348,844.12, and various securities, in connection with an Individual Retirement Account (the "IRA account"). (Pet'r's App. Ex. L; Greenblatt Decl. Ex. A.) She also filed a claim for the amount of her deposits, less withdrawals, and various securities, in connection with another account in her name. On May 20, 2009, the trustee issued a determination letter with respect to the first claim, allowing the claim to the extent of her deposit, but otherwise denying it. (Greenblatt Decl. Ex. B.) The trustee advised Ebel that she would be paid $500,000 from funds advanced by SIPC, and that the remainder of her claim would be a claim against the fund of customer property. (Greenblatt Decl. Ex. B.) Ebel provided the trustee with a Partial Release and Assignment, dated May 27, 2009, which provided that her claim would be released "only to the extent that the SIPA trustee and/or SIPC has paid monies to [her] to satisfy [her] Customer Claim." (Greenblatt Decl. ¶ 15.) Ebel received $500,000 from the trustee.

On May 22, 2009, the trustee issued a determination notice to Ebel with respect to her second claim. The trustee allowed the claim for the amount of her deposits less withdrawals, $2,290,387.49, denied the rest of the claim, and advised her that her claim would be satisfied in part from funds provided by SIPC. (Greenblatt Decl. Ex. D.) The trustee advised Ebel, however, that because she had received a "preferential transfer" of $102,000 from BLMIS in the 90 days preceding the commencement of the bankruptcy case, that amount would be deducted from the $500,000 otherwise owed to her. (Greenblatt Decl. Ex. D.) On June 9, 2009, the trustee issued a revised determination letter to Ebel. (Greenblatt Decl. ¶ 22 & Ex. E.) On August 5, 2009, the trustee issued a partial release and assignment, which Ebel executed on August 8, 2009. (Resp't's Counterstmt. Exs. 5, 6.) This release also provided that Ebel's claim would be released "only to the extent that the SIPA trustee and/or SIPC has paid monies to [her] to satisfy [her] Customer Claim." (Resp't's Counterstmt. Ex. 6 at 3.) Additionally, the accompanying determination letter made explicit that "[b]y executing the Partial Assignment and Release, [Ebel would] not be waiving any rights to the full payment of the SIPC protection potentially available to [her]." According to the trustee, Ebel has now been paid $500,000 out of funds advanced by SIPC with respect to her second claim, with no deduction to reflect the alleged $102,000 preferential transfer.

On February 23, 2009, appellants Diane and Roger Peskin filed a claim with the trustee in connection with an account held in their names, seeking securities they valued at $3,247,367.40. (Greenblatt Decl. Ex. F.) They submitted a second claim on June 29, 2009, in connection with the same account, claiming securities they valued at $470,265.98. (Greenblatt Decl. Ex. G.) On July 16, 2009, the trustee issued a notice of determination advising the Peskins that their claims had been combined into one claim for the purposes of the decision, and informing them that their combined claim would be allowed in the amount of $2,310,191.25 - the amount they deposited with BLMIS for the purchase of securities, less subsequent withdrawals. (Greenblatt Decl. Ex. H.) The trustee denied the remainder of the Peskins' claim and advised them that, upon their execution of a partial release and assignment, they would be paid $500,000 ...


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