No. 08-01789 (BRL) Adv. Pro. No. 09-1182 (BRL)
The opinion of the court was delivered by: Wood, U.S.D.J.:
Bart M. Schwartz, as Receiver ("Receiver") of Defendants Ariel Fund Limited and Gabriel Capital, L.P. (collectively, the "Funds"), moves for leave to appeal from a decision of the United States Bankruptcy Court for the Southern District of New York ("The Bankruptcy Court"). The Bankruptcy Court denied the Funds' motion to dismiss a Complaint filed by Irving H. Picard, the Trustee ("Trustee") for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS"). Picard v. Merkin (In re Bernard L. Madoff Inv. Sec., LLC) ("Merkin"), 440 B.R. 243 (Bankr. S.D.N.Y. 2010).
For the reasons stated below, this Court DENIES the Receiver's motion for leave to appeal.
The background of this action is detailed in the Bankruptcy Court's decision, familiarity with which is assumed. See Merkin 440 B.R. at 249-54. This Court notes here only facts necessary to provide context for the issues raised on the pending motion.
Bernard L. Madoff ("Madoff"), through BLMIS, perpetrated a Ponzi scheme "of unparalleled magnitude." Id. at 249. Madoff received billions of dollars in investments from customers, and generated account statements purportedly showing that securities were purchased and traded on behalf of his customers. See id. at 249-50. Madoff did not, however, use any of his customers' funds to purchase securities. Id. at 251. Rather, he used their funds to pay other customers when those customers requested the distribution of their "profits." Id. The scheme ultimately collapsed when the customers' requests for "profits" came to exceed the inflow of new investments. Id. In March 2009, Madoff admitted to having operated a Ponzi scheme, and pleaded guilty to all charges filed against him. Id. at 250.
The Funds were among the many who had invested through BLMIS. The Funds' investments were managed by J. Ezra Merkin ("Merkin"). Id. at 251. Merkin was the sole general partner of Gabriel; he was also the sole shareholder and sole director of Gabriel Capital Corporation, which in turn was the investment advisor to Ariel. Id. at 251. Merkin maintained a close business and social relationship with Madoff. Id. at 258- 59. From at least 1995 through 2008, the several investment funds under Merkin's stewardship collectively withdrew more than $500 million from BLMIS. Id. at 251.
The Trustee brought the instant action under the Bankruptcy Code and New York State's Debtor and Creditor Law ("NYDCL") in part to avoid and to recover alleged fraudulent transfers that BLMIS made to the Funds. The Trustee seeks to recover approximately $34 million from the Funds.*fn1 See id. at 258. (See also Pl. Opp. at 4; Def. Mem. at 6.)
2. The Motion to Dismiss and the Bankruptcy Court's Decision
The Funds moved to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.*fn2 The Bankruptcy Court denied the Funds' motion on all issues relevant to the instant proceeding. It granted the Funds' motion to dismiss the Trustee's claims for immediate turnover of transferred funds and the Trustee's preference claim under Section 547 of the Bankruptcy Code. The Bankruptcy Court's key relevant holdings can be summarized as follows.
First, the Bankruptcy Court held that the Trustee sufficiently pleaded his federal and state law claims seeking to avoid and to recover actual fraudulent transfers. Merkin, 440 B.R. at 254. The Bankruptcy Court also held that the Funds were not, at the pleading stage, entitled to dismissal of the Bankruptcy Code-based actual fraudulent transfer claims pursuant to the statutory "good faith transferee" affirmative defense. See id. at 254-60 (discussing the Section 548(c) defense).
Second, the Bankruptcy Court held that the Trustee sufficiently pleaded his federal and state law claims seeking to avoid and to recover constructive fraudulent transfers. See id. at 261-66. In addition, the Bankruptcy Court held that the Funds were not, at the pleading stage, entitled to dismissal of the Bankruptcy Code-based constructive fraudulent transfer claims pursuant to a statutory "safe harbor" affirmative defense. See id. at 266-68 (discussing the Section 546(e) defense).
3. The Motion for Leave to Appeal
Following the Bankruptcy Court's decision, the Receiver filed the instant motion for leave to appeal. The Receiver frames the issues for appeal as follows:
(A) Must a complaint for actual fraudulent transfer under Section 548(a)(1)(A) of the Bankruptcy Code and Section 276 of the NYDCL allege facts sufficient to connect the defendant transferee to the alleged scheme to defraud creditors?;
(B) In a case for actual fraudulent transfer under Section 548(a)(1)(A) of the Bankruptcy Code and Section 276 of the NYDCL, are allegations that Madoff operated in a non-transparent manner, that a fund manager did not disclose the full extent of his relationship with Madoff, had a close personal relationship with Madoff, and knew of various unproven allegations respecting Madoff and the returns he was obtaining, all originating years before the transfers at issue, sufficient to establish "fraudulent intent" on behalf of the transferee-funds in accordance with the pleading requirements of Rule 9(b)?;
(C) Can a complaint for actual fraudulent transfer under Section 548(a) of the Bankruptcy Code that fails to allege facts permitting an inference [that] the defendants acted other than in good faith within the meaning of Section 548(c) of the Code withstand a motion for dismissal under Rule 12(b)(6)?;
(D) Does an investor in a Ponzi scheme who has received payments of less than his principal forfeit the remainder of his principal based on a theory [that] he had constructive knowledge of the Ponzi scheme, absent a plea or proof of facts that show actual knowledge of, and participation by the investor in, that scheme? (E) Was [BLMIS] a stockbroker or financial institution and were the payments to investors made by it pursuant to securities contracts so that the "safe harbor" of Section 546(e) of the Bankruptcy Code would preclude avoidance of any transfers on a constructive fraudulent transfer basis? (Def. Mem. at 8-9.)
District courts have jurisdiction over appeals from interlocutory orders of a bankruptcy court, and the determination of whether or not leave to appeal is warranted falls within the exercise of the district court's discretion. See 28 U.S.C. § 158(a); Gibson v. Kassover (In re Kassover), 343 F.3d 91, 94 (2d Cir. 2003). In evaluating requests for leave to appeal, reviewing courts have applied the standard codified in 28 U.S.C. § 1292(b), which establishes a three-part test. See 28 U.S.C. 1292(b); Sec. Investor Prot. Corp. v. Bernard Madoff Inv. Sec. LLC (In re Madoff), SIPA Liquidation No. 08-01789, 2010 WL 3260074, at *3 (S.D.N.Y. Aug. 6, 2010).
First, the movant must establish that the order being appealed "involves a controlling question of law." 28 U.S.C. § 1292(b). A question of law is "controlling" within the meaning of Section 1292(b) if reversal of the bankruptcy court's ruling would
(1) terminate the action, or (2) materially affect the outcome of the litigation. See In re Adelphia Commc'ns Corp., 333 B.R. 649, 658 (S.D.N.Y. 2005). The question of law must be "pure[ly]" legal, such that the reviewing court can decide it "quickly and cleanly without having to study the record." Id. (quotations omitted).
Second, the movant must demonstrate that "there is substantial ground for difference of opinion" as to the controlling question of law. 28 U.S.C. § 1292(b). This substantial ground for difference of opinion must arise out of "a genuine doubt as to whether the Bankruptcy Court applied the correct legal standard." Enron Corp. v. Springfield Assocs., LLC (In re Enron Corp.), No. 01-16034, 2006 WL 2548592, at *4 (S.D.N.Y. Sept. 5, 2006). "Substantial ground for difference of opinion" exists where "(1) there is conflicting authority on the issue, or (2) the issue is particularly difficult and of first impression" in this Circuit. Id. (quotations omitted).
Third, the movant must show that an interlocutory appeal from the order "may materially advance the ultimate termination of the litigation." 28 U.S.C. § 1292(b). A movant may satisfy this prong of the Section 1292(b) test by showing that an appeal "promises to advance the time for trial or shorten the time required for trial." In re Enron Corp., No. 01-16034, 2007 WL 2780394, at *2 (S.D.N.Y. Sept. 24, 2007) (quotations omitted).
In addition to the foregoing statutory requirements, the movant must establish that "exceptional circumstances . . . [exist that] . . . overcome the general aversion to piecemeal litigation" and justify departing from "the basic policy of postponing appellate review until after the entry of a ...