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In re Bernard L. Madoff Investment Securities LLC

United States District Court, S.D. New York

January 24, 2017

In re BERNARD L. MADOFF INVESTMENT SECURITIES LLC. Debtor.
v.
CAPITAL GROWTH COMPANY, et al. Appellees. A & G GOLDMAN PARTNERSHIP and PAMELA GOLDMAN, Appellants,

          MEMORANDUM OPINION AND ORDER

          GREGORY H. WOODS, UNITED STATES DISTRICT JUDGE

         These consolidated bankruptcy appeals arise out of the third attempt by A&G Goldman Partnership and Pamela Goldman (the “Appellants” or “Goldman Parties”) to side step a permanent injunction entered by the bankruptcy court in 2011 in connection with its approval of a $7.2 billion settlement between the Trustee of Bernard L. Madoff Investment Securities (“BLMIS”) and a number of parties affiliated with Jeffry M. Picower (the “Picower Parties”). The bankruptcy court enjoined the prosecution of the complaint, and these appeals followed. For the reasons stated below, the order of the bankruptcy court is AFFIRMED.

         I. BACKGROUND

         As noted by Judge Stuart M. Bernstein in his decision enjoining prosecution of the Goldman Parties' third complaint, Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 546 B.R. 284, 288 (Bankr. S.D.N.Y. 2016) (“Goldman III”), the background to these proceedings has been recounted in A&G Goldman P'ship v. Picard (In re BLMIS), No. 12-cv-6109 (RJS), 2013 WL 5511027, at *1-3 (S.D.N.Y. Sept. 30, 2013) (“Goldman I District Court Opinion”) and Picard v. Marshall (In re BLMIS), 511 B.R. 375, 379-386 (Bankr. S.D.N.Y. 2014) (“Fox II BK Opinion”), aff'd sub nom. In re Madoff, 531 B.R. 345 (S.D.NY. 2015) (“Fox II District Court Opinion”). This Court assumes familiarity with these decisions, as well as familiarity with Bernard Madoff's infamous Ponzi scheme, and therefore, provides below only a brief discussion of the background facts necessary to provide context for the Court's resolution of this appeal.

         A. Bernard Madoff's Ponzi Scheme

         Over many years, Bernard Madoff “represented to customers that he invested their funds according to a ‘split-strike' investment strategy.” Goldman I District Court Opinion, 2013 WL 5511027, at *1 (citation omitted). This strategy purportedly entailed investing in S&P 100 stocks and hedging the investments through the use of options. In fact, however, “customer funds were rarely invested and used mainly to pay withdrawals for other customers.” Id. Madoff was arrested in December 2008 and “[i]n March 2009, Madoff pleaded guilty to securities fraud and admitted that he had used [BLMIS] as a vast Ponzi scheme.” Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC), 721 F.3d 54, 59 (2d Cir. 2013). As Judge Bernstein noted in Goldman III, Madoff “conducted the largest Ponzi scheme in history through BLMIS until its collapse and his arrest.” 546 B.R. at 288.

         Following Madoff's arrest, upon application by the Securities Investment Protection Corporation, the United States District Court for the Southern District of New York entered a protective order placing BLMIS-the investment “firm” used to effectuate Madoff's Ponzi scheme-in liquidation under the Securities Investor Protection Act (“SIPA”) and appointing Irving Picard as the Trustee. The district court then referred the case to the bankruptcy court. The Trustee thereafter “brought approximately 1, 000 adversary proceedings to avoid and recover the transfers from BLMIS to its customers.” Id.

         B. The SIPA Liquidation of BLMIS

         SIPA “establishes procedures for the expeditious and orderly liquidation of failed broker-dealers, and provides special protections to their customers.” In re Bernard L. Madoff Inv. Sec. LLC, 740 F.3d 81, 85 (2d Cir. 2014) (“Marshall”). A trustee's “primary duty under SIPA is to liquidate the broker-dealer and, in doing so, satisfy claims made by or on behalf of the broker-dealer's customers for cash balances.” Id. (citation omitted); see also In re Madoff, 848 F.Supp.2d 469, 473 (2012) (“Fox I District Court Opinion”) (“Under SIPA, Picard has the powers and duties of a bankruptcy trustee, and is charged with, among other things, recovering the property of BLIMIS' customers, and distributing those assets.”) (citing 15 U.S.C. §§ 78fff-1(a)-(b)).

         “A SIPA liquidation confers priority on customer claims by an expeditious alternative to a traditional bankruptcy proceeding.” JPMorgan, 721 F.3d at 59. “In a SIPA liquidation, a fund of ‘customer property' is established-consisting of cash and securities held by the broker-dealer for the account of a customer, or proceeds therefrom . . . for priority distribution exclusively among customers, ” and property is allocated by the trustee so that customers “share ratably in such customer property . . . to the extent of their respective net equities.” Marshall, 740 F.3d at 85.

         In order to calculate a customer's “net equity” in the liquidation of BLMIS, Picard chose the “‘net investment method, ' under which the amount owed to each customer by BLMIS was ‘the amount of cash deposited by the customer into his BLMIS customer account less any amounts already withdrawn by him.'” Marshall, 740 F.3d at 85 (quoting Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122, 125 (Bankr. S.D.N.Y. 2010)). The decision to use the net investment method was approved by the Bankruptcy Court on March 1, 2010, and later affirmed by the Second Circuit. In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. at 135, 140, aff'd sub nom. In re Bernard L. Madoff Inv. Securities LLC, 654 F.3d 229 (2d Cir. 2011). “BLMIS customers who had withdrawn more from their BLMIS accounts than their principal investments, so-called ‘net winners, ' are not entitled to a share of the property recovered by the Trustee until all ‘net losers' have received back their principal investments.” Fox I District Court Opinion, 848 F.Supp.2d at 473-74 (internal citations omitted); see also Marshall, 740 F.3d at 85 (“BLMIS customers had net equity only to the extent that their total cash deposits exceeded their total cash withdrawals.”).

         C. The Trustee's Settlement with the Picower Parties and Entry of the Permanent Injunction

         In May 2009, the Trustee filed an adversary proceeding against the Picower Parties seeking to recover the proceeds of hundreds of allegedly improper withdrawals they had made from BLMIS between 1995 and the collapse of the Ponzi scheme. The Trustee asserted claims for fraudulent transfers, avoidable preferences, and turnover under the Bankruptcy Code and New York's Uniform Fraudulent Conveyance Act. Among other things, the Trustee's complaint alleged that the “Picower Parties knew or should have known that BLMIS was a Ponzi scheme, and actively participated by giving directions to BLMIS to create fictitious trading records for their accounts.” Goldman III, 546 B.R. at 289.

         On December 17, 2010, the Trustee and the Picower Parties entered into a settlement agreement under which the Picower Parties agreed to return $5 billion to the BLMIS estate and forfeit $2.2 billon to the Government. This sum represented 100% of the net withdrawals from the Picower Parties' BLMIS accounts. In return, the Trustee agreed to release any other claims he might have had against the Picower Parties. The Trustee also agreed to seek a permanent injunction “barring claims against the Picower Parties by BLMIS investors that are duplicative or derivative of the claims that were brought, or could have been brought, by Picard.” Fox I District Court Opinion, 848 F.Supp.2d at 476. In connection with its approval of the settlement, on January 3, 2011, Judge Burton R. Lifland of the bankruptcy court issued the following permanent injunction:

Any BLMIS customer or creditor of the BLMIS estate who filed or could have filed a claim in liquidation, anyone acting on their behalf or in concert or participation with them, or anyone whose claim in any way arises from or is related to BLMIS or the Madoff Ponzi scheme, is hereby permanently enjoined from asserting any new claim against the Picower BLMIS Accounts of the Picower Releasees that is duplicative or derivative of the claims brought by the Trustee, or which could have been brought by the Trustee against the Picower BLMIS Accounts of the Picower Releasees . . . .

Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 2011 WL 10549389, at *4 (Bankr. S.D.N.Y. Jan. 13, 2011) (the “Permanent Injunction”). The Trustee also agreed, as part of the settlement with the Picower Parties, to “use his reasonable best efforts to oppose challenges to the scope, applicability, or enforceability of the Permanent Injunction.” Goldman III, 546 B.R. at 289.

         D. Prior Actions Challenging or Held Barred by the Permanent Injunction

         Since the bankruptcy court's issuance of the Permanent Injunction, “various former BLMIS customers have attempted, without success, to side step the restrictions imposed by the injunction and sue the Picower Parties to recover their lost investments.” Id. at 288. The Court briefly summarizes the history of those prior actions, the Goldman III complaint, and the opinion below.

         (1) Fox I

         Prior to the Trustee's settlement with the Picower Parties, former BLMIS customers Adele Fox and Stone Marshall filed putative class actions against the Picower Parties in the United States District Court for the Southern District of Florida, alleging claims under Florida state law for conversion, unjust enrichment, conspiracy, and state RICO violations. The Trustee commenced an adversary proceeding to enjoin the Fox/Marshall actions pending the bankruptcy court's final approval of the Trustee's settlement with the Picower Parties, and on the ground that the actions were barred by the automatic stay provisions of 11 U.S.C. § 362(a). The bankruptcy court enjoined the actions, finding that they violated the automatic stay imposed by operation of the SIPA liquidation of BLMIS because they “usurp[ed] causes of action belonging to the estate . . . [under] the Code” because the complaints did not “seek[] to redress a particularized injury or alleg[e] harm caused directly to them by the Picower Defendants.” Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 429 B.R. 423, 430-31 (Bankr. S.D.N.Y. 2010) (“Fox I BK Opinion”). The bankruptcy court also employed its equitable powers under Section 105(a) of the Code to enjoin the actions on the ground that the purported claims would “have an immediate adverse economic consequence for the debtor's estate.” Id. at 434 (quoting Queenie, Ltd. v. Nygard Int'l, 321 F.3d 282, 287 (2d Cir. 2003)). The threat to the estate was “particularly imminent” because the Trustee was “on the brink of a settlement” with the Picower Parties, and the Fox and Marshall actions would have undermined the “integrity of the SIPA proceedings and the Trustee's settlement negotiations for the benefit of the BLMIS estate and all of its customer claimants.” Id. at 435-36.

         On appeal to the district court, Judge Koeltl noted that the “central issue in [the] appeal [was] whether the Bankruptcy Court had the power to declare the Florida Actions void and otherwise to enjoin the Appellants from prosecuting them” and reasoned that “[t]hat question hinges on the nature of the Florida Actions-whether they are independent actions, or whether they are derivative or duplicative of claims that were property of the BLMIS estate.” Fox I District Court Opinion, 848 F.Supp.2d at 479. Judge Koeltl based his analysis on the principle stated by the Second Circuit Court of Appeals in St. Paul Fire & Marine Insurance Co. v. PepsiCo., Inc., 884 F.2d 688, 701 (2d Cir. 1989), that “[i]f a claim is a general one, with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor, the trustee is the proper person to assert the claim, and the creditors are bound by the outcome of the trustee's action.” Id. at 480.

         Judge Koeltl found that the “complaints contain[ed] no additional allegations of acts by the Picower defendants that were directed toward the Appellants specifically, or any duty owed specifically to the Appellants by the Picower defendants” and that, in light of the principle stated in St. Paul, “the alleged wrongful acts harmed every BLMIS investor (and BLMIS itself) in the same way: by withdrawing billions of dollars in customer funds from BLMIS and thus substantially diminishing the assets available to BLMIS to pay its customers and creditors, and to continue to function.” Id. As a result, he concluded that the claims were “substantively duplicative of the Trustee's fraudulent transfer action, ” and that the bankruptcy court “correctly found that the claims asserted [in those actions] were the property of the estate” which could only be asserted by the Trustee, and not the Fox/Marshall plaintiffs. Id. at 481. Judge Koeltl observed that the putative claims of the Fox/Marshall plaintiffs and those asserted by the Trustee against the Picower Parties were “based upon the same conduct by the Picower Defendants: involvement in the Madoff Ponzi scheme, and the transfer of billions of dollars in BLMIS-held customer funds to the Picower Defendants, ” which led Judge Koeltl to conclude that, “[p]ut bluntly, the wrongs pleaded in the Florida Actions and in the Trustee's actions are the same.” Id. at 479.

         Fox and Marshall appealed and the Second Circuit affirmed. Marshall, 740 F.3d 81. The Second Circuit opined that the complaints “impermissibly attempt[ed] to ‘plead around' the Bankruptcy Court's injunction barring all claims ‘derivative' of those asserted by the Trustee” and failed to allege “‘particularized' conduct directed at BLMIS customers.” Id. at 84. The court explained that a “derivative injury” is “based upon a secondary effect of harm done to the debtor, ” while an “injury is said to be particularized” when it “can be directly traced to the third party's conduct.” Id. at 89 (citing St. Paul, 884 F.2d at 704) (internal quotation marks and brackets omitted). In the Court of Appeals' view, Fox and Marshall had not “allege[d] that the Picower defendants made any . . . misrepresentations to BLMIS customers” and had instead “allege[d] nothing more than steps necessary to effect the Picower defendants' fraudulent withdrawals of money from BLMIS.” Id. at 84, 92.

         (2) Goldman I

         While the Fox/Marshall litigation was ongoing, the Goldman Parties sought leave from the bankruptcy court to file a putative class action complaint in Florida district court. The Goldman I complaint asserted a claim under Section 20(a) of the Securities Exchange Act of 1934, alleging that Jeffry Picower was a “control person” with respect to BLMIS and that Picower had ...


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