Presenting a live 90-minute webinar with interactive Q&A Litigation Trustee and Committee Claims Against Insiders, Auditors and Other Third Parties in Asset Sale Cases Addressing Limitations on Recovery Such as In Pari Delicto, Standing and the Insured v. Insured D&O Exclusion
THURSDAY, APRIL 26, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
Today’s faculty features:
Robert J. Keach, Partner, Bernstein Shur, Portland, Maine Michael P. Richman, Partner, Patton Boggs, New York
BEFORE PRINTING, PLEASE NOTE: The following PDF documents total 271 pages. Case: 11-5207 Document: 122-1 Page: 1 04/05/2012 572946 95 11-5207-bk United States Court of Appeals for the Second Circuit
In Re: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.
IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff - Appellant, (caption continued on inside cover)
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
BRIEF OF THE HSBC DEFENDANTS - APPELLEES
CLEARY GOTTLIEB STEEN & HAMILTON LLP Thomas J. Moloney Evan A. Davis David E. Brodsky Marla A. Decker Charles J. Keeley Jason B. Frasco One Liberty Plaza New York, New York 10006 (212) 225-2000 Attorneys for Defendants - Appellees
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– v. –
HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A., HSBC BANK BERMUDA LIMITED, HSBC PRIVATE BANK (SUISSE) S.A., HSBC PRIVATE BANKING HOLDINGS (SUISSE) S.A., HSBC BANK (CAYMAN) LIMITED, HSBC SECURITIES SERVICES (BERMUDA) LIMITED, HSBC BANK USA, N.A., HSBC INSTITUTIONAL TRUST SERVICES (BERMUDA) LIMITED, HSBC SECURITIES SERVICES (IRELAND) LIMITED, HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED, HSBC HOLDINGS PLC, HSBC FUND SERVICES (LUXEMBOURG) S.A., Defendants - Appellees.
SECURITIES INVESTOR PROTECTION CORPORATION. Intervenor.
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CORPORATE DISCLOSURE STATEMENT
The HSBC Defendants - Appellees,i through their undersigned attorneys, submit the following corporate disclosure statement pursuant to Rule
26.1 of the Federal Rules of Appellate Procedure:
HSBC Bank plc identifies HSBC Holdings plc as a corporation that directly or indirectly owns 10% or more of any class of HSBC Bank plc’s equity interests.
HSBC Securities Services (Luxembourg) S.A. identifies HSBC Bank plc and HSBC Holdings plc as corporations that directly or indirectly own 10% or more of HSBC Securities Services (Luxembourg) S.A.’s equity interests.
HSBC Bank Bermuda Limited identifies HSBC Holdings plc, HSBC
Finance (Netherlands), HSBC Holdings B.V., HSBC Asia Holdings (UK) Limited, and HSBC Asia Holdings B.V. as corporations that directly or indirectly own 10% or more of any class of HSBC Bank Bermuda Limited’s equity interests.
HSBC Private Bank (Suisse) S.A. identifies HSBC Private Banking
Holdings (Suisse) S.A., HSBC Europe (Netherlands) B.V., HSBC Europe B.V.,
i The thirteen HSBC Defendants - Appellees are HSBC Bank plc, HSBC Securities Services (Luxembourg) S.A., HSBC Bank Bermuda Limited, HSBC Private Bank (Suisse) S.A., HSBC Private Banking Holdings (Suisse) S.A., HSBC Bank (Cayman) Limited, HSBC Securities Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC Institutional Trust Services (Bermuda) Limited, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Ireland) Limited, HSBC Holdings plc, and HSBC Fund Services (Luxembourg) S.A.
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Griffin International Limited, Midcorp Limited, HSBC Bank plc, and HSBC
Holdings plc as corporations that directly or indirectly own 10% or more of any class of HSBC Private Bank (Suisse) S.A.’s equity interests.
HSBC Private Banking Holdings (Suisse) S.A. identifies HSBC
Holdings plc, HSBC Bank plc, HSBC Europe B.V., Griffin International Limited,
Midcorp Limited, and HSBC Europe (Netherlands) B.V. as corporations that directly or indirectly own 10% or more of any class of HSBC Private Banking
Holdings (Suisse) S.A.’s equity interests.
HSBC Bank (Cayman) Limited identifies HSBC Holdings plc, HSBC
Finance (Netherlands), HSBC Holdings B.V., HSBC Asia Holdings (UK) Limited,
HSBC Asia Holdings B.V., HSBC Bank Bermuda Limited, and Cayman
International Finance Limited as corporations that directly or indirectly own 10% or more of any class of HSBC Bank (Cayman) Limited’s equity interests.
HSBC Securities Services (Bermuda) Limited identifies HSBC
Holdings plc, HSBC Finance (Netherlands), HSBC Holdings B.V., HSBC Asia
Holdings (UK) Limited, HSBC Asia Holdings B.V., and HSBC Bank Bermuda
Limited as corporations that directly or indirectly own 10% or more of any class of
HSBC Securities Services (Bermuda) Limited’s equity interests.
HSBC Bank USA, N.A identifies HSBC USA Inc., HSBC North
America Inc., HSBC Investments (North America) Inc., HSBC North America
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Holdings Inc., HSBC Overseas Holdings (UK) Limited, and HSBC Holdings plc as corporations that directly or indirectly own 10% or more of any class of HSBC
Bank USA, N.A.’s equity interests.
HSBC Institutional Trust Services (Bermuda) Limited identifies
HSBC Holdings plc, HSBC Finance (Netherlands), HSBC Holdings B.V., HSBC
Asia Holdings (UK) Limited, HSBC Asia Holdings B.V., and HSBC Bank
Bermuda Limited as corporations that directly or indirectly own 10% or more of any class of HSBC Institutional Trust Services (Bermuda) Limited’s equity interests.
HSBC Securities Services (Ireland) Limited identifies HSBC
Holdings plc, HSBC Bank plc, HSBC Europe B.V., HSBC Europe (Netherlands)
B.V., and HSBC Securities Services Holdings (Ireland) Limited as corporations that directly or indirectly own 10% or more of any class of HSBC Securities
Services (Ireland) Limited’s equity interests.
HSBC Institutional Trust Services (Ireland) Limited identifies HSBC
Holdings plc, HSBC Bank plc, HSBC Europe B.V., HSBC Europe (Netherlands)
B.V., and HSBC Securities Services Holdings (Ireland) Limited as corporations that directly or indirectly own 10% or more of any class of HSBC Institutional
Trust Services (Ireland) Limited’s equity interests.
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HSBC Holdings plc, which directly or indirectly owns 10% or more of any class of all other HSBC defendants’ equity interests, identifies HKSCC
Nominees Limited as a corporation that directly or indirectly owns 10% or more of any class of HSBC Holdings plc’s equity interests. HKSCC Nominees Limited is the legal owner of securities that are deposited into the Hong Kong Exchanges and
Clearing Limited Central Clearing and Settlement System by those securities’ beneficial holders.
HSBC Fund Services (Luxembourg) S.A. identifies HSBC Holdings plc, HSBC Bank plc, and HSBC Securities Services (Luxembourg) S.A. as corporations that directly or indirectly own 10% or more of any class of HSBC
Fund Services (Luxembourg) S.A.’s equity interests.
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TABLE OF CONTENTS
Page TABLE OF AUTHORITIES ...... iv
COUNTER-STATEMENT OF THE ISSUES PRESENTED FOR REVIEW ...... 1
PRELIMINARY STATEMENT ...... 3
STATEMENT OF THE CASE ...... 8
STATEMENT OF FACTS ...... 13 A. The Trustee’s Overreaching Allegations ...... 13 B. The Trustee Improperly Seeks To Rely On The Claims Of Feeder Fund Investors ...... 15 C. The SIPA Statutory Scheme ...... 17 SUMMARY OF ARGUMENT ...... 20 ARGUMENT ...... 22
I. The Trustee Lacks Standing To Bring The Common Law Claims ...... 22 A. The In Pari Delicto Doctrine Bars Any Claims By The BLMIS/Madoff Consolidated Estate ...... 22
B. Under Caplin, Wagoner And Hirsch, The Trustee Lacks Standing To Bring The Tort Claims Of Injured Investors ...... 25
C. St. Paul Does Not Support The Trustee’s Claims ...... 28
D. SIPA Does Not Authorize The Trustee To Bring Claims On Behalf Of The “Customer Property Estate” ...... 31
E. Redington Does Not Authorize The Trustee To Bring His Claims ...... 34
1. Redington Is Not Binding ...... 34
i
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Page a. Redington’s Subsequent History Deprived It Of Any Precedential Effect ...... 34
b. The Subsequent Amendment To SIPA’s Priority Distribution Scheme Supersedes Redington’s Subrogation Holding ...... 39
2. Redington Is Not Persuasive Authority ...... 40
a. Redington Was Wrongly Decided, As Many Judges Have Recognized ...... 40 b. The Trustee Has No Bailee Standing Under The Common Law Or Rule 15c3-3, And Application Of Redington’s Bailment Holding Would Run Afoul Of Wagoner ...... 44 c. Redington Did Not Address The Trustee’s Or SIPC’s Standing To Assert Common Law Claims ...... 47
d. The Lack Of A Causal Connection Between HSBC’s Alleged Misconduct And The Losses Of BLMIS Customers Further Distinguishes This Case From Redington ...... 48 F. The SIPA Trustee Lacks Standing To Vindicate SIPC’s Subrogation Rights ...... 54
II. The Trustee Lacks Standing To Litigate Any Claim For Contribution .. 58
A. SIPA Does Not Grant The Trustee Any Right To Contribution And Implying Such A Right Would Be Inconsistent With SIPA 58
B. The Trustee Lacks Standing To Assert Any Claim For Contribution BLMIS May Have Under New York Law ...... 60
C. Even Assuming That New York Law Could Be A Source Of Potential Contribution Rights, The Claim Still Fails As A Matter Of Law ...... 61
ii
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Page III. The Trustee’s Quasi-Contract Claims Fail For Additional Reasons ...... 64
IV. SLUSA Bars The Trustee’s Common Law Claims ...... 65
A. The Trustee’s Suit On Behalf Of Thousands Of BLMIS Customers Is A “Covered Class Action” ...... 65
B. The Trustee’s Common Law Claims Are “In Connection With” BLMIS’s Fraudulent Purchases Of Covered Securities ...... 70
C. Preempting The Trustee’s Claims Serves The Purposes of SLUSA ...... 72 CONCLUSION ...... 74
iii
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TABLE OF AUTHORITIES
Page(s) Cases Adams v. Zarnel (In re Zarnel), 619 F.3d 156 (2d Cir. 2010) ...... 42
Andrulonis v. United States, 26 F.3d 1224 (2d Cir. 1994) ...... 63
Aozora Bank Ltd. v. SIPC (In re Bernard L. Madoff Inv. Sec., LLC), Nos. 11 Civ. 5683(DLC) et al., 2012 WL 28468 (S.D.N.Y. Jan. 4, 2012) ...... 15, 49-50
Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris USA Inc., 344 F.3d 211 (2d Cir. 2003) ...... 57
Bd. of Educ. v. Sargent, Webster, Crenshaw & Folley, 71 N.Y.2d 21 (1987) ...... 62
Breeden v. Kirkpatrick & Lockhart, LLP (In re Bennett Funding Grp.), 336 F.3d 94 (2d Cir. 2003) ...... 25-26, 27
Brown v. Kelly, 609 F.3d 467 (2d Cir. 2010) ...... 36
Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416 (1972) ...... 25, 27-28
Cent. Bank of Dover, N.A. v. First Interstate Bank of Denver, 511 U.S. 164 (1994) ...... 41-42, 73
Clark-Fitzpatrick, Inc. v. Long Island R.R. Co., 70 N.Y.2d 382 (1987) ...... 64
Devon Mobile Commc’ns Liquidating Trust v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.), 322 B.R. 509 (Bankr. S.D.N.Y. 2005) ...... 61
Durning v. Citibank, N.A., 950 F.2d 1419 (9th Cir. 1991) ...... 36-37
iv
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Page(s) Empire City Capital Corp. v. Citibank, N.A., No. 10-CV-2601 (KNK), 2011 WL 4484453 (S.D.N.Y. Sep. 28, 2011) ...... 50
Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011) ...... 49
FDIC v. Ernst & Young, LLP, 256 F. Supp. 2d 798 (N.D. Ill. 2003), aff’d, 374 F.3d 579 (7th Cir. 2004) .... 54
Fox v. McGrath, 152 F.2d 616 (2d Cir. 1945) ...... 38
Fox v. Picard (In re Bernard L. Madoff), Nos. 10 Civ. 4652 (JGK) et al., 2012 WL 990829 (S.D.N.Y. Mar. 26, 2012) ...... 30, 31
Gerosa v. Savasta & Co., 329 F.3d 317 (2d Cir. 2003) ...... 42
Granite Partners, L.P. v. Bear Stearns & Co., 17 F. Supp. 2d 275 (S.D.N.Y. 1998) ...... 64-65
Gutierrez v. Fox, 141 F.3d 425 (2d Cir. 1998) ...... 37 Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995) ...... 25, 27
Holmes v. SIPC, 503 U.S. 258 (1992) ...... passim
In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) ...... 56
In re Herald, Primeo &Thema Sec. Litig., No. 09 Civ. 289 (RMB), 2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011), appeals docketed, Nos. 12-156 et al. (2d Cir. Jan. 12, 2012) ...... 16, 17
Instituto De Prevision Militar v. Merrill Lynch, 546 F.3d 1340 (11th Cir. 2008) ...... 72
v
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Page(s) Jordan (Bermuda) Inv. Co. v. Hunter Green Inv. LLC., 566 F. Supp. 2d 295 (S.D.N.Y. 2008) ...... 51
KBL Corp. v. Arnouts, 646 F. Supp. 2d 335 (S.D.N.Y. 2009) ...... 60
Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010) ...... 3, 22, 23, 24
Kirschner v. KPMG LLP, 590 F.3d 186 (2d Cir. 2009) ...... 24
Kirschner v. KPMG LLP, 626 F.3d 673 (2d Cir. 2010) ...... 22, 27 Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101 (2d Cir. 2001) ...... 72
LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008) ...... 66-67, 73
LaSala v. Lloyds TSB Bank, PLC, 514 F. Supp. 2d 447 (S.D.N.Y. 2007) ...... 68
Lee v. Marsh & McLennan Cos., Nos. 06 Civ. 6523 (SWK), 06 Civ. 15448 (SWK), 2007 WL 704033 (S.D.N.Y. Mar. 7, 2007) ...... 68
Lehman Bros., Inc. v. Wu, 294 F. Supp. 2d 504 (S.D.N.Y. 2003) ...... 58, 59
Lerner v. Fleet Bank, N.A., 459 F.3d 273 (2d Cir. 2006) ...... 49, 50
LNC Inv., Inc. v. First Fed. Bank N.A., 935 F. Supp. 1333 (S.D.N.Y. 1996) ...... 59, 62
Mediators, Inc. v. Manney (In re Mediators, Inc.), 190 B.R. 515 (S.D.N.Y. 1995), aff’d, 105 F.3d 822 (2d Cir. 1997) ...... 64
vi
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Page(s) Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822 (2d Cir. 1997) ...... 26, 27
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) ...... 68, 70
Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531 (S.D.N.Y. 1990) ...... 41, 42, 43
Mulligan Law Firm v. Zyprexa MDL Plaintiffs’ Steering Comm. II (In re Zyprexa Prods. Liab. Litig.), 594 F.3d 113 (2d Cir. 2010) ...... 37
Nassau Roofing & Sheet Metal Co. v. Facilities Dev. Corp., 71 N.Y.2d 599 (1988) ...... 63
Nat’l R.R. Passenger Corp. v. Nat’l Assoc. of R.R. Passengers, 414 U.S. 453 (1974) ...... 37-38
N.Y. State Elec. & Gas Corp. v. FirstEnergy Corp., No. 03-CV-438 (DEP), 2007 WL 1434901 (N.D.N.Y. May 11, 2007) ...... 62-63
Newdow v. Rio Linda Union Sch. Dist., 597 F.3d 1007 (9th Cir. 2010) ...... 38 Nw. Airlines, Inc. v. Transp. Workers Union of Am., 451 U.S. 77 (1981) ...... 58, 60
O’Connor v. Donaldson, 422 U.S. 563 (1975) ...... 36
Official Comm. of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145 (11th Cir. 2006) ...... 24
Official Comm. of Unsecured Creditors v. Pardee (In re Stanwich Fin. Servs. Corp.), 317 B.R. 224 (Bankr. D. Conn. 2004) ...... 29-30
Pereira v. Farace, 413 F.3d 330 (2d Cir. 2005) ...... 29
vii
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Page(s) Picard v. HSBC Bank, 454 B.R. 25 (S.D.N.Y. 2011) ...... passim
Picard v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011) ...... passim Picard v. Kohn, No. 11 Civ. 1181 (JSR), 2012 WL 566298 (S.D.N.Y. Feb. 22, 2012) ...... 52, 53
Picard v. Taylor (In re Park S. Sec. LLC), 326 B.R. 505 (Bankr. S.D.N.Y. 2005) ...... 64
Pinter v. Dahl, 486 U.S. 622 (1988) ...... 42 Rawoof v. Texor Petroleum Co., 521 F.3d 750 (7th Cir. 2008) ...... 38
Redington v. Touche Ross & Co., 428 F. Supp. 483 (S.D.N.Y. 1977) ...... 34
Redington v. Touche Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979), and vacated, Order, Nos. 77-7183, 77-7186 (2d Cir. Aug. 8, 1979) ...... passim Redington v. Touche Ross & Co., 612 F.2d 68 (2d Cir. 1979) ...... 36
RGH Liquidating Trust v. Deloitte & Touche LLP, 17 N.Y. 3d 397 (2011) ...... 69-70
Romano v. Kazacos, 609 F.3d 512 (2d Cir. 2010) ...... 70
Rosenman Family, LLC v. Picard, 395 F. App’x 766 (2d Cir. 2010) ...... 32
SEC v. Zandford, 535 U.S. 813 (2002) ...... 72
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Page(s) Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) ...... passim
Sigmon v. Miller-Sharpe, Inc. (In re Miller), 197 B.R. 810 (W.D.N.C. 1996) ...... 30
Silverman v. Meister Seelig & Fein, LLP (In re Agape World, Inc.), No. 811-9170-reg, 2012 WL 566303 (Bankr. E.D.N.Y. Feb. 21, 2012) ...... 61
Singleton v. Wulff, 428 U.S. 106 (1976) ...... 27
SIPC v. BDO Seidman, LLP, 222 F.3d 63 (2d Cir. 2000) ...... 43 SIPC v. BDO Seidman, LLP, 49 F. Supp. 2d 644 (S.D.N.Y. 1999) ...... passim Smith v. Arthur Andersen LLP, 421 F.3d 989 (9th Cir. 2005) ...... 68
St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) ...... 11, 20, 29
Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83 (1998) ...... 38
Steinberg v. Buczynski, 40 F.3d 890 (7th Cir. 1994) ...... 29 Stichting Ter Behartiging Van de Belangen Van Oudaandeelhouders In Het Kapitaal Van Saybolt Intʼl B.V. v. Schreiber, 407 F.3d 34 (2d Cir. 2005) ...... 34
Texas Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630 (1981) ...... 58, 59
Touche Ross & Co. v. Redington, 442 U.S. 560 (1979) ...... 36, 38, 40
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Page(s) Union of Needletrades, Indus. & Textile Employees v. INS, 336 F.3d 200 (2d Cir. 2003) ...... 42
United States v. Braunig, 553 F.2d 777 (2d Cir. 1977) ...... 28
Wailea Partners, LP v. HSBC Bank USA, N.A., 11-CV-3544 (SC), 2011 WL 6294476 (N.D. Cal. Dec. 15, 2011), appeal docketed, No. 11-18041 (9th Cir. Dec. 22, 2011) ...... 15
Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96 (2d Cir. 2005) ...... 28
Wight v. BankAmerica Corp., 219 F.3d 79 (2d Cir. 2000) ...... 26
Xpedior Creditor Trust v. Credit Suisse First Boston (USA) Inc., 341 F. Supp. 2d 258 (S.D.N.Y. 2004) ...... 64
Federal Statutes 11 U.S.C. § 541(a) ...... 17, 32 15 U.S.C. § 78bb(f)(1) ...... 65
15 U.S.C. § 78bb(f)(1)(A) ...... 70 15 U.S.C. § 78bb(f)(5)(B) ...... 70 15 U.S.C. § 78bb(f)(5)(B)(i) ...... 65 15 U.S.C. § 78bb(f)(5)(D) ...... 67 15 U.S.C. § 78bb(f)(5)(E) ...... 72
15 U.S.C. § 78ddd(c)(2) ...... 17
15 U.S.C. § 78eee(b)(3) ...... 17
15 U.S.C. § 78fff(a) ...... 17
x
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Page(s) 15 U.S.C. § 78fff(a)(1)(B) ...... 33
15 U.S.C. § 78fff(b) ...... 17, 32
15 U.S.C. § 78fff-1(a) ...... 4, 17, 32
15 U.S.C. § 78fff-1(b) ...... 17, 32
15 U.S.C. § 78fff-1(d)(3) ...... 17-18, 32
15 U.S.C. § 78fff-2(b) ...... 62 15 U.S.C. § 78fff-2(c) ...... 18, 32, 55 15 U.S.C. § 78fff-2(c)(1)(B) ...... 18 15 U.S.C. § 78fff-2(c)(1) ...... 19, 32, 39
15 U.S.C. § 78fff-2(c)(1)(D) ...... 18 15 U.S.C. § 78fff-2(c)(2) ...... 46 15 U.S.C. § 78fff-2(c)(3) ...... passim
15 U.S.C. § 78fff-3(a) ...... passim 15 U.S.C. § 78fff-4(c) ...... 19, 57 15 U.S.C. § 78lll(2) ...... 66 15 U.S.C. § 78lll(3) ...... 46
15 U.S.C. § 78lll(4) ...... 31
15 U.S.C. § 78lll(11) ...... 54
Securities Investor Protection Act of 1970, Pub. L. No. 91-598, 84 Stat. 1636 (1970) ...... 39
Securities Investor Protection Act of 1978, Pub. L. No. 95-283, 92 Stat. 249 (1978) ...... 39
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Page(s)
Rules N.Y.C.P.L.R. § 1401 ...... 61
N.Y.C.P.L.R. § 1402 ...... 61, 63
Legislative History H.R. Rep. No. 91-1613 (1970), reprinted in 1970 U.S.C.C.A.N. 5254...... 57
S. Rep. No. 105-182 (1998) ...... 73 Securities Investor Protection Act of 1975, Hearings on H.R. 8064 Before the Subcomm. on Consumer Protection and Finance of the Comm. on Interstate and Foreign Commerce, 94th Cong. (1975) ...... 56-57 Securities Investor Protection Act of 1977, Hearings on H.R. 8331 Before the Subcomm. on Consumer Protection and Finance of the Comm. on Interstate and Foreign Commerce, 95th Cong. (1977) ...... 46
Court Documents Brief for Petitioner, Touche Ross & Co. v. Redington, 442 U.S. 560 (1979) (No. 78-309), 1979 WL 213586 ...... 35-36
Brief of Plaintiff-Appellant SIPC, Redington v. Touche Ross & Co., 592 F.2d 617 (2d Cir. 1978) (No. 77-7183) (Addendum C) ...... 39
Brief of Respondent Redington, Touche Ross & Co. v. Redington, 442 U.S. 560 (1979) (No. 78-309), 1979 WL 199873 ...... 35 Consent Order Substantively Consolidating The Estate Of Bernard L. Madoff Into The Estate Of [BLMIS], SIPC v. Bernard L. Madoff Inv. Sec. LLC, Adv. Pro. No. 08-1789 (Bankr. S.D.N.Y. June 10, 2009), Dkt. No. 252 ...... 22
Judgment, Redington v. Touche Ross & Co., No. 77-7183 (2d Cir. Apr. 21, 1978) (Addendum B) ...... 36
Order, Redington v. Touche Ross & Co., Nos. 77-7183, 77-7186 (2d Cir. Aug. 8, 1979) (Addendum A) ...... 36
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Page(s)
Superseding Indictment, United States v. O’Hara, No. 10-CR-228 (S.D.N.Y. Nov. 17, 2010), Dkt. No. 36 ...... 14
Tr. of Plea Hr’g, United States v. DiPascali, No. 09 CR 764 (RJS) (S.D.N.Y. Aug. 11, 2009), available at http://www.justice.gov/usao/nys/madoff/ dipascaliplea81109.pdf ...... 71
Tr. of Plea Hr’g, United States v. Madoff, No. 09 CR 213 (DC) (S.D.N.Y. Mar. 12, 2009), available at http://www.justice.gov/usao/nys/madoff/ madoffhearing031209.pdf ...... 71
Other Authorities 2d N.Y. Jur. Bailments & Chattel Leases § 115 (2011) ...... 44
8 C.J.S. Bailments § 100 (2012) ...... 46
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COUNTER-STATEMENT OF THE ISSUES PRESENTED FOR REVIEW
I. Whether the District Court correctly held that Irving H. Picard, as trustee
(the “Trustee”) pursuant to the Securities Investor Protection Act, 15 U.S.C.
§ 78aaa et seq. (“SIPA”), for the consolidated liquidation of the business of
Bernard L. Madoff Investment Securities LLC (“BLMIS”) and the estate of
Bernard L. Madoff (“Madoff”), lacks standing under the doctrines of in pari
delicto and prudential standing established in Shearson Lehman Hutton, Inc.
v. Wagoner, 944 F.2d 114 (2d Cir. 1991), which allocate to injured creditors
and investors – and not to a fraudulent debtor’s trustee – the standing to seek
redress from third parties who are alleged to have assisted such debtor in
causing their injuries.
II. Whether the District Court correctly held that the Trustee lacks standing to
litigate the common law claims of customers of a bankrupt broker because a
Title 11 trustee would have no standing to bring such claims and SIPA
expressly limits a SIPA trustee to the same rights as a Title 11 trustee.
III. Whether the District Court correctly rejected the Trustee’s purported
standing to bring common law claims of customers as “bailor” for customer
property, based on SIPA, Securities and Exchange Commission Rule 15c3-
3, 17 C.F.R. § 240.15c3-3 (“Rule 15c3-3”), and Redington v. Touche Ross
& Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979), and
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vacated, Order, Nos. 77-7183, 77-7186 (2d Cir. Aug. 8, 1979)
(“Redington”), because none of those purported authorities support such
standing and Redington is no longer binding precedent.
IV. Whether the District Court correctly rejected the Trustee’s purported
standing to assert claims based on subrogation rights of the Securities
Investor Protection Corporation (“SIPC”) because SIPA expressly limits
such rights to customer net equity claims against the debtor’s estate and such
additional standing would conflict with SIPA’s priority scheme, which
subordinates SIPC’s subrogation rights to the claims of customers.
V. Whether the District Court correctly held that the Trustee has no
contribution claim.
VI. Whether the District Court’s decision should be affirmed on an alternative
ground, namely that the Securities Litigation Uniform Standards Act, 15
U.S.C. § 77bb(f) et seq. (“SLUSA”), preempts the Trustee’s claims.
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PRELIMINARY STATEMENT
The Trustee brings this action as representative of the substantively consolidated estate of BLMIS and Madoff, which, in the Trustee’s own words, perpetrated “the largest financial fraud in history.” Joint Appendix (“A”) at 35 ¶ 1.
By asserting enormous claims against parties who provided no services and owed no duty to BLMIS or to the creditors or customers the Trustee seeks to benefit, the
Trustee also seems determined to make this the largest and most expensive SIPA case in history. The Trustee’s strategy is contrary to well-established precedent, as well as SIPA.
This is not the first major fraud or Ponzi scheme, and the relevant standing rules that govern this case and preclude the claims that have been asserted here are well-established. First, under the in pari delicto doctrine, which, at the request of this Court, was recently clarified by the New York Court of Appeals in Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010), the Trustee for an entity that engaged in fraud cannot bring an action against another party to recover losses resulting from the entity’s fraudulent conduct, even if the beneficiaries of such a claim would be innocent creditors. Second, under this Court’s precedents, including Shearson
Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991), the Trustee lacks prudential standing to bring an action against a party that assists a fraudulent
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debtor in causing injury to its creditors. Under the so-called “Wagoner rule,” the injured creditors themselves have the exclusive ability to bring such claims.
Third, SIPA explicitly adopts these standing rules by providing that a SIPA trustee is only “vested with the same powers . . . as a trustee in a case under [T]itle
11.” 15 U.S.C. § 78fff-1(a) (SPA-63). Critically, to the extent the amount of customer property is insufficient to satisfy customer claims, the exclusive remedy that SIPA provides is a statutory avoidance claim for the return of “property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under provisions of Title 11.” Id. § 78fff-2(c)(3) (SPA-65). These three basic principles preclude all of the Trustee’s overreaching assertions of standing to bring non- bankruptcy claims.
The Trustee initially commenced this case in the United States Bankruptcy
Court for the Southern District of New York on July 15, 2009, as a garden-variety adversary proceeding asserting bankruptcy code avoidance and turnover claims.
On December 5, 2010, the Trustee filed an Amended Complaint, which – in addition to asserting traditional bankruptcy claims seeking approximately $2 billion in allegedly avoidable transfers from all defendants – includes five new common law claims against the HSBC Defendants and other defendants, in Counts
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20 through 24, seeking a total of $6.6 billion.1 Those claims are for aiding and abetting BLMIS’s fraud and aiding and abetting BLMIS’s breach of fiduciary duty
(the “Tort Claims”), money had and received and unjust enrichment (the “Quasi-
Contract Claims”), and contribution (collectively, the “Common Law Claims”).
The gravamen of the Trustee’s Common Law Claims against HSBC is that, based on various purported red flags, HSBC was aware that BLMIS was a Ponzi scheme and substantially assisted that scheme by (i) providing custodial and administrative services to certain feeder funds, (ii) promoting investments in certain feeder funds to a few clients of the HSBC Private Bank in Switzerland, and (iii) selling derivative products that provided investors with synthetic exposure to certain feeder funds. A-36-39 ¶¶ 3-14, A-65-70 ¶¶ 95-109, A-76-78 ¶¶ 136-43.
Although there have been myriad broker-dealer failures caused by fraud in
SIPA’s 41-year history, there is scant, if any, authority allowing the Trustee to bring the Common Law Claims asserted here. The Trustee and SIPC purport to rely on Redington. But Redington is no longer good law, and in any event, does not support their theories of standing based on a fictional “customer property estate” or SIPC’s novel reading of Rule 15c3-3. The Supreme Court’s reversal of this Court’s original decision, which was followed by this Court vacating its own judgment and then dismissing the action for lack of federal subject matter
1 See supra Corporate Disclosure Statement at note i for a list of the HSBC defendants (collectively, “HSBC” or “HSBC Defendants”).
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jurisdiction, deprives the case of any precedential authority. Moreover,
Redington’s bailment theory does not apply here and would not support the
Trustee’s ability to assert common law claims against parties that performed no services for and owed no duties to BLMIS. Further, Redington’s subrogation holding was clearly undermined by subsequent congressional action.
Like the Trustee’s other theories, his purported contribution claim has no support in SIPA and it is precluded by the requirements of New York law. The in pari delicto doctrine and various state law defects also doom his Quasi-Contract claims. Alternatively, the dismissal of the Common Law Claims is also required by SLUSA’s preemption of state law mass actions alleging securities fraud, which is, at bottom, what the Trustee attempts to bring on behalf of the thousands of
BLMIS customers.
There is no policy justification for, and there are important policy arguments against, changing the law to allow the Trustee the expansive standing he seeks here. That standing is not necessary to vindicate the rights of the investors who dealt with HSBC, because those investors who feel they have been aggrieved have already brought their own claims in courts around the world. HSBC has a legitimate interest in not having wrongs allegedly committed against one group of investors with whom it dealt used to benefit another group to which it was a total stranger.
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The Trustee’s overreaching assertion of standing is also inconsistent with the purpose of SIPA, which is to provide modest loss compensation to a very specific group of a failed brokerage’s “customers” in a “prompt” liquidation proceeding.
SIPA was not intended to provide an engine for the Trustee to right the wrongs of all BLMIS investors injured by the Madoff fraud. The statutory limitations defining the “customer” group who would benefit the most from any of his recoveries – which does not include any of the feeder fund investors or even, for the most part, the feeder funds themselves – are fundamentally inconsistent with the Trustee assuming such a mantle.2
2 A “feeder fund” is the term widely used to describe a legally separate fund with its own investment manager and set of investors that invested all or substantially all of its assets in a customer securities account at BLMIS that was managed by Madoff.
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STATEMENT OF THE CASE
On April 12, 2011, the Honorable Jed S. Rakoff of the United States District
Court for the Southern District of New York granted HSBC’s motion to withdraw the case from the Bankruptcy Court to resolve two threshold issues of non- bankruptcy law: (i) whether the Trustee has standing to bring the Common Law
Claims, and (ii) whether SLUSA bars the Common Law Claims. A-574. HSBC subsequently moved to dismiss the claims on these grounds (without waiving other grounds). On July 28, 2011, after briefing and oral argument, Judge Rakoff granted HSBC’s motion to dismiss, holding that the Trustee lacks standing to assert the Tort and Quasi-Contract Claims and that the Trustee cannot demonstrate a right to contribution. SPA-2, 24-26.3 Judge Rakoff did not reach the question of whether SLUSA bars the claims. SPA-4.
Judge Rakoff identified two well-settled, independent obstacles to the
Trustee’s standing: (i) that the Bankruptcy Code “does not itself confer standing on a bankruptcy trustee to assert claims against third parties on behalf of the estate’s creditors themselves, because the trustee stands in the shoes of the debtor, not the creditors,” SPA-5; and (ii) that in this context, where there has been a massive fraud, “prudential considerations deprive a bankruptcy trustee of standing to even bring a claim that would be barred by in pari delicto[,]” SPA-5-6.
3 References to Judge Rakoff’s opinion, Picard v. HSBC Bank plc, 454 B.R. 25 (S.D.N.Y. 2011), will cite to the Special Appendix (“SPA”).
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Judge Rakoff found nothing in SIPA that supported the Trustee’s theory of standing, observing that “the only provision in SIPA that actually discusses how the Trustee is permitted to go about recovering customer property provides the
Trustee with the authority to bring avoidance claims, not common law claims.”
SPA-10. Judge Rakoff was also “mystified by the suggestion that Rule 15c3-3 – a rule that is undisputedly not a part of SIPA – may somehow confer upon a SIPA trustee broad authority that is neither available to an ordinary bankruptcy trustee nor provided by SIPA.” SPA-11.
Judge Rakoff rejected the bailment argument because (i) the Trustee was
“not seeking to return any recovered bailments to the individual bailors, as a bailee would, but instead is seeking to distribute customer property pro rata pursuant to the SIPA distribution scheme[;]” (ii) “the actionable conduct [was] alleged to have occurred prior to the bailment[;]” and (iii) “the immediate effect of the . . . alleged misconduct caused a gain in the value of the bailed property rather than a loss.”
SPA-12-13 (emphasis in original). Similarly, Judge Rakoff rejected the Trustee’s subrogation theory of standing because “[t]he plain language of SIPA . . . makes clear that SIPC is only subrogated to customer net equity claims against the estate, not to all customer claims against third parties[,]” and allowing SIPC to bring claims against third parties as subrogee would conflict with SIPA’s requirement
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that customers be made whole before SIPC can recover any advances paid to customers. SPA-15 (emphasis in original).4
The Trustee relied principally on this Court’s initial decision in Redington for his claimed standing as bailee and subrogee. As an initial matter, Judge Rakoff concluded that Redington is not binding precedent because the Supreme Court’s reversal of that decision eliminated federal subject matter jurisdiction over the action. SPA-17. Judge Rakoff also concluded that even if Redington is binding, it is distinguishable on its facts. SPA-19. Among other things, Judge Rakoff observed that Redington did not involve common law claims, which “unlike the implied private right of action for failure to discharge a regulatory duty that was at issue in Redington . . . generally require proof of individual reliance and causation, which may pose justiciability concerns[.]” SPA-19. Additionally, Judge Rakoff noted that in Redington, the SIPA trustee sought damages from the debtor’s own accountant, unlike the case here, where the HSBC Defendants are not alleged to have provided direct services or to owe any duties to BLMIS or to its customers at large. SPA-19-20.
Finally, Judge Rakoff dismissed the Trustee’s contribution claim, concluding that “[i]f Congress had intended to confer upon the Trustee authority to
4 Judge Rakoff likewise rejected the Trustee’s contention that he could sue as assignee of customers’ claims against third parties, finding that the assignments authorized by SIPA do not extend to such claims, and that the Trustee had not alleged that he had obtained any such assignments. SPA-21-22.
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seek contribution for payments of customer claims, it would have said so in SIPA.”
SPA-25. Judge Rakoff also found that the Trustee was not liable for damages, one of the requirements under New York’s contribution statute. SPA-25.
After Judge Rakoff issued his decision, briefing commenced before the
Honorable Colleen McMahon on nearly identical issues arising in the Trustee’s multi-billion dollar lawsuits against JPMorgan Chase & Co., UBS AG, and their respective affiliates. In addition to the theories of standing rejected by Judge
Rakoff, which Judge McMahon agreed were unsound, Judge McMahon also found the Trustee’s new theories of standing unpersuasive. JPM-SPA-8-18.5
One of the Trustee’s new theories – which he did not raise before Judge
Rakoff but purports to rely on in this appeal – is his argument that St. Paul Fire &
Marine Insurance Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989), confers exclusive standing on the Trustee to bring common law claims against third parties because the injury to the customers is “generalized.”6 Judge McMahon disagreed, holding that “St. Paul Fire does not stand for the proposition that the Trustee can
5 For the Court’s convenience, citations to Judge McMahon’s decision in Picard v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011), will reference the page number in the Special Appendix filed in appeal number 11-5044 (“JPM-SPA”), which is being heard in tandem with this appeal. 6 Brief For Trustee-Appellant Irving H. Picard, As Trustee For The Substantively Consolidated SIPA Liquidation Of Bernard L. Madoff Investment Securities LLC And Bernard L. Madoff (“Tr. Br.”) at 38-41, Picard v. HSBC Bank plc, No. 11- 5207-bk (2d Cir. Feb. 16, 2011), Dkt. No. 76.
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pursue claims that belong individually to the creditors – just the opposite.” JPM-
SPA-14. Under St. Paul, a trustee can only bring claims that accrue “generally to the corporation.” JPM-SPA-15 (internal quotation marks and citation omitted).
For myriad reasons, Judge McMahon found that this situation was not present here, and concluded that “[w]hen a third party has injured not the bankrupt corporation itself but a creditor of that corporation, the trustee in bankruptcy cannot bring suit against the third party.” JPM-SPA-17 (internal quotation marks and citation omitted). This appeal followed.
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STATEMENT OF FACTS
A. The Trustee’s Overreaching Allegations In the ten pages of his brief devoted to asserting that HSBC reaped massive profits from deliberately helping to perpetuate Madoff’s fraud, the Trustee goes well beyond his own pleadings. Tr. Br. 9-18. For example, the Trustee’s brief asserts that HSBC and other defendants “profited even more from the scheme than
Madoff himself,” id. at 6, and “reaped hundreds of millions, if not billions of dollars,” id. at 17, whereas the Amended Complaint alleges only that “the HSBC defendants received over $25 million in fees” since the early 1990s, A-110 ¶ 227,
A-120 ¶ 244. Similarly, the Trustee’s brief asserts that HSBC knew of Madoff’s fraud, whereas the Amended Complaint’s only factual allegation is that HSBC was aware of the litany of red flags found in the many complaints seeking compensation for the Madoff losses from a large array of deep pocket defendants.
A-78-110 ¶¶ 144-226. The Trustee’s brief further asserts that HSBC helped
Madoff by bringing new investors into his Ponzi scheme, but his complaint merely alleges that HSBC served as custodian and administrator to several funds that in turn invested in Madoff’s purported “split strike conversion” strategy. Tr. Br. 9-
10, 12. Unable to argue that either a custodian or an administrator bears responsibility for determining the financial viability of this strategy, a role that plainly belongs to a fund and its investment manager, the Trustee claims that
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HSBC promoted the Madoff scheme simply by having a reputable name attached to the role of custodian and administrator. Id. at 10.
Of course, the plausibility of the Trustee’s assertions is not a matter before the Court on this appeal, but the outrageous assertions open the door to a brief response.
First, contrary to the Trustee’s assertion that HSBC knew of Madoff’s fraud,
HSBC retained KPMG to review Madoff’s operations, and specifically to trace the flow of funds from receipt through the purchase of securities. Id. at 16. As the
Department of Justice has alleged in the prosecutions of several BLMIS employees
(including Frank DiPascali, Madoff’s longtime co-conspirator, who has pleaded guilty and is cooperating), the KPMG review was foiled by the creation of forged records of the Depository Trust Corporation (“DTC”) purporting to show the existence of trades settled through the DTC. Superseding Indictment ¶¶ 70-72,
United States v. O’Hara, No. 10-CR-228 (S.D.N.Y. Nov. 17, 2010), Dkt. No. 36.
What KPMG reported to HSBC was that it had specifically confirmed the absence of sham transactions by reconciling BLMIS’s books and records to those of the
DTC. See Declaration of Oren J. Warshavsky, Ex. A, at 38, Picard v. HSBC Bank plc, No. 11-CV-763 (S.D.N.Y. June 7, 2011), Dkt. No. 36.
Second, the derivative contracts entered into by HSBC did not directly result in the purchasers of those products making any investment with BLMIS or a
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Madoff feeder fund.7 Instead, to hedge its exposure under those contracts, HSBC invested nearly $1 billion of its own money in the feeder funds referenced by the derivative contracts, and that money was lost.8 It strains credulity that HSBC would have made such sizable investments with its own money if it believed
BLMIS was a Ponzi scheme.
B. The Trustee Improperly Seeks To Rely On The Claims Of Feeder Fund Investors Equally incredible is the Trustee’s assertion that his claims against HSBC are part of his just efforts to compensate the victims of Madoff’s fraud. Much of the money invested in Madoff was invested through feeder funds. Yet as the
Trustee advocated, feeder fund investors are not BLMIS customers, see Aozora
Bank Ltd. v. SIPC (In re Bernard L. Madoff Inv. Sec., LLC), Nos. 11 Civ.
5683(DLC), et al., 2012 WL 28468, at *1 (S.D.N.Y. Jan. 4, 2012), and therefore are not entitled to compensation from the BLMIS estate. The feeder funds themselves are BLMIS customers, but the Trustee is in most instances suing those funds, including eleven of the twelve funds that HSBC serviced, see A-53-57
¶¶ 57-68, and denying their claims. The Trustee has gone so far as to seek to
7 See Wailea Partners, LP v. HSBC Bank USA, N.A., 11-CV-3544 (SC), 2011 WL 6294476, at *2-3 (N.D. Cal. Dec. 15, 2011), appeal docketed, No. 11-18041 (9th Cir. Dec. 22, 2011) (describing the above-referenced derivative products). 8 See 2009 HSBC Holdings plc, Annual Report (Form 20-F) 25, 28, 75 (Mar. 10, 2009), available at http://www.sec.gov/Archives/edgar/data/1089113/ 000115697309000141/u06425-20f.htm.
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enjoin feeder fund investor lawsuits against HSBC, claiming that the plaintiffs are not only seeking to recover money that belongs to the BLMIS customers, but also stealing his apparently copyrighted list of red flags. See A-643-48. The net effect of the Trustee’s strategy is to prefer the claims of BLMIS customers over the claims of feeder fund investors by, in effect, appropriating the feeder funds’ claims. Nearly all of the “bad acts” the Trustee relies on in the Amended
Complaint for his Common Law Claims relate to alleged violations by the HSBC
Defendants of their duties to the feeder funds or their investors. For example, the
Trustee alleges that HSBC violated certain European custody rules when HSBC purportedly yielded custody of fund assets to BLMIS. A-130-131 ¶¶ 285-89.
HSBC is currently defending lawsuits in Luxembourg and Ireland by the funds themselves making this same claim. See, e.g., In re Herald, Primeo & Thema Sec.
Litig., No. 09 Civ. 289 (RMB), 2011 WL 5928952, at *13 (S.D.N.Y. Nov. 29,
2011), appeals docketed, Nos. 12-156 et al. (2d Cir. Jan. 12, 2012). Similarly, the
Trustee alleges that HSBC lured investors and synthetic investors into the feeder funds by improperly lending its imprimatur to the feeder funds. See A-119 ¶ 243.
The Trustee asserts that he somehow has the right to bring the same lawsuit as those HSBC customers to whom HSBC owed duties, in order to benefit BLMIS
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customers to whom HSBC owed no duties whatsoever, under the European custody rules or otherwise.9
C. The SIPA Statutory Scheme The Trustee derives all of his powers from SIPA and, to the extent not inconsistent with SIPA, the Bankruptcy Code. 15 U.S.C. §§ 78fff(b), 78fff-1(a)
(SPA-62-63). SIPA is a limited statute with a modest purpose; namely, for a trustee “as promptly as possible after [his] appointment” to “distribute customer property and (in advance thereof or concurrently therewith) otherwise satisfy net equity claims of customers[.]” Id. § 78fff(a) (SPA-62). SIPC, a creation of SIPA, maintains a fund comprised of assessments levied against its broker-dealer members. Id. §§ 78ddd(c)(2) (SPA-56). When a broker-dealer member becomes insolvent, SIPC, as it did in this case, can petition for a “trustee for the liquidation of the business of the debtor” to be appointed under SIPA. Id. § 78eee(b)(3) (SPA-
59).
Absent an express grant of authority in SIPA, a SIPA trustee’s rights and powers are limited to those available to an ordinary bankruptcy trustee, id.
§§ 78fff(b), 78fff-1(a)-(b) (SPA-62-63), whose rights are limited to bringing causes of action available to the estate, see 11 U.S.C. § 541(a). Cf. 15 U.S.C.
9 HSBC is also being sued by feeder funds and investors in the United States, Ireland and Luxembourg, see In re Herald, Primeo & Thema Sec. Litig., 2011 WL 5928952, at *13, and several other jurisdictions.
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§ 78fff-1(d)(3) (SPA-64) (providing that a SIPA trustee should investigate and report to the court “any causes of action available to the estate”) (emphasis added).
Accordingly, a SIPA trustee’s authority to bring claims to augment the fund of customer property is limited to pursuing avoidance claims and to whatever other rights would be available to an ordinary Title 11 trustee. Id. § 78fff-2(c)(3) (SPA-
65). If a shortfall in customer property remains, SIPA provides that customers may
“participate in the general estate as unsecured creditors . . . to the extent only of their respective unsatisfied net equities[.]” Id. § 78fff-2(c)(1)(D) (SPA-65).
SIPA defines “customer property” as property “of the debtor” to which customers have a priority “net equity” claim. Id. § 78fff-2(c) (SPA-65). Customer property includes only securities purchased by the debtor on behalf of customers to the extent of the customers’ net equity, id. § 78fff-2(c)(1)(B) (SPA-65), and if that is insufficient to satisfy customer claims, it also includes “property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of title
11[,]” id. § 78fff-2(c)(3) (SPA-65). Where the net equity claim of each customer exceeds his ratable share of customer property, SIPA provides that SIPC may make advances to the Trustee (capped at $500,000 per customer) to satisfy such claims.
Id. § 78fff-3(a) (SPA-66). Contrary to the legal fiction that the Trustee seeks to create, “Customer Property” is not a separate legal entity that can sue or be sued.
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SIPA also subrogates SIPC to customer net equity claims only as against the estate, and only insofar as SIPC makes advances to pay those claims. Id. § 78fff-
4(c) (SPA-67-68). Notably, Congress amended SIPA in 1978 to revise the priority scheme for distribution of customer property, providing that “SIPC as subrogee may assert no claim against customer property until after the allocation thereof to customers[.]” Id. § 78fff-3(a) (SPA-67). Accord id. 78fff-2(c)(1) (SPA-65).
Accordingly, the statute contemplates that SIPC will not recover its advances unless and until the customers are first made whole.
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SUMMARY OF ARGUMENT
The District Court correctly dismissed the Common Law Claims. The
Trustee stands in the shoes of BLMIS, and any claims BLMIS may have based on its own injury are barred by the in pari delicto doctrine. Further, under this Court’s decision in Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir.
1991), the Trustee has no standing to bring claims against parties that are alleged to have joined with BLMIS to injure investors; those claims belong exclusively to the investors. These principles governing who has standing to bring such claims are not changed by St. Paul Fire & Marine Insurance Co. v. PepsiCo, Inc., 884 F.2d
688 (2d Cir. 1989).
The Trustee’s attempt to cloak himself as a bailee with standing fails because (i) the SIPA statute affords no such standing; (ii) Redington, on which the
Trustee relies, has been deprived of precedential effect and is distinguishable; and
(iii) the elements of a common law bailment have not been met. The Trustee also may not assert SIPC’s subrogee rights as such rights do not exist and are also inconsistent with SIPA’s distribution scheme.
The Trustee’s contribution claim fails because neither SIPA nor New York state law (if it is even applicable) provides such a right. The Trustee lacks standing to bring his Quasi-Contract Claims, which also fail as a matter of state law.
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Finally, SLUSA precludes the Trustee from bringing state law claims on behalf of thousands of BLMIS customers in connection with Madoff’s securities fraud.
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ARGUMENT
I. THE TRUSTEE LACKS STANDING TO BRING THE COMMON LAW CLAIMS
A. The In Pari Delicto Doctrine Bars Any Claims By The BLMIS/Madoff Consolidated Estate The Trustee sues here as the representative of the substantively consolidated
BLMIS/Madoff estate.10 Accordingly, with respect to any non-statutory claims
that the Trustee purports to bring on behalf of the consolidated estate, the Trustee
stands not only in the shoes of BLMIS, but also of Madoff himself. As the
Trustee’s own pleadings make clear, this case provides a textbook example of
when the in pari delicto doctrine bars the Trustee from bringing such claims.11 It is
therefore not surprising that before Judge Rakoff, the Trustee argued that he was
entitled to bring the Common Law Claims not in his own right as representative of
10 The Trustee successfully moved for the substantive consolidation of these two bankruptcy estates “based upon the unity of interest between Madoff and BLMIS, the transfer and commingling of assets and the intertwined financial affairs generally between the two entities[.]” Consent Order Substantively Consolidating The Estate Of Bernard L. Madoff Into The Estate Of [BLMIS] ¶ L, SIPC v. Bernard L. Madoff Inv. Sec. LLC, Adv. Pro. No. 08-1789 (Bankr. S.D.N.Y. June 10, 2009), Dkt. No. 252. 11 The Amended Complaint acknowledges Madoff’s central role as the “mastermind[]” of the fraud. See, e.g., A-35 ¶ 1, A-46-47 ¶ 35. Even if BLMIS and Madoff had separate legal personalities, Madoff’s wrongful conduct would be imputed to BLMIS because a Ponzi scheme operator such as Madoff steals for the corporation and not from the corporation. Kirschner v. KPMG LLP, 626 F.3d 673, 676-77 (2d Cir. 2010). See also Kirschner v. KPMG LLP, 15 N.Y.3d 446, 468 (2010) (“So long as the corporate wrongdoer’s fraudulent conduct enables the business to survive – to attract investors and customers and raise funds for corporate purposes” – a wrongdoer’s conduct is imputed to the corporation.).
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BLMIS, but as the representative of the customer claimants of BLMIS.12 He based this assertion of standing on purported special rights provided by SIPA and the bailment theory set forth in this Court’s initial decision in Redington.
On appeal, the Trustee has changed tack and now also asserts standing to bring the Tort Claims in his own right under this Court’s decision in St. Paul.
Based on his status as an innocent trustee, he asks this Court to create a new equitable exception to the in pari delicto doctrine. This new argument goes nowhere.
Even if the Common Law Claims somehow belong to the debtor under St.
Paul, as the Trustee now argues, they would be barred by the in pari delicto doctrine.13 The application of the in pari delicto doctrine to the Trustee’s Tort
12 See A-51 ¶ 50(f) (“the Trustee, as bailee of Customer Property, can sue on behalf of the customer-bailors”); A-559 (stating at oral argument before Judge Rakoff that the Trustee is only “embracing being simply Bernie Madoff and BLMIS” for three of the five Common Law claims, including contribution and apparently the Quasi-Contract Claims). 13 This is true whether the doctrine is viewed as a prudential limitation on standing or as an affirmative defense, inasmuch as the basis for the defense is established on the face of the complaint and facts as to which this Court can take judicial notice. Kirschner, 15 N.Y. 3d at 459 n.3 (“[I]n pari delicto may be resolved on the pleadings in a state court action in an appropriate case.”) (citing Donovan v. Rothman, 302 A.D. 2d 238, 239 (1st Dep’t 2003)). See A-35-36 ¶¶ 1, 2, A-39 ¶ 13, A-48 ¶ 38. The Trustee has not identified any recognized exception to the in pari delicto defense that would apply here, and his argument that the comparative fault of his consolidated estate and HSBC should be assessed, Tr. Br. 48-49, is precisely what Kirschner held New York law does not permit, 15 N.Y. 3d at 474- 75.
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Claims is a matter of well-settled state law, and therefore this Court neither can nor should create a new exception.14 The New York Court of Appeals has already rejected the argument that the Trustee makes here, i.e., that there should be an exception to the in pari delicto doctrine when a trustee or other representative seeks to achieve recovery for blameless stakeholders “at the expense of [third- party] defendants who allegedly assisted the fraud or were negligent.” Kirschner,
15 N.Y.3d at 475 (rejecting argument of Refco trustee). See also Official Comm. of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145, 1151 (11th Cir.
2006) (collecting circuit precedents finding that the in pari delicto defense applies to bankruptcy trustees).
In any event, as shown below, the Common Law Claims do not belong to the debtor, and the Trustee therefore does not have standing to assert them. This
Court has consistently held as a matter of prudential standing that such claims belong solely to injured creditors and investors and not to the debtor.
14 This Court recognized this in Kirschner when it sought guidance from the New York Court of Appeals regarding the scope of the in pari delicto defense. Kirschner v. KPMG LLP, 590 F.3d 186, 194-95 (2d Cir. 2009) (certifying questions related to the scope of the “adverse interest exception” to the in pari delicto doctrine).
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B. Under Caplin, Wagoner And Hirsch, The Trustee Lacks Standing To Bring The Tort Claims Of Injured Investors In Caplin v. Marine Midland Grace Trust Co. of New York, the Supreme
Court established the fundamental rule that a Title 11 trustee or debtor can only bring claims that it has standing to bring in its own right, which do not include claims that belong to its creditors or investors. 406 U.S. 416, 434 (1972). And in
Wagoner, 944 F.2d at 120, and Hirsch v. Arthur Andersen & Co., 72 F.3d 1085,
1094 (2d Cir. 1995), this Court held that with respect to claims against third parties who are alleged to have joined with the debtor to injure its creditors or investors, as a matter of prudential standing under federal law, the proper parties to bring such claims are the injured creditors and investors, not the debtor or its trustee. This
Court has specifically applied that rule to prevent a trustee from asserting common law tort claims, like the ones asserted here, based on a third party’s alleged assistance to a Ponzi scheme. Id. at 1094 (finding claims based on alleged
“promulgating and promoting [the debtor’s] Ponzi scheme” belong to creditors and not the trustee).
This Court succinctly explained this holding, known as the “Wagoner rule,” as follows:
Where “a bankrupt corporation has joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors.” . . . Where a corporation’s management and a third party collaborated in the fraudulent scheme, the
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trustee can sue only if it can establish that there has been damage to the corporation apart from the damage to the third-party creditors.
Breeden v. Kirkpatrick & Lockhart, LLP (In re Bennett Funding Grp.), 336 F.3d
94, 100 (2d Cir. 2003) (citing and quoting Wagoner, 944 F.2d at 114, 118-19).15
Even if a debtor can demonstrate a unique injury, it lacks standing if its suit would be barred by the doctrine of in pari delicto, id., i.e., if the acts of the corporation’s agents are imputed to the corporation (under New York law) such that the corporation is a “guilty party” not entitled to “sue to recover for a wrong that he himself essentially took part in[,]” Wight, 219 F.3d at 87. In sum, the Wagoner rule provides that “[a] claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors, not to the guilty corporation.”
Wagoner, 944 F.2d at 120 (citations omitted). As Judge Rakoff correctly observed, this Court has determined numerous times that application of this rule is a matter of prudential standing, established at the pleading stage, despite the fact that New York recognizes in pari delicto as an affirmative defense. SPA-22-23.
This prudential standing rule derives from the general prohibition on jus tertii standing, see Wagoner, 944 F.2d at 118 (explaining that “[a] party ‘must assert his own legal rights and interests, and cannot rest his claim to relief on the
15 The Wagoner rule applies not only to claims for aiding and abetting fraud, but also to claims for aiding and abetting breach of fiduciary duty. See Wight v. BankAmerica Corp., 219 F.3d 79, 83, 86-87 (2d Cir. 2000); Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822, 825-27 (2d Cir. 1997).
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legal rights or interests of third parties’”) (quoting Warth v. Seldin, 422 U.S. 490,
499 (1975)), and consistent with that doctrine, these decisions allocate standing to the party that has suffered the direct injury under the theory that such person is in the best position to choose a cause of action to vindicate its rights and is entitled to have control over that decision, Singleton v. Wulff, 428 U.S. 106, 114 (1976)
(“[T]hird parties themselves usually will be the best proponents of their own rights.”).
This Court has often applied this rule to preclude trustees (and others standing in the debtor’s shoes) from bringing claims against third parties where the debtor’s former management participated in a fraud or other wrongdoing, see, e.g.,
Kirschner, 626 F.3d at 677-78; Mediators, 105 F.3d at 825-27, including in the context of Ponzi schemes, see, e.g., Breeden, 336 F.3d at 100-02; Hirsch, 72 F.3d at 1093-94. Hirsch unequivocally held that the investors, not the bankruptcy trustee, are the exclusive parties to bring claims against third parties alleged to have assisted a debtor in perpetrating a Ponzi scheme. Id.
Given the size of the claims asserted here, which are in the billions of dollars, one of the express rationales for the holdings of Caplin and Wagoner – that third parties should not face the danger of duplicative recoveries – applies with special force. See Caplin, 406 U.S. at 431-32; Mediators, 105 F.3d at 826. The large, offshore feeder funds that dealt with HSBC, whose rights the Trustee seeks
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to enforce or appropriate, are sophisticated, managed funds, which are perfectly capable of “mak[ing] their own assessment of the respective advantages and disadvantages” of litigation, Caplin, 406 U.S. at 431, and can vindicate their rights without the Trustee’s assistance. Indeed, these feeder funds have already commenced litigation against HSBC in various jurisdictions.
C. St. Paul Does Not Support The Trustee’s Claims The Trustee’s new argument based on St. Paul – which he claims gives him exclusive standing to pursue any claim that would “redress common injuries suffered by all customers,” Tr. Br. 38 – is also without merit. As an initial matter, this Court should not even consider the Trustee’s St. Paul argument because where, as here, an argument was “available but not pressed below,” a party waives the right to advance the argument on appeal. Wal-Mart Stores, Inc. v. Visa U.S.A.,
Inc., 396 F.3d 96, 124 n.29 (2d Cir. 2005) (internal quotation marks and citation omitted).16
In any event, including for the reasons set forth by Judge McMahon, before whom the argument was raised, St. Paul does not apply here. As Judge McMahon correctly observed, “St. Paul Fire does not stand for the proposition that the
Trustee can pursue claims that belong individually to the creditors – just the opposite.” JPM-SPA-14. St. Paul merely held that a “veil piercing” claim against
16 Referencing an argument only at oral argument does not preserve it for appeal. See United States v. Braunig, 553 F.2d 777, 780 (2d Cir. 1977).
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a debtor’s owners “belongs” to the debtor. JPM-SPA-14. Critically, the veil- piercing claim in St. Paul was based on the allegation that the defendant caused a direct injury to the debtor by stripping away its assets through transfers that were fraudulent against all creditors. 884 F.2d at 691-92. St. Paul does not create standing for a debtor that has suffered no independent, direct injury giving rise to a cognizable legal claim, and does not provide “a trustee standing to pursue a claim based solely on an allegation that creditors suffered a generalized harm[.]” Official
Comm. of Unsecured Creditors v. Pardee (In re Stanwich Fin. Servs. Corp.), 317
B.R. 224, 228 (Bankr. D. Conn. 2004). See also Steinberg v. Buczynski, 40 F.3d
890, 892 (7th Cir. 1994) (Posner, J.) (rejecting as “perfectly circular” the argument that a trustee has standing so long as “any judgment he obtains will enure to the benefit of the bankrupt estate”). Put simply, St. Paul does not provide the Trustee with any “greater [rights] than the rights [BLMIS] would have against [the HSBC
Defendants].” Pereira v. Farace, 413 F.3d 330, 342 (2d Cir. 2005).
Here, the Trustee is not alleging that HSBC assisted in the depletion of the
BLMIS/Madoff estate, but that it injured investors by assisting BLMIS/Madoff in stealing their money. Under the well-established Wagoner rule, claims predicated on such allegations do not belong to the debtor, but to its investors, because they – not the debtor – were directly injured by such conduct. Wagoner, 944 F.2d at 120.
St. Paul does not hold otherwise. See In re Stanwich, 317 B.R. at 228-30, 228 n.4
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(observing that St. Paul must be read in light of the Wagoner rule); Sigmon v.
Miller-Sharpe, Inc. (In re Miller), 197 B.R. 810, 814 n.5 (W.D.N.C. 1996) (same).
Moreover, even assuming the Trustee had the right to bring such claims on behalf of the debtor, he would be barred by in pari delicto. See supra Section I.A.
The Honorable John G. Koeltl’s recent decision in Fox v. Picard (In re
Bernard L. Madoff), Nos. 10 Civ. 4652 (JGK) et al., 2012 WL 990829 (S.D.N.Y.
Mar. 26, 2012), provides a helpful example of when the Trustee is entitled to the standing he wrongfully claims here. Judge Koeltl held, relying in part on St. Paul, that the Trustee had exclusive standing to bring fraudulent conveyance claims and that an individual creditor lacked standing to assert claims that were “duplicative of the fraudulent transfer claims already asserted by the Trustee.” Id. at *12.
Additionally, in finding that the individual creditors had no standing, Judge
Koeltl relied on the fact that there was “no allegation that the . . . defendants owed any duty directly to the [plaintiff investors].” Id. at *8 (citations omitted). Here, the Trustee has predicated his Common Law Claims not on the violation of any duty owed by HSBC to the debtor (because there was none), but on the alleged violation of specific duties owed by HSBC to the feeder funds. Accordingly, rather than bringing a claim on behalf of all creditors to vindicate a generalized injury, the Trustee seeks to rely on purported wrongs done to one particular group
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of creditors to benefit a different group. Nothing in St. Paul or Fox supports this perverse result.
Judge Koeltl also found that the Wagoner rule did not apply to bar the
Trustee from bringing his fraudulent transfer actions because the rule does not apply to “causes of action that the Bankruptcy Code specifically confers on a
Trustee or debtor in possession.” Id. at *12 (internal quotation marks and citations omitted). Here, of course, there is no challenge to the Trustee’s standing to bring the $2 billion in bankruptcy avoidance claims alleged in the Amended Complaint.
The logic and authority that support his standing with respect to such claims and his ability to bring them free from the barrier of the in pari delicto defense have no additional application to the Common Law Claims he has alleged here.
D. SIPA Does Not Authorize The Trustee To Bring Claims On Behalf Of The “Customer Property Estate” The Trustee’s argument that he has the exclusive right to bring claims on behalf of something he calls the “customer property estate”17 is unprecedented and flatly inconsistent with SIPA. A SIPA liquidation involves no separate “customer property estate,” but only one estate; part of that estate is known as “customer property.”18 SIPA provides for the allocation of “customer property” first to
17 Tr. Br. 23-25, 38-39. 18 “Customer Property” is a defined term in SIPA, and describes a subset of property of the debtor as to which creditors qualifying as “customers” have a priority claim. See 15 U.S.C. § 78lll(4) (SPA-72-73). This property includes cash,
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satisfy customer “net equity” claims and certain specified SIPC reimbursements, and second, to the extent of any surplus, to the general creditors of the debtor.
15 U.S.C. § 78fff-2(c) (SPA-65).
Absent an express grant of authority in SIPA, a SIPA trustee’s rights and powers are limited to those available to an ordinary bankruptcy trustee, id.
§§ 78fff(b), 78fff-1(a)-(b) (SPA-62-63), whose rights are limited to bringing causes of action available to the estate, see 11 U.S.C. § 541(a). Cf. 15 U.S.C.
§ 78fff-1(d)(3) (SPA-64) (providing that a SIPA trustee should investigate and report to the court “any causes of action available to the estate”) (emphasis added).
Critically, if the amount of customer property is insufficient to satisfy customer claims, SIPA provides for the recovery of “property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of [T]itle
11.” Id. § 78fff-2(c)(3) (SPA-65). Accordingly, a SIPA trustee’s authority to bring claims to augment the fund of customer property is limited to pursuing avoidance claims and to whatever other rights would be available to an ordinary
Title 11 trustee. Id. §§ 78fff-1(a) (SPA-63), 78fff-2(c)(3) (SPA-65). Here, securities and other “property of the debtor” that was or should have been set aside for customers. Id. See also id. § 78fff-2(c)(1) (SPA-65) (describing how to “allocate customer property of the debtor”) (emphasis added); Rosenman Family, LLC v. Picard, 395 F. App’x 766, 769 (2d Cir. 2010) (holding that money transferred to BLMIS qualifies as “debtor’s property” and “part of the debtor’s estate”).
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however, there is no dispute that the Common Law Claims are not claims to recover transfers of property from BLMIS. To the contrary, the Trustee’s theory is that HSBC facilitated the transfer of property to BLMIS, thus removing those claims from the ambit of Section 78fff-2(c)(3).
Indeed, allowing the Trustee to recover shortfalls in customer property by pursuing common law claims against third parties through protracted and duplicative litigation like this one is inconsistent with the express statutory purpose of a SIPA liquidation, which is to “as promptly as possible after [the Trustee’s] appointment . . . distribute customer property and (in advance thereof or concurrently therewith) otherwise satisfy net equity claims of customers[.]” Id.
§ 78fff(a)(1)(B) (SPA-62) (emphasis added).
Moreover, neither Redington, discussed further below, nor any other authority, approves the theory of standing advanced here, i.e., that a SIPA trustee has “exclusive standing” to assert claims on behalf of a “customer property estate.”
The Trustee effectively concedes this point, acknowledging that his purported standing “on behalf of the customer property estate” is “independent of
Redington.” Tr. Br. 3.19 The Trustee’s theory of exclusive standing also contradicts his subrogation argument. Id. at 53-56. Redington held that SIPC
19 The Trustee’s Amended Complaint is more consistent with Redington’s holdings than his brief. The Amended Complaint alleges his standing to “sue on behalf of customers” because he claims to be “standing in the shoes of customers.” A-50-51 ¶ 50.
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becomes subrogated to the claims of customers upon making advances to satisfy customers’ net equity claims against the estate. 592 F.2d at 624. But if the Trustee has exclusive standing because the claims here seek to redress “generalized injury” to the “customer property estate,” then customers themselves have no claims to which SIPC can become subrogated.
E. Redington Does Not Authorize The Trustee To Bring His Claims As an additional or alternative basis for his theory of standing, the Trustee continues to rely on this Court’s decision in Redington.20 That reliance is entirely misplaced.
1. Redington Is Not Binding a. Redington’s Subsequent History Deprived It Of Any Precedential Effect In Redington, a SIPA trustee and SIPC sued a failed broker-dealer’s accountant, asserting claims under Section 17(a) of the Securities Exchange Act on behalf of the broker-dealer’s customers and claims under state common law.
Redington v. Touche Ross & Co., 428 F. Supp. 483, 486-87 (S.D.N.Y. 1977). The
District Court dismissed the federal claim on the ground that Section 17(a) did not
20 The Trustee also repeatedly invokes Federal Rule of Civil Procedure 17(a)’s “real party in interest” language but does not explain what this contributes to his argument. See, e.g., Tr. Br. 19, 23-26, 28, 33-34, 36-37. As a procedural rule, Rule 17(a) cannot create or expand substantive rights. See Stichting Ter Behartiging Van de Belangen Van Oudaandeelhouders In Het Kapitaal Van Saybolt Intʼl B.V. v. Schreiber, 407 F.3d 34, 47 (2d Cir. 2005).
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create a private cause of action, without addressing whether the SIPA trustee or
SIPC had standing to assert such a claim, and dismissed the common law claims for lack of subject matter jurisdiction. Id. at 491-93.
On appeal, a divided panel of this Court reversed the District Court’s decision over a vigorous dissent by the Honorable William H. Mulligan. The majority held that broker-dealer customers had a private right of action under
Section 17(a), reasoning that implying a private remedy furthered the statute’s general purposes. Redington, 592 F.2d at 621-23. The Court then held that the
SIPA trustee and SIPC had standing to assert the customers’ Section 17(a) claim by relying on common law bailment and insurance principles not provided for in
SIPA. Id. at 623-25. Specifically, Redington held that a SIPA trustee, as bailee of the customers’ property, and SIPC, as subrogee of such customers, could assert a
Section 17(a) claim “on behalf of the customer/bailors” against any third party
“whom they [the customers] could sue themselves.” Id. at 624-25.
This Court’s rulings on the standing issue no longer have precedential effect.
The Supreme Court granted certiorari in Redington to review not only whether
Section 17(a) created a right of action, but also whether a SIPA trustee and SIPC had standing to assert that claim. See Brief of Respondent Redington at 2, Touche
Ross & Co. v. Redington, 442 U.S. 560 (1979) (No. 78-309), 1979 WL 199873 at
*2; Brief for Petitioner at 2-3, Redington, 442 U.S. 560 (No. 78-309), 1979 WL
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213586 at *2-3. The Supreme Court reversed on the ground that no private right of action existed under Section 17(a), and therefore found it “unnecessary to reach” the standing issue. Redington, 442 U.S. at 567 n.9.
On remand, this Court issued an order vacating its original judgment in light of the Supreme Court’s reversal. Order, Redington v. Touche Ross, Nos. 77-7183,
77-7186 (2d Cir. Aug. 8, 1979), attached as Addendum A. The order provides
“that the judgment of this court dated April 21, 1978”21 – which had reversed the district court’s decision – “be and it hereby is vacated[.]” Id. In a subsequent opinion, this Court acknowledged that the Supreme Court had “reversed our decision to allow the Trustee to maintain a private right of action” under Section
17(a) and “remanded the case . . . for a decision on the Trustee’s alternative bases for jurisdiction[.]” Redington v. Touche Ross & Co., 612 F.2d 68, 70 (2d Cir.
1979) (emphasis added). Finding no such alternative bases, this Court affirmed the
District Court’s original dismissal for lack of subject matter jurisdiction. Id. at 73.
An order “vacating the judgment of the Court of Appeals deprives that court’s opinion of precedential effect[.]” O’Connor v. Donaldson, 422 U.S. 563,
577 n.12 (1975). See also Brown v. Kelly, 609 F.3d 467, 476-77 (2d Cir. 2010)
(collecting cases); Durning v. Citibank, N.A., 950 F.2d 1419, 1424 n. 2 (9th Cir.
1991) (stating that “a decision that has been vacated has no precedential authority
21 A copy of the judgment is attached as Addendum B.
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whatsoever”). The Trustee concedes that “if a decision is vacated,” as opposed to merely reversed, it will “automatically erase the precedential effect” of the decision. Tr. Br. 28. That is exactly what happened here.
This Court’s vacatur of the original Redington opinion and order annulled that decision and eliminated its precedential effect. Judges Rakoff and McMahon were also correct that, even absent that step, the Supreme Court’s reversal on the
Section 17(a) question deprived this Court’s ruling on standing of precedential effect. JPM-SPA-26-29; SPA-17-19. The reversal eliminated the only basis for subject matter jurisdiction over the case, as this Court later held on remand, which in turn nullified the Court’s earlier ruling on standing. See Gutierrez v. Fox, 141
F.3d 425, 426 (2d Cir. 1998) (“Without jurisdiction, any decision or ruling by the court would be a nullity.”) (citation omitted). See also Mulligan Law Firm v.
Zyprexa MDL Plaintiffs’ Steering Comm. II (In re Zyprexa Prods. Liab. Litig.),
594 F.3d 113, 126-28 (2d Cir. 2010) (per curiam) (observing that only an “order that is collateral to the merits[,]” such as one imposing Rule 11 sanctions, “may be upheld despite a later conclusion that the court lacked subject matter jurisdiction over the litigation”) (internal quotation marks and citation omitted).
Further, as the Supreme Court held in National Railroad Passenger Corp. v.
National Association of Railroad Passengers, if “no right of action exists, questions of standing . . . bec[o]me immaterial.” 414 U.S. 453, 465 n.13 (1974). The Court
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explained that the “threshold question” in a lawsuit “is whether [a federal statute] or any other provision of law creates a cause of action . . . ; for it is only if such a right of action exists that we need consider whether the respondent had standing to bring the action . . . .” Id. at 456. When the Supreme Court reverses on such a threshold question, it essentially holds that the lower court erred in reaching other issues, and rulings on those issues are not precedential. See Newdow v. Rio Linda
Union Sch. Dist., 597 F.3d 1007, 1041 (9th Cir. 2010). This is the precise approach taken by the Supreme Court in Redington, which, after finding no cause of action under Section 17(a), declined to reach the standing issue. 442 U.S. at 567 n.9.22
The Trustee argues that the Supreme Court’s reversal on the Section 17(a) question left undisturbed this Court’s “holdings” that a SIPA trustee and SIPC have standing to bring common law claims. Tr. Br. 28. In truth, there were no such holdings. The issue presented for review in the SIPA trustee’s brief to the
Second Circuit was limited to “standing to sue . . . under Section 17.” A-904.
22 The Trustee’s and SIPC’s reliance on Steel Co. v. Citizens for a Better Environment, 523 U.S. 83 (1998), is misplaced. Steel Co. requires that issues of “Article III jurisdiction” be decided before other issues, including the existence of a cause of action. Id. at 89. Redington’s determination that a SIPA trustee could assert a Section 17(a) claim as a “real party in interest” under Federal Rule of Civil Procedure 17(a) was not an issue of Article III jurisdiction. See, e.g., Rawoof v. Texor Petroleum Co., 521 F.3d 750, 756 (7th Cir. 2008) (“The requirements of [FRCP] 17 should not be confused with the jurisdictional doctrine of standing.”); Fox v. McGrath, 152 F.2d 616, 618-19 (2d Cir. 1945) (citing cases holding that “real party in interest” defenses are waivable and not jurisdictional).
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SIPC likewise sought appellate review only on the issue of its standing to assert
Section 17(a) claims. See Brief of Plaintiff-Appellant SIPC at 3, Redington v.
Touche Ross & Co., 592 F.2d 617 (2d Cir. 1978) (No. 77-7183), excerpt attached as Addendum C. Therefore, the Redington majority did not rule on standing to assert common law claims and remanded the case to the district court to determine whether to exercise jurisdiction over those claims. 592 F.2d at 625.
b. The Subsequent Amendment To SIPA’s Priority Distribution Scheme Supersedes Redington’s Subrogation Holding In any event, Redington’s reliance on common law insurance principles to hold that SIPC had standing as subrogee of customers’ claims against third parties
(even though SIPA expressly subrogates SIPC to claims against the broker-dealer’s estate only, see infra Section I.F) has been superseded by subsequent amendments to SIPA. In May 1978, after the Redington majority’s decision, an amendment to
SIPA took effect specifying the priority of distribution of customer property.23 As amended, Section 78fff-2(c)(1) of the statute provides that customer property shall be allocated “to SIPC as subrogee for the claims of customers” only after customer claims have been satisfied in full. SPA-65. Section 78fff-3(a) further provides
23 Compare SIPA of 1970, Pub. L. No. 91-598, §§ 6(c)(2)(B), 6(f), 84 Stat. 1636 (1970) (providing that SIPC is subrogated as against the estate without specifying its claim priority), with SIPA of 1978, Pub. L. No. 95-283, § 9, 92 Stat. 249 (1978) (enacting, inter alia, the now current distribution priorities for customer property, which places customers ahead of SIPC as subrogee).
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“that SIPC as subrogee may assert no claim against customer property until after the allocation thereof to customers as provided in section 78fff-2(c)[.]” SPA-67.
Because actions by SIPC as subrogee would deprive customers of their statutory right to be made whole before SIPC, “the priority scheme enacted post-Redington forecloses the possibility that SIPC can be subrogated to customer claims against third parties.” SPA-21.
2. Redington Is Not Persuasive Authority As explained above, Redington has no precedential effect, and this Court is not obliged to follow it. In any event, Redington’s analysis is not persuasive.
a. Redington Was Wrongly Decided, As Many Judges Have Recognized Redington’s engraftment of common law bailment and subrogation principles onto SIPA is inconsistent with the Supreme Court’s holding on the
Section 17(a) issue and has been criticized by numerous courts. In refusing to recognize an implied private right action under Section 17(a), the Supreme Court held that “[t]he ultimate question is one of congressional intent, not one of whether this Court thinks that it can improve upon the statutory scheme that Congress enacted into law.” Redington, 442 U.S. at 578. The Redington majority’s error in implying a private right of action under Section 17(a), in the absence of any supporting statutory language or legislative history, likewise infected its
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conclusion that a SIPA trustee and SIPC had standing under common law principles to assert that right.
In a subsequent case, the Supreme Court returned to the standing issue and criticized Redington’s subrogation analysis. In Holmes v. SIPC, the Court stated:
As a threshold matter, SIPC’s theory of subrogation is fraught with unanswered questions. In suing Holmes, SIPC does not rest its claimed subrogation to the rights of the broker-dealers’ customers on any provision of SIPA. SIPC assumes that SIPA provides for subrogation to the customers’ claims against the failed broker-dealers, but not against third parties like Holmes. As against him, SIPC relies rather on “common law rights of subrogation” for what it describes as “its money paid to customers for customer claims against third parties.” . . . But SIPC stops there, leaving us to guess at the nature of the “common law rights of subrogation” that it claims, and failing to tell us whether they derive from federal or state common law, or, if the latter, from common law of which State.
503 U.S. 258, 270-71 (1992) (internal citations omitted). In the text of its opinion, the Supreme Court cited, with apparent approval, the Honorable Milton Pollack’s decision in Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531 (S.D.N.Y.
1990), criticizing Redington, see 503 U.S. at 270, while, in a footnote, it declined to express an opinion on Redington, id. at 271 n.17.24
24 Additional intervening Supreme Court decisions have undercut Redington’s holding that common law theories not referred to in a statute should supplement the rights and powers expressly provided by that statute. See, e.g., Cent. Bank of Dover, N.A. v. First Interstate Bank of Denver, 511 U.S. 164, 176-78 (1994) (declining to incorporate common law “aiding and abetting” liability into Section
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It is therefore not surprising that every District Court in this Circuit that has considered Redington has agreed with Judge Mulligan that the majority’s decision on standing was wrong. See JPM-SPA-25-29; SPA-17-19; SIPC v. BDO Seidman,
LLP, 49 F. Supp. 2d 644, 651-54 (S.D.N.Y. 1999); Mishkin, 744 F. Supp. at 557-
58.
As those courts have found, Redington’s holding – that a SIPA trustee’s responsibility to marshal and distribute customer property grants him additional powers to bring claims on behalf of the estate’s creditors – contradicts the plain language of SIPA, which vests a SIPA trustee only with the “same powers . . . as a trustee in a case under [T]itle 11.” 15 U.S.C. § 78fff-1 (SPA-63) (emphasis added). See also JPM-SPA-8 (same); SPA-6-7 (same); Mishkin, 744 F. Supp. at
558; supra Section I.D. As Judge Mulligan observed, “that responsibility of the
Trustee is created by SIPA, and is inherent in the Trustee function,” and thus
10(b) private right of action); Pinter v. Dahl, 486 U.S. 622, 652 (1988) (declining to incorporate tort common law doctrines of reliance and causation into elements of Exchange Act claim). See also Gerosa v. Savasta & Co., 329 F.3d 317, 322-23 (2d Cir. 2003) (finding that the Supreme Court’s ERISA precedents apply “a strong presumption that creation of an express remedy clearly forecloses others” and “makes evident that we are no longer free to fill unwritten gaps in [the statute]”) (citations omitted). Those decisions cast doubt on Redington and would authorize this panel to overrule it without en banc review even if Redington retained any precedential value, which it does not. See Adams v. Zarnel (In re Zarnel), 619 F.3d 156, 168 (2d Cir. 2010); Union of Needletrades, Indus. & Textile Employees v. INS, 336 F.3d 200, 210 (2d Cir. 2003).
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provides no basis to imply powers not specified in the statute. Redington, 592 F.2d at 634-35 (Mulligan, J., dissenting) (citing 15 U.S.C. §§ 78fff(a)(1), 78fff(b)(1)).
With respect to subrogation, Judge Mulligan criticized the “alchemy” by which the majority had imbued a “congressionally created corporation with limited powers to litigate” with subrogation rights beyond those provided by the statute, thereby “circumvent[ing] the intent of Congress by ignoring the directive of SIPA that SIPC be subrogated ‘[w]ith the rights and priorities provided in this section.’”
Id. (quoting 15 U.S.C. § 78fff(f)(1)). The district judges of this Circuit have agreed. See JPM-SPA-31-33; SPA-20-21; BDO Seidman, 49 F. Supp. 2d at 654;
Mishkin, 744 F. Supp. at 556-57.
Against this backdrop of judicial criticism of Redington, the Trustee asserts that this Court’s decision in SIPC v. BDO Seidman, LLP, 222 F.3d 63 (2d Cir.
2000), recognized Redington’s precedential value. But in BDO Seidman, this
Court expressly declined to consider whether it was “justified in revisiting the
Redington decision,” noted that it was “assum[ing] without deciding” that SIPC and the trustee had standing, and affirmed the dismissal of the claims on the merits.
Id. at 69-71.
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b. The Trustee Has No Bailee Standing Under The Common Law Or Rule 15c3-3, And Application Of Redington’s Bailment Holding Would Run Afoul Of Wagoner Further, Redington does not apply here because it did not address what standing rule should apply with respect to a Ponzi scheme. As Judge Rakoff held, it is black-letter New York law that a bailment is not created when the would-be bailee – here, Madoff/BLMIS – was undisputedly a thief, who intended to steal property entrusted to his possession. SPA-13-14 (citing Pivar v. Graduate Sch. of
Figurative Art, 290 A.D.2d 212, 213 (1st Dep’t 2002) (explaining that a bailment is only created where the bailee takes “lawful possession without a present intent to appropriate”)). Redington based its bailment analysis on an application of New
York law, 592 F.2d at 625 (citing New York Jurisprudence), and New York law simply would not recognize a bailment in this case.
The bailment theory also fails because, as Judge Rakoff held, the claims against HSBC – for allegedly inducing individuals to give something to a bailee – do not fall within the category of claims that a bailee has capacity to bring because they arose prior to the bailment. SPA-12. See also 2d N.Y. Jur. Bailments &
Chattel Leases § 115 (2011) (“A bailee . . . may bring an action to recover for the loss or injury to the bailed property while in his or her possession.”) (emphasis added) (collecting cases).
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The Trustee’s argument that SIPA itself creates a bailment relationship upon the appointment of the Trustee is without merit. Even if it could somehow be argued that the injury for which the Trustee seeks compensation followed the inducement of the bailment (Judge Rakoff noted the logical flaw in such an argument since the investments themselves increased the amount of bailed property, see SPA-13), the injury would still have occurred prior to the Trustee’s appointment, while the bailed property was in the care of BLMIS. JPM-SPA-30-
31 (explaining that the Trustee’s theory that a bailment was created when he was appointed is akin to a parking garage operator attempting without basis to sue as bailee for damages caused to a car before it entered the garage).
Nor is there any merit to SIPC’s strained position that Rule 15c3-3 somehow creates a bailee/bailor relationship between a broker and its customers under federal or state common law. See Brief of Intervenor SIPC (“SIPC Br.”) at 17-
39.25 It defies logic to infer the Trustee’s standing from such an indirect source.
Indeed, this proposition “mystified” the District Court. SPA-11. Rule 15c3-3 says nothing whatsoever about bailment, let alone grants any power to the Trustee to pursue claims based on a bailment theory. SIPC argues that Rule 15c3-3 imposes requirements on brokers that resemble a bailee’s duties to its bailor. SIPC Br. 17-
18, 26-31. But SIPC’s pro rata distribution of property is utterly incompatible
25 Notably, the Trustee does not make this argument.
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with a bailment relationship, as is the distribution of cash as a substitute for bailed securities. See 8 C.J.S. Bailments § 100 (2012) (“[T]he bailee ordinarily is under an absolute duty to redeliver to his or her bailor the property bailed, in its original or altered form[.]”). SIPC also fails to explain how a bailment could be created under the auspices of a rule that BLMIS completely ignored.
The legislative history of SIPA and Rule 15c3-3 provides SIPC with no help here. To the contrary, it appears that Congress intended to limit property that could be reclaimed by customers pursuant to bailment principles to “customer name securities,” see 15 U.S.C. § 78fff-2(c)(2) (SPA-65) (providing that customers can “reclaim customer name securities”), defined as non-negotiable securities actually registered in the name of the customer, see id. § 78lll(3) (SPA-72). See
SIPA of 1977, Hearings on H.R. 8331 Before the Subcomm. on Consumer
Protection and Finance of the Comm. on Interstate and Foreign Commerce, 95th
Cong. 189-90 (1977) (attachment to statement of Hugh Owens, Chairman of SIPC)
(stating that unlike customer property that is distributed pro rata to customers,
“customer name securities” would be treated “as though they are not part of the debtor’s estate, but merely held by the debtor as bailee”). As Judges Rakoff and
McMahon found, Redington’s reliance on common law bailment principles conflicts with SIPA’s distribution scheme, which requires the Trustee to distribute customer property (other than customer name securities) on a pro rata basis rather
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than to return the recovered bailments to the individual bailors, as a bailee would be required to do. JPM-SPA-31; SPA-12.
Finally, applying Redington’s bailee analysis where, as here, a broker-dealer and third party allegedly worked together to defraud investors, would run afoul of this Court’s long line of decisions beginning with Wagoner, which post-date
Redington and, as discussed above, establish that claims against the third party for such conduct belong to the investors and not the entity or a trustee standing in its shoes. See supra Section I.A. As Judge McMahon aptly put it:
[I]f Wagoner could be avoided by allowing the Trustee to step out of the debtor’s shoes and into [the customers’ shoes], and then back into the debtor’s shoes [by assuming the role of “bailee”] without debtor’s liability, then Wagoner would be avoided in every [SIPA liquidation], effectively overruling it. Convenient legal fictions should not be employed to overrule binding precedent sub silentio. JPM-SPA-18.
c. Redington Did Not Address The Trustee’s Or SIPC’s Standing To Assert Common Law Claims Redington is further distinguishable because, as noted above, Redington addressed the trustee’s and SIPC’s standing to assert statutory claims on behalf of customers, not common law claims. See supra pp. 38-39. The distinction between a statutory claim and a common law claim is an important one, as Judge Rakoff correctly observed, because “unlike the implied private right of action for failure to
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discharge a regulatory duty that was at issue in Redington, common law claims
(such as those asserted here) generally require proof of individual reliance and causation, which may pose justiciability concerns in the context of a mass tort action by a SIPA trustee.” SPA-19. This case exemplifies such concerns. For example, there are critical differences among BLMIS investors with respect to
HSBC: a small number of BLMIS customers were feeder funds that dealt directly with HSBC, while the vast majority had no relationship to HSBC whatsoever; some customers invested with BLMIS before HSBC ever provided services to a feeder fund, and others invested after HSBC began providing such services.
Neither the Trustee nor SIPC address how such individual reliance and causation issues could be overcome.
d. The Lack Of A Causal Connection Between HSBC’s Alleged Misconduct And The Losses of BLMIS Customers Further Distinguishes This Case From Redington Remoteness, or lack of proximate cause, is another important factor distinguishing this case from Redington, where the auditor defendant was a service provider to the broker. See SPA-19 (“[I]n Redington the SIPA trustee sought damages against the bankrupt broker-dealer’s own accountant . . . .”) (emphasis in original). By contrast, here, HSBC was not a service provider to BLMIS and almost all of BLMIS’s customers are total strangers to HSBC. HSBC respectfully submits that Redington, even if correctly decided (which it was not), should not be
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read to confer standing where, as here, remoteness negates both common law proximate cause and loss causation as those concepts are applied under the federal securities laws. See, e.g., Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct.
2179, 2183 (2011) (“To prevail on the merits in a private securities fraud action, investors must demonstrate that the defendant’s deceptive conduct caused their claimed economic loss.”).
HSBC’s alleged wrongful promotion of investments in certain feeder funds that in turn invested in Madoff had at best an “inherently speculative” connection to the injury suffered by Madoff’s customers generally. See Lerner v. Fleet Bank,
N.A., 459 F.3d 273, 286 (2d Cir. 2006) (citation omitted). The alleged promotion of certain feeder fund investments did not cause every BLMIS customer’s loss.
Madoff’s fraud caused that loss. Promotion of feeder fund investments did not even cause every BLMIS customer to invest through Madoff.26 At most, the alleged promotion of feeder funds may have caused investors to purchase shares in those particular funds. But the Trustee is not seeking to recover money for the investors who purchased shares in the promoted funds. To the contrary, he has denied customer status to those investors, and has generally sued the feeder funds in which they invested. See generally Aozora Bank Ltd. v. SIPC (In re Bernard L.
26 To the extent the alleged promotion would have facilitated BLMIS’s ability to redeem existing customers’ security positions, the direct consequence of that assistance would benefit redeeming customers. Any impact of these redemptions on new investors is inherently speculative.
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Madoff Inv. Sec. LLC), Nos. 11 Civ. 5683 (DLC) et al., 2012 WL 28468
(S.D.N.Y. Jan. 4, 2012) (affirming bankruptcy court’s decision that feeder fund investors are not customers). What the Trustee seeks is recovery from the HSBC
Defendants for the thousands of BLMIS customers who never dealt with HSBC.
In Lerner, this Court held that a bank’s allegedly negligent failure to report lawyer trust account overdrafts to bar authorities, thereby assisting a fraud perpetrated by the lawyer/customer, proximately caused injury only to those fraud victims who were depositors with the bank. Non-depositor victims could not establish common law proximate cause, even though the complaint alleged that proper reporting would have ended the fraudulent scheme. See Lerner, 459 F.3d at
287 (concluding that the bank’s allegedly improper actions were “too far removed from the damages . . . subsequently caused to persons who never deposited funds with the bank and who participated in future transactions to which the bank was not a party”). See also Empire City Capital Corp. v. Citibank, N.A., No. 10-CV-
2601 (KNK), 2011 WL 4484453, at *9 (S.D.N.Y. Sep. 28, 2011) (collecting cases, including Lerner, for the proposition that banks do not owe duties of care to non- customers). The same rationale applies here. The injuries to BLMIS customers
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with whom HSBC had no dealings are far too remote to HSBC’s alleged wrongdoing to support the Trustee’s claims.27
As the Supreme Court explained in Holmes v. SIPC, principles of proximate cause require “some direct relation between the injury asserted and the injurious conduct alleged,” and exclude injuries that are “too remote,” “purely contingent” or “indirect[].” 503 U.S. 258, 268, 271, 274 (1992). In Holmes, two broker- dealers purchased securities whose value had been artificially inflated by a stock manipulation scheme. When the securities’ value plummeted, the broker-dealers became insolvent and were unable to pay their obligations to their customers. Id. at 262-63. As purported subrogee of the broker-dealers’ customers, SIPC brought
RICO claims against third parties who allegedly participated in the manipulation scheme, seeking to recover advances that it had paid to the customers under SIPA.
Id. at 270. Like here, however, the third-party defendants had no direct relationship with the injured investors, and the Supreme Court held that the connection between the acts of the third parties and the customers’ injury was “too
27 The Trustee’s conclusory allegations regarding HSBC’s intent and knowledge do not change the result, because the Trustee must still establish proximate cause for his intentional tort claims. See, e.g., Jordan (Bermuda) Inv. Co. v. Hunter Green Inv. LLC., 566 F. Supp. 2d 295, 300 (S.D.N.Y. 2008) (dismissing aiding and abetting claims on proximate cause grounds) (citing Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 62 (2d Cir. 1985)).
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remote,” where the injury was caused by the “intervening insolvency” of the broker-dealers. Id. at 271.
The policy considerations identified in Holmes are equally relevant here.
First, permitting the Trustee to pursue a claim against HSBC for such an indirect injury would make it difficult “to ascertain the amount of [his] damages attributable to the violation, as distinct from other, independent, factors.” Id. at
269 (citation omitted). As Judge Rakoff noted in dismissing on proximate cause grounds RICO claims brought by the Trustee against another financial institution,
“neither the Court nor any jury has any reliable method of ascertaining” how long
Madoff’s Ponzi scheme would have lasted had it not allegedly received an influx of cash from the funds serviced by the defendants, and “[a]ny attempt to estimate that damage would have to consider such imponderable counterfactuals as whether
[Madoff] might have obtained funds from other sources and how much earlier
[Madoff] would have been caught or entered bankruptcy” without the money invested by other funds. Picard v. Kohn, No. 11 Civ. 1181 (JSR), 2012 WL
566298, at *4 (S.D.N.Y. Feb. 22, 2012).28
Second, “recognizing claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at
28 Notably, the Madoff/BLMIS fraud began well before any alleged involvement of HSBC. Moreover, the Trustee has alleged numerous prominent institutions lent their “imprimatur” by servicing Madoff feeder funds, and has brought actions against them, including, among others, Citibank and UBS.
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different levels of injury from the violative acts, to obviate the risk of multiple recoveries.” Holmes, 503 U.S. at 269 (citations omitted). Here, again, “neither the
Court nor any jury has any reliable method for apportioning damages among
[BLMIS’s] investors[.]” Kohn, 2012 WL 566298, at *4. For example, “[h]ow much should [BLMIS] investors who invested before [HSBC’s alleged involvement] receive compared to those who invested afterwards?” Id.
Third, “the need to grapple with these problems is simply unjustified by the general interest in deterring injurious conduct, since directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely.”
Holmes, 503 U.S. at 269-70 (citation omitted). See also Kohn, 2012 WL 566298, at *4 (“[T]hose who invested in [defendants’ BLMIS] feeder funds have direct causes of action . . . .”). That observation could not be more salient here. If HSBC caused a direct injury to anyone (an assertion HSBC disputes), it was to the funds to whom HSBC provided custodial or administrative services (like the depositors of the defendant banks in Lerner), and those funds have already filed suits around the world against HSBC alleging the same injurious conduct that the Trustee alleges here.
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F. The SIPA Trustee Lacks Standing To Vindicate SIPC’s Subrogation Rights Judge Rakoff properly concluded that SIPA subrogates SIPC to customer net equity claims against the estate only, and only insofar as SIPC pays advances on those claims. SPA-15. See also 15 U.S.C. § 78fff-3(a) (SPA-67) (stating that “[t]o the extent moneys are advanced by SIPC to the trustee to pay or otherwise satisfy the claims of customers,” SIPC shall be “subrogated to the claims of such customers”); id. § 78lll(11) (SPA-73) (defining “claims of customers” as net equity claims against the debtor only). “Since Congress has delineated the subrogation rights of SIPC, its failure to provide for subrogation against any third party would clearly dictate that none exist under the . . . principle: Expressio unius est exclusio alterius.” Redington, 592 F.2d at 634-35 (Mulligan, J., dissenting) (citation omitted). Accord JPM-SPA-32; SPA-15; SIPC v. BDO Seidman, LLP, 49 F.
Supp. 2d 644, 654 (S.D.N.Y. 1999). Cf. FDIC v. Ernst & Young, LLP, 256 F.
Supp. 2d 798, 805 (N.D. Ill. 2003), aff’d, 374 F.3d 579 (7th Cir. 2004) (holding that the FDIC was not subrogated to insured depositors’ claims against third parties, where the relevant statute only provided for subrogation to “all rights of the depositor against the failed [banking] institution[,]” because allowing such claims would “impair the statutory priority scheme”) (internal quotation marks and citations omitted).
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Recognizing this difficulty, the Trustee purports to rely on common law subrogation rights based on the addition in 1978 of the phrase “in addition to all other rights it may have at law or in equity” to Section 78fff-3(a). The numerous courts that have considered this argument have rejected it, for the sound reason that
“this catch-all phrase appearing in SIPA’s text cannot be read to contradict [the] more specific provision of SIPA” that limits SIPC’s subrogation rights to a claim against the estate. SPA-15-16. Accord JPM-SPA-32; BDO Seidman, 49 F. Supp.
2d at 654.
Moreover, to allow SIPC to pursue third-party actions as subrogee would undermine SIPA’s priority distribution scheme, see 15 U.S.C. § 78fff-2(c) (SPA-
65), discussed above, which subordinates SIPC to customers. The Trustee’s rejoinder – that SIPA “merely limits when SIPC can recover against the customer property estate and requires only that SIPC await payment of its subrogation rights until the customers’ claims have been allocated[,]” Tr. Br. 57 (emphasis in original) – construes SIPA too narrowly and misses the point. If SIPC is entitled to seek recovery from third parties to recover its advances, it could be made whole before the customers (if the customers were ever made whole). This clearly conflicts with the congressional intent that SIPC, which specifically maintains a fund for such contingencies, should bear the first loss if there is a shortage of assets to compensate customers.
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Further, engrafting a common law right of equitable subrogation relies on the assumption that SIPA should be analogized to an insurance scheme, which is a dubious proposition that this Court specifically has rejected. In re Bernard L.
Madoff Inv. Sec. LLC, 654 F.3d 229, 239 (2d Cir. 2011) (“While this Court has referred to SIPC as providing a form of public insurance, it is clear that the obligations imposed on an insurance provider under state law do not apply to this congressionally-created non-profit membership corporation.”) (emphasis in original) (internal quotation marks and citations omitted).
Finally, SIPC’s suggestion that the 1978 amendment adding the “all other rights” language affirms Redington’s holding that SIPC has common law subrogee standing, SIPC Br. 48, is flatly incorrect. First, the “all other rights” language was included in a proposed bill in 1975, see SIPA of 1975, Hearings on H.R. 8064
Before the Subcomm. on Consumer Protection and Finance of the Comm. on
Interstate and Foreign Commerce, 94th Cong. 199 (1975), years before Redington was decided, and was accordingly neither a response to nor an affirmation of that decision. Second, as a textual matter, the phrase “all other rights” means rights other than the subrogation rights, which are expressly limited to those provided by
SIPA. This is made clear by the decision to change the draft statutory language, which had expanded SIPC’s subrogation rights to those provided in SIPA “or otherwise provided by law” to the enacted phrase, limiting subrogation rights to
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only those “provided by this chapter.” See id. Third, Congress clearly contemplated that “claims of SIPC as subrogee (except as otherwise provided), should be allowable only as claims against the general estate.” Id. at 64
(emphasis added). See also id. at 71 (commenting that SIPC is entitled to “assert a claim based on such advances against the general estate of the debtor and share on a parity with other creditors”) (emphasis added); H.R. Rep. No. 91-1613 (1970), reprinted in 1970 U.S.C.C.A.N. 5254, 5262 (“It is, of course, hoped and contemplated that, when the liquidation proceedings are completed, SIPC will receive back some moneys from the trustee.”) (emphasis added). Cf. 15 U.S.C.
§ 78fff-4(c) (SPA-68) (providing that under direct payment procedure “SIPC shall be subrogated to the claims of such customers against the member”) (emphasis added).29
29 Further, the individualized elements that must be pled to assert common law claims, see supra Section I.E.2.c, make SIPC’s assertion of such claims as subrogee untenable, since for a subrogee to assert a cognizable claim – something that SIPC has not even attempted to do here – it must provide “individualized information about the claims . . . so that defendants would have the opportunity to assert defenses against those claims.” Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris USA Inc., 344 F.3d 211, 217-18 (2d Cir. 2003). See also BDO Seidman, 49 F. Supp. 2d at 654-58 (dismissing breach of contract, negligence and fraud claims for failure to sufficiently plead individual reliance and causation elements).
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II. THE TRUSTEE LACKS STANDING TO LITIGATE ANY CLAIM FOR CONTRIBUTION
A. SIPA Does Not Grant The Trustee Any Right To Contribution And Implying Such A Right Would Be Inconsistent With SIPA It is well-settled that “whether contribution is available in connection with a
federal statutory scheme is a question governed solely by federal law[,]” Lehman
Bros., Inc. v. Wu, 294 F. Supp. 2d 504, 505 n.1 (S.D.N.Y. 2003) (internal
quotation marks and citation omitted), and federal law is clear that a contribution
right exists under a federal statute only if the statute provides for such a right,
either expressly or by implication, or if the right arises under federal common law,
see Texas Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 638 (1981).
SIPA makes no provision for contribution, and nothing in SIPA’s legislative
history suggests that Congress intended to provide such a right for net equity
payments made pursuant to SIPA’s comprehensive statutory scheme. Instead,
under SIPA, the Trustee’s only remedy to make up for a shortfall in customer
property is through avoidance actions. See 15 U.S.C. § 78fff-2(c)(3) (SPA-65).
“The presumption that a remedy was deliberately omitted from a statute is
strongest when Congress has enacted a comprehensive legislative scheme
including an integrated system of procedures for enforcement,” Nw. Airlines, Inc.
v. Transp. Workers Union of Am., 451 U.S. 77, 97 (1981), and federal courts
routinely decline to find federal common law contribution rights in connection
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with statutory schemes, see Texas Indus., 451 U.S. at 644-47 (finding no common law contribution rights in the Sherman Act); Wu, 294 F. Supp. at 505 (same for
Copyright Act); LNC Inv., Inc. v. First Fed. Bank N.A., 935 F. Supp. 1333, 1343-
46 (S.D.N.Y. 1996) (same for Trust Indenture Act). As Judge Rakoff observed below, “[i]f Congress had intended to confer upon the Trustee authority to seek contribution for payments of customer claims, it would have said so in SIPA.”
SPA-25.30
Implying a right of contribution against those who allegedly contributed to the Madoff fraud would be inconsistent with the purpose of SIPA. Such a right would presuppose the weighing of fault between Madoff and each and every potential party, including the contributory negligence of each customer who placed funds with Madoff. Such a weighing would be unworkable and, if attempted in this case, could launch a global proceeding extending decades into the future. See
Holmes, 503 U.S. at 273-74 (recognizing the difficulties involved with apportioning such claims). Unlike the classic contribution situation, this case is not about a patient who died in a single operating room during a single operation, where the task of apportioning fault is manageable. Here, there are hundreds of operating rooms all over the world, each occupied by different service providers
30 By contrast, Congress has specifically chosen to include a right to contribution in other parts of the securities laws. See, e.g., Texas Indus., Inc., 451 U.S. at 640 n.11.
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interacting with each other and with different patients in discrete ways over substantial periods of time. Sorting all this out in one SIPA proceeding is not feasible and was certainly not intended by Congress.
B. The Trustee Lacks Standing To Assert Any Claim For Contribution BLMIS May Have Under New York Law On appeal, the Trustee appears to acknowledge that SIPA does not grant him a right to seek contribution, and argues instead that his claim is “grounded in New
York law.” Tr. Br. 58. But federal courts recognize a state right of contribution only when state law, not a federal statute, supplies the rules of decision to determine the rights and obligations of the parties. See Nw. Airlines, 451 U.S. at
97 n.38. That is not the case here. Because the source of the Trustee’s obligation to satisfy claims of customers and creditors is SIPA itself, and not state law, the
Trustee cannot claim a state law right of contribution. See KBL Corp. v. Arnouts,
646 F. Supp. 2d 335, 341 (S.D.N.Y. 2009) (finding that plaintiff could not “use
New York State common law as an end-around to make a claim for contribution that it could not make under the federal statutory scheme”).
Even assuming that the Trustee were free to assert a contribution claim under New York law, that claim would be barred by Wagoner, which holds that a
Trustee has no standing to bring claims, under any formulation, where the “essence
. . . is that [the third party] aided, [and] abetted . . . [the debtor]” in order to recover for a wrong in which he himself took part, even where the debtor suffered “money
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damages to . . . itself.” Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114,
119-20 (2d Cir. 1991). Here, Wagoner dictates that BLMIS’s customers and creditors, and not the Trustee, are the proper parties to pursue claims against alleged joint tortfeasors. See Silverman v. Meister Seelig & Fein, LLP (In re
Agape World, Inc.), No. 811-9170-reg, 2012 WL 566303, at *18 (Bankr. E.D.N.Y.
Feb. 21, 2012) (holding that Wagoner barred trustee’s claims for negligence and aiding and abetting breach of fiduciary duties, and, in turn, trustee’s claim for contribution predicated on such defective claims); Devon Mobile Commc’ns
Liquidating Trust v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.),
322 B.R. 509, 529 (Bankr. S.D.N.Y. 2005) (“This standing requirement cannot be circumvented by the expedient of filing a third-party complaint and denominating the . . . claims as claims for contribution[.]”).
C. Even Assuming That New York Law Could Be A Source Of Potential Contribution Rights, The Claim Still Fails As A Matter Of Law A claim for contribution under New York law may only be sought when two or more persons are subject to liability for damages for the same injury.
N.Y.C.P.L.R. § 1401. The amount of contribution is limited to the excess paid by a party “over and above his equitable share of the judgment recovered by the injured party[.]” Id. § 1402. Here, (i) neither the Trustee nor the BLMIS estate is subject to liability for damages, (ii) there is no common liability for the same
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injury, and (iii) there is no allegation that the Trustee will pay more than an equitable share, if that amount is even calculable.
First, “[t]he source of a right of contribution under state law must be an obligation imposed by state law,” LNC, 935 F. Supp. at 1349 (emphasis added), and “the existence of some form of tort liability is a prerequisite,” Bd. of Educ. v.
Sargent, Webster, Crenshaw & Folley, 71 N.Y.2d 21, 28 (1987). As the Trustee concedes, however, his sole obligation to BLMIS customers is the payment of net equity claims pursuant to SIPA’s federal statutory scheme. Tr. Br. 66. Under that scheme, the customer is not entitled to recover all losses, i.e., damages, but only to share in the fund of customer property and, to the extent that fund is insufficient, receive the limited SIPC payments authorized by Congress. See 15 U.S.C.
§§ 78fff-2(b) (SPA-64), 78fff-3(a) (SPA-66).
As Judge McMahon rightly concluded, the Trustee is not liable to customers in any way contemplated under New York law, which is “triggered only when one joint tortfeasor is compelled under state law to pay damages arising out of a tort or tort-like injury.” JPM-SPA-20. Judge Rakoff similarly concluded that the Trustee is simply “not subject to ‘liability for damages’ in the sense contemplated by New
York’s contribution statute.” SPA-25.
Second, “the lynchpin of New York’s contribution provision is common liability for the same injury[.]” N.Y. State Elec. & Gas Corp. v. FirstEnergy Corp.,
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No. 03-CV-438 (DEP), 2007 WL 1434901, at *8 (N.D.N.Y. May 11, 2007). Here, there is nothing common between the Trustee’s obligations under SIPA and
HSBC’s tort liability, if any, to BLMIS customers. As Judge McMahon explained, the Trustee’s “‘compulsion’ (or ‘liability’) is not based on state law fraud claims against BMIS by its customers; therefore, it is not based on the ‘same injury’ allegedly caused by Defendants.” JPM-SPA-20. If the Trustee is not subject to any allegations of injury by the claimants, he is unable to allege the “critical requirement” for contribution that “the breach of duty by the contributing party must have had a part in causing or augmenting the injury for which the contribution is sought.” See Nassau Roofing & Sheet Metal Co. v. Facilities Dev.
Corp., 71 N.Y.2d 599, 603 (1988) (citations omitted).
Third, and finally, the Trustee does not allege to have already paid more than his equitable share of any judgment, and looking forward, he does not explain how he would ever be required to pay more than his equitable share standing in the shoes of BLMIS and Madoff. See N.Y.C.P.L.R. § 1402; Andrulonis v. United
States, 26 F.3d 1224, 1233 (2d Cir. 1994) (“the right to contribution does not arise . . . unless and until the defendant pays the plaintiff an amount exceeding its equitable share of the primary judgment”) (citation omitted).
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III. THE TRUSTEE’S QUASI-CONTRACT CLAIMS FAIL FOR ADDITIONAL REASONS The Trustee’s Quasi-Contract Claims seek to recover service fees paid by
certain BLMIS feeder funds to HSBC. But as discussed above, see supra Section
I.A, if the Trustee is suing on behalf of BLMIS/Madoff, he is in pari delicto and
lacks standing to sue. See Xpedior Creditor Trust v. Credit Suisse First Boston
(USA) Inc., 341 F. Supp. 2d 258, 273 (S.D.N.Y. 2004); Mediators, Inc. v. Manney
(In re Mediators, Inc.), 190 B.R. 515, 529-30 (S.D.N.Y. 1995), aff’d, 105 F.3d 822
(2d Cir. 1997). And if he is suing on behalf of the customers to recover these fees,
it is the customers themselves who have standing to sue (and in fact have sued),
not the Trustee, because their injuries are particular to them. Picard v. Taylor (In
re Park S. Sec. LLC), 326 B.R. 505, 514 (Bankr. S.D.N.Y. 2005) (concluding that
the first prong of Wagoner bars a SIPA trustee from pursuing unjust enrichment
claims on behalf of a subset of customers).
Finally, even if the Trustee somehow had standing on behalf of BLMIS to
recover fees earned by HSBC as service provider to certain feeder funds, those
claims would still fail, because the fees were paid pursuant to valid, enforceable
contracts between certain HSBC entities and the feeder funds. See Clark-
Fitzpatrick, Inc. v. Long Island R.R. Co., 70 N.Y.2d 382, 388 (1987). See also
Granite Partners, L.P. v. Bear Stearns & Co., 17 F. Supp. 2d 275, 311 (S.D.N.Y.
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1998) (rejecting quasi-contract claim even where plaintiff was not a party to
contracts).
IV. SLUSA BARS THE TRUSTEE’S COMMON LAW CLAIMS SLUSA mandates that “covered class actions” involving allegations of
misstatements or omissions “in connection with” the purchase or sale of covered
securities shall proceed only under the federal securities laws. 15 U.S.C.
§ 78bb(f)(1) (SPA-48). Because the Trustee’s Common Law Claims on behalf of
thousands of BLMIS customers meet the clear definition of a “covered class
action” and are “in connection with” Madoff’s fraudulent purchases of covered
securities, SLUSA would preempt those claims even if the Trustee had standing to
bring them.
A. The Trustee’s Suit On Behalf Of Thousands Of BLMIS Customers Is A “Covered Class Action” SLUSA defines the term “covered class action” to include “any single
lawsuit in which – (I) damages are sought on behalf of more than 50 persons or
prospective class members” or “(II) one or more named parties seek to recover
damages on a representative basis on behalf of themselves or other unnamed
parties similarly situated,” provided that common questions of fact or law
predominate over individualized issues, without reference to issues of reliance.
Id. § 78bb(f)(5)(B)(i) (SPA-49-50).
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The Trustee’s action falls squarely within this definition. The Trustee, as trustee, has suffered no injury. Nor has the BLMIS estate suffered injury. The injured parties are the BLMIS customers, and it is on behalf of those customers that the Trustee is bringing his aiding and abetting claims. So too, the Trustee’s contribution claim is purportedly predicated on the joint liability of the BLMIS estate and the HSBC Defendants to BLMIS customers and seeks to hold the HSBC
Defendants to a share of that liability.
The Trustee’s complaint acknowledges that he is “su[ing] on behalf of” and
“stand[ing] in the shoes of” customers, who he asserts “were injured as a result of the conduct” he alleges. A-50-51 ¶ 50 (c), (f)-(h). SIPC agrees. See SIPC Br. 39.
The Trustee has allowed the claims of over two thousand BLMIS account holders, and each of these persons is a “customer” under SIPA. See 15 U.S.C. § 78lll(2)
(SPA-72). Because the number of customers exceeds SLUSA’s fifty-person threshold, the Trustee’s suit on their behalf is a “covered class action” under the plain terms of the statute.
This plain reading of the statute is confirmed by LaSala v. Bordier et Cie,
519 F.3d 121 (3d Cir. 2008), the only federal decision to consider SLUSA’s application to a trustee’s assertion of claims on behalf of creditors. In LaSala, the trustees of a bankrupt company’s liquidating trust sought to assert two types of claims that had been assigned to the trust: (i) claims once belonging to the
66 Case: 11-5207 Document: 122-1 Page: 86 04/05/2012 572946 95
bankrupt company itself and (ii) claims once belonging to the bankrupt estate’s creditors. Id. at 126-27. The Third Circuit interpreted the phrase “on behalf of more than 50 persons” in the class action definition to refer to “the original owners of the claim – those injured by the complained-of conduct[.]” Id. at 134. Thus, the claims originally owned by the estate were asserted on behalf of the estate, an entity that counted as “one person” under the counting provision in Section
78bb(f)(5)(D). Id. at 132-37. By contrast, the assertion of claims originally owned by the creditors was on behalf of more than fifty persons and therefore “would seem to take the form of a covered class action.” Id. at 138.
The Trustee tries to avoid the conclusion that this action is a “covered class action” by invoking what SIPC calls the “entity exception” to the SLUSA definition. There is nothing in the statute called the “entity exception.” Rather, to determine whether there are more than fifty persons or class members on whose behalf damages are being sought, the statute contains a provision entitled
“[c]ounting of certain class members[,]” which provides that “[f]or purposes of this paragraph, a corporation, investment company, pension plan, partnership, or other entity, shall be treated as one person or prospective class member, but only if the entity is not established for the purpose of participating in the action.” 15 U.S.C.
§ 78bb(f)(5)(D) (SPA-50).
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While this provision might be relevant if the Trustee were seeking to bring claims that belonged to the BLMIS estate, the claims he is advancing belong to
BLMIS customers, and his point is therefore unavailing. Moreover, SIPC’s argument in favor of creating a special “entity exception” for a SIPA trustee suing on behalf of customers runs afoul of the Supreme Court’s admonition that it is
“inappropriate for courts to create additional, implied exceptions” to SLUSA.
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 88 (2006).
SLUSA provides no exception for claims asserted by a SIPA trustee on behalf of a failed broker-dealer’s customers.
The federal decisions cited by SIPC are all distinguishable because they involved a trustee asserting claims that originally belonged to the corporate debtor or trust. See Smith v. Arthur Andersen LLP, 421 F.3d 989, 1007-08 (9th Cir.
2005); LaSala v. Lloyds TSB Bank, PLC, 514 F. Supp. 2d 447, 468 (S.D.N.Y.
2007) (“plaintiffs assert that they are bringing claims solely on behalf of the
[bankrupt] company,” rather than claims of the company’s defrauded shareholders); Lee v. Marsh & McLennan Cos., Nos. 06 Civ. 6523 (SWK), 06 Civ.
15448 (SWK), 2007 WL 704033, at *4 (S.D.N.Y. Mar. 7, 2007) (stating that a
“Chapter 11 trust established to represent a bankrupt estate for all purposes . . . is entitled to entity treatment”) (citations omitted).
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SIPC also cites a divided decision by the New York Court of Appeals in
RGH Liquidating Trust v. Deloitte & Touche LLP, in which the liquidating trust of a bankrupt company asserted state law claims originally owned by more than fifty bondholders, claims that would have been time-barred if asserted under federal securities laws. 17 N.Y. 3d 397, 415 (2011) (Smith, J., dissenting).
Acknowledging that the question “[was] a difficult one” and would “ultimately be resolved by the federal courts[,]” the majority interpreted SLUSA’s counting provision as creating a “single-entity exemption” and found that the trust qualified for this exemption. Id. at 399, 406-14 (majority opinion). The majority relied on the fact that the claims were first assigned to the bankrupt debtor and then to the trust, distinguishing the Third Circuit’s decision in LaSala on this ground. Id. at
413-14. This also distinguishes RGH from the instant case, because the claims of
BLMIS customers did not pass through the estate to the Trustee. Furthermore, the flaws in the majority’s reasoning were exposed in a forceful dissent by Judge
Smith, who pointed out the irrelevance of the counting provision because “even if the Trust is ‘treated as one person’ it is still suing ‘on behalf of’ more than 50 others[;]” that “[n]othing in either the language or the legislative history of SLUSA suggests that Congress meant to grant [the] exemption” the majority had created; and that the majority had ignored the “critical” distinction drawn by federal case
69 Case: 11-5207 Document: 122-1 Page: 89 04/05/2012 572946 95
law between claims owned by the bankrupt estate and those assigned by creditors.
Id. at 415-419 (Smith, J., dissenting).
Finally, SIPC contends that this is not a “covered class action” because there are no questions of fact or law “common to putative class members.” SIPC
Br. 55-56. A “covered class action” exists where questions of law or fact common to prospective class members predominate over individualized issues without reference to issues of reliance. 15 U.S.C. § 78bb(f)(5)(B) (SPA-49-50). SIPC does not identify a single such individualized issue to counterbalance the numerous questions that are common to the customers, including, for example, whether
HSBC knew of and substantially assisted BLMIS’s fraud.
B. The Trustee’s Common Law Claims Are “In Connection With” BLMIS’s Fraudulent Purchases Of Covered Securities For SLUSA preemption, the complaint must allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security[.]” Id. § 78bb(f)(1)(A) (SPA-48). This Court has held that the “in connection with” standard is met “where plaintiff’s claims necessarily allege, necessarily involve, or rest on the purchase or sales of securities.” Romano v.
Kazacos, 609 F.3d 512, 522 (2d Cir. 2010) (internal quotation marks omitted). See also Dabit, 547 U.S. at 85 (“it is enough that the fraud alleged ‘coincide’ with a securities transaction”) (internal citation omitted).
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Madoff and other BLMIS employees have pleaded guilty to violating
Section 10b and Rule 10b-5 by making misrepresentations and omissions in connection with the purchase of securities,31 and the allegation that HSBC aided and abetted this underlying securities fraud is necessarily “in connection with” that fraud. Further, the Amended Complaint is replete with allegations of material misstatements and omissions by HSBC in connection with the fraud.32 Indeed, the gravamen of the Trustee’s Amended Complaint – that the HSBC Defendants, despite their alleged awareness of the fraud, sustained the Madoff Ponzi scheme by promoting investments in the feeder funds – necessarily entails misrepresentation.
Nor can there be any doubt that the Trustee’s claims involve the purchase or sale of covered securities. Here, as the Trustee alleges, BLMIS purported to purchase securities within the S&P 100 Index, which are listed and publicly traded
31 See, e.g., Tr. of Plea Hr’g at 7-8, 35-36, United States v. Madoff, No. 09 CR 213 (DC) (S.D.N.Y. Mar. 12, 2009), available at http://www.justice.gov/usao/nys/ madoff/madoffhearing031209.pdf; Tr. of Plea Hr’g at 18-20, 22, 65, United States v. DiPascali, No. 09 CR 764 (RJS) (S.D.N.Y. Aug. 11, 2009), available at http://www.justice.gov/usao/nys/madoff/dipascaliplea81109.pdf. 32 See, e.g., A-78 ¶ 144 (alleging that defendants “encouraged others to invest . . . through BLMIS’s IA business notwithstanding explicit awareness of myriad red flags indicating that Madoff was engaged in a massive fraud”); A-79 ¶ 147 (alleging that defendants “acknowledged that they were concealing Madoff’s identity and role in managing the Madoff Feeder Funds”); A-90 ¶ 170 (alleging that defendants “never publicly disclosed that BLMIS acted as sub-custodian” and that the HSBC Defendants “allowed their names to be used by the Feeder Fund Defendants to indicate – inaccurately – that HSBC exercised control over and care of investor assets”).
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on the national exchanges. A-47 ¶ 36. BLMIS customers invested directly in what they thought were those securities, and their BLMIS customer statements showed purported purchases and sales of such securities. Because a “covered security” includes any security that is listed or authorized for listing on the New York Stock
Exchange or another national exchange, see 15 U.S.C. § 78bb(f)(5)(E) (SPA-50), the securities purportedly purchased and sold for BLMIS customers were covered securities.
The fact that Madoff did not actually purchase these covered securities does not remove the case from the ambit of the federal securities laws. See SEC v.
Zandford, 535 U.S. 813, 819-20 (2002) (citations omitted); Instituto De Prevision
Militar v. Merrill Lynch, 546 F.3d 1340, 1347-51 (11th Cir. 2008).
C. Preempting The Trustee’s Claims Serves The Purposes Of SLUSA Because the text of SLUSA unambiguously provides for preemption in this case, the Court need not consider legislative intent, unless the Trustee produces
“clear evidence that Congress never intended [the claims] to be covered by
SLUSA” and that preemption “would undermine the intent of the statute.” Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 110 (2d Cir. 2001). The
Trustee cannot meet this burden because the opposite is true: preemption furthers
SLUSA’s purpose of ensuring that uniform federal standards apply to securities class actions. Because this action for aiding and abetting Madoff’s securities fraud
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would be barred if it were under the federal securities laws, see Cent. Bank of
Dover, N.A. v. First Interstate Bank of Denver, 511 U.S. 164, 176-78 (1994), preemption would further this uniform standards purpose.
Finally, SIPC, in support of its legislative history argument, misconstrues a single statement from the Senate Committee Report stating that the class action definition was changed from the original draft so as not to cover, among other things, a “trustee in bankruptcy.” S. Rep. No. 105-182, at 8 (1998). The Third
Circuit in LaSala interpreted this statement simply to reflect “Congress’s desire not to preempt claims that pass from a debtor corporation to its bankruptcy estate[.]”
519 F.3d at 136 (emphasis added). Nothing in the legislative history suggests any congressional concern about SLUSA preclusion of state common law claims advanced by a SIPA trustee on behalf of more than fifty brokerage customers.
Indeed, the very next paragraph of the Senate Committee report emphasizes that the statute should be “interpreted broadly” to prevent all types of “procedural devices that might be used to circumvent the class action definition.” S. Rep. No.
105-182, at 8.
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CONCLUSION
For the foregoing reasons, the HSBC Defendants respectfully submit that the judgment below dismissing the Trustee’s Common Law Claims against the HSBC
Defendants should be affirmed.
Date: New York, New York April 5, 2012
Respectfully submitted,
CLEARY GOTTLIEB STEEN & HAMILTON LLP
By: /s/ Thomas J. Moloney . Thomas J. Moloney, a Member of the Firm
One Liberty Plaza New York, New York 10006 Phone: (212) 225-2000 Facsimile: (212) 225-3999
Attorneys for Defendants - Appellees HSBC Bank plc, HSBC Securities Services (Luxembourg) S.A., HSBC Bank Bermuda Limited, HSBC Private Bank (Suisse) S.A., HSBC Private Banking Holdings (Suisse) S.A., HSBC Bank (Cayman) Limited, HSBC Securities Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC Institutional Trust Services (Bermuda) Limited, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Ireland) Limited, HSBC Holdings plc, and HSBC Fund Services (Luxembourg) S.A.
74 Case: 11-5207 Document: 122-1 Page: 94 04/05/2012 572946 95
CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME LIMITATION, TYPEFACE REQUIREMENTS AND TYPE STYLE REQUIREMENTS
The undersigned counsel hereby certifies that:
1. This brief complies with the March 13, 2012 Order of the United States
Court of Appeals for the Second Circuit (Carney, J.) granting Defendants -
Appellees permission to file one oversized brief of up to 17,500 words,
because this brief contains 17,312 words, excluding the parts of the brief
exempted by Fed. R. App. P. 32(a)(7)(B)(iii).
2. This brief complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because
this brief has been prepared in a proportionally spaced typeface using
Microsoft Office Word 2007 in 14-point Times New Roman font.
Date: New York, New York April 5, 2012
Respectfully submitted,
CLEARY GOTTLIEB STEEN & HAMILTON LLP
By: /s/ Thomas J. Moloney . Thomas J. Moloney, a Member of the Firm
One Liberty Plaza New York, New York 10006 Phone: (212) 225-2000 Facsimile: (212) 225-3999
Case: 11-5207 Document: 122-1 Page: 95 04/05/2012 572946 95
Attorneys for Defendants - Appellees HSBC Bank plc, HSBC Securities Services (Luxembourg) S.A., HSBC Bank Bermuda Limited, HSBC Private Bank (Suisse) S.A., HSBC Private Banking Holdings (Suisse) S.A., HSBC Bank (Cayman) Limited, HSBC Securities Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC Institutional Trust Services (Bermuda) Limited, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Ireland) Limited, HSBC Holdings plc, and HSBC Fund Services (Luxembourg) S.A.
Case: 11-5044 Document: 110 Page: 1 04/05/2012 572673 91 11-5044-BK
IN THE United States Court of Appeals FOR THE SECOND CIRCUIT
IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC.,
IRVING H. PICARD, Plaintiff-Appellant, v.
JPMORGAN CHASE & CO., JPMORGAN CHASE BANK, N.A., J.P. MORGAN SECURITIES LLC, J.P. MORGAN SECURITIES LTD., Defendants-Appellees, and
SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor.
On Appeal from the United States District Court for the Southern District of New York
BRIEF FOR DEFENDANTS-APPELLEES
JOHN F. SAVARESE DOUGLAS K. MAYER STEPHEN R. DIPRIMA EMIL A. KLEINHAUS LAUREN M. KOFKE JONATHON R. LA CHAPELLE WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd Street New York, New York 10019 212-403-1000 Attorneys for Defendants-Appellees Case: 11-5044 Document: 110 Page: 2 04/05/2012 572673 91
TABLE OF CONTENTS
Page PRELIMINARY STATEMENT ...... 1
COUNTERSTATEMENT OF THE ISSUES PRESENTED...... 6
COUNTERSTATEMENT OF FACTS ...... 6
A. JPMorgan’s contacts with Madoff ...... 6
B. Madoff’s securities fraud ...... 7
C. The Trustee’s lawsuit ...... 8
D. The District Court’s decision ...... 10
SUMMARY OF ARGUMENT ...... 10
ARGUMENT ...... 11
I. THE TRUSTEE LACKS STANDING TO BRING COMMON LAW DAMAGES CLAIMS AGAINST JPMORGAN...... 11
A. Under Caplin, Wagoner and Hirsch, the Trustee has no authority to assert claims that belong to customers...... 12
B. St. Paul does not permit the Trustee to assert claims that belong to customers...... 16
C. Under the Wagoner rule, the Trustee also has no authority to assert damages claims that belong to BMIS...... 21
II. THE DISTRICT COURT CORRECTLY REJECTED THE TRUSTEE’S BAILEE STANDING THEORY...... 27
A. SIPA does not authorize the Trustee to sue third parties as a bailee...... 28
B. The Trustee has no bailment rights as successor to BMIS...... 32
C. Redington is not controlling...... 36
1. Redington is not good law...... 36 Case: 11-5044 Document: 110 Page: 3 04/05/2012 572673 91
2. Redington did not involve a broker that stole property from customers...... 44
3. Redington did not address common law claims...... 45
III. THE DISTRICT COURT CORRECTLY REJECTED THE TRUSTEE’S SUBROGEE STANDING THEORY...... 46
A. SIPC has no authority under SIPA to sue third parties as a subrogee...... 46
B. The Amended Complaint does not adequately plead subrogation claims...... 52
IV. THE DISTRICT COURT CORRECTLY DISMISSED THE TRUSTEE’S CONTRIBUTION CLAIM...... 55
A. The Trustee has no authority under SIPA to seek contribution for payments to customers...... 55
B. The Amended Complaint fails to plead the elements of contribution under New York law...... 60
C. The contribution claim is barred by the Wagoner rule...... 62
V. THE TRUSTEE’S COMMON LAW CLAIMS ARE PRECLUDED BY SLUSA...... 63
A. SLUSA broadly forecloses securities mass actions based on state law...... 64
B. SLUSA preempts the Trustee’s claims on behalf of Madoff’s customers...... 66
1. This action is based on state law...... 66
2. This action alleges misrepresentations or omissions in connection with the purchase or sale of securities...... 66
3. This is a “covered class action” under SLUSA...... 69
CONCLUSION...... 73
- ii - Case: 11-5044 Document: 110 Page: 4 04/05/2012 572673 91
TABLE OF AUTHORITIES
Cases Page A.O. Fox Mem’l Hosp. v. Am. Tobacco, 302 A.D.2d 413 (2d Dep’t 2003)...... 54
A.P.I., Inc. v. Home Ins. Co., 706 F. Supp. 2d 926 (D. Minn. 2010)...... 59n
Alside, Inc. v. Spancrete Ne., Inc., 84 A.D.2d 616 (3d Dep’t 1981)...... 61
Am. Tissue, Inc. v. Arthur Andersen, L.L.P., 2003 WL 22909155 (S.D.N.Y. Dec. 9, 2003)...... 62-63
Am. Tissue, Inc. v. Donaldson, Lufkin & Jenrette Securities, 351 F. Supp. 2d 79 (S.D.N.Y. 2004) ...... 15
Andrulonis v. U.S., 26 F.3d 1224 (2d Cir. 1994) ...... 61
Appleton v. First National Bank, 62 F.3d 791 (6th Cir. 1995) ...... 51n
Barron v. Igolnikov, 2010 WL 882890 (S.D.N.Y. Mar. 10, 2010)...... 68
Bateman Eichler, Hill Richards Inc. v. Berner, 472 U.S. 299 (1985)...... 24
Bd. of Educ. v. Sargent, 71 N.Y.2d 21 (1987)...... 60
Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57 (2d Cir. 1985) ...... 53
Blue Cross & Blue Shield of New Jersey, Inc. v. Philip Morris USA, 344 F.3d 211 (2d Cir. 2003) ...... 4, 52-53, 54
Breeden v. Kirkpatrick & Lockhart LLP (In re Bennett Funding Grp., Inc.), 336 F.3d 94 (2d Cir. 2003) ...... 22
- iii - Case: 11-5044 Document: 110 Page: 5 04/05/2012 572673 91
Brown v. Kelly, 609 F.3d 467 (2d Cir. 2010) ...... 38
Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972)...... passim
Chem One, Ltd. v. M/V Rickmers Genoa, 660 F.3d 626 (2d Cir. 2011) ...... 40
Del Re v. Prudential Lines, Inc., 669 F.2d 93 (2d Cir. 1982) ...... 31
Devon Mobile Commc’ns Liquidating Trust v. Adelphia Commc’ns Corp., 322 B.R. 509 (Bankr. S.D.N.Y. 2005)...... 63
Eastern States Health & Welfare Fund v. Philip Morris, Inc., 188 Misc. 2d 638 (Sup. Ct. N.Y. Co. 2000) ...... 54
Falkowski v. Imation Corp., 309 F.3d 1123 (9th Cir. 2002), amended by 320 F.3d 905 (9th Cir. 2002)...... 68
FDIC v. Ernst & Young, LLP, 256 F. Supp. 2d 798 (N.D. Ill. 2003)...... 49n
Fox v. McGrath, 152 F.2d 616 (2d Cir. 1945) ...... 42
Fox v. Picard (In re Madoff), 2012 WL 990829 (S.D.N.Y. Mar. 26, 2012)...... 19n
Friedman v. Morabito, 1995 WL 502909 (4th Cir. Aug. 25, 1995) ...... 59n
Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co., Inc.), 280 B.R. 794 (Bankr. S.D.N.Y. 2002)...... 23
Gutierrez v. Fox, 141 F.3d 425 (2d Cir.1998) ...... 40
Health Care Serv. Corp. v. Brown & Williamson Tobacco Corp., 208 F.3d 579 (7th Cir. 2000) ...... 54n
- iv - Case: 11-5044 Document: 110 Page: 6 04/05/2012 572673 91
Herman v. RSR Sec. Serv. Ltd., 172 F.3d 132 (2d Cir. 1999) ...... 57
Hill v. Day (In re Today’s Destiny, Inc.), 388 B.R. 737 (Bankr. S.D. Tex. 2008) ...... 59
Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995) ...... passim
Holmes v. SIPC, 503 U.S. 258 (1992)...... 44, 47, 49
In re Beacon Assocs. Litig., 745 F. Supp. 2d 386 (S.D.N.Y. 2010) ...... 68
In re BLMIS, 654 F.3d 229 (2d Cir. 2011) ...... 30
In re Herald, Primeo, and Thema Sec. Litig., 2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011)...... 65-66, 67, 68
In re J.P. Jeanneret Assocs., Inc., 769 F. Supp. 2d 340 (S.D.N.Y. 2011) ...... 66, 68
In re Jett, Securities Act Rel. No. 8395, Exchange Act Rel. No. 49366, 2004 SEC LEXIS 504 (Mar. 5, 2004) ...... 68
Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340 (11th Cir. 2008) ...... 68
KBL Corp. v. Arnouts, 646 F. Supp. 2d 335 (S.D.N.Y. 2009) ...... 57
Kirschner v. Grant Thornton LLP, 2009 WL 1286326 (S.D.N.Y. Apr. 14, 2009), aff’d, 626 F.3d 673 (2d Cir. 2010)...... 22, 27, 62
Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010)...... 22-23, 25, 26
Kittay v. Atl. Bank of New York, 316 B.R. 451 (Bankr. S.D.N.Y. 2004)...... 59n
- v - Case: 11-5044 Document: 110 Page: 7 04/05/2012 572673 91
Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339 (7th Cir. 1987) ...... 18
Kotoshirodo v. Hancock, 2009 WL 2225450 (Bankr. D. Haw. July 23, 2009) ...... 59n
Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413 (1996)...... 53
Lander v. Hartford Life & Ann. Ins., 251 F.3d 101 (2d Cir. 2001) ...... 64-65
LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008) ...... 70, 71, 71n, 73
Lehman Bros., Inc. v. Wu, 294 F. Supp. 2d 504 (S.D.N.Y. 2003) ...... 55, 57
Levinson v. PSCC Servs., 2009 WL 5184363 (D. Conn. Dec. 23, 2009) ...... 66
Levitin v. PaineWebber, Inc., 159 F.3d 698 (2d Cir. 1998) ...... 34
Leykin v. AT&T Corp., 216 F. App’x 14 (2d Cir. 2007) ...... 65
LNC Invs., Inc. v. First Fid. Bank, 935 F. Supp. 1333 (S.D.N.Y. 1996) ...... 55, 57, 58-59
Martin v. Briggs, 235 A.D.2d 192 (1st Dep’t 1997) ...... 33
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006)...... 64, 65
Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531 (S.D.N.Y. 1990) ...... 44, 48, 51
MLSMK v. JP Morgan Chase & Co., 431 F. App’x 17 (2d Cir. 2011) ...... 10
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Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010)...... 43n
Motorola Credit Corp. v. Uzan, 388 F.3d 39 (2d Cir. 2004) ...... 43n
National Railroad Passenger Corp. v. National Association of Railroad Passengers, 414 U.S. 453 (1974)...... 29, 39, 42, 43, 48
Newdow v. Rio Linda Union Sch. Dist., 597 F.3d 1007 (9th Cir. 2010) ...... 39, 40, 41, 42
Nw. Airlines, Inc. v. Transp. Workers Union of Am., 451 U.S. 77 (1981)...... 55, 56, 58, 60
O’Connor v. Donaldson, 422 U.S. 563 (1975)...... 38
Pereira v. Farace, 413 F.3d 330 (2d Cir. 2005) ...... 13, 18, 19, 45
Peterson v. McGladrey & Pullen, LLP, 2012 WL 1088274 (7th Cir. Apr. 3, 2012)...... 25-26n
Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011) ...... passim
Pivar v. Graduate Sch. of Figurative Art of the N.Y. Acad. of Art, 290 A.D.2d 212 (1st Dep’t 2002) ...... 32
Rahilly v. Wilson, 20 F. Cas. 176 (D. Minn. 1872)...... 35n
Rahilly v. Wilson, 20 F. Cas. 179 (Circ. Ct. D. Minn. 1873) ...... 35n
Rawoof v. Texor Petrol. Co., Inc., 521 F.3d 750 (7th Cir. 2008) ...... 42
Redington v. Touche Ross & Co., 428 F. Supp 483 (S.D.N.Y. 1977) ...... 36
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Redington v. Touche Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979) on remand, 612 F.2d 68 (2d Cir. 1979) ...... passim
Redington v. Touche Ross & Co., 612 F.2d 68 (2d Cir. 1979) ...... 38, 40
RGH Liquidating Trust v. Deloitte & Touche LLP, 17 N.Y.3d 397 (2011)...... 71, 71-72, 72
Romano v. Kazacos, 609 F.3d 512 (2d Cir. 2010) ...... 65
Rosenman Family, LLC v. Picard, 395 F. App’x 766 (2d Cir. 2010) ...... 30
Rozsa v. May Davis Grp., 152 F. Supp. 2d 526 (S.D.N.Y. 2001) ...... 33-34
Safir v. U.S. Lines, Inc., 792 F.2d 19 (2d Cir. 1986) ...... 29
Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995) ...... 25n
Seaboard Sand & Gravel Corp. v. Moran Towing Corp., 154 F.2d 399 (2d Cir. 1946) ...... 32, 35
SEC v. Zandford, 535 U.S. 813 (2002)...... 67
Seitter v. Schoenfeld, 88 B.R. 343 (D. Kan. 1988)...... 59n
Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) ...... passim
SIPC v. BDO Seidman, LLP, 49 F. Supp. 2d 644 (S.D.N.Y. 1999) ...... 23
SIPC v. BDO Seidman, LLP, 222 F.3d 63 (2d Cir. 2000) ...... 43, 43-44, 45
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SIPC v. Cheshier & Fuller, LLP, 377 B.R. 513 (Bankr. E.D. Tex. 2007)...... 59n
St. Paul Fire & Marine Insurance Co.v.PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) ...... 2, 16, 17, 18
Steel Co. v. Citizens for a Better Environment, 523 U.S. 83 (1998)...... 42, 43
Steinberg v. Buczynski, 40 F.3d 890 (7th Cir. 1994) ...... 19, 20
Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630 (1981)...... 35, 55
The Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822 (2d Cir. 1997) ...... passim
Touche Ross & Co. v. Redington, 442 U.S. 560 (1979)...... 37, 39-40, 42
U.S. v. Perea, 986 F.2d 633 (2d Cir. 1993) ...... 31
U.S. v. Philip Morris Inc., 153 F. Supp. 2d 32 (D.D.C. 2001)...... 54n
Westerhoff v. Slind, 688 F.2d 62 (8th Cir. 1982) ...... 59n
Wight v. BankAmerica Corp., 219 F.3d 79 (2d Cir. 2000) ...... 22
Wornick v. Gaffney, 544 F.3d 486 (2d Cir. 2008) ...... 13
Statutes and Rules 11 U.S.C. § 541(a)(1)...... 13
15 U.S.C. § 77p(b) ...... 65
15 U.S.C. § 77p(f)(2)(A)...... 69
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15 U.S.C. § 77p(f)(2)(C)...... 69
15 U.S.C. § 77p(f)(3) ...... 67
15 U.S.C. § 77r(b)...... 67
15 U.S.C. § 78bb(f)(1) ...... 65
15 U.S.C. § 78bb(f)(5)(B)...... 69
15 U.S.C. § 78bb(f)(5)(D)...... 69, 72
15 U.S.C. § 78bb(f)(5)(E) ...... 67
15 U.S.C. § 78fff(a)(3)...... 48
15 U.S.C. § 78fff-1(a) ...... 23, 28, 29
15 U.S.C. § 78fff-2(b)...... 56n
15 U.S.C. § 78fff-2(c)(1) ...... 30, 48, 56n, 61
15 U.S.C. § 78fff-2(c)(3) ...... 29, 56
15 U.S.C. § 78fff-3(a) ...... 46-47, 49, 50
15 U.S.C. § 78lll(4)...... 30
15 U.S.C. § 78lll(11)...... 47
17 C.F.R. § 240.15c3-3...... 33, 33n, 34
Fed. R. Bankr. P. 7001...... 62
Fed. R. Bankr. P. 7014...... 62
Fed. R. Civ. P. 17(a)...... 31, 42, 43
N.Y. C.P.L.R. § 1401...... 60
N.Y. C.P.L.R. § 1402...... 60
Other Authorities 8 C.J.S. Bailments § 7...... 34
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9 N.Y. Jur. 2d Bailments and Chattel Leases § 115 (2011)...... 31
Exchange Act Release No. 9388, 36 Fed. Reg. 22312 (Nov. 24, 1971) ...... 33n
Exchange Act Release No. 9622, 37 Fed. Reg. 11687 (June 10, 1972)...... 33n
Exchange Act Release No. 9775, 37 Fed. Reg. 20260 (Sept. 28, 1972) ...... 33n
Exchange Act Release No. 9856, 37 Fed. Reg. 25224 (Nov. 29, 1972) ...... 33n
Securities Investor Protection Act Amendments of 1975: Hearings on H.R. 8064 Before the Subcomm. on Consumer Protection and Finance of the H. Comm. on Interstate and Foreign Commerce, 94th Cong. (1976)...... 51
Securities Investor Protection Act Amendments: Hearings on H.R. 8331 Before the Subcomm. on Securities, Comm. on Banking, Housing and Urban Affairs, 95th Cong. (1978)...... 34
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CORPORATE DISCLOSURE STATEMENT
Pursuant to Fed. R. App. P. 26.1(a), defendant-appellee JPMorgan
Chase & Co. states that it is a publicly held company and has no parent corporation.
Defendant-appellee JPMorgan Chase Bank, N.A. states that it is a private non-governmental party, and JPMorgan Chase & Co. owns, directly or indirectly, 10% or more of the stock of JPMorgan Chase Bank, N.A.
Defendant-appellee J.P. Morgan Securities LLC states that it is a private non-governmental party, and JPMorgan Chase & Co. owns, directly or indirectly, 10% or more of the stock of J.P. Morgan Securities LLC.
Defendant-appellee J.P. Morgan Securities Ltd. states that it is a private non-governmental party, and JPMorgan Chase & Co. owns, directly or indirectly, 10% or more of the stock of J.P. Morgan Securities Ltd. Case: 11-5044 Document: 110 Page: 14 04/05/2012 572673 91
PRELIMINARY STATEMENT
The district court faithfully applied two well-established rules of standing in dismissing the common law claims brought by the Trustee for Bernard
Madoff’s disgraced brokerage firm. First, as the United States Supreme Court and this Court have held, “a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate’s creditors, but may only assert claims held by the bankrupt corporation itself.” Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d
114, 118 (2d Cir. 1991) (citing Caplin v. Marine Midland Grace Trust Co., 406
U.S. 416 (1972)). Second, as this Court has held, a bankruptcy trustee also lacks standing to sue third parties on behalf of the bankrupt corporation where the debtor itself participated in defrauding creditors. Id. at 120.
Based on these settled rules, the district court correctly held that the
Trustee has no authority to bring common law damages claims against JPMorgan.
Finding “no doubt” that the Trustee’s common law claims “belong” only to
Madoff’s defrauded investors, the court held that the Trustee — as successor to
Madoff’s brokerage firm — lacks standing to pursue those claims. SPA-7. The district court further held that even if those common law claims are deemed to belong to Madoff’s brokerage firm, the Trustee would still be barred from pursuing them in light of the brokerage firm’s criminal fraud. SPA-8. Case: 11-5044 Document: 110 Page: 15 04/05/2012 572673 91
In reaching this result, the district court echoed the Supreme Court’s sound reasoning in Caplin. In that case, the Supreme Court held that nothing in federal bankruptcy law authorizes a trustee to aggregate and assert creditor claims.
406 U.S. at 428; SPA-7. The Supreme Court reasoned that permitting a trustee to usurp creditor claims would create a morass of legal and practical problems: it would not only strip creditors of control over their own claims, but also invite duplicative lawsuits to redress the same harms. 406 U.S. at 431-32; SPA-7.
In seeking to justify his pursuit of common law claims in the face of
Caplin and Wagoner, the Trustee has changed course repeatedly, putting forward a shifting array of arguments. In the district court, the Trustee’s lead argument was that section 544(a) of the Bankruptcy Code, under which a trustee has the rights of a hypothetical lien creditor, authorizes trustees to assert creditor damages claims.
The district court thoroughly refuted this argument, SPA-9-17, and the Trustee has summarily abandoned it on appeal, Trustee Br. 7 n.4.
The Trustee’s remaining arguments are no more persuasive. The
Trustee invokes this Court’s decision in St. Paul Fire & Marine Insurance Co.v.
PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989), which held that a bankruptcy trustee could pursue a veil-piercing claim against the bankrupt company’s parent. What the Trustee overlooks, however, is that the veil-piercing claim in St. Paul belonged solely to the debtor; creditors lacked standing to pursue the claim. Id. at 703-05.
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St. Paul thus did not depart from the bedrock rule that a bankruptcy trustee lacks standing to pursue creditor claims — a rule that this Court has since applied repeatedly in dismissing claims brought by trustees. E.g., The Mediators, Inc. v.
Manney (In re Mediators, Inc.), 105 F.3d 822 (2d Cir. 1997); Hirsch v. Arthur
Andersen & Co., 72 F.3d 1085 (2d Cir. 1995).
The Trustee also contends that under the Securities Investor
Protection Act of 1970 (SIPA), he has broader powers than an ordinary bankruptcy trustee and can assert customer claims against third parties either as a “bailee” of customer property or as a “subrogee” of customer claims. As the district court held, however, the Trustee has no possible bailment rights as successor to
Madoff’s brokerage firm because “a thief can never take the status of a bailee.”
SPA-30. Moreover, as the district court held, it would be “fanciful” to read SIPA as creating new bailment rights in favor of the Trustee: the statute “does not create or contemplate a bailment relationship.” SPA-30-31.
The Trustee’s subrogation theory fares no better. According to the
Trustee, after paying all or a portion of customers’ statutory “net equity” claims against the estate, as required by SIPA, the Securities Investor Protection
Corporation (SIPC) becomes subrogated to any tort claims customers may have against third parties, and SIPC can then assign such subrogation rights to the
Trustee. SIPA establishes a comprehensive system designed by Congress to
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expedite the satisfaction of “net equity” claims filed by customers of failed
brokerage firms. As part of that system, SIPA provides SIPC with subrogation
rights only with respect to customer “net equity” claims against the debtor’s estate
— it confers no such rights as to any claims against third parties. SPA-23-24. In addition, under this Court’s precedent, the Trustee’s subrogation claims also fail because the Trustee has provided no individualized information about the supposed subrogors or their alleged claims. See Blue Cross & Blue Shield of New Jersey,
Inc. v. Philip Morris USA Inc., 344 F.3d 211, 217-18 (2d Cir. 2003).
The Trustee’s assertion that he can seek contribution from JPMorgan
for his payments to customers is equally baseless. Since SIPA is the source of the
Trustee’s obligation to pay customers, the Trustee must look to federal law for any
contribution rights. But SIPA confers no contribution rights. And in any event,
under New York law, a contribution claim is available only when a joint tortfeasor
is compelled to pay more than its fair share of tort liability; here, however, it is the
SIPA statute — not state tort law — that compels the Trustee to pay customers.
SPA-18-22.
In urging reversal, the Trustee relies heavily on Redington v. Touche
Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979), in which this
Court: (1) first held that a broker-dealer’s customers had an implied private right
of action under section 17(a) of the Securities Exchange Act; and (2) then found
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that a SIPA trustee as a “bailee,” and SIPC as a “subrogee,” had the power to assert that implied right of action. The Supreme Court, however, reversed this Court’s decision to imply a private right of action. As the district court held, the Supreme
Court’s reversal on the threshold question of whether a section 17(a) claim existed means that this Court’s secondary conclusion regarding who could assert that non- existent claim was “superfluous” and “cannot bind a lower court.” SPA-28-29.
But even if Redington were good law, it does not control here.
Redington did not involve a broker that stole from its customers. Accordingly, this
Court had no occasion to apply either the rule that a thief is not a bailee or in pari delicto principles — both of which prevent the Trustee from asserting bailment rights in this case. In Redington, moreover, this Court expressly limited its standing analysis to the section 17(a) claim. Redington did not hold that a SIPA trustee can assert customer common law claims as a bailee or subrogee, and this
Court has never so held.
Having properly dismissed the Trustee’s claims for lack of standing, the district court did not consider JPMorgan’s additional arguments for dismissal.
But the Securities Litigation Uniform Standards Act provides an alternative ground for affirming the district court’s dismissal of the Trustee’s claims. That federal statute requires dismissal of mass actions based on state law that allege securities fraud. This lawsuit — in which the Trustee seeks to aggregate and assert the
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common law claims of thousands of customers who were defrauded by Madoff’s securities scheme — is precisely the kind of mass state law securities fraud action that SLUSA was designed to preempt.
COUNTERSTATEMENT OF THE ISSUES PRESENTED
1. Whether the district court was correct in holding that the Trustee lacks standing to pursue common law damages claims against JPMorgan.
2. Whether the district court was correct in dismissing the Trustee’s contribution claim.
3. Whether SLUSA precludes the Trustee from bringing state law securities fraud claims on behalf of thousands of Madoff customers.
COUNTERSTATEMENT OF FACTSA
A. JPMorgan’s contacts with Madoff
JPMorgan Chase is one of the largest banks in the world.
A-671(¶ 22). Bernard L. Madoff Investment Securities LLC (BMIS) had a checking account at JPMorgan Chase and predecessor banks since 1986. A-691,
A-716(¶¶ 104, 199).
A Throughout this brief, “JPMorgan” refers to the four defendants: JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and J.P. Morgan Securities Ltd. “JPMorgan Chase” refers to JPMorgan Chase Bank, N.A.
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During the six-year period prior to BMIS’s bankruptcy, JPMorgan
Chase received approximately $590,000 in fees from BMIS for banking services.
A-747, A-810-12(¶ 306 & Ex. A). JPMorgan Chase also received interest payments of approximately $3.5 million on $145 million in loans to BMIS that
BMIS repaid. A-741, A-810-12(¶ 288 & Ex. A).
Beginning in 2006, J.P. Morgan Securities Ltd. invested more than
$300 million in four Madoff “feeder funds,” i.e., investment funds that invested with BMIS. These investments served as hedges for financial products under which JPMorgan’s payments to sophisticated investors in Europe were tied to the feeder funds’ returns. A-698, A-705-06, A-710(¶¶ 131, 160, 178).
After JPMorgan acquired Bear Stearns, JPMorgan conducted a review of its exposure to hedge funds. A-698(¶ 130). That review resulted in significant redemptions from hedge funds, including redemptions of approximately $276 million from Madoff feeder funds. A-710, A-929(¶ 178 & Ex. E).
B. Madoff’s securities fraud
On December 11, 2008, the FBI arrested Bernard Madoff, and the
U.S. Attorney for the Southern District of New York charged him with securities fraud. A-680(¶ 53). On March 12, 2009, Madoff pleaded guilty to securities fraud and admitted that he operated a Ponzi scheme through BMIS. A-681(¶ 58).
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Madoff was the founder, chairman, chief executive officer and sole owner of BMIS, which he personally operated for decades as a Ponzi scheme.
A-674, A-677, A-678(¶¶ 36, 44, 46). The Trustee has represented to the
Bankruptcy Court that BMIS and Bernard Madoff were “alter ego[s]” and, on that basis, procured the substantive consolidation of the BMIS bankruptcy proceeding with Madoff’s personal bankruptcy. A-964.
C. The Trustee’s lawsuit
On December 2, 2010, after taking document and deposition discovery from JPMorgan, the Trustee commenced this action. After withdrawal of the reference to the district court, the Trustee filed the Amended Complaint.
The first 20 causes of action in the Amended Complaint are avoidance claims under federal bankruptcy law. These causes of action, which are not at issue on this appeal, seek to recover alleged direct and indirect transfers to
JPMorgan totaling approximately $425 million. A-752-75(¶¶ 328-489).
Causes of action 21 to 28 are common law claims seeking to recover
$19 billion, apparently the full amount of customer losses resulting from Madoff’s fraud. These causes of action include claims for aiding and abetting fraud, aiding and abetting breach of fiduciary duty, “knowing participation in a breach of trust,”
“fraud on the regulator,” unjust enrichment, conversion, aiding and abetting conversion, and contribution. A-775-800(¶¶ 490-589).
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On August 1, 2011, JPMorgan moved to dismiss the common law claims in the Amended Complaint and certain of the bankruptcy claims. A-930-
31. JPMorgan moved to dismiss the Trustee’s common law claims for lack of standing and based on SLUSA. In addition, JPMorgan moved to dismiss for failure to state a claim.
Although not the subject of this appeal, a word is in order regarding the Trustee’s allegations, repeated at length in his appellate brief, that JPMorgan employees were complicit in Madoff’s crimes. After years of investigation, including substantial pre-litigation discovery from JPMorgan under Federal Rule of Bankruptcy Procedure 2004, the Trustee has nothing to support this false accusation. He has nothing to show that anyone at JPMorgan had actual knowledge of Madoff’s fraud or any motive to participate in it. And his basic thesis — namely, that JPMorgan employees deliberately joined in a doomed-to-fail
Ponzi scheme simply to preserve routine banking income — is preposterous. The
Amended Complaint is a massive overreach on the part of a Trustee who, in a search for deep pockets, has recklessly accused people at JPMorgan of participating in Madoff’s crimes without factual support and without regard for the consequences of his public accusations.
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D. The District Court’s decision
On November 1, 2011, the district court granted JPMorgan’s motion to dismiss the common law claims, holding that the Trustee lacks standing to bring damages claims against JPMorgan and has no valid claim for contribution. SPA-1-
33. The district court relied in part on Judge Rakoff’s decision in the HSBC case, which dismissed common law claims brought by the Trustee against HSBC,
Unicredit and other defendants. Picard v. HSBC Bank PLC, 454 B.R. 25
(S.D.N.Y. 2011). As a result, the district court did not reach JPMorgan’s arguments that the common law claims should be dismissed under SLUSA and for failure to state a claim. SPA-5.
Dismissal of the Trustee’s claims for lack of standing does not prevent customers from bringing their own claims. Individual customers have already sued
JPMorgan. E.g., MLSMK v. JP Morgan Chase & Co., 431 F. App’x 17 (2d Cir.
2011). Other customers have sought to bring class actions against the bank.
Shapiro v. JPMorgan Chase & Co., No. 11-CV-8331 (S.D.N.Y.); Hill v.
JPMorgan Chase & Co., No. 11-CV-7961 (S.D.N.Y.).
SUMMARY OF ARGUMENT
The district court’s decision should be affirmed. Under the Supreme
Court’s decision in Caplin, as well as this Court’s decisions in Wagoner and
Hirsch, the Trustee lacks standing to bring claims on behalf of Madoff’s
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customers. Moreover, under Wagoner, the Trustee also lacks standing to bring claims on behalf of BMIS due to its fraudulent conduct. Point I, infra.
The Trustee and SIPC offer no sound basis to defy these settled rules.
Neither the Trustee nor SIPC has authority to pursue customer claims against third parties as a “bailee” or a “subrogee.” Points II & III, infra. The Trustee also has no valid contribution claim, because his compulsion to pay customers arises under
SIPA, which creates no contribution rights. Point IV, infra.
Even assuming that the Trustee had standing to assert the common law claims of Madoff’s customers, SLUSA requires the dismissal of those claims.
That statute preempts state law mass actions alleging securities fraud, which is exactly what this case is. Point V, infra.
ARGUMENT
I. THE TRUSTEE LACKS STANDING TO BRING COMMON LAW DAMAGES CLAIMS AGAINST JPMORGAN.
The Trustee seeks to recover losses suffered by a group of BMIS’s creditors, i.e., customers. As the district court recognized, “there is no doubt that the common law causes of action in the Amended Complaint[] . . . belong to the creditors, not to BMIS.” SPA-7. Thus, as the district court held, the Trustee lacks standing to bring those claims. Id.
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A. Under Caplin, Wagoner and Hirsch, the Trustee has no authority to assert claims that belong to customers.
The Trustee’s lack of standing to bring claims that belong to Madoff’s customers is rooted in the Supreme Court’s 1972 decision in Caplin. In that case, the Supreme Court rejected a bankruptcy trustee’s argument that federal bankruptcy law “enables him to collect money” owed to creditors, ruling instead that the statute only permitted the trustee to recover funds “owed to the estate.”
406 U.S. at 428. The Court found that, despite the extensive legislation governing reorganizations, “nowhere in the statutory scheme is there any suggestion that the trustee in reorganization is to assume the responsibility of suing third parties” on behalf of creditors. Id. at 428, 434 (“Congress has not yet indicated even a scintilla of an intention” to confer such standing).
The Supreme Court in Caplin further explained that creditors of a bankrupt company “are capable of deciding for themselves whether or not it is worthwhile to seek to recoup whatever losses they may have suffered by an action against” third parties. 406 U.S. at 431. Permitting a trustee to assert creditors’ claims, the Court reasoned, would (1) deprive creditors of the opportunity to
“make their own assessment of the respective advantages and disadvantages” of litigation; (2) create the risk that “a suit by [the trustee] on behalf of [creditors] may be inconsistent with any independent actions” brought by creditors; and
(3) raise questions as to who would be “bound by any settlement.” Id. at 431-32.
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Accordingly, as the district court recognized, Caplin long ago established the rule that a bankruptcy trustee may pursue “only those claims that properly belonged to the debtor before it entered bankruptcy.” SPA-6. As the district court also recognized, “[t]here is good reason for this rule” (SPA-7): under the Bankruptcy Code, a trustee succeeds only to the “legal or equitable interests of the debtor.” 11 U.S.C. § 541(a)(1) (SPA-40) (emphasis added). Authorizing a trustee to assert creditors’ claims, in violation of this statutory language, would
“usurp the creditors’ right to determine whether and in what forum to vindicate their legal injuries, and would raise difficult issues of preclusion.” SPA-7.
This Court has strictly and consistently enforced the rule set forth in
Caplin. In Shearson Lehman Hutton, Inc. v. Wagoner, this Court held, based on
Caplin, that “a bankruptcy trustee has no standing generally to sue third parties on
behalf of the estate’s creditors.” 944 F.2d at 118. Rather, “the trustee stands in the
shoes of the debtors, and can only maintain those actions that the debtors could
have brought prior to the bankruptcy proceedings.” Hirsch, 72 F.3d at 1093;
Wornick v. Gaffney, 544 F.3d 486, 490 (2d Cir. 2008) (same); Pereira v. Farace,
413 F.3d 330, 342 (2d Cir. 2005) (same); The Mediators, Inc. v. Manney (In re
Mediators, Inc.), 105 F.3d 822, 825-26 (2d Cir. 1997) (same). If a claim belongs
to creditors under state law, those creditors “are exclusively entitled to pursue that
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claim, and the bankruptcy trustee is precluded from doing so.” Hirsch, 72 F.3d at
1093, 1094; Mediators, 105 F.3d at 826 (same).
Based on these principles, this Court in Wagoner held that a bankruptcy trustee had no standing to bring claims under New York law against a broker, Shearson Lehman, for aiding and abetting the fraudulent investment activity of the bankrupt debtor. 944 F.2d at 119-20. In Wagoner, the owner and president of the debtor sold notes to members of his church and misappropriated the proceeds, trading stocks in the name of the debtor through a Shearson account.
Id. at 116. When the debtor filed for bankruptcy, its trustee sued Shearson for damages, alleging that Shearson aided the wrongdoer in his trading. Id. at 117.
Dismissing the claims, this Court held that a bankruptcy trustee “has no power to assert a claim” if it is “not one belonging to the bankrupt estate.” Id. at 118. The
Court then ruled that, to the extent the trustee’s “claim alleges money damages to the ‘clients of [the debtor],’ it belongs only to the creditors” under New York law
“and the trustee has no standing to assert it.” Id. at 119-20.
Likewise, in Hirsch, this Court held that a bankruptcy trustee had no standing to bring creditor claims against accounting firms that had provided services to the debtor, a real estate investment firm operated as a Ponzi scheme.
The Court concluded that “Connecticut law has recognized the standing of creditors to maintain causes of action for negligence, breach of fiduciary duty, and
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fraud in precisely these circumstances.” 72 F.3d at 1093. As a result, “claims
predicated upon the distribution of misleading [documents] to investors in [the
debtor’s] limited partnerships are the property of those investors, and may be
asserted only by them and to the exclusion of” the trustee. Id. at 1094; see also
Mediators, 105 F.3d at 826 (affirming dismissal of breach of fiduciary duty claim brought by bankruptcy estate representative that “belong[ed] to the creditors qua creditors” under New York law); American Tissue, Inc. v. Donaldson, Lufkin &
Jenrette Securities, 351 F. Supp. 2d 79, 90 (S.D.N.Y. 2004) (Lynch, J.) (“Insofar as [the debtor] seeks to recover money owed to creditors, it lacks standing.”).
Wagoner and Hirsch are completely controlling. As in those cases, the Trustee here is asserting common law claims, against a third-party service provider to a fraudulent investment firm, to recover losses suffered by the investors. The Trustee’s aiding and abetting and “knowing participation” claims allege that JPMorgan caused $19 billion in losses to Madoff’s customers by assisting Madoff in his fraud and breach of fiduciary duty. See, e.g., A-779,
A-783, A-787, A-799(¶¶ 506, 508, 520, 535, 583). The Trustee’s conversion and unjust enrichment claims similarly allege that JPMorgan wrongfully took property that belonged to Madoff’s customers. A-787, A-788, A-792(¶¶ 538, 543, 557).
Accordingly, the Trustee’s common law claims against JPMorgan are “concededly
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the property of the creditors directly, and not the property of the debtor.” SPA-17.
As such, the Trustee lacks standing to bring those claims. SPA-33.
B. St. Paul does not permit the Trustee to assert claims that belong to customers.
The Trustee seeks to escape from this well-settled law by misstating the holding and reasoning of this Court’s 1989 decision in St. Paul Fire and
Marine Insurance Co.v.PepsiCo, Inc. That case simply allowed a trustee to bring a veil-piercing claim that belonged to the debtor under state law. As the district court correctly recognized, St. Paul did not hold that a trustee could bring damages claims belonging to creditors, as the Trustee is trying to do here. SPA-14-15.
In St. Paul, PepsiCo brought a complaint against Banner Industries alleging that Banner was an alter ego of Banner’s subsidiary, Commercial
Lovelace, and that Banner was therefore liable for Commercial Lovelace’s diversion of assets from a former PepsiCo subsidiary, Lee Way, whose debts
PepsiCo had guaranteed before Lee Way was sold to Commercial Lovelace. At the same time, the bankruptcy trustee for the successor to Commercial Lovelace brought his own lawsuit against Banner, alleging that “the same acts identified by
PepsiCo as causing harm to Lee Way also caused harm to both the estate and the unsecured creditors, of whom PepsiCo [was] one.” St. Paul, 884 F.2d at 695. The
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question presented was whether PepsiCo had standing to bring a veil-piercing
claim or, alternatively, whether the trustee alone had such standing. Id. at 696.
This Court framed the issue as follows: if PepsiCo’s claims “are
property of the debtor” under state law, “and therefore properly brought by the
trustee, and if PepsiCo has not alleged a direct injury traceable to Banner,” then
PepsiCo would lack standing to assert those claims. Id. at 700 (emphasis added).
The Court went on to conclude that, “under Ohio law, a corporation [here,
Commercial Lovelace] would be able to assert an alter ego cause of action against
its parent corporation [Banner]. The cause of action therefore becomes property of
the estate of a bankrupt subsidiary, and is properly asserted by the trustee in bankruptcy.” Id. at 703-04 (emphasis added). In contrast, the Court determined that individual creditors such as PepsiCo could not allege “the type of harm necessary to support a finding of standing,” as PepsiCo only alleged “that Banner’s acts harmed a third party [the debtor] and that that harm in turn led to PepsiCo’s harm.” Id. at 704. PepsiCo’s claims, therefore, were dismissed for lack of standing. Id. at 705.
Thus, as Judge McMahon properly recognized, “St. Paul Fire does not stand for the proposition that the Trustee can pursue claims that belong individually to the creditors — just the opposite.” SPA-14. St. Paul confirms that
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“if a cause of action is property of the debtor,” then a bankruptcy trustee can assert the cause of action “on behalf of the estate.” 884 F.2d at 700 (emphasis added).
The Trustee seizes on dictum in St. Paul stating that a trustee is the proper person to bring a cause of action if the “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.” Trustee Br. 40 (quoting 884 F.2d at 701). But the St. Paul panel went on to explain precisely what it meant by a “general” claim: the veil- piercing claim was “general” only insofar as it belonged to the debtor, and thus would benefit all creditors indirectly since recoveries on the claim would go to the estate. 884 F.2d at 704. For creditors to bring the claim themselves, they would have to do so on a “derivative” basis. See id. at 697 (bankruptcy trustee succeeds only to rights that “can be enforced by either the corporation directly or the shareholders derivatively” (quoting Koch Refining v. Farmers Union Cent. Exch.,
Inc., 831 F.2d 1339, 1343 (7th Cir. 1987))).
The limited import of St. Paul’s language regarding “general” claims was definitively confirmed in Pereira v. Farace, 413 F.3d 330 (2d Cir. 2005). In
Farace, the district court held, relying erroneously on St. Paul, that a trustee could bring creditor claims for breach of a duty of care, reasoning that “where the injury is to all creditors as a class, it is the creditors who lack standing and the Trustee who may bring a claim based on that generalized injury.” Id. at 342. But this
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Court reversed, finding that the trustee was barred from bringing such creditor
claims. The Court explained that, while the district court’s statement about
generalized injuries “may be true — because claims that injure all creditors as a
class normally belong to the corporation — it does not imply that the Trustee’s
rights are greater than the rights the corporation would have against malfeasant
directors.” Id. (emphasis added). Farace thus squarely rejects the Trustee’s
misreading of St. Paul, and reaffirms the bedrock principle that trustees may only
bring claims belonging to the debtor.A
The Seventh Circuit has similarly rejected the Trustee’s misreading of
St. Paul. In Steinberg v. Buczynski, 40 F.3d 890, 892 (7th Cir. 1994) (Posner, J.),
the Seventh Circuit ruled that a bankruptcy trustee lacked standing to bring a veil-
piercing claim that, in that instance, belonged to creditors under applicable state
law. Citing St. Paul, the Court explained that “if a claim against the shareholders
A A recent case arising out of the Madoff fraud illustrates the circumstances in which St. Paul may vest standing in a trustee. In Fox v. Picard (In re Madoff), 2012 WL 990829 (S.D.N.Y. Mar. 26, 2012), the district court cited St. Paul in barring certain Madoff customers from pursuing claims “that were the property of the BLMIS estate,” that arose from “actions that harmed BLMIS and all BLMIS customers in the same way,” and that were “duplicative and derivative of the Trustee’s fraudulent transfer claim” against the same defendants, id. at *6, *8. Here, in contrast, the claims at issue are not property of the BMIS estate, do not seek to redress harms to BMIS, and are not derivative of fraudulent transfer claims.
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arising from their disregard of corporate formalities is the property of the corporation, then the trustee can sue; otherwise he cannot.” Id. (emphasis added).
The Seventh Circuit went on to dismiss as “perfectly circular” the reasoning espoused by the Trustee on this appeal, which posits that when recovery on a claim by the Trustee will benefit “all creditors,” Trustee Br. 41, the Trustee has standing to bring the claims:
The trustee argues that since he is, in fact, the plaintiff in this adversary proceeding . . . , any judgment he obtains will enure to the benefit of the bankrupt estate; he is therefore suing on behalf of the estate, as he is authorized to do. This reasoning is perfectly circular. Suppose a neighbor of the Buczynskis [the defendants] had slipped on ice in front of their house. Could the trustee sue the Buczynskis, on the theory that if the suit succeeded the proceeds of the suit would go to the bankrupt estate . . . ? To ask the question is to answer it.
40 F.3d at 892.
Accordingly, under controlling precedent and compelling logic, the
Trustee’s argument based on St. Paul should be rejected. The claims at issue here, far from being “generalized” claims belonging to the debtor, are classic individual claims belonging to thousands of customers, each of whom made an individual investment at a particular time, in particular amounts, and in reliance on particular representations, and thus suffered particularized injuries. There is nothing
“general” about these customer claims. Indeed, in the district court, the Trustee
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did not dispute “to whom the common law claims belong — the Trustee
acknowledge[d] [that] they are the customers’, and not the debtor’s.” SPA-14.
C. Under the Wagoner rule, the Trustee also has no authority to assert damages claims that belong to BMIS.
Despite acknowledging in the district court that his common law claims belonged to customers, the Trustee has now advanced an equivocal position on the question of whose claims he is bringing. E.g., Trustee Br. 44, 46 (arguing that the common law claims belong to a “customer property estate” and do not
“belong to a specific BLMIS customer”).
But there is “no doubt” that the common law claims asserted by the
Trustee belong to Madoff’s customers. SPA-7. It was BMIS’s individual customers who suffered the damages that the Trustee is trying to recover.
Likewise, it was the customers who were defrauded, the customers who were owed fiduciary duties by BMIS, and the customers whose property was converted. The notion that the Trustee is really asserting common law claims belonging to
Madoff’s defunct brokerage firm — i.e., the criminal enterprise through which
Madoff perpetrated his Ponzi scheme — is facially absurd.
In any event, even if one were to indulge the fiction that the Trustee is asserting claims of the BMIS estate, he lacks standing to do so. In addition to holding that a trustee may not usurp claims belonging to creditors, Wagoner holds
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that a claim against a third party for harming a corporation with the cooperation of management “accrues to creditors, not to the guilty corporation.” 944 F.2d at 120.
Under this doctrine — known as the “Wagoner rule” — “when a bankrupt corporation has joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors.” Id. at 118; accord Kirschner v. Grant Thornton LLP, 2009 WL 1286326, at *10 (S.D.N.Y.
Apr. 14, 2009) (Lynch, J.), aff’d, 626 F.3d 673 (2d Cir. 2010) (applying Wagoner rule to dismiss fraud and breach of fiduciary claims where the debtor “participated in, and benefitted from, the very wrong for which it seeks to recover”); Breeden v.
Kirkpatrick & Lockhart LLP (In re Bennett Funding Grp., Inc.), 336 F.3d 94, 99-
100 (2d Cir. 2003) (applying Wagoner rule to prevent trustee for Ponzi scheme operator from bringing malpractice claims); Hirsch, 72 F.3d at 1094-95 (same).
The Wagoner rule is related to the state-law doctrine of in pari delicto. The rule “derives from the fundamental principle of agency that the misconduct of managers within the scope of their employment will normally be imputed to the corporation.” Wight v. BankAmerica Corp., 219 F.3d 79, 86-87
(2d Cir. 2000). “[B]ecause a trustee stands in the shoes of the corporation, the
Wagoner rule bars a trustee from suing to recover for a wrong that he himself essentially took part in.” Id. at 87; see also Kirschner v. KPMG LLP, 15 N.Y.3d
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446, 464 (2010) (“The doctrine of in pari delicto mandates that the courts will not
intercede to resolve a dispute between two wrongdoers.”).
In this case, the Wagoner rule and the doctrine of in pari delicto
plainly prevent the Trustee from bringing claims as successor to BMIS. SPA-7-8.
Indeed, there could hardly be a clearer case for application of the Wagoner rule: as
alleged in the Amended Complaint, BMIS was operated for decades by Madoff,
the principal officer and sole owner of BMIS, as a criminal “Ponzi scheme.” A-
674, A-677, A-678(¶¶ 36, 44, 46).
The Trustee and SIPC try to avoid the Wagoner rule by arguing that it
should not apply in SIPA cases as opposed to ordinary bankruptcy cases. There is
no basis for this distinction. SIPA grants a trustee the “same powers and title with
respect to the debtor and the property of the debtor . . . as a trustee in a case under
Title 11.” 15 U.S.C. § 78fff-1(a) (SPA-51). Thus, a SIPA trustee acts as successor
to the debtor in the same way as any other bankruptcy trustee. The Trustee cites no
cases that exempt a SIPA trustee from the Wagoner rule. And lower courts in this
Circuit have applied Wagoner to bar claims by a SIPA trustee. See, e.g., SIPC v.
BDO Seidman, LLP, 49 F. Supp. 2d 644, 650-51 (S.D.N.Y. 1999); Giddens v. D.H.
Blair & Co. (In re A.R. Baron & Co., Inc.), 280 B.R. 794, 799-801 (Bankr.
S.D.N.Y. 2002).
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Both the Trustee and SIPC also argue, in vague terms, that in pari delicto principles should not interfere with enforcement of the federal securities laws. Trustee Br. 48; SIPC Br. 42. But the claims at issue here, as framed by the
Trustee himself, are not based on federal securities law. The Amended Complaint invokes only state law as the basis for those claims, and they are precisely the kind of claims rejected in Wagoner and Hirsch. Although the Trustee and SIPC cite
Bateman Eichler, Hill Richards Inc. v. Berner, 472 U.S. 299 (1985), that case addressed the applicability of in pari delicto to a federal securities claim under section 10(b) of the Securities Exchange Act. The Court concluded that, in the circumstances presented, the policies underlying federal securities law would not be served by applying in pari delicto to prevent “a defrauded tippee [from] bring[ing] suit against his defrauding tipper.” 472 U.S. at 315-16. Bateman
Eichler has no bearing on the application of the Wagoner rule or in pari delicto to the common law claims asserted here.
The Trustee and SIPC make other policy arguments against applying the Wagoner rule, but they are just attacks on the rule itself. The Trustee asserts that “inequitable results” would follow from applying the Wagoner rule to the
Trustee, who is “not a wrongdoer himself.” Trustee Br. 49. SIPC, meanwhile, suggests that enforcement of the Wagoner rule could permit customers that bring lawsuits to recover before other customers. SIPC Br. 42-43.
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If accepted, these arguments would gut the Wagoner rule. In every bankruptcy case, including Wagoner itself, the trustee is “not a wrongdoer” and seeks to recover value for “innocent” creditors. Likewise, in every bankruptcy case, enforcing Wagoner could result in some creditors choosing to pursue claims while others do not. But that is entirely consistent with the Supreme Court’s decision in Caplin, where the Court recognized that creditors would make their own choices about pursuing claims, and stated that any “policy decision” to mandate a different result “must be left to Congress.” 406 U.S. at 434.
The Trustee cites out-of-circuit decisions that have declined to apply in pari delicto principles to receivers or trustees. Trustee Br. 49-50. But these decisions have no relevance in light of Wagoner and New York law. In Kirschner v. KPMG LLC, the New York Court of Appeals recently considered whether there should be an exception to in pari delicto where a trustee or other representative,
“stand[ing] in the shoes of corporate malefactors,” seeks to recover damages that will benefit “blameless” creditors and shareholders. 15 N.Y.3d at 475. Rejecting the same arguments that the Trustee has made here, the Court of Appeals found no basis for such an exception in law or equity. Id.A
A Although beside the point in light of Wagoner and Kirschner, the Seventh Circuit has now squarely rejected the Trustee’s claim that, under Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), the in pari delicto doctrine does not apply to a trustee. Trustee Br. 49. In Peterson v. McGladrey & Pullen, LLP, 2012 WL (footnote continued)
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The Trustee also contends, for the first time on appeal, that the
Wagoner rule should not have been applied because the complaint (i) alleges that
Madoff acted “outside the scope of his agency” and (ii) raises other “factual
questions” that preclude dismissal. Trustee Br. 45 n.15, 51-53. The first of these
new contentions — i.e., the invocation of the “adverse interest” exception to the
Wagoner rule — is plainly wrong. There can be no adverse interest “where the principal and agent are one and the same,” including in situations where a corporation’s fraudulent agent is its “sole shareholder.” Mediators, 105 F.3d at
827. The adverse interest doctrine is likewise inapplicable when “the corporate wrongdoer’s fraudulent conduct enables the business to survive — to attract investors and customers and raise funds for corporate purposes.” Kirschner, 15
N.Y.3d at 468.
The Amended Complaint on its face defeats any “adverse interest” argument. It alleges that BMIS was “wholly owned by Madoff,” which itself precludes any “adverse interest.” A-674(¶ 36). It also alleges that Madoff propped
1088274 (7th Cir. Apr. 3, 2012), the court concluded that the language in Scholes that the Trustee has quoted in his brief “should not be generalized beyond the law of fraudulent conveyances and preferential transfers,” id. at *4. The court “agree[d] with the conclusion of every other court of appeals that has addressed this subject and h[e]ld that a person sued by a trustee in bankruptcy may assert the defense of in pari delicto, if the jurisdiction whose law creates the claim permits such a defense outside of bankruptcy.” Id.
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up BMIS with his fraud, and that BMIS would have collapsed had the fraud ceased. A-677-78(¶¶ 44-47). The Trustee, moreover, has procured Bankruptcy
Court relief by representing to the court that BMIS and Madoff were “alter ego[s],” which again is flatly at odds with an adverse interest theory. A-964.
The Trustee’s broader contention that the Wagoner rule — a rule of standing — should not have been applied on a motion to dismiss is contradicted by numerous decisions. E.g., Kirschner, 626 F.3d at 674 (affirming dismissal on the pleadings based on the Wagoner rule); Mediators, 105 F.3d at 825-27 (same);
Hirsch, 72 F.3d at 1094-95 (same). Although the Trustee claims that “factual questions” preclude dismissal here based on the Wagoner rule, he does not explain what those questions are. The Trustee hints that there is some “factual question” as to whether Madoff shares responsibility with JPMorgan for customer losses — but how Madoff could lack responsibility for his fraud is too absurd for the Trustee even to articulate. Trustee Br. 52-53. The crux of the Trustee’s claims is that
BMIS allegedly “joined with [JPMorgan]” in the misconduct alleged in the complaint, which is the operative test under Wagoner. 944 F.2d at 118.
II. THE DISTRICT COURT CORRECTLY REJECTED THE TRUSTEE’S BAILEE STANDING THEORY.
The Trustee and SIPC each attempt to escape the result dictated by
Caplin and Wagoner by invoking the law of bailment. The Trustee claims that, as
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a SIPA trustee, he has bailment rights under SIPA that the debtor never had. SIPC, in contrast, claims that the Trustee is asserting bailment rights that originated with
BMIS. Neither theory has any merit. Nor is there refuge to be taken in this
Court’s reversed decision in Redington, which permitted a SIPA trustee to assert customer claims under section 17(a) of the Securities Exchange Act as a bailee.
Even if that decision were good law, which it is not, the case has no relevance here, where — unlike in Redington — the Trustee is the successor to a thief and is asserting common law claims.
A. SIPA does not authorize the Trustee to sue third parties as a bailee.
The Trustee argues that, under SIPA, he has a “special relationship” with a “fund of customer property” that permits him to bring claims as the bailee on behalf of a “customer property estate.” Trustee Br. 26-28, 46-48. Judge
McMahon rightly characterized this claim as “fanciful.” SPA-31.
Not a word in the statute supports the Trustee’s position. Although
Congress easily could have authorized a SIPA trustee to bring common law claims on behalf of customers, it did not do so. In the section of SIPA entitled “Powers and duties of a trustee,” the statute provides that a trustee “shall be vested with the same powers and title with respect to the debtor and the property of the debtor . . . as a trustee in a case under Title 11.” 15 U.S.C. § 78fff-1(a) (SPA-51) (emphasis
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added). In the same section, the statute authorizes the trustee to perform three additional tasks: to hire and fix the compensation of the broker’s personnel, to utilize SIPC employees in the liquidation, and to maintain customer accounts. Id.
There is nothing in this section or elsewhere in SIPA that states or suggests that Congress intended to create any bailment between the Trustee and brokerage customers. The statute never uses the words “bailee,” “bailor” or
“bailment.” Moreover, the one section of SIPA that the Trustee cites as supposed support for his bailment theory simply authorizes a trustee, when there is a shortfall in customer property, to bring claims under the Bankruptcy Code to recover “property transferred by the debtor.” 15 U.S.C. § 78fff-2(c)(3) (SPA-55)
(Trustee Br. 26). By authorizing a SIPA trustee to bring statutory avoidance claims, but not common law claims belonging to customers, that provision makes it perfectly clear that a SIPA trustee lacks power to assert customer damages claims. See National Railroad Passenger Corp. v. National Association of
Railroad Passengers, 414 U.S. 453, 458 (1974) (“[W]hen legislation expressly provides a particular remedy or remedies, courts should not expand the coverage of the statute to subsume other remedies.”); accord, e.g., Safir v. U.S. Lines, Inc., 792
F.2d 19, 22 (2d Cir. 1986).
The Trustee’s suggestion that he is the bailee for some kind of
“customer property estate” — rather than for the customers that Madoff defrauded
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— does not improve his position. SIPA makes no reference to a “customer property estate,” does not purport to create any new legal entity, and certainly does not permit a trustee to bring claims on behalf of that made-up entity. The statute instead defines “customer property” as certain “cash and securities” held by the liquidating broker, 15 U.S.C. § 78lll(4) (SPA-59-60), and provides that customers have priority to that pool of assets, id. § 78fff-2(c)(1) (SPA-54-55). “Customer property,” therefore, is simply a category of property as to which customers have priority over general creditors — it is not a new juridical person with independent rights to bring causes of action that belong to customers.
The Trustee cites no case law to support his theory that SIPA creates a new legal entity with authority to pursue customer claims. The cases cited by the
Trustee merely acknowledge that claims of customers to “customer property” have priority over claims of general creditors. In re BLMIS, 654 F.3d 229, 233 (2d Cir.
2011) (“In a SIPA liquidation, a fund of ‘customer property’ . . . is established for priority distribution exclusively among customers.”); Rosenman Family, LLC v.
Picard, 395 F. App’x 766, 768 (2d Cir. 2010) (describing the term “customer property estate” to have the same meaning as “customer property” and explaining that “SIPA accords . . . ‘customers’ of the debtor priority over the distribution of
‘customer property’” (quotation marks omitted)).
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In addition to having no basis in the statute, the notion that the Trustee
could assert claims based on a SIPA-created bailment is irreconcilable with black-
letter bailment law. As Judge McMahon observed, any bailment in favor of the
Trustee — as a person separate from BMIS — could have arisen only after Madoff stole his customers’ property. SPA-30. A bailee, however, may only “bring an action to recover for the loss of or injury to the bailed property while in his or her possession.” 9 N.Y. Jur. 2d Bailments and Chattel Leases § 115 (2011) (emphasis added); see also United States v. Perea, 986 F.2d 633, 641 (2d Cir. 1993) (bailee
can sue for “destruction of or damage to the bailed property, by another while in
his possession” (emphasis added)). Here, since the Trustee “was not in possession
of customer funds when the alleged torts took place,” there was “no damage to the
property that the Trustee as bailee of those funds could pursue.” SPA-30.
The Trustee, in sum, has failed to demonstrate that SIPA permits him
to bring claims as a “bailee.” As a result, the Trustee obtains no aid from Federal
Rule of Civil Procedure 17(a), a merely procedural rule that permits a “bailee” to
sue for the benefit of a bailor without joining the bailor. See Del Re v. Prudential
Lines, Inc., 669 F.2d 93, 96 (2d Cir. 1982) (“real party in interest” provisions of
Rule 17(a) do not create substantive rights).
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B. The Trustee has no bailment rights as successor to BMIS.
In contrast to the Trustee, SIPC argues that the Trustee is asserting the bailment rights of BMIS, which supposedly derive from BMIS’s relationship with its customers. SIPC Br. 9 (“a SIPA trustee assumes the broker-dealer’s position as bailee”). This argument also fails. Under Wagoner and New York law, the
Trustee, as successor to a thief, has no valid bailment rights. SPA-30.
First, under the Wagoner rule, the Trustee lacks standing — as successor to BMIS — to sue other alleged participants in BMIS’s fraud. Rather, any claims arising from BMIS’s fraud on investors “are the property of those investors, and may be asserted only by them and to the exclusion of [the trustee].”
Hirsch, 72 F.3d at 1094 (emphasis added). The Wagoner rule thus squarely prevents the Trustee from asserting BMIS’s rights, if any, to sue as a “bailee.” See
Point I.C, supra.
New York law independently compels the same result: “no bailment can exist where the would-be bailee is a thief.” HSBC, 454 B.R. at 33; accord
SPA-30 (“[A] thief can never take the status of a bailee.”). A bailment relationship arises if the bailee takes “lawful possession” of property “without present intent to appropriate” it. Pivar v. Graduate Sch. of Figurative Art of the N.Y. Acad. of Art,
290 A.D.2d 212, 213 (1st Dep’t 2002) (quotation marks omitted); accord Seaboard
Sand & Gravel Corp. v. Moran Towing Corp., 154 F.2d 399, 402 (2d Cir. 1946);
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Martin v. Briggs, 235 A.D.2d 192, 197 (1st Dep’t 1997). In this case, BMIS took possession of customers’ property precisely in order to appropriate it, and thus was never a bailee. E.g., A-675-77(¶¶ 37-39, 41, 44). Thus, as successor to a thief, the
Trustee has no bailment rights.
In the face of the New York rule that a thief is not a bailee, SIPC strains to argue that the Trustee’s standing to sue is predicated not on New York law, but on a bailment that arose under SEC Rule 15c3-3. Judge Rakoff was understandably “mystified” by this argument. HSBC, 454 B.R. at 32. Rule
15c3-3, which requires a broker-dealer to maintain a minimum cash balance in a reserve account, “says nothing about a SIPA trustee’s standing to bring common law claims against third parties.” Id. (emphasis in original). The Rule does not mention the terms “bailee,” “bailor” or “bailment,” nor do any of the SEC releases that accompanied the Rule’s adoption.A
Rule 15c3-3’s reserve requirement differs from a bailment. A bailment of money arises if “a special or specific bank account is created, title to the funds remains with the account holder, and the funds are separated from other
A See 17 C.F.R. § 240.15c3-3 (SPA-62-71); Exchange Act Release No. 9856, 37 Fed. Reg. 25224 (Nov. 29, 1972); Exchange Act Release No. 9775, 37 Fed. Reg. 20260 (Sept. 28, 1972); Exchange Act Release No. 9622, 37 Fed. Reg. 11687 (June 10, 1972); Exchange Act Release No. 9388, 36 Fed. Reg. 22312 (Nov. 24, 1971).
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deposits.” Rozsa v. May Davis Grp., 152 F. Supp. 2d 526, 532 (S.D.N.Y. 2001); accord 8 C.J.S. Bailments § 7. Rule 15c3-3, however, “specifically contemplates the commingling of customer monies and the lending of customer securities.”
Levitin v. PaineWebber, Inc., 159 F.3d 698, 706 (2d Cir. 1998). The broker is not even required to use the customers’ cash to meet the Rule’s segregation requirements — rather, the broker’s own money can be placed in the reserve account. See 17 C.F.R. § 240.15c3-3(e) (SPA-70).
Notably, SIPC itself has acknowledged that ordinary customer property, as opposed to the “highly limited” category of “customer name securities,” SIPC Br. 29, is not held by a broker as a “bailee.” In a statement to
Congress regarding the 1978 amendments to SIPA, SIPC stated:
“Customer name securities” takes the place of “specifically identifiable property” as the category of securities which will be returned to individual customers outside the normal procedure for allocating and distributing customer property. Securities registered in the names of customers or in the process of being so registered on the filing date will be treated, in short, as though they are not part of the debtor’s estate, but merely held by the debtor as bailee.
Securities Investor Protection Act Amendments: Hearings on H.R. 8331 Before the
Subcomm. on Securities, Comm. on Banking, Housing and Urban Affairs, 95th
Cong. 41-42 (1978) (Statement by Hugh F. Owens, Chairman of SIPC) (emphasis added). The Chairman of SIPC thus recognized that, while “customer name securities” are “held by the debtor as bailee,” other property held by an insolvent
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broker-dealer, including cash, becomes “part of the debtor’s estate.” The Trustee’s damages claims have nothing to do with this “limited” category of customer name securities.A
SIPC’s further assertion that “federal common law” should govern the bailment that supposedly arises under Rule 15c3-3 is equally farfetched. Federal common law exists only in “narrow areas,” such as admiralty. Texas Industries,
Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 641 (1981). And indeed, each of the cases that SIPC cites in support of a “federal common law of bailment” is an admiralty case. SIPC Br. 36. Moreover, there is no conflict between state law and federal policy, as a bailee must take “lawful possession without present intent to appropriate” not only under New York law, but also under federal admiralty law.
Seaboard, 154 F.2d at 402. More broadly, there is nothing in Rule 15c3-3 that conflicts with New York bailment law, and there is nothing in New York bailment
A Ignoring its own statements to Congress, SIPC relies on cases from more than a century ago to argue that ratable distribution of customers’ property is consistent with bailment. SIPC Br. 38-39. The only case that arguably supports this proposition, Rahilly v. Wilson, 20 F. Cas. 176, 176-77 (D. Minn. 1872), held that a bailment was created where multiple wheat producers stored grain in a warehouse. That holding, however, was reversed. The Circuit Court found that no bailment had been created because the warehouse was not obliged to return to each producer the same grain that it deposited. Rahilly v. Wilson, 20 F. Cas. 179 (Circ. Ct. D. Minn. 1873).
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law that conflicts with federal law protecting customers, who are entitled under
Caplin and Wagoner to pursue their own claims.
C. Redington is not controlling. In support of their argument that the Trustee can bring claims as a bailee, the Trustee and SIPC rely almost exclusively on Redington v. Touche Ross
& Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979), on remand, 612
F.2d 68 (2d Cir. 1979). Redington is not good law and, in any event, is entirely inapplicable here for numerous reasons.
1. Redington is not good law. In Redington, a SIPA trustee and SIPC brought suit against an insolvent broker’s accountant, asserting claims on behalf of the broker’s customers for violations of the broker record-keeping provisions of section 17(a) of the
Securities Exchange Act and under state common law. The district court held that section 17(a) did not create an implied private right of action, and thus did not consider whether the trustee could assert customer claims. Redington v. Touche
Ross & Co., 428 F. Supp. 483, 491 (S.D.N.Y. 1977). After dismissing the section
17(a) claim, the district court concluded that it lacked jurisdiction over the common law claims. Id. at 492-93.
On appeal, a divided panel of the Second Circuit reversed the district court’s decision and held that customers of a failed brokerage firm had an implied
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private right of action under section 17(a). Redington v. Touche Ross & Co., 592
F.2d 617 (2d Cir. 1978). The majority went on to conclude that the trustee had authority to bring the section 17(a) claim “on behalf of such customers” as a
“bailee” and that SIPC had authority to bring the claim as a “subrogee” of the customer claims it had paid. Id. at 624-25.
The Supreme Court granted certiorari to address not only the issue of whether there was an implied private right of action under section 17(a) but also whether the trustee could assert that right of action. SPA-1383-84. Reversing, the
Supreme Court held that there was no private right of action to enforce section
17(a), and thus that it was “unnecessary to reach” the issue of standing. 442 U.S. at 579, 567 n.9.
As a result of the Supreme Court’s reversal on the threshold question of whether a cause of action existed, this Court’s rulings on bailee and subrogee standing have no precedential effect. Upon receiving the Supreme Court’s decision, this Court promptly issued an order vacating its prior judgment.
Redington v. Touche Ross & Co., No. 77-7183 (2d Cir. Aug. 8, 1979). The order provides “that the judgment of this court dated April 21, 1978,” which had reversed the district court’s decision, “hereby is vacated.” Id.A
A A copy of the August 8, 1979 order is attached hereto as Addendum A. A copy of the April 21, 1978 order is attached hereto as Addendum B.
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In a subsequent opinion, this Court went on to acknowledge that the
Supreme Court had “reversed our decision to allow the Trustee to maintain a private right of action” and remanded “for a decision on the Trustee’s alternative bases for jurisdiction.” Redington v. Touche Ross & Co., 612 F.2d 68, 70 (2d Cir.
1979) (emphasis added). Finding no such alternative bases, this Court affirmed the district court’s complete dismissal of the lawsuit for lack of subject matter jurisdiction. Id. at 70-73.
In light of this history, the Trustee’s reliance on cases that gauge the precedential force of an opinion based on whether it was “vacated” or “reversed” refutes his own position. Trustee Br. 30. On remand, the Second Circuit vacated its prior judgment in Redington. An order “vacating the judgment of the Court of
Appeals deprives that court’s opinion of precedential effect[.]” O’Connor v.
Donaldson, 422 U.S. 563, 577 n.12 (1975); accord Brown v. Kelly, 609 F.3d 467,
476-77 (2d Cir. 2010) (collecting cases). Accordingly, under the Trustee’s own logic, any “precedential effect” of the original Redington decision has been
“automatically erase[d].” Tr. Br. 30.
Even if one were to ignore the Second Circuit’s vacatur, Judge
McMahon was clearly correct that the Supreme Court’s reversal in Redington on the basis that “no private right of action existed” deprived this Court’s rulings on standing of precedential effect. SPA-28; accord HSBC, 454 B.R. at 34-35. In
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National Railroad Passenger Corp. v. National Association of Railroad
Passengers, the Supreme Court held that when a federal court has to determine
both whether a statute creates a private right of action and who has standing to
assert that right, “the threshold question clearly is whether [the statute] . . . creates
a cause of action . . . ; for it is only if . . . a right of action exists that [a court] need
consider whether the [party] ha[s] standing to bring the action.” 414 U.S. at 456
(emphasis added). Accordingly, in National Railroad, after the Supreme Court
concluded that there was no private right of action under the Rail Passenger
Service Act, it further held that the question of “standing” to assert that non-
existent cause of action became “immaterial.” Id. at 465 n.13.
“[W]hen the Supreme Court reverses a lower court’s decision on a
threshold question,” the Court “effectively holds the lower court erred by
reaching” other issues, and any rulings on those issues are not precedential.
Newdow v. Rio Linda Union Sch. Dist., 597 F.3d 1007, 1041 (9th Cir. 2010). That
is precisely what happened in Redington. As mandated by National Railroad, the
Second Circuit in Redington first adjudicated whether section 17(a) created an implied private right of action and only then determined that the trustee and SIPC could assert that right of action. 592 F.2d at 624-25. The Supreme Court likewise followed this sequence: after reversing on the question of whether an implied right of action existed, the Court held that it was “unnecessary to reach” the questions of
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standing. 442 U.S. at 567 n.9. As a result of the Supreme Court’s reversal on the
threshold question of whether a right of action existed, “whatever the Second
Circuit said about standing was rendered superfluous” and non-binding. SPA-28.
“To hold otherwise would give precedential effect to the determination of an issue
that should never have been decided.” Newdow, 597 F.3d at 1041; see also Chem
One, Ltd. v. M/V Rickmers Genoa, 660 F.3d 626, 639-40 (2d Cir. 2011) (reasoning that is not “necessary” to a prior decision is not binding); SPA-29 (“It is holdings, not reasoning, that bind later courts.”).
Indeed, in Redington, had the panel decided the threshold right-of- action issue correctly, it would have had no reason to reach, and thus would have recognized that it had no jurisdiction to consider, the issues of bailee or subrogee standing. On remand, this Court found that, without the section 17(a) claim, there were no “alternative bases for jurisdiction” over the trustee’s suit. Redington, 612
F.2d at 70. As a result, as Judge Rakoff concluded, this Court did not have jurisdiction to decide the issues of standing in Redington, further depriving those rulings of precedential weight. HSBC, 454 B.R. at 34-35 (citing, inter alia,
Gutierrez v. Fox, 141 F.3d 425, 426 (2d Cir. 1998)).
The Trustee argues that this Court in Redington supposedly determined that a trustee had “standing to assert state common law claims,” and that this Court’s “holdings” on that question were left undisturbed. Trustee Br. 30,
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35. But the very first sentence of Redington refutes this argument: the sole issue presented was “whether a private cause of action exists under section 17 of the
Securities Exchange Act . . . and if so, who may maintain such an action.” 592
F.2d at 617 (emphasis added); accord id. at 624 (concluding that SIPC was
“subrogated to the right of action implied in section 17 in favor of brokers’ customers against third parties” (emphasis added)).
The Trustee also argues that the questions presented in Redington were “independent and unrelated to one another” such that, under Newdow, a decision on one such independent ruling “leave[s] the decisions reached on other grounds intact.” Trustee Br. 30 (quoting Newdow, 597 F.3d at 1041). Once again, the Trustee has mischaracterized what happened in Redington. The standing analysis in Redington was in no sense “independent” or “unrelated” to the threshold issue of whether an implied right of action existed. To the contrary, consistent with National Railroad, the panel only reached the standing question because it had first decided that section 17(a) contained an implied right of action.
Moreover, the Court’s analysis of standing was grounded in the section 17(a) claim that was before it: after concluding that the trustee could not sue on behalf of the broker, because “brokers . . . were not included in the class of those [p]rotected by section 17,” the Court found that the same “considerations” did not “apply to an action brought by the Trustee as bailee.” 592 F.2d at 624-25. As a result, although
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“[m]erits questions may be independent of each other” in some cases, this Court’s
decision in Redington on the threshold right-of-action question was in no way
“independent” of the secondary question of who could assert that particular right of
action. Newdow, 597 F.3d at 1041. Rather, as in National Railroad, the two issues were inextricably linked.
SIPC, meanwhile, argues that “this Court’s standing decision in
Redington was a jurisdictional determination,” which had to be made before reaching any other issues. SIPC Br. 52. This too is clearly incorrect. In concluding that the trustee in Redington was entitled to assert the section 17(a) claim as a bailee, the Court relied on Federal Rule of Civil Procedure 17(a), 592
F.2d at 625. A decision applying Federal Rule 17(a) is not “jurisdictional,” as evidenced by the fact that the Supreme Court in Redington chose not to address the
standing issue on appeal. 442 U.S. at 567 n.9; see also, e.g., Fox v. McGrath, 152
F.2d 616, 618 (2d Cir. 1945) (citing cases holding that “real party in interest”
defenses are waivable); Rawoof v. Texor Petrol. Co., Inc., 521 F.3d 750, 756 (7th
Cir. 2008) (“The requirements of Rule 17 should not be confused with the
jurisdictional doctrine of standing.”).
For similar reasons, the Trustee’s and SIPC’s reliance on Steel Co. v.
Citizens for a Better Environment, 523 U.S. 83 (1998), is misplaced. That decision
requires that issues of “Article III jurisdiction” be decided before other issues,
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including the existence of a cause of action. Id. at 89. However, nothing in Steel
Co. requires a court — in contravention of National Railroad — to decide non- jurisdictional questions, such as whether a plaintiff is a “real party in interest” under Fed. R. Civ. P. 17, prior to resolving such “threshold” issues as whether a cause of action exists. To the contrary, the Supreme Court in Steel Co. endorsed the decisional sequence prescribed by National Railroad, agreeing that — in the absence of a dispute as to whether there is an Article III “case or controversy” — a federal court should first consider the “threshold” issue of whether a cause of action exists before determining whether the plaintiff has “statutory standing.” Id. at 97 & n.2.A
Finally, the Trustee blatantly mischaracterizes the case law when he says that Redington “has been recognized as binding precedent.” Trustee Br. 21,
38. In SIPC v. BDO Seidman, 222 F.3d 63, 69 (2d Cir. 2000), this Court did not
recognize Redington as binding. To the contrary, the Court declined the
opportunity to reaffirm Redington and instead merely “assum[ed] without
A Other cases cited by the Trustee are likewise beside the point. In Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), the issue presented was not the threshold issue of whether there was any implied private right of action under Section 10(b), but rather whether the plaintiffs could state a claim based on extraterritorial transactions. In Motorola Credit Corp. v. Uzan, 388 F.3d 39 (2d Cir. 2004), a RICO claim was dismissed for failure to state a claim, not based on any threshold determination.
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deciding” that there was statutory standing even as it held that SIPC’s asserted
claims failed. 222 F.3d at 69, 71 (emphasis added). Likewise, in Holmes v. SIPC,
the Supreme Court did not “acknowledge” the precedential value of Redington,
Trustee Br. 38; rather, it expressly questioned its rationale while citing Judge
Pollack’s decision in Mishkin — which had rejected subrogee standing — with approval. 503 U.S. 258, 270 (1992).
Neither this Court nor the Supreme Court has ever held that Redington is good law. The district court correctly concluded that it is not.
2. Redington did not involve a broker that stole property from customers.
Even if Redington were good law, it would not support standing in this case. As Judge Rakoff noted, “there was no suggestion that the broker-dealer in Redington participated in a fraud whereby it intended to ‘appropriate’ customer property.” HSBC, 454 B.R. at 36. Indeed, the Redington trustee took the position that Weis, the broker at issue, was not a wrongdoer, alleging instead that “Weis as an entity distinct from its conniving officers was directly damaged by Touche
Ross’ unsatisfactory audit.” 592 F.2d at 620. In Redington, therefore, unlike in this case, the common law rule that a thief is not a bailee did not bar the trustee’s assertion of bailment rights. Likewise, in Redington, the in pari delicto principles reflected in the Wagoner rule did not operate to bar the trustee’s suit.
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3. Redington did not address common law claims.
Moreover, even if Redington were good law, its limited holding should not be extended to give the Trustee standing to assert common law claims.
“Redington does not anywhere hold that a SIPA trustee has standing to pursue common law claims against third parties as bailee of customer property.” HSBC,
454 B.R. at 35; accord Redington, 592 F.2d at 619. Nor does it hold that SIPC can pursue common law claims against third parties as a subrogee. Redington, 592
F.2d at 624 (holding that SIPC is “subrogated to the right of action implied in section 17”).
There is good reason to distinguish between standing to bring a section 17(a) claim and standing to bring common law claims. Common law claims, unlike federal securities claims, “generally require proof of individual reliance and causation, which may pose justiciability concerns in the context of a mass tort action by a SIPA trustee.” HSBC, 454 B.R. at 35; see also SIPC v. BDO
Seidman, LLP, 222 F.3d 63, 73 (2d Cir. 2000) (dismissing fraudulent misrepresentation claim brought by SIPC and SIPA trustee on behalf of customers on the grounds that the complaint failed to plead reliance by the customers).
In addition, interpreting Redington to extend to the common law claims here would put Redington squarely at odds with this Court’s subsequent decisions in Wagoner and its extensive progeny, including Mediators, Farace and
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Hirsch. Under those decisions, claims arising from alleged fraud on the investors in a Ponzi scheme “are the property of those investors, and may be asserted only by them and to the exclusion of [the trustee].” Hirsch, 72 F.3d at 1094 (emphasis added). If this Court’s reversed decision in Redington has any vitality, it certainly should not be construed to conflict with this well-settled law precluding trustees from bringing precisely the sort of common law damages claims that the Trustee has asserted.
III. THE DISTRICT COURT CORRECTLY REJECTED THE TRUSTEE’S SUBROGEE STANDING THEORY.
The Trustee argues that SIPC — which has advanced approximately
$800 million to satisfy or partially satisfy thousands of customer claims — is entitled to bring causes of action against third parties as a subrogee of those customer claims, and that the Trustee can enforce SIPC’s supposed subrogation rights as its assignee. Trustee Br. 54-56. The district court correctly rejected this argument. SPA-31-33.
A. SIPC has no authority under SIPA to sue third parties as a subrogee.
No provision of SIPA provides SIPC with authority to bring customer claims against third parties. Instead, the statute provides that, when SIPC makes advances (of up to $500,000) to satisfy customer claims against the estate, SIPC is subrogated to those claims against the estate. Section 78fff-3(a) provides:
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To the extent moneys are advanced by SIPC to the trustee to pay or otherwise satisfy the claims of customers, in addition to all other rights it may have at law or in equity, SIPC shall be subrogated to the claims of such customers with the rights and priorities provided in this chapter . . . .
15 U.S.C. § 78fff-3(a) (SPA-58). The “claims of such customers” paid by SIPC, which have the “rights and priorities provided in this chapter,” are “net equity claims” — i.e., claims against the estate. 15 U.S.C. § 78lll(11) (SPA-61). Thus, as
Judge McMahon held, “SIPC’s statutory subrogation right is a limited one: it permits claims only to the extent of customers’ net equity claims against the
[estate], and not against any other party.” SPA-31; accord HSBC, 454 B.R. at 33.
As a result, SIPC’s asserted right to sue third parties as a subrogee falls outside the limited subrogation rights granted by SIPA. Even the majority in
Redington reached this conclusion, explaining — before granting subrogation rights to SIPC that are not in the statute — that “SIPA provides expressly that
SIPC, upon reimbursing a customer’s losses, shall be subrogated to that customer’s claims against the debtor’s (here Weis’) estate.” Redington, 592 F.2d at 624.
Likewise, when briefing the Holmes case to the Supreme Court, SIPC itself
“assume[d] that SIPA provides for subrogation to the customers’ claims against the failed broker-dealers, but not against third parties.” 503 U.S. at 270 (citations omitted).
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In light of SIPA’s carefully circumscribed treatment of subrogation, there is no basis to imply broader subrogation rights in favor of SIPC. As explained by Judge Mulligan’s dissent in Redington, because SIPA delineates certain specific and limited subrogation rights, “its failure to provide for subrogation against any third party would clearly dictate that none exist under the
. . . principle: Expressio unius est exclusio alterius.” 592 F.2d at 634-35
(Mulligan, J., dissenting); see also National Railroad, 414 U.S. at 458 (applying the same canon; “when legislation expressly provides a particular remedy,” courts should not imply other remedies). Judge Pollack likewise concluded in Mishkin v.
Peat, Marwick, Mitchell & Co., that a SIPA trustee has no legal authority to assert extra-statutory subrogation claims. 744 F. Supp. 531, 557-58 & n.15 (S.D.N.Y.
1990). This conclusion is also supported by section 78fff(a)(3) of SIPA, which states that a purpose of a SIPA liquidation is “to enforce rights of subrogation as provided in this chapter.” 15 U.S.C. § 78fff(a)(3) (SPA-49) (emphasis added).
Congress’s intent to limit SIPC’s subrogation rights to claims against the debtor is further demonstrated by SIPA’s priority scheme. In May 1978, after the Redington decision, an amendment to SIPA took effect specifying the priority of distribution of customer property. As amended, the statute provides that customer property is allocated “to SIPC as subrogee for the claims of customers” only after customer claims have been fully satisfied. 15 U.S.C. § 78fff-2(c)(1)
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(SPA-54); accord 15 U.S.C. § 78fff-3(a) (SPA-58) (“SIPC as subrogee may assert no claim against customer property until after the allocation thereof to customers.”). The Trustee’s theory, under which SIPC is permitted to recover from third parties as a subrogee, “would effectively permit SIPC to jump the line” by recouping its advances before customers are paid in full. SPA-32.A
The Trustee’s subrogation theory has profound problems even beyond its complete lack of statutory support. In Holmes v. SIPC, the Supreme Court observed that SIPC’s “theory of subrogation” — essentially the same theory of extra-statutory subrogation rights advanced by the Trustee here — is “fraught with unanswered questions.” 503 U.S. at 270. And so it is. One such question, unanswered by the Trustee’s or SIPC’s briefs, is why SIPC should be able to
“assign” its subrogation rights to the Trustee when no provision of SIPA authorizes such an assignment.
The statute does not address this issue, nor does it discuss a host of other questions that would arise from the Trustee’s pursuit of thousands of
A It is no answer for SIPC to say that, as a result of its decision to assign its claims to the Trustee, the Trustee will retain any damages on those claims. SIPC Br. 47-48. SIPC’s decision to forego recoveries has no bearing on whether SIPA should be read to permit SIPC to bring claims against third parties that contravene the statutory priority scheme. FDIC v. Ernst & Young, LLP, 256 F. Supp. 2d 798, 805 (N.D. Ill. 2003) (where lawsuit by FDIC would permit the FDIC to “bypass” a statutory priority scheme, the FDIC’s “voluntary assurances” that it would adhere to the scheme were insufficient to support standing).
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individual customer claims. For example, when SIPC pays a customer claim in full, is SIPC really entitled to bring whatever causes of action it wishes on that customer’s behalf, subjecting the customer to unwanted discovery and trial? And when SIPC pays only part of a customer claim, can it still sue third parties as a subrogee? If so, who decides whether to sue, where to sue, what claims to pursue, and whether to settle? Likewise, if SIPC is allowed to pursue only part of a customer’s claim, are determinations made in that litigation binding on the customer?
SIPA’s complete silence on these important questions is strong evidence that — just as Congress never contemplated that bankruptcy trustees would prosecute creditor common law claims, Caplin, 406 U.S. at 434 —
Congress likewise never contemplated that SIPC, upon advancing “net equity” payments to customers, would be able to spearhead a mass, common law damages action.
In the face of SIPA’s narrowly defined and limited treatment of subrogation, the district court was also correct to conclude that SIPC’s asserted subrogation rights were not supported by the phrase in SIPA stating that SIPC, upon paying customer claims, maintains “all other rights it may have at law or in equity.” 15 U.S.C. § 78fff-3(a) (SPA-58). As the district court held, this phrase cannot “overcome the[] specific, concrete statutory impediments” to subrogee
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standing. SPA-32. Other courts have likewise concluded that this “catch-all”
phrase cannot be read to undermine the specific provisions of SIPA directing only
that SIPC be subrogated to customer claims against the estate. HSBC, 454 B.R. at
34; see also Mishkin, 744 F. Supp. at 558.
SIPC mistakenly suggests that the “all other rights” phrase in the statute somehow codified Redington. SIPC Br. 48. The language had nothing to do with Redington. It was proposed by SIPC in November 1975 (two and a half years before this Court’s first decision in Redington) as a “minor substantive or
technical amendment[].” Securities Investor Protection Act Amendments of 1975:
Hearings on H.R. 8064 Before the Subcomm. on Consumer Protection and
Finance of the H. Comm. on Interstate and Foreign Commerce, 94th Cong. 197,
199 (1976). Moreover, Congress received a report from a SIPC task force
observing that “claims of SIPC as subrogee (except as otherwise provided), should
be allowable only as claims against the general estate.” Id. at 64 (emphasis
added).A
A The Sixth Circuit’s reliance in Appleton v. First National Bank, 62 F.3d 791 (6th Cir. 1995), on the 1978 amendment to SIPA is misplaced. Although the Appleton court stated that a SIPA trustee’s powers are “supplemented by § 78fff- 3(a),” id. at 800, this amendment cannot fairly be read to effect a major substantive change to the statute, as shown above, especially in light of the contemporaneous amendment to the statute’s priority language and the absence of any reference in the statute to subrogation rights against third parties.
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B. The Amended Complaint does not adequately plead subrogation claims.
The Trustee’s subrogation theory also fails on the independent basis that the Trustee has not pleaded individual claims on behalf of any supposed subrogors. As JPMorgan demonstrated in the court below, a fundamental flaw in the Amended Complaint is that the Trustee, despite purporting to aggregate and assert thousands of individual fraud claims under New York law, has failed to meet the pleading requirements applicable to any of those individual claims. This pleading failure is fatal to SIPC’s purported claims as a “subrogee.”
Under clear Second Circuit precedent, to recover as a subrogee, a party must identify the subrogors and provide “individualized information about the claims” that the subrogee is asserting. Blue Cross & Blue Shield of New
Jersey, Inc. v. Philip Morris USA Inc., 344 F.3d 211, 217-18 (2d Cir. 2003).
Moreover, as “a general matter, a subrogation claim by an insurer depends upon the claim of the insured and is subject to whatever defenses the tortfeasor has against the insured.” Id. at 218 (quotation marks omitted).
Blue Cross is directly on point. There, a purported subrogee sought to bring fraud claims on behalf of a large group of injured consumers without providing the number or names of the subrogors or the individual circumstances concerning the claims. This Court concluded that it was “clearly contrary to the common law understanding of the nature of subrogation claims” to proceed as a
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purported subrogee without identifying the “number of subrogors or their names” or any “individualized information” about the claims. Id. at 217-18. Such an attempt to “proceed under the guise of subrogation was improper as it was not a true subrogation claim.” Id. at 218. The Court thus held that the defendants were entitled to judgment as a matter of New York law. Id.
Here, the Amended Complaint does not allege facts to support any individual customer’s claims. For instance, to sustain a fraud claim, the plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney Inc., 88
N.Y.2d 413, 421 (1996). The Amended Complaint, however, does not allege these elements with respect to any particular customer. It also does not show how
JPMorgan, by providing conventional banking services to BMIS, proximately caused any customer’s loss. See Bloor v. Carro, Spanbock, Londin, Rodman &
Fass, 754 F.2d 57, 62-63 (2d Cir. 1985) (complaint for aiding and abetting “must allege that the acts of the aider and abettor proximately caused the harm”).
Instead, the Trustee lumps all of Madoff’s customers together as if they were one plaintiff, even though the Trustee himself has alleged that some customers
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participated in Madoff’s fraud and caused their own losses. See, e.g., A-992-95,
Picard v. Fairfield Sentry Ltd. et al., No. 09-01239 (Bankr. S.D.N.Y.).
In light of the Trustee’s failure to provide any information about individual customer claims, let alone the particularized information required by
Fed. R. Civ. P. 9(b) to support claims of fraud, neither SIPC nor the Trustee may
“proceed under the guise of subrogation.” Blue Cross, 344 F.3d at 218. “At the very least, a subrogation claim would require [the Trustee] to identify its subrogors and those subrogors’ claims so that defendants would have the opportunity to assert defenses against those claims.” Id. (citing A.O. Fox Mem’l Hosp. v. Am.
Tobacco, 302 A.D.2d 413 (2d Dep’t 2003); Eastern States Health & Welfare Fund v. Philip Morris, Inc., 188 Misc. 2d 638, 652-53 (Sup. Ct. N.Y. Co. 2000)). The
Trustee’s failure to identify the individual subrogors and their “particular injuries” mandates dismissal of his subrogation claims as a matter of law. A.O. Fox, 302
A.D.2d at 414; see also Eastern States, 188 Misc. 2d at 652-53.A
A Although Blue Cross was decided after trial, the New York cases it relied upon granted motions to dismiss and the Court’s logic applies fully to such motions: If information regarding subrogation claims is not pleaded, the defendants cannot assert the defenses in Fed. R. Civ. P. 12. See also, e.g., Health Care Serv. Corp. v. Brown & Williamson Tobacco Corp., 208 F.3d 579, 581 (7th Cir. 2000); U.S. v. Philip Morris Inc., 153 F. Supp. 2d 32, 39 (D.D.C. 2001).
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IV. THE DISTRICT COURT CORRECTLY DISMISSED THE TRUSTEE’S CONTRIBUTION CLAIM.
The Trustee seeks contribution for the payment of “customer claims”
filed in the SIPA liquidation, including claims the Trustee has not yet paid. A-
800(¶¶ 588-89). The district court correctly dismissed this claim on the grounds,
among others, that: (1) SIPA does not permit a trustee to seek contribution for
payments to customers; and (2) even apart from SIPA, the Amended Complaint
does not state a contribution claim under New York law. SPA-18-22.
A. The Trustee has no authority under SIPA to seek contribution for payments to customers.
A right to contribution exists under a federal statute if the statute
provides for such a right, “either expressly or by clear implication.” Texas Indus.,
Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 638 (1981) (no right of contribution
under the Sherman Act or Clayton Act); see also Nw. Airlines, Inc. v. Transp.
Workers Union of Am., 451 U.S. 77, 94-95 (1981) (no right of contribution under
the Equal Pay Act or Title VII of the Civil Rights Act of 1964); Lehman Bros., Inc.
v. Wu, 294 F. Supp. 2d 504, 505 (S.D.N.Y. 2003) (no right of contribution under
the Copyright Act); LNC Invs., Inc. v. First Fid. Bank, 935 F. Supp. 1333, 1346
(S.D.N.Y. 1996) (no right of contribution under the Trust Indenture Act).
As the district court concluded, SIPA does not provide the Trustee with a contribution right for payments to customers mandated by the statute.
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SPA-21; HSBC, 454 B.R. at 37-38. SIPA requires a trustee to distribute customer
property to the broker’s customers ratably based on their “net equities.”A But
nothing in SIPA empowers a trustee to seek contribution for those payments. To
the contrary, although SIPA expressly provides that a trustee can bring avoidance
actions, 15 U.S.C. § 78fff-2(c)(3) (SPA-55), it makes no similar provision for
contribution claims. “If Congress had intended to confer upon the Trustee
authority to seek contribution for payments of customer claims, it would have said
so in SIPA,” the comprehensive statutory scheme that governs the brokerage
liquidation process. HSBC, 454 B.R. at 38; see also Nw. Airlines, Inc., 451 U.S. at
97 (rejecting contribution right omitted from “a comprehensive legislative scheme including an integrated system of procedures for enforcement”).
Lacking contribution rights under SIPA itself, the Trustee seeks to assert a claim under New York’s contribution statute. However, as this Court has held, where payments are compelled by a federal statutory scheme — rather than by state law — the defendant must look to federal law for any contribution rights.
A 15 U.S.C. § 78fff-2(b) (SPA-53-54) (“After receipt of a written statement of claim [by a customer],” the trustee “shall promptly discharge . . . all obligations of the debtor to a customer relating to, or net equity claims based upon, securities or cash.”); 15 U.S.C. § 78fff-2(c) (SPA-54) (directing that the Trustee “shall allocate customer property of the debtor . . . to customers of such debtor, who shall share ratably in such customer property on the basis and to the extent of their respective net equities”).
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Herman v. RSR Sec. Serv. Ltd., 172 F.3d 132, 144 (2d Cir. 1999) (affirming
dismissal of New York state law contribution claims for liability under the Fair
Labor Standards Act); see also KBL Corp. v. Arnouts, 646 F. Supp. 2d 335, 341
(S.D.N.Y. 2009) (plaintiff seeking contribution for expenses from Copyright Act litigation could not “use New York State common law as an end-around to make a claim for contribution that it could not make under the federal statutory scheme”);
LNC Inv., Inc., 935 F. Supp. at 1349 (“Because federal law provides no right of contribution under the [Trust Indenture Act], there likewise can be no right of contribution for violations of the TIA under state law.”); Lehman Bros., 294
F. Supp. 2d at 505 n.1 (“[W]hether contribution is available in connection with a federal statutory scheme is a question governed solely by federal law.” (quotation marks omitted)).
In the district court, the Trustee “acknowledge[d] that, ‘The compulsion to pay in this case is the Trustee’s obligation to pay customer claims under SIPA.’” SPA-20 (emphasis in original). On appeal, however, the Trustee asserts that his claim for contribution “does not arise out of SIPA,” but rather is
“grounded in New York law” and is “based on the breach of state law duties.”
Trustee Br. at 62, 65. But it is beside the point that the Trustee has brought state law claims against JPMorgan for breach of state law duties. Those claims are not the basis of the Trustee’s obligation to make the payments for which he seeks
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contribution. The payments to customers, for which the Trustee is seeking
contribution, are indisputably mandated by SIPA.
The Trustee’s own authorities establish that the Trustee cannot look to
state law for contribution rights when his obligation to pay customers arises from a
federal statute. In Northwest Airlines, the Supreme Court explained that federal
courts have recognized state-law contribution rights only “in cases in which state
law supplied the appropriate rule of decision,” i.e., cases in which the underlying
obligation is based on state law. 451 U.S. at 97 n.38. But since the case before it
involved liability under a federal statutory scheme, the Court looked only to federal
law for contribution rights and said that “it would be improper for us to add a right
to contribution to the statutory rights that Congress created.” Id. at 98.
Likewise, in LNC Investments, Judge Mukasey permitted a defendant
to bring a state law contribution claim on the basis of the plaintiffs’ breach of
fiduciary duty claim, but held that the defendant could not maintain a state law
contribution claim on the basis of an alleged violation of the Trust Indenture Act, a
federal statute. 935 F. Supp. at 1348-49. As the court explained, “[t]he source of a
right of contribution under state law must be an obligation imposed by state law.”
Id. at 1349 (emphasis added). Notably, Judge Mukasey rejected the contribution claim based on the Trust Indenture Act even while finding that the alleged joint tortfeasor had potential liability under a state law theory of breach of fiduciary
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duty. 935 F. Supp. at 1348-49, 1353. Judge Mukasey thus recognized that where
— as in this case — the party seeking contribution is required by a federal statute
to make payments, but asserts claims against third parties based on state law, any
contribution rights must still be grounded in federal law.
The other cases cited by the Trustee are inapposite, because they
involve contribution claims for obligations imposed by state law or contract. For
example, in Hill v. Day (In re Today’s Destiny, Inc.), 388 B.R. 737, 753-56
(Bankr. S.D. Tex. 2008), a debtor sought contribution under Texas law for
obligations set forth in proofs of claim alleging fraud. The claimants there could
recover only by establishing liability for the state law torts. Here, by contrast, the
Trustee’s obligation to make payments to customers derives from SIPA, and
customers need not prove any state law tort claims.A
A The Trustee’s other cases are similarly inapposite. See Westerhoff v. Slind, 688 F.2d 62, 63 (8th Cir. 1982) (contribution for payments on promissory note); Friedman v. Morabito, 1995 WL 502909, at *1 (4th Cir. 1995) (contribution for payment on loan guaranty); A.P.I., Inc. v. Home Ins. Co., 706 F. Supp. 2d 926, 946 (D. Minn. 2010) (contribution for payments on insurance policies); Seitter v. Schoenfeld, 88 B.R. 343, 348 (D. Kan. 1988) (contribution for liability on fraud and contract claims); Kotoshirodo v. Hancock, 2009 WL 2225450, at *5 (Bankr. D. Haw. July 23, 2009) (contribution for payment on note guaranty). In Kittay v. Atl. Bank of New York, 316 B.R. 451, 464 (Bankr. S.D.N.Y. 2004), the contribution claim was dismissed, and SIPC v. Cheshier & Fuller, LLP, 377 B.R. 513, 570 (Bankr. E.D. Tex. 2007), involved comparative negligence.
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In sum, the Trustee has failed to identify any case holding that a SIPA
trustee may seek contribution for payments to customers under the statute. Instead,
the Trustee asks this Court to engraft an unprecedented contribution remedy onto a
comprehensive statutory scheme that has never been read to grant such a remedy.
As the Supreme Court directed in Northwest Airlines, “[t]he judiciary may not, in the face of such comprehensive legislative schemes, fashion new remedies that might upset carefully considered legislative programs.” 451 U.S. at 97 (emphasis added).
B. The Amended Complaint fails to plead the elements of contribution under New York law.
Even if the Trustee could invoke New York law, he has failed to state a claim under New York’s contribution statute. Under New York law, joint tortfeasors “who are subject to liability for damages for the same personal injury, injury to property or wrongful death, may claim contribution among them.” N.Y.
C.P.L.R. § 1401 (SPA-71). The amount of contribution that may be recovered
“shall be the excess paid by [one tortfeasor] over and above his equitable share of the judgment recovered by the injured party.” N.Y. C.P.L.R. § 1402 (SPA-71).
The Trustee’s contribution claim fails on numerous grounds. First, it is well established that a contribution claim must be based on an adverse judgment of shared “tort liability.” Bd. of Educ. v. Sargent, 71 N.Y.2d 21, 28 (1987). As the
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district court recognized, the Trustee’s obligation to pay BMIS customers arises from SIPA, not from “liability for damages” under state law. SPA-18. Under
SIPA, customers of a broker have a statutory entitlement to receive distributions of
“customer property” ratably based on their “net equities,” irrespective of any tort liability. See 15 U.S.C. § 78fff-2(c) (SPA-54). The payments for which the
Trustee seeks contribution — customer claims that he has “allowed” and advances made by SIPC — did not require or result in any predicate determination of state- law tort liability against BMIS. SPA-20.
Second, the Trustee has failed to plead that BMIS has paid, or ever will pay, more than its “equitable share” of any judgment, as required to state a contribution claim. Andrulonis v. U.S., 26 F.3d 1224, 1233 (2d Cir. 1994) (right of contribution does not accrue “unless and until the defendant pays the plaintiff an amount exceeding its equitable share of the primary judgment”). Given that the
Trustee’s and SIPC’s obligation to pay net equity claims is set by federal statute, there can be nothing “inequitable” about the amount of those payments.
Third, the Trustee has never impleaded JPMorgan into an underlying proceeding. New York law is clear: in the absence of a valid impleader, a joint tortfeasor cannot bring a contribution claim until it actually pays more than its equitable share. See Andrulonis, 26 F.3d at 1233; Alside, Inc. v. Spancrete Ne.,
Inc., 84 A.D.2d 616, 617 (3d Dep’t 1981). Faced with this limitation, the Trustee
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purports to “implead” JPMorgan into “the SIPA Proceeding” — i.e., the brokerage liquidation before Bankruptcy Judge Lifland — “pursuant to Rule 14 of the
Federal Rules of Civil Procedure and Rule 7014 of the Federal Rules of
Bankruptcy Procedure.” A-671(¶ 21). The Trustee’s theory appears to be that
JPMorgan, simply by virtue of the Amended Complaint against it, should be treated as a third-party defendant as to every customer claim filed against the estate. There is no basis for this procedural hocus-pocus. Under Bankruptcy Rule
7014, Rule 14 applies only “in adversary proceedings,” not in contested matters such as objections to claims. See F.R.B.P. 7001. The Trustee, moreover, has never filed any motion to implead JPMorgan into any claims proceeding.
C. The contribution claim is barred by the Wagoner rule.
Alternatively, the Trustee’s contribution claim — which he says is brought as “successor-in-interest to BLMIS,” A-671(¶ 21) — is barred by the
Wagoner rule. If the Trustee were permitted to bring New York law contribution claims against JPMorgan, even though his payments to customers are compelled by SIPA rather than New York tort law, then the contribution claim fails under
Wagoner, for “a trustee cannot sue to recover for a wrong undertaken by the debtor itself.” Kirschner, 2009 WL 1286326, at *1.
The Trustee may argue that parties seeking contribution are necessarily in pari delicto. But “[t]he Wagoner rule is a standing rule — it says
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that a bankrupt corporation cannot sue a third party for fraud that the corporation
itself participated in.” Am. Tissue, Inc. v. Arthur Andersen, L.L.P., 2003 WL
22909155, at *4 (S.D.N.Y. Dec. 9, 2003) (emphasis in original). In this context, because BMIS is in bankruptcy, the Wagoner rule dictates that BMIS’s customers, not the Trustee, are the proper parties to pursue claims against joint tortfeasors.
See Wagoner, 944 F.2d at 120; see also Devon Mobile Commc’ns Liquidating
Trust v. Adelphia Commc’ns Corp., 322 B.R. 509, 529 (Bankr. S.D.N.Y. 2005)
(standing requirements “cannot be circumvented by the expedient of filing a third- party complaint” and denominating the claims as “claims for contribution”). The
Trustee’s contribution claim, if permitted to go forward, would be nothing more than an end-run around the bedrock rule that creditors of a fraudulent debtor should control their own tort claims.
V. THE TRUSTEE’S COMMON LAW CLAIMS ARE PRECLUDED BY SLUSA.
The Securities Litigation Uniform Standards Act provides an alternative basis for dismissal. In holding that the Trustee lacked authority to assert claims on behalf of Madoff’s customers, the district court did not need to reach JPMorgan’s alternative argument that SLUSA preempts this state law securities fraud case aggregating thousands of customer claims. As shown below, the Trustee has resorted to state common law to avoid the pleading and substantive
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requirements imposed by federal securities law. But in so doing, the Trustee has run headlong into SLUSA, which mandates that securities mass actions be litigated in federal court under federal law.
A. SLUSA broadly forecloses securities mass actions based on state law.
SLUSA had its genesis in the Private Securities Litigation Reform
Act, which imposed new procedural and substantive requirements for filing securities actions. Congress enacted the PSLRA to curb “perceived abuses of the class-action vehicle in litigation involving nationally traded securities.” Merrill
Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81-82 (2006). But this reform had an unintended consequence: it prompted the filing of securities suits under state law, often in state court, by plaintiffs seeking to circumvent “the obstacles set in their path by the [PSLRA].” Id. at 82.
Congress enacted SLUSA in 1998 to “‘prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives’ of the Reform Act.” Id. (quoting SLUSA, Pub. L. No. 105-353,
§§ 2(2), (5), 112 Stat. 3227 (1998) (quotation marks omitted)). SLUSA accomplished this objective “by making federal court the exclusive venue for class actions alleging fraud in the sale of certain covered securities and by mandating that such class actions be governed exclusively by federal law.” Lander v.
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Hartford Life & Ann. Ins., 251 F.3d 101, 108 (2d Cir. 2001) (emphasis added).
The United States Supreme Court has held that SLUSA must be given a “broad construction” to effectuate Congress’s intent. Dabit, 547 U.S. at 85-86.
SLUSA’s preemption provision states as follows:
No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging —
(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or
(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.
15 U.S.C. § 78bb(f)(1) (SPA-42); see also § 77p(b) (SPA-41). SLUSA thus mandates dismissal of (1) any covered class action, (2) based on state law,
(3) alleging a material misrepresentation or omission or the use of a manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. E.g., Romano v. Kazacos, 609 F.3d 512, 518 (2d Cir. 2010).
A plaintiff cannot avoid SLUSA on the basis that not all claims in the complaint are styled as “fraud” claims. SLUSA preempts any “action . . . alleging a misrepresentation or omission,” regardless of what labels plaintiffs may place on their claims. 15 U.S.C. §§ 78bb(f)(1) (SPA-42), 77p(b) (SPA-41) (emphasis added); see also, e.g., Leykin v. AT&T Corp., 216 F. App’x 14, 17 (2d Cir. 2007)
(SLUSA preempted claim for breach of fiduciary duty); In re Herald, Primeo, and
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Thema Sec. Litig., 2011 WL 5928952, at *4 (S.D.N.Y. Nov. 29, 2011) (SLUSA preempted claims for aiding and abetting breach of fiduciary duty, conversion, gross negligence, and unjust enrichment); In re J.P. Jeanneret Assocs., Inc., 769
F. Supp. 2d 340, 378-81 (S.D.N.Y. 2011) (SLUSA preempted claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust enrichment); Levinson v. PSCC Servs., 2009 WL 5184363, at *12-13 (D. Conn.
Dec. 23, 2009) (SLUSA preempted aiding and abetting conversion claim).
B. SLUSA preempts the Trustee’s claims on behalf of Madoff’s customers.
1. This action is based on state law.
The common law damages claims asserted against JPMorgan are all brought under state law.
2. This action alleges misrepresentations or omissions in connection with the purchase or sale of securities.
The Amended Complaint contains allegations of material misrepresentations and omissions in connection with the purchase or sale of a covered security. It alleges that Madoff made “intentional misrepresentation[s] of fact” to carry out his fraudulent scheme — namely, he falsely claimed to be purchasing and selling publicly traded securities — and that JPMorgan
“substantially assisted” Madoff’s securities fraud. A-678(¶ 47); A-675-76(¶¶ 38-
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41); A-729(¶ 239). The Amended Complaint further alleges that JPMorgan
“ignored blatant misrepresentations” and engaged in “fraud” because it did not
report Madoff’s securities fraud to regulators. A-726(¶ 231); A-799(¶ 583).
There is no question that the securities Madoff purported to be buying
and selling were “covered securities” under SLUSA. A security is a “covered
security” if it is listed or authorized for listing on the New York Stock Exchange or
another national exchange. See 15 U.S.C. § 77r(b), cited in 15 U.S.C.
§§ 78bb(f)(5)(E), 77p(f)(3). The stocks in the S&P 100 Index that Madoff reported he was trading are publicly traded, as are S&P 100 options that he reported he was trading. See A-675-76(¶¶ 38-39); Herald, 2011 WL 5928952, at *6 (“Madoff’s purported trading strategy utilized ‘indisputably covered securities.’” (citation omitted)).
Under SLUSA, it makes no difference that Madoff never actually traded the covered securities. In SEC v. Zandford, the Supreme Court observed that “the SEC has consistently adopted a broad reading of the phrase ‘in connection with the purchase or sale of any security’” and has “maintained that a broker who accepts payment for securities that he never intends to deliver . . . violates § 10(b) and Rule 10b-5.” 535 U.S. 813, 819 (2002). The Zandford Court found the SEC’s interpretation to be “reasonable” and entitled to deference. Id. at 819-20.
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Consistent with Zandford, courts in this Circuit have held that
Madoff’s falsified securities trades satisfy SLUSA’s covered securities requirement. See Jeanneret, 769 F. Supp. 2d at 363 (“[A]ll of my colleagues who have encountered this issue in Madoff-related cases have concluded that, in the context of his Ponzi scheme, the ‘in connection with’ requirement is satisfied by his phony purchases and sales.”); accord Herald, 2011 WL 5928952, at *8; Barron v. Igolnikov, 2010 WL 882890, at *4 (S.D.N.Y. Mar. 10, 2010); In re Beacon
Assocs. Litig., 745 F. Supp. 2d 386, 410-11 (S.D.N.Y. 2010).
These decisions are fully consistent with the case law outside the
Madoff context. See, e.g., Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d
1340, 1347-51 (11th Cir. 2008) (SLUSA precluded class action seeking to hold defendant liable for fraud in which third party stole investors’ money rather than purchasing securities); Falkowski v. Imation Corp., 309 F.3d 1123, 1129-30 (9th
Cir. 2002) (SLUSA precluded class action relating to unexercised stock options because “if a person contracts to sell a security, that contract is a ‘sale’ even if the sale is never consummated”), amended by 320 F.3d 905 (9th Cir. 2002); see also In re Jett, Securities Act Rel. No. 8395, Exchange Act Rel. No. 49366, 2004 SEC
LEXIS 504, at *72 & n.41 (Mar. 5, 2004) (“When a person portrays activities as securities purchases and sales that, in fact, are no such thing, that conduct can, and here does, constitute securities fraud.” (citing cases)).
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3. This is a “covered class action” under SLUSA.
SLUSA defines “covered class action” to include not only actions styled as class actions, but all lawsuits in which common issues other than reliance predominate and (1) “damages are sought on behalf of more than 50 persons” or
(2) the plaintiffs are suing “on a representative basis on behalf of themselves and other unnamed parties similarly situated.” 15 U.S.C. §§ 77p(f)(2)(A) (SPA-41),
78bb(f)(5)(B) (SPA-42-43).
This lawsuit is a “covered class action.” The Trustee’s causes of action aggregate and assert thousands of separate, individual claims of Madoff’s customers. Indeed, in seeking to pursue claims as a “bailee,” the Trustee’s original complaint expressly acknowledged that his claims were brought “on behalf of” customers, the very language of SLUSA’s covered class action definition.
A-35(¶ 17(f)). The Trustee’s tactical deletion of that phrase in no way changes the substance of his claims, which invoke customer rights to recover customer losses.
In seeking to avoid the reach of SLUSA, the Trustee and SIPC have relied on SLUSA’s “Counting” provision, which states that a “corporation . . . or other entity, shall be treated as one person or prospective class member, but only if the entity is not established for the purpose of participating in the action.” 15
U.S.C. §§ 77p(f)(2)(C) (SPA-42), 78bb(f)(5)(D) (SPA-43). By its terms, however, that provision is not an exception to the “covered class action” definition. Rather,
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it simply clarifies that when an entity such as a corporation brings an action, it will generally count as one person under SLUSA — so that a claim brought by a corporation on its own behalf will not run afoul of SLUSA. The provision, in other words, respects “the usual rule of not looking through an entity to its constituents unless the entity was established for the purpose of bringing the action.” LaSala v.
Bordier et Cie, 519 F.3d 121, 132-33 (3d Cir. 2008).
SLUSA’s counting provision, therefore, does not help the Trustee.
Under the plain language of the statute, the relevant question is whether the plaintiff is bringing claims “on behalf of” more than 50 persons; if he is, it makes no difference if the plaintiff is “one person” or many.
The Third Circuit’s decision in LaSala is on point. In LaSala, the trustees for a liquidating trust brought claims that had been assigned to the trust by a bankrupt debtor as well as claims that had been assigned to the trust by purchasers of the debtor’s stock. The court concluded that the claims that originally belonged to the debtor corporation were not barred by SLUSA, because those claims alleged an injury to the debtor, a single entity. 519 F.3d at 133-34.
By contrast, the court found that the claims that originally belonged to the
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purchasers “would seem to take the form of a covered class action.” Id. at 138.A
In drawing this distinction, the Third Circuit explained that, where claims are aggregated by a single plaintiff, SLUSA applies with full force when “the original owners of the claim” number more than 50. Id. at 134 (emphasis added).
It makes no difference that the plaintiff here is a trustee rather than a typical lead plaintiff. As the Third Circuit explained in LaSala, “Congress’s clear intent [for SLUSA] not to reach claims asserted by a bankruptcy trustee” embraced only “claims that the debtor-in-possession once owned.” LaSala, 519 F.3d at 135
(emphasis added). In a case such as this one, therefore, where the Trustee is seeking to assert claims that the debtor BMIS never owned, SLUSA controls.
The recent decision of the New York Court of Appeals in RGH
Liquidating Trust v. Deloitte & Touche LLP, 17 N.Y.3d 397 (2011), does not support a different result. There, the Court of Appeals — over a strong dissent by
Judge Robert Smith — held that a liquidating trust that succeeded to a debtor’s rights under a chapter 11 plan was not precluded by SLUSA from bringing state law claims against accountants and managers that the debtor’s bondholders had assigned to the debtor. Noting that the question presented was a “difficult one”
A The Court ultimately found that SLUSA did not apply to the claims that originally belonged to the purchasers because they were based on foreign law. 519 F.3d at 138, 143.
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that would “be resolved by the federal courts,” id. at 406 & n.6, the majority
concluded that, under SLUSA’s “Counting” provision, the liquidating trust could
pursue its claims in its capacity as a “single entity” asserting the debtor’s rights.
The Court analogized the liquidating trust at issue to the trust addressed by the
Third Circuit in LaSala, which was permitted to pursue claims against third parties that originally belonged to the bankrupt debtor. Id. at 412-14.
Judge Smith’s dissent in RGH Liquidating Trust persuasively refutes the majority’s reasoning. As explained by Judge Smith, the lawsuit at issue was manifestly brought “on behalf of more than 50 persons,” since the trust was “the assignee of more than 50 bondholders.” Id. at 415-17. Judge Smith reasoned that
SLUSA’s “Counting” provision is “not relevant,” because “even if the Trust is
‘treated as one person’ it is still suing ‘on behalf of’ more than 50 others — just as a class representative may be one person, but a class action will still be barred by
SLUSA.” Id. at 416 (quoting 15 U.S.C. § 78bb(f)(5)(D)).
In addition, it is clear that Judge Smith had the correct reading of
LaSala. As Judge Smith explained, “the critical fact supporting the Third Circuit’s holding that the case was not barred by SLUSA” was that “the claims being litigated there had originally belonged not to many entities, but to one, a bankrupt company.” Id. at 417. In contrast, with respect to claims that originally belonged
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to purchasers of the company’s stock, the Third Circuit concluded that they did fit within the definition of “covered class action.” LaSala, 519 F.3d at 137-38.
In any event, the Trustee here, in contrast to the trust in RGH
Liquidating Trust, is not asserting claims that were assigned to the debtor (or even the Trustee). Rather, the Trustee purports to assert claims on behalf of thousands of customers that have never consented to the Trustee’s pursuit of those claims.
The mass action that the Trustee seeks to bring is irreconcilable with SLUSA.
CONCLUSION
For the reasons set forth herein, the judgment of the district court should be affirmed.
Dated: April 5, 2012 Respectfully submitted, By: /s/ John F. Savarese John F. Savarese Douglas K. Mayer Stephen R. DiPrima Emil A. Kleinhaus Lauren M. Kofke Jonathon R. La Chapelle WACHTELL,LIPTON,ROSEN &KATZ 51 West 52nd Street New York, New York 10019 (212) 403-1000 Attorneys for Defendants-Appellees
-73- Case: 11-5044 Document: 110 Page: 87 04/05/2012 572673 91
CERTIFICATE OF COMPLIANCE WITH FRAP 32(A)
I hereby certify that:
1. This brief complies with the March 14, 2012 Order of the
United States Court of Appeals for the Second Circuit (Carney, J.) granting
Defendants-Appellees permission to file one oversized brief of up to 17,500 words, because this brief contains 17,495 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).
2. This brief complies with the typeface requirements of Fed. R.
App. P. 32(a)(5) and the typestyle requirements of Fed. R. App. P. 32(a)(6) because the brief has been prepared in a proportionally spaced typeface using
Microsoft Office Word 2003 in 14-point Times New Roman font.
Dated: April 5, 2012 Respectfully submitted, /s/ John F. Savarese John F. Savarese Douglas K. Mayer Stephen R. DiPrima Emil A. Kleinhaus Lauren M. Kofke Jonathon R. La Chapelle WACHTELL,LIPTON,ROSEN &KATZ 51 West 52nd Street New York, New York 10019 (212) 403-1000
Attorneys for Defendants-Appellees Case: 11-5044 Document: 110 Page: 88 04/05/2012 572673 91
Addendum A Case: 11-5044 Document: 110 Page: 89 04/05/2012 572673 91
Add-1 Case: 11-5044 Document: 110 Page: 90 04/05/2012 572673 91
Addendum B Case: 11-5044 Document: 110 Page: 91 04/05/2012 572673 91
Add-2 Case: 11-5051 Document: 98 Page: 1 04/05/2012 572762 85
11-5051-bk
United States Court of Appeals FOR THE SECOND CIRCUIT
IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC
IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Plaintiff-Appellant, – against –
UBS FUND SERVICES (LUXEMBOURG) SA,
(For Continuation of Caption see Inside Cover)
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK BRIEF OF DEFENDANTS-APPELLEES UBS AG, UBS (LUXEMBOURG) S.A., UBS FUND SERVICES (LUXEMBOURG) S.A., UBS THIRD PARTY MANAGEMENT COMPANY S.A., RENE EGGER, ALAIN HONDEQUIN, HERMANN KRANZ, AND RALF SCHROETER
GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue New York, New York 10166 (212) 351-4000
Attorneys for Defendants-Appellees UBS AG, UBS (Luxembourg) S.A., UBS Fund Services (Luxembourg) S.A., UBS Third Party Management Company S.A., Rene Egger, Alain Hondequin, Hermann Kranz, and Ralf Schroeter
Case: 11-5051 Document: 98 Page: 2 04/05/2012 572762 85
ACCESS INTERNATIONAL ADVISORS LLC, ACCESS INTERNATIONAL ADVISORS EUROPE LIMITED, ACCESS INTERENATIONAL ADVISORS LTD., ACCESS PARTNERS (SUISSE) SA, ACCESS MANAGEMENT LUXEMBOURG SA, AS REPRESENTED BY ITS LIQUIDATOR MAITRE FERDINAND ENTRINGER, FKA ACCESS INTERNATIONAL ADVISORS LUXEMBOURG SA, ACCESS PARTNERS SA, AS REPRESENTED BY ITS LIQUIDATOR MAITRE FERDINAND ENTRINGER, PATRICK LITTAYE, CLAUDINE MAGON DE LA VILLEHUCHET, IN HER CAPACITY AS EXECUTRIX UNDER THE WILL OF THIERRY MAGON DE LA VILLEHUCHET (A/K/A RENE THIERRY DE LA VILLEHUCHET), INDIVIDUALLY AS THE SOLE BENEFICIARY UNDER THE WILL OF THIERRY MAGON DE LA VILLEHUCHET (A/K/A RENE THIERRY DE LA VILLEHUCHET), AKA CLAUDINE DE LA VILLEHUCHET, PIERRE DELANDMETER, THEODORE DUMBAULD, LUXALPHA SICAV, AS REPRESENTED BY ITS LIQUIDATORS MAITRE ALAIN RUKAVINA AND PAUL LAPLUME, ROGER HARTMANN, RALF SCHROETER, RENE EGGER, ALAIN HONDEQUIN, HERMANN KRANZ, BERNARD STIEHL, GROUPEMENT FINANCIER LTD., UBS AG, UBS (LUXEMBOURG) SA, MAITRE ALAIN RUKAVINA, IN THEIR CAPACITY AS LIQUIDATOR AND REPRESENTATIVE OF LUXALPHA SICAV, PAUL LAPLUME, IN THEIR CAPACITY AS LIQUIDATOR AND REPRESENTATIVE OF LUXALPHA SICAV, UBS THIRD PARTY MANAGEMENT COMPANY SA,
Defendants-Appellees,
-and-
SECURITIES INVESTOR PROTECTION CORPORATION,
Intervenor. Case: 11-5051 Document: 98 Page: 3 04/05/2012 572762 85
CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure, the undersigned counsel certifies that:
Defendant UBS AG is a publicly held company, and no corporation owns, directly or indirectly, 10% or more of its stock.
Defendant UBS (Luxembourg) S.A. is a private non-governmental party, and UBS AG, a publicly held company, owns, directly or indirectly, 10% or more of the stock of UBS (Luxembourg) S.A.
Defendant UBS Fund Services (Luxembourg) S.A. is a private non- governmental party, and UBS AG, a publicly held company, owns, directly or indirectly, 10% or more of the stock of UBS Fund Services (Luxembourg) S.A.
Defendant UBS Third Party Management Company S.A. is a private non- governmental party, and UBS AG, a publicly held company, owns, directly or indirectly, 10% or more of the stock of UBS Third Party Management
Company S.A.
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TABLE OF CONTENTS
Page ISSUES PRESENTED FOR REVIEW ...... 1 STATEMENT OF THE CASE ...... 2 STATEMENT OF FACTS ...... 4 A. The Trustee Alleges that the Defendants Harmed BLMIS Customers and Purports to Assert Their Claims ...... 4 B. The Decision Below ...... 7 SUMMARY OF ARGUMENT ...... 9 ARGUMENT ...... 11 I. THE DISTRICT COURT CORRECTLY HELD THAT THE TRUSTEE LACKS STANDING TO PURSUE THE COMMON LAW CLAIMS HE HAS ASSERTED ...... 11 A. The Trustee’s Powers Are Limited by Statute ...... 11 B. The Trustee Lacks Standing Under the Bankruptcy Code to Bring Claims on Behalf of BLMIS Customers ...... 13 C. St. Paul Is Consistent with Caplin and Confers No Greater Authority on the Trustee ...... 16 D. Claims Asserted on Behalf of BLMIS Are Barred by the Wagoner Rule and the Doctrine of In Pari Delicto ...... 25 1. The Adverse Interest Exception Is Inapplicable ...... 27 2. A SIPA Trustee Is Not Exempt from Wagoner or In Pari Delicto ...... 29 3. Wagoner and In Pari Delicto Are Applicable on the Face of the Trustee’s Complaint...... 34 E. Redington Is No Longer Good Law and Is Otherwise Inapplicable ...... 37 1. Redington’s Procedural History ...... 37 2. The Supreme Court’s Reversal on a Threshold Issue Rendered the Panel’s Discussion of Standing Superfluous ...... 39
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TABLE OF CONTENTS [Continued] Page
3. Subsequent Cases Have Questioned Redington’s Authority and Rationale ...... 44 F. The Trustee Lacks Standing as an Alleged Bailee ...... 46 1. The Trustee as Possessor of Customer Property ...... 47 2. The Trustee as Successor to BLMIS ...... 50 G. The Trustee Lacks Standing as an Alleged Subrogee ...... 53 1. SIPA Limits SIPC’s Subrogation Rights to Net Equity Claims Against the Debtor’s Estate ...... 53 2. Any Equitable Subrogation Rights Would, Likewise, Run Solely Against the Estate for Customers’ Net Equity ...... 56 H. The Trustee Has No Claim for Contribution ...... 58 II. SLUSA PRECLUDES THE TRUSTEE’S COMMON LAW CLAIMS ...... 62 CONCLUSION ...... 69
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TABLE OF AUTHORITIES
Page(s)
Cases Allen v. Wright, 468 U.S. 737 (1984) ...... 14 Allstate Ins. Co. v. Mazzola, 175 F.3d 255 (2d Cir. 1999) ...... 57 Alsol v. Mukasey, 548 F.3d 207 (2d Cir. 2008) ...... 42 Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010)...... 65 Backus v. Connecticut Cmty. Bank, N.A., No. 3:09-CV-1256, 2009 WL 5184360 (D. Conn. Dec. 23, 2009) ...... 65 Bankruptcy Servs., Inc. v. Ernst & Young (In re CBI Holding Co.), 529 F.3d 432 (2d Cir. 2008) ...... 19 Baraket v. Holder, 632 F.3d 56 (2d Cir. 2011) ...... 42 Barnes v. Schatzkin, 215 A.D. 10, 212 N.Y.S. 536 (1st Dep’t 1925), aff’d, 242 N.Y. 555, 152 N.E. 424 (1926) ...... 19, 20, 24 Barron v. Igolnikov, No. 09 Civ. 4471 (TPG), 2010 WL 882890 (S.D.N.Y. Mar. 10, 2010) ...... 64, 65 Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) ...... 29, 30, 31 Blue Cross & Blue Shield of New Jersey, Inc. v. Philip Morris USA Inc., 344 F.3d 212 (2d Cir. 2003) ...... 58 Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972) ...... passim
iii Case: 11-5051 Document: 98 Page: 7 04/05/2012 572762 85
Chem One, Ltd. v. M/V Rickmers Genoa, 660 F.3d 626 (2d Cir. 2011) ...... 42 Cohain v. Klimley, Nos. 08 Civ. 5047, 09 Civ. 4527, 09 Civ. 10584, 2010 WL 3701362 (S.D.N.Y. Sept. 20, 2010) ...... 22 Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1986) ...... 13, 31 Fischer v. Int’l Ry. Co., 112 Misc. 212, 182 N.Y.S. 313 (Sup. Ct. Erie County 1920) ...... 52 Fox v. Picard (In re Bernard L. Madoff), Nos. 10 Civ. 4652 (JGK), 10 Civ. 7101 (JGK), 10 Civ. 7219 (JGK), 11 Civ. 1298 (JGK), 11 Civ. 1328 (JGK), 2012 WL 990829 (S.D.N.Y. Mar. 26, 2012) ...... 22 Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co.), 280 B.R. 794 (Bankr. S.D.N.Y. 2002) ...... 32 Gomes v. Brodhurst, 394 F.2d 465 (3d Cir. 1967) ...... 60 Green v. Bate Records, Inc. (In re 10th Ave. Record Distrib., Inc.), 97 B.R. 163 (S.D.N.Y. 1989) ...... 22 Hamlet at Willow Creek Dev. Co., LLC v. Northeast Land Dev. Corp., 64 A.D.2d 85, 878 N.Y.S.2d 97 (2d Dep’t 2009) ...... 57 Harleysville Worcester Mut. Ins. Co. v. Bank of America, N.A. (In re Suprema Specialties, Inc.), 370 B.R. 517 (S.D.N.Y. 2007) ...... 56 Hartford Courant Co. v. Pellegrino, 380 F.3d 83 (2d Cir. 2004) ...... 62 Highland Capital Mgmt. LP v. Chesapeake Energy Corp. (In re Seven Seas Petroleum, Inc.), 522 F.3d 575 (5th Cir. 2008)...... 23, 25 Hill v. Day (In re Today’s Destiny, Inc.), 388 B.R. 737 (Bankr. S.D. Tex. 2008) ...... 60, 61 Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995) ...... 14, 18, 21, 26
iv Case: 11-5051 Document: 98 Page: 8 04/05/2012 572762 85
Holmes v. SIPC, 503 U.S. 258 (1992) ...... 46 Hudson Transit Corp. v. Antonucci, 137 N.J.L. 704, 61 A.2d 180 (N.J. 1948) ...... 48 In re Beacon Assocs. Litig., 745 F. Supp. 2d 386 (S.D.N.Y. 2010)...... 64 In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011), petition for cert. filed, 80 U.S.L.W. 3483 (U.S. Feb. 3, 2012) ...... 54, 61, 64 In re Herald, Primeo, and Thema Sec. Litig., No. 09 Civ. 289 (RMB), 2011 WL 5928952 (S.D.N.Y. Nov. 29, 2011) ..... 64, 65 In re J.P. Jeanneret Assocs., Inc., 769 F. Supp. 2d 340 (S.D.N.Y. 2011)...... 65 In re Kingate Mgmt. Ltd. Litig., No. 09 Civ. 5386 (DAB), 2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011) .... 65, 66 In re Merkin & BDO Seidman Sec. Litig., Nos. 08 Civ. 10922 (DAB), 09 Civ. 6031 (DAB), 09 Civ. 6483 (DAB), 2011 WL 4435873 (S.D.N.Y. Sept. 23, 2011) ...... 65 In re MV Sec., Inc., 48 B.R. 156 (Bankr. S.D.N.Y. 1985) ...... 61 In re Parmalat Sec. Litig., 377 F. Supp. 2d 390 (S.D.N.Y. 2005)...... 21, 25 In re Schuler, 354 B.R. 37 (Bankr. W.D.N.Y. 2006) ...... 56 J.I. Case Co. v. Borak, 377 U.S. 426 (1964) ...... 30 Kagan v. St. Vincents Catholic Med. Ctrs. (In re St. Vincents Catholic Med. Ctrs.), 449 B.R. 209 (S.D.N.Y. 2011) ...... 21 King Grain Co. v. Caldwell Mfg. Co., 820 F. Supp. 569 (D. Kan. 1993) ...... 48 Kirschner v. KPMG LLP, 15 N.Y.3d 446, 938 N.E.2d 941, 912 N.Y.S.2d 508 (2010) ...... passim
v Case: 11-5051 Document: 98 Page: 9 04/05/2012 572762 85
Kirschner v. KPMG LLP, 590 F.3d 186 (2d Cir. 2009) ...... 31 Kirschner v. KPMG LLP, 626 F.3d 673 (2d Cir. 2010) ...... 31 Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339 (7th Cir. 1987) ...... 22, 24 Labarbera v. United Crane & Rigging Servs., Nos. 08-cv-3274, 08-cv-3983, 2011 WL 1303146 (E.D.N.Y. Mar. 2, 2011) .....22 LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008) ...... 68 Levinson v. PSCC Servs., Inc., No. 3:09-CV-00269, 2009 WL 5184363 (D. Conn. Dec. 23, 2009) ...... 65 LNC Invs., Inc. v. First Fidelity Bank, N.A., 935 F. Supp. 1333 (S.D.N.Y. 1996) ...... 60 Martin v. Briggs, 235 A.D.2d 192, 663 N.Y.S.2d 184 (1st Dep’t 1997) ...... 50 Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822 (2d Cir. 1997) ...... passim Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) ...... 62, 64 Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531 (S.D.N.Y. 1990) ...... 44, 45, 46, 55 Nat’l R.R. Passenger Corp. v. Nat’l Ass’n of R.R. Passengers, 414 U.S. 453 (1974) ...... 41, 42, 43, 44 Newdow v. Rio Linda Union Sch. Dist., 597 F.3d 1007 (9th Cir. 2010) ...... 42 Newman v. Family Mgmt. Corp., 748 F. Supp. 2d 299 (S.D.N.Y. 2010)...... 65 Northwest Airlines, Inc. v. Transp. Workers Union, AFL-CIO, 451 U.S. 77 (1981) ...... 60 O’Connor v. Donaldson, 422 U.S. 563 (1975) ...... 43
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Peltz v. SHB Commodities, Inc., 115 F.3d 1082 (2d Cir. 1997) ...... 30 Pereira v. Farace, 413 F.3d 330 (2d Cir. 2005) ...... 14, 21, 32 Perma Life Mufflers, Inc. v. Int’l Parts Corp., 392 U.S. 134 (1968) ...... 30 Petro v. Eisenberg, 207 Misc. 380, 138 N.Y.S.2d 705 (Sup. Ct. Queens County 1955) ...... 52 Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011) ...... passim Pinter v. Dahl, 486 U.S. 622 (1988) ...... 30 Pivar v. Graduate School of Figurative Art of N.Y. Academy of Art, 290 A.D.2d 212, 735 N.Y.S.2d 522 (1st Dep’t 2002) ...... 50 Redington v. Touche Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979), and vacated, Nos. 77-7183 & 77-7186 (2d Cir. Aug. 8, 1979) ...... passim Redington v. Touche Ross & Co., 612 F.2d 68 (2d Cir. 1979) ...... 39, 44 Redington v. Touche Ross & Co., 428 F. Supp. 483 (S.D.N.Y. 1977), rev’d, 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979) ...... 37, 38, 39 Redington v. Touche Ross & Co., Nos. 77-7183 & 77-7186 (2d Cir. Aug. 8, 1979) ...... 38 Rogers v. Atl., Gulf & Pac. Co., 213 N.Y. 246, 107 N.E. 661 (1915) ...... 47 Romano v. Kazacos, 609 F.3d 512 (2d Cir. 2010) ...... 63 Rosenman Family, LLC v. Picard, 395 F. App’x 766 (2d Cir. 2010) ...... 32 Ross v. Bolton, 904 F.2d 819 (2d Cir. 1990) ...... 30
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Schwartz v. Fletcher, 238 A.D. 554, 265 N.Y.S. 277 (1st Dep’t 1933) ...... 48 Seaboard Sand & Gravel Corp. v. Moran Towing Corp., 154 F.2d 399 (2d Cir. 1946) ...... 51 Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) ...... passim SIPC v. BDO Seidman, LLP, 222 F.3d 63 (2d Cir. 2000) ...... 45 SIPC v. BDO Seidman, LLP, 49 F. Supp. 2d 644 (S.D.N.Y. 1999), aff’d in part and vacated in part, 222 F.3d 63 (2d Cir. 2000) ...... 31, 45, 46 SIPC v. Charisma Sec. Corp., 371 F. Supp. 894 (S.D.N.Y.), aff’d, 506 F.2d 1191 (2d Cir. 1974) ...... 61 St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) ...... passim Stafford v. Giddens (In re New Times Sec. Servs., Inc.), 463 F.3d 125 (2d Cir. 2006) ...... 32 Steinberg v. Buczynski, 40 F.3d 890 (7th Cir. 1994) ...... 23 Sumner v. Brenner, 53 N.Y.S.2d 250 (App. Term 1945) ...... 48 Touche Ross & Co. v. Redington, 442 U.S. 560 (1979) ...... 38, 39 United States v. Jones, 132 S. Ct. 945 (2012) ...... 48 United States v. Perea, 986 F.2d 633 (2d Cir. 1993) ...... 47 United States v. Yellow Cab Co., 340 U.S. 543 (1951) ...... 60 Warth v. Seldin, 422 U.S. 490 (1975) ...... 7, 14 Wight v. BankAmerica Corp., 219 F.3d 79 (2d Cir. 2000) ...... passim
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Wolf Living Trust v. FM Multi-Strategy Inv. Fund, LP, No. 09 Civ. 1540 (LBS), 2010 WL 4457322 (S.D.N.Y. Nov. 2, 2010) ...... 65 Statutes 11 U.S.C. § 544(a) ...... 9 11 U.S.C. § 704(a) ...... 13 15 U.S.C. § 77p(b) ...... 63 15 U.S.C. § 77p(f)(2)(C) ...... 67 15 U.S.C. § 77r(b) ...... 64 15 U.S.C. § 78q ...... 37 15 U.S.C. § 78bb(f)(1) ...... 3, 63 15 U.S.C. § 78bb(f)(5)(B) ...... 66 15 U.S.C. § 78bb(f)(5)(B)(i)(I) ...... 68 15 U.S.C. § 78bb(f)(5)(D) ...... 67 15 U.S.C. § 78bb(f)(5)(E) ...... 64 15 U.S.C. § 78eee(b)(3) ...... 4 15 U.S.C. § 78fff(a)(1)(B) ...... 50 15 U.S.C. § 78fff(b) ...... 12 15 U.S.C. § 78fff-1(a) ...... passim 15 U.S.C. § 78fff-1(b) ...... 11 15 U.S.C. § 78fff-2(b) ...... 58 15 U.S.C. § 78fff-2(c) ...... 58 15 U.S.C. § 78fff-2(c)(1) ...... 54 15 U.S.C. § 78fff-2(f)...... 11 15 U.S.C. § 78fff-3(a) ...... 54, 55, 56 15 U.S.C. § 78lll(11) ...... 54, 59
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28 U.S.C. § 157(d) ...... 3 N.Y. C.P.L.R. 1401 ...... 59, 62 Other Authorities 8A Am. Jur. 2d Bailments § 165 (2009) ...... 51 9 N.Y. Jur. 2d Bailments and Chattel Leases § 1 (2004) ...... 49, 50 9 N.Y. Jur. 2d Bailments and Chattel Leases § 115 (2004) ...... 48 23 N.Y. Jur. 2d Contributions, Indemnity and Subrogation § 6 (2001) ...... 56 Pierre N. Leval, Judging Under the Constitution: Dicta About Dicta, 81 N.Y.U. L. Rev. 1249 (2006) ...... 42 Rules Fed. R. Civ. P. 12(b)(1) ...... 3 Fed. R. Civ. P. 12(b)(6) ...... 3 17 C.F.R. § 240.15c3-3 ...... 52
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This brief is submitted on behalf of Defendants-Appellees UBS AG, UBS
(Luxembourg) S.A., UBS Fund Services (Luxembourg) S.A., and UBS Third Party
Management Company S.A. (the “UBS Entities”), and Rene Egger, Alain
Hondequin, Hermann Kranz, and Ralf Schroeter (the “Luxalpha Directors” and, together with the UBS Entities, “UBS”), in opposition to the appeal by Plaintiff-
Appellant Irving H. Picard, as trustee (the “Trustee”) for the liquidation of the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”), from a decision and order of the United States District Court for the Southern District of
New York (McMahon, J.), dated November 1, 2011, and the related December 7,
2011 judgment, which dismissed all of the Trustee’s common law claims for lack of standing.
ISSUES PRESENTED FOR REVIEW
1. Whether a trustee appointed under the Securities Investor Protection
Act of 1970 (“SIPA”), 15 U.S.C. §§ 78aaa-78lll, to oversee the liquidation of a broker-dealer has standing to bring common law claims on behalf of the broker- dealer’s customers.
2. Whether the reversed and vacated decision in Redington v. Touche
Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979), and vacated,
Nos. 77-7183 & 77-7186 (2d Cir. Aug. 8, 1979), is binding authority or whether a
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SIPA trustee otherwise has standing to bring claims as a bailee or subrogee of customers.
3. Whether a SIPA trustee has a state law right of contribution based on distributions made to customers in satisfaction of their “net equity claims” under federal law.
4. Whether the Securities Litigation Uniform Standards Act of 1998
(“SLUSA”) precludes common law claims sounding in securities fraud brought on behalf of thousands of customers of a broker-dealer.
STATEMENT OF THE CASE
This appeal arises out of the Trustee’s overly aggressive and legally unsupportable effort to hold dozens of third parties responsible for damages suffered by customers of BLMIS due to the Ponzi scheme perpetrated by the principal of BLMIS, Bernard Madoff. In this suit and others like it, the Trustee purported to bring tort claims against deep-pocket third parties on behalf of
BLMIS customers based on a variety of inconsistent and often-changing theories of standing. The court below rightly rejected the Trustee’s effort to assert such overreaching claims.
The Trustee commenced this action on November 24, 2010 by filing a
Complaint in the United States Bankruptcy Court for the Southern District of New
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York. A23-129.1 On June 21, 2011, the UBS Entities moved to withdraw the reference pursuant to 28 U.S.C. § 157(d). A13-15. On consent of the Trustee,
Judge Colleen McMahon of the United States District Court for the Southern
District of New York (the “District Court”) withdrew the reference. A262.
On August 1, 2011, UBS moved to dismiss the complaint pursuant to Fed.
R. Civ. P. 12(b)(1) and (b)(6)). A868-69. As directed by Judge McMahon (A262;
A1113), UBS’s motion addressed only the issues of whether the Trustee had standing to pursue the common law claims he had asserted, and whether his claims were preempted by SLUSA, 15 U.S.C. § 78bb(f)(1).2
On August 17, 2011, the Trustee filed an Amended Complaint in the District
Court. A907-1060. The District Court deemed the UBS motion to dismiss to be directed toward the Amended Complaint. A1105.
On November 1, 2011, Judge McMahon issued a decision and order granting
UBS’s motion on the basis that the Trustee lacked standing to pursue his common law claims, and dismissed Counts 12 through 28 of the Amended Complaint.
1 Citations in the form “A__” are to the Joint Appendix. Citations in the form “SPA__” are to the Special Appendix. 2 UBS expressly preserved any and all defenses to the Trustee’s claims, including lack of personal jurisdiction, and noted its intent to present additional grounds for dismissal following the court’s decision on the two preliminary issues. This Brief, likewise, is submitted without waiving any rights or defenses, including the right to contest personal jurisdiction.
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Picard v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011) (SPA1-33). On
December 2, 2011, Judge McMahon directed the entry of judgment pursuant to
Fed. R. Civ. P. 54(b) (A1118-20), and on December 7, 2011, the District Court entered a judgment. SPA34-35.
The Trustee filed a Notice of Appeal on December 1, 2011. A1116-17.
STATEMENT OF FACTS A. The Trustee Alleges that the Defendants Harmed BLMIS Customers and Purports to Assert Their Claims
BLMIS was a registered securities broker-dealer run by its founder, chairman, and chief executive officer, Bernard Madoff. A928, ¶ 48. After
Madoff’s “colossal Ponzi scheme” came to light in December 2008, the Trustee was appointed pursuant to SIPA, 15 U.S.C. § 78eee(b)(3), to oversee the liquidation of BLMIS. A935, ¶ 72(a).
The Trustee’s Amended Complaint alleges wrongdoing in connection with two investment funds, Luxalpha SICAV (“Luxalpha”) and Groupement Financier
Ltd., which were customers of BLMIS and for which some of the UBS Entities provided services. The Trustee contends that the UBS Entities “facilitated” or
“enable[d]” Madoff’s scheme, and that they are “liable for at least $2 billion”
(A914-15, ¶¶ 1, 3), based on common law claims for aiding and abetting fraud
(A1005-07, ¶¶ 349-55), aiding and abetting breach of fiduciary duty (A1007-10,
¶¶ 356-63), aiding and abetting conversion (A1010-13, ¶¶ 364-74), knowing
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participation in a breach of trust (A1013-16, ¶¶ 375-88), conversion (A1016,
¶¶ 389-92), unjust enrichment (A1016-17, ¶¶ 393-97), money had and received
(A1018, ¶¶ 398-400), and contribution (A1032, ¶¶ 462-66). In brief, the Trustee contends that the UBS Entities were aware of “indicia of fraud” and “other red flags” concerning BLMIS, but nevertheless provided services to several funds that invested money with BLMIS, thereby “provid[ing] those funds with the appearance of legitimacy” and supplying BLMIS with additional funds needed to perpetuate its fraud. A914-15, ¶ 2; A957, ¶ 142; A968-69, ¶ 184.
Each of the Luxalpha Directors is alleged to have served on the Board of
Directors of Luxalpha, one of the funds, for some period of time. A927, ¶¶ 37-40.
Although the Amended Complaint says virtually nothing else about the Luxalpha
Directors – certainly, nothing particular about what any one of them allegedly knew, did, or said – the Trustee asserts a common law claim against each of these individuals for aiding and abetting a breach of fiduciary duty by BLMIS. A1029-
31, ¶¶ 450-55. The Trustee also asserts the same contribution claim against the
Luxalpha Directors that he asserts against the other defendants. A1032, ¶¶ 462-66.
In his original Complaint, the Trustee explicitly conceded that he was purporting to sue “on behalf of” BLMIS customers. A34, ¶ 14(f). The Trustee’s
Amended Complaint attempted various cosmetic rewordings, but the essence of the claims asserted by the Trustee remains unchanged: The duties at issue were
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allegedly owed to, and the injuries were allegedly suffered by, BLMIS customers – not by BLMIS itself – and the Trustee seeks recovery of damages solely in respect of those injuries. See A917, ¶ 8 (“the Defendants were unjustly enriched at the expense of BLMIS’s customers”) (emphasis added); A969, ¶ 192 (UBS Entities
“aided and abetted Madoff’s fraud and breach of fiduciary duty to BLMIS’s customers”) (emphasis added); A1008, ¶ 357 (“Madoff and/or BLMIS owed a fiduciary duty to its BLMIS customers”) (emphasis added); A1011, ¶ 369 (“the
UBS Defendants knew of suspicious conduct by and facts concerning Madoff and/or BLMIS that would have led a reasonably prudent person to suspect that
Madoff and/or BLMIS did not purchase securities but instead stole BLMIS customers’ money”) (emphasis added); A1016, ¶ 387 (UBS Entities are “liable for all funds Madoff and/or BLMIS misappropriated from investors”) (emphasis added); id., ¶ 390 (alleging conversion of money that BLMIS customers “invested with BLMIS”); A1017, ¶ 396 (alleging that UBS Entities were enriched by money
“that rightfully belongs to BLMIS’s customers and creditors”) (emphasis added);
A1030, ¶ 452 (alleging that Luxalpha Directors knew that Madoff was breaching
“a fiduciary duty to his customers”) (emphasis added).
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B. The Decision Below
On August 1, 2011, UBS moved to dismiss the common law claims asserted against it, arguing that the Trustee lacked standing to pursue such claims and that they were preempted by SLUSA. A868-69.3
In a decision issued on November 1, 2011, the District Court rejected each of the Trustee’s theories of standing, and granted UBS’s motion. SPA1-33. Judge
McMahon began her analysis with the overarching requirement that a party must
“assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.” SPA6 (quoting Warth v. Seldin, 422 U.S.
490, 499 (1975) and Wight v. BankAmerica Corp., 219 F.3d 79, 86 (2d Cir. 2000)).
She then held that “[t]hree propositions . . . demonstrate that the Trustee lacks standing to pursue his common law claims against defendants.” Id.
First, recognizing that a trustee under SIPA is granted the same powers as a bankruptcy trustee, see 15 U.S.C. § 78fff-1(a), Judge McMahon relied on the “well settled” rule that “a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate’s creditors, but may only assert claims held by the
3 Judge McMahon had directed UBS to address only those two issues in its motion to dismiss. A262; A1113. Nearly identical legal issues were presented in a case already pending before Judge McMahon, Picard v. JPMorgan Chase & Co., et al., No. 11 Civ. 913 (CM) (S.D.N.Y.), and Judge McMahon directed that the briefing in the two cases proceed on the same schedule. A264; A1113. Her ultimate decision granting UBS’s motion to dismiss bore a dual caption and covered both this case and JPMorgan. SPA1.
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bankrupt corporation itself.” SPA6 (quoting Shearson Lehman Hutton, Inc. v.
Wagoner, 944 F.2d 114, 118 (2d Cir. 1991)).
Second, although there was “no doubt” that the common law claims asserted in the Amended Complaint “belong to creditors, not to BMIS,” the District Court held that even if the Trustee had attempted to pursue claims “on behalf of the debtor,” they would be barred by the equitable doctrine of in pari delicto and this
Court’s Wagoner rule. SPA7-8. Because BLMIS was responsible for Madoff’s wrongdoing, BLMIS “could not have sued Defendants for the alleged scheme” and the Trustee, “standing [in] the shoes” of BLMIS, “cannot do so either.” SPA8.
Third, Judge McMahon rejected the Trustee’s various other theories of standing. She held that the Trustee did not have a right to contribution under
New York law. SPA8. She likewise held that SIPA did not confer power to pursue claims on behalf of customers, either as a bailee or a subrogee, as the
Trustee had contended. Id. She extensively addressed the Trustee’s reliance on this Court’s decision in Redington, supra, and explained why “Redington’s statements regarding bailee and subrogee standing are no longer good law.”
SPA29.
In reaching her decision, Judge McMahon relied on the decision of one of her colleagues in another case brought by the Trustee, Picard v. HSBC Bank PLC,
454 B.R. 25 (S.D.N.Y. 2011). There, Judge Jed S. Rakoff rejected similar standing
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arguments advanced by the Trustee, concluding that none of the “convoluted theories” offered by the Trustee was sufficient to establish standing to pursue the kinds of common law claims asserted in HSBC and in the instant case. 454 B.R. at
29.
Finally, Judge McMahon rejected the Trustee’s “novel theory of standing” as a “hypothetical judgment creditor” under 11 U.S.C. § 544(a) (SPA8), one which the Trustee does not even bother to raise on this appeal (and did not assert in the
HSBC case). Brief for Trustee-Appellant Irving H. Picard (“Trustee Br.”) at 7 n.5.
Having dismissed the Trustee’s common law claims for lack of standing, the
District Court did not reach UBS’s alternative basis for dismissal – i.e., that the common law claims were preempted by SLUSA.
SUMMARY OF ARGUMENT
The Trustee asserts a hodgepodge of theories of standing, which are inconsistent with one another, inconsistent with the allegations of the Trustee’s
Amended Complaint, inconsistent with the theories asserted by Intervenor
Securities Investor Protection Corporation (“SIPC”), and, most importantly, unsupported by applicable law.
A SIPA trustee’s powers are, by statute, the “same” as those possessed by bankruptcy trustees. Well-established Supreme Court and Second Circuit law holds that bankruptcy trustees – and, by extension, SIPA trustees – lack standing to
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bring claims on behalf of creditors of a debtor, and are limited to those claims that belong to the debtor itself. Here, the Trustee does not purport to bring claims on behalf of BLMIS, and if he did, those claims would be barred by the doctrine of in pari delicto and this Court’s Wagoner rule, by virtue of the wrongdoing committed by BLMIS, in whose shoes the Trustee now stands.
The Trustee’s reliance on theories of “bailee” and “subrogee” standing discussed in this Court’s Redington decision is misplaced, because Redington was reversed by the Supreme Court on a threshold issue, thereby invalidating and rendering superfluous the standing analysis below, and this Court subsequently vacated its prior ruling on remand. Even if Redington remained authoritative, it is not applicable to the facts and claims alleged here. And there is no other basis for finding bailee or subrogee standing for the claims alleged here, because the Trustee cannot squeeze his claims within the narrow confines of those doctrines.
Similarly, SIPA provides no right of contribution to the Trustee for payments made pursuant to that statute, and state law does not apply to that issue.
Finally, even if the Trustee had standing to bring any of the asserted common law claims, those state law claims would be precluded by the plain terms of SLUSA.
For these reasons, explained in detail below, the District Court’s decision should be affirmed.
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ARGUMENT
I.
THE DISTRICT COURT CORRECTLY HELD THAT THE TRUSTEE LACKS STANDING TO PURSUE THE COMMON LAW CLAIMS HE HAS ASSERTED
A. The Trustee’s Powers Are Limited by Statute A trustee appointed pursuant to SIPA is a creature of statute, vested only with such authority as specifically granted by Congress. The extent of that authority is set forth in 15 U.S.C. § 78fff-1(a), entitled “Trustee Powers.” That section provides that a SIPA trustee “shall be vested with the same powers and title with respect to the debtor and the property of the debtor, including the same rights to avoid preferences, as a trustee in a case under title 11.” 15 U.S.C. § 78fff-1(a); see also id. § 78fff-1(b) (“To the extent consistent with the provisions of this chapter or as otherwise ordered by the court, a trustee shall be subject to the same duties as a trustee in a case under chapter 7 of title 11 . . . .”). SIPA also authorizes three – but only three – additional powers, subject to the approval of SIPC: to hire and fix the compensation of personnel assisting with the liquidation; to utilize
SIPC employees for that purpose; and to maintain customer accounts for the purposes of 15 U.S.C. § 78fff-2(f) (permitting the transfer of customer accounts to other members of SIPC). Id. § 78fff-1(a).
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Thus, except for those three additional powers – which are inapplicable here
– the Trustee’s authority is the “same” as that of a trustee under the Bankruptcy
Code. Id.; see also 15 U.S.C. § 78fff(b) (“To the extent consistent with the provisions of this chapter, a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under . . . title 11.”);
HSBC, 454 B.R. at 30 (“the powers of a SIPA trustee are still, as indicated, cabined by Title 11”); Brief of Intervenor Securities Investor Protection Corporation
(“SIPC Br.”) at 56 (“he generally has the same powers and duties as a Chapter 7 trustee, with limited modifications specified in SIPA”). As explained below, this statutorily limited authority largely dictates the outcome of this appeal.
Tellingly, the Trustee’s Brief never mentions 15 U.S.C. § 78fff-1(a) or attempts to show how his alleged standing to bring the claims asserted here squares with the statutory language, even though his own pleading acknowledges that section as the statutory basis for his standing (A919, ¶ 15), and Judges McMahon and Rakoff each cited it in rejecting his standing arguments. SPA8; SPA23;
HSBC, 454 B.R. at 30. But, of course, pretending that the Trustee’s authority has no confines does not make it so.
For its part, SIPC at least acknowledges the terms of section 78fff-1, but its effort to divine “other unique powers that the trustee has under SIPA,” in addition to those of a bankruptcy trustee, is unavailing. SIPC Br. at 45-46. SIPC claims
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that such other powers come from the “larger statutory context” of SIPA, and a
SIPA trustee’s responsibilities to “marshal, allocate, and distribute” customer property. Id. But what SIPC ignores is that these duties are no different than those imposed on bankruptcy trustees. See Commodity Futures Trading Comm’n v.
Weintraub, 471 U.S. 343, 352 (1986) (bankruptcy trustee “has the duty to maximize the value of the estate”); 11 U.S.C. § 704(a) (“The trustee shall –
(1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest . . . .”); see also Trustee Br. at 58-59 (arguing that both SIPA trustees and bankruptcy trustees have authority to bring causes of action belonging to the debtor). Accordingly, there is no basis for implying any powers for a SIPA trustee that do not exist for a bankruptcy trustee.4
B. The Trustee Lacks Standing Under the Bankruptcy Code to Bring Claims on Behalf of BLMIS Customers
To establish standing in federal court, a plaintiff must first establish that he
“has made out a ‘case or controversy’ between himself and the defendant within the meaning of Art. III. . . . The Art. III judicial power exists only to redress or
4 Contrary to SIPC’s assertion, UBS never contended below that section 78fff- 1(a) limits a SIPA trustee’s standing to “claims brought under the avoidance provisions of the Bankruptcy Code.” SIPC Br. at 45. Although a SIPA trustee – just like a bankruptcy trustee – has certain rights broader than the avoidance provisions, for the reasons explained below, his standing does not extend so far as to permit bringing claims on behalf of the debtor’s customers.
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otherwise to protect against injury to the complaining party, even though the court’s judgment may benefit others collaterally.” Warth, 422 U.S. at 498-99. In addition, “even when the plaintiff has alleged injury sufficient to meet the ‘case or controversy’ requirement, . . . the plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.” Id. at 499; see also Allen v. Wright, 468 U.S. 737, 751
(1984) (describing this second requirement as one of “several judicially self- imposed limits on the exercise of federal jurisdiction”); Wight, 219 F.3d at 86.
In the context of lawsuits filed by bankruptcy trustees, the law concerning standing is well established: Because the trustee “stands in the shoes of the bankrupt corporation,” a bankruptcy trustee “has no standing generally to sue third parties on behalf of the estate’s creditors, but may only assert claims held by the bankrupt corporation itself.” Wagoner, 944 F.2d at 118 (citing Caplin v. Marine
Midland Grace Trust Co., 406 U.S. 416, 434 (1972)); see also Pereira v. Farace,
413 F.3d 330, 342 (2d Cir. 2005); Wight, 219 F.3d at 86; Mediators, Inc. v.
Manney (In re Mediators, Inc.), 105 F.3d 822, 825-26 (2d Cir. 1997); Hirsch v.
Arthur Andersen & Co., 72 F.3d 1085, 1093 (2d Cir. 1995).
In Caplin, the Supreme Court held that a bankruptcy trustee was not authorized “to collect money not owed to the estate,” and therefore lacked standing to sue on behalf of creditors. 406 U.S. at 428. Among other “problems” that
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would result if trustees had such standing, the Court concluded that a suit on behalf of creditors “may be inconsistent with any independent actions that they might bring themselves,” and that “the persons truly affected by the suit . . . should make their own assessment of the respective advantages and disadvantages, not only of litigation, but of various theories of litigation.” Id. at 431-32.
Here, as Judge McMahon recognized, “there is no doubt that the common law causes of action in the Amended Complaint[], premised on a Ponzi scheme of unprecedented scope and duration orchestrated by BMIS, belong to the creditors, not to BMIS.” SPA7; accord HSBC, 454 B.R. at 28 (rejecting arguments that
Trustee had standing to bring “common law claims against third parties who allegedly violated a duty to Madoff Securities’ customers”). Again and again, the
Amended Complaint asserts the breach of duties allegedly owed to customers of
BLMIS, and injury suffered by customers as a result of the wrongdoing alleged.
A917, ¶ 8; A969, ¶ 192; A1008, ¶ 357; A1011, ¶ 369; A1016, ¶ 387; A1017,
¶ 396; A1030, ¶ 452. Even on this appeal, the Trustee contends that the actions of the defendants were “to the detriment of BLMIS’s customers and creditors,” and he never argues that Judge McMahon erred in construing his claims as she did.
Trustee Br. at 5; see also id. at 20 (“for the benefit of BLMIS customers”), 21
(“victimized BLMIS customers”), 38 (“customers of BLMIS were injured by the malfeasance of UBS/AIA”), 39 (“injuries to BLMIS customers”), 53 (purporting to
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assert “rights, defenses and remedies of the customers”). Thus, just as in Wagoner, where the trustee’s claim alleged “money damages to the ‘clients of [the debtor],’” the Trustee’s claims here belong “only to the creditors and the trustee has no standing to assert [them].” 944 F.2d at 119-20.
C. St. Paul Is Consistent with Caplin and Confers No Greater Authority on the Trustee
Notwithstanding Caplin, Wagoner, and the many cases that follow them, the
Trustee insists that he has standing to sue for “common injuries suffered by all customers.” Trustee Br. at 34. He bases this argument on language plucked out of context from St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d
Cir. 1989), which (the Trustee claims) stands for the proposition that “Congress intended that a trustee should be able to assert generalized creditor claims” against third parties. Trustee Br. at 34-35. As subsequent cases make clear, however,
St. Paul merely applies the usual rule that a trustee has standing to bring claims belonging to the debtor, but not claims belonging to creditors or other third parties.
Contrary to the Trustee’s assertions, the operative inquiry in which the
St. Paul court engaged was whether a given claim is the property of the debtor, or, alternatively, the property of the creditors, and not whether a claim is “general” or
“particularized.” In St. Paul, the third-party plaintiff (PepsiCo) had guaranteed certain surety bonds of its subsidiary, which secured performance obligations of the subsidiary. 884 F.2d at 690. PepsiCo later sold the subsidiary to a company
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(CL) partly owned by the third-party defendant (Banner), which allegedly caused
CL to plunder the assets of the purchased subsidiary and to pay the proceeds to
Banner, thereby causing the purchased subsidiary to default on its obligations and ultimately to file for bankruptcy protection. Id. at 690-91. Because PepsiCo remained liable on the surety bonds, the issuing surety sued PepsiCo for damages.
Id. at 692. PepsiCo impleaded Banner, the owner of the purchaser, asserting a claim for damages on an alter ego theory – i.e., that Banner used its influence and domination of the debtor to strip the debtor’s assets and to pay debts owed to
Banner. Id. at 691-92. The question addressed by this Court was whether
PepsiCo, a creditor of the debtor, had standing to bring the alter ego claim, or whether the bankruptcy trustee for the purchased subsidiary had standing, to the exclusion of PepsiCo and all other creditors of the subsidiary.
The Court defined its inquiry as follows: “If the claims asserted by PepsiCo in this action are property of the debtor . . . under state law and therefore properly brought by the trustee . . . PepsiCo does not have standing to assert those claims outside of the bankruptcy proceeding.” 884 F.2d at 700 (emphasis added). The
Court concluded that “under Ohio law, a corporation would be able to assert an alter ego cause of action against its parent corporation. The cause of action therefore becomes property of the estate of a bankrupt subsidiary, and is properly asserted by the trustee in bankruptcy.” Id. at 703-04 (emphasis added).
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The holding of St. Paul is, therefore, perfectly consistent with the holdings of Caplin and Wagoner, pursuant to which the issue of standing turns on an analysis of who owns the claim at issue. As explained above, these cases provide that a trustee’s standing is limited to recovery of funds “owed to the estate”
(Caplin, 406 U.S. at 428), and he may not “sue third parties on behalf of the estate’s creditors.” Wagoner, 944 F.2d at 118. Put differently, the trustee “can only maintain those actions that the debtors could have brought prior to the bankruptcy proceedings.” Hirsch, 72 F.3d at 1093. Indeed, Hirsch specifically cited St. Paul for the proposition that the relevant question is “[w]hether the rights belong to the debtor or the individual creditors.” Id.; see also Mediators, 105 F.3d at 825. Here, the Trustee never contends – nor could he – that the common law claims asserted against UBS are claims that belong to BLMIS (i.e., the debtor) or that they could have been asserted by BLMIS prior to the commencement of the
SIPA proceeding. That implicit concession is dispositive of the Trustee’s standing.
St. Paul repeatedly emphasized that who owns the claims “is a question of state law” and “depends on an analysis of state alter ego and tort law” (884 F.2d at
700; see also id. at 696, 697), and it extensively analyzed the nature of alter ego claims under Ohio law to determine whether they were appropriately brought by the debtor or a creditor. Id. at 702-06; see also Wight, 219 F.3d at 86 (“state law – here the law of New York – ‘determines whether a right to sue belongs to the
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debtor or to the individual creditors’”) (quoting Mediators, 105 F.3d at 825). Yet, remarkably, the Trustee never mentions the law of New York (under which
BLMIS was organized (A928, ¶ 48)), nor does he analyze under New York law the particular claims asserted here to determine whether those claims belong to BLMIS or to its customers. Plainly, he avoids that analysis because New York law is clear:
Claims that third parties aided and abetted a stockbroker in committing fraud and converting assets deposited by customers “were never part of the assets of [the stockbroker] nor did they arise in favor of the plaintiff as trustee in bankruptcy.
They belonged to various creditors. The right of action was in them.” Barnes v.
Schatzkin, 215 A.D. 10, 11, 212 N.Y.S. 536, 537 (1st Dep’t 1925) (emphasis added), aff’d, 242 N.Y. 555, 152 N.E. 424 (1926); see also Bankruptcy Servs., Inc. v. Ernst & Young (In re CBI Holding Co.), 529 F.3d 432, 455 (2d Cir. 2008) (“The
Barnes Court’s reasoning is quite clear. New York law dictates that claims against a third party for defrauding a debtor’s creditors with the help of the debtor accrue to those creditors rather than to the debtor.”);5 Wight, 219 F.3d at 86 (citing
Barnes); Mediators, 105 F.3d at 826 (citing Barnes and holding that “[u]nder
5 CBI concluded that a separate holding of Barnes applying federal bankruptcy law – that a bankruptcy trustee could not take an assignment of creditor claims – was not binding on a federal court and had been undermined by subsequent changes in the Bankruptcy Code. 529 F.3d at 454-59. Nevertheless, “to the extent that Barnes determined who owned the claims the trustee sought to assert, it was interpreting state law and its judgment binds us if still in force.” Id. at 454.
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New York law, claims such as the present one [for aiding and abetting breach of fiduciary duty to creditors] belong to the creditors qua creditors”); Wagoner, 944
F.2d at 118 (citing Barnes and holding that “when a bankrupt corporation has joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors”).
Rather than addressing the operative inquiry under St. Paul and analyzing the ownership of the claims under state law, the Trustee instead fixates upon a single passage from St. Paul, which stated that a bankruptcy trustee is the proper plaintiff “[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.” Trustee Br. at 35
(quoting St. Paul, 884 F.2d at 701). The Trustee then reasons that because “all customers of BLMIS were injured by the malfeasance of UBS/AIA, the standard set by St. Paul is met.” Trustee Br. at 38.
This isolated language of St. Paul, however, does not set a “standard.”
Multiple courts have criticized the attempt to distinguish between “general” and
“particularized” claims, and have clarified that the analysis of claim ownership, rather than the characterization of the claim as “general” or “particular,” constitutes the key inquiry. That conclusion is evident from reading St. Paul in its entirety – as opposed to the limited snippet taken out of context by the Trustee. See St. Paul,
884 F.2d at 702 n.3 (“[o]ur decision today goes no further than to say that causes
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of action that could be asserted by the debtor are property of the estate and should be asserted by the trustee”). The same conclusion also is clear from this Court’s subsequent decisions, which treat St. Paul as consistent with the Caplin and
Wagoner line of cases. See Mediators, 105 F.3d at 825; Hirsch, 72 F.3d at 1093.
In Farace, the Court squarely reframed the “generalized claim” issue as merely the usual inquiry of whether the right sought to be vindicated belongs to the debtor:
The Trustee argues, and the district court agreed, that . . . the Trustee could bring a claim for breach of the duty of care on behalf of the creditors, rather than the corporation. The court reasoned that “where the injury is to all creditors as a class, it is the creditors who lack standing and the Trustee who may bring a claim based on that generalized injury.” While this proposition may be true – because claims that injure all creditors as a class normally belong to the corporation – it does not imply that the Trustee’s rights are greater than the rights the corporation would have against malfeasant directors. 413 F.3d at 342 (second emphasis added; citations omitted); see also In re
Parmalat Sec. Litig., 377 F. Supp. 2d 390, 420 (S.D.N.Y. 2005) (“[A]lthough [the] language [of St. Paul] is broad, the circuit did not reject the principle that a trustee may bring only the claims of the debtor corporation.”); SPA14 (“the analysis in
St. Paul Fire . . . is employed consistently with Caplin to determine which claims should be considered debtor property”).6
6 The cases cited by the Trustee as supporting the continued vitality of St. Paul similarly recognize that a trustee’s standing depends on whether the cause of action belongs to the debtor. See Kagan v. St. Vincents Catholic Med. Ctrs. (In re St. Vincents Catholic Med. Ctrs.), 449 B.R. 209, 219-20 (S.D.N.Y. 2011) [Footnote continued on next page]
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The “generalized claim” language in St. Paul derives from a Seventh Circuit case, Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339 (7th Cir.
1987), also relied upon by the Trustee. In Koch, as in St. Paul, the court held that an alter ego claim belonged to the debtor under state law, and it purported to draw a distinction between “personal” claims of creditors and “general” claims of creditors. Id. at 1348-49. But in a later case, the Seventh Circuit criticized the attempt to characterize claims as “personal” or “general” as “not an illuminating
[Footnote continued from previous page] (“[T]he Court properly concluded that the Article 78 proceeding violated the automatic stay by usurping causes of action belonging to the estate.”); Labarbera v. United Crane & Rigging Servs., Nos. 08-cv-3274, 08-cv-3983, 2011 WL 1303146, at *5-6 (E.D.N.Y. Mar. 2, 2011) (upholding magistrate judge’s determination barring assertion of successorship claim by individual creditors because the claim was “the property of [the debtor’s] bankruptcy estate”); Cohain v. Klimley, Nos. 08 Civ. 5047, 09 Civ. 4527, 09 Civ. 10584, 2010 WL 3701362, at *11-12 (S.D.N.Y. Sept. 20, 2010) (claims for fraudulent conveyance, waste of corporate assets, self-dealing, deepening insolvency and breach of fiduciary duty are “property of the debtor’s estate in bankruptcy” and individual plaintiffs do not have standing to assert them); Green v. Bate Records, Inc. (In re 10th Ave. Record Distrib., Inc.), 97 B.R. 163, 166 (S.D.N.Y. 1989) (alter ego cause of action may be asserted by a trustee in bankruptcy as “an attempt to collect property of the estate”). Fox v. Picard (In re Bernard L. Madoff), decided last week, is similar. Nos. 10 Civ. 4652 (JGK), 10 Civ. 7101 (JGK), 10 Civ. 7219 (JGK), 11 Civ. 1298 (JGK), 11 Civ. 1328 (JGK), 2012 WL 990829 (S.D.N.Y. Mar. 26, 2012). There, Judge Koeltl, relying on St. Paul, held that fraudulent transfer and preference claims were property of the estate, and therefore the automatic bankruptcy stay precluded creditors from separately bringing claims that were “duplicative of the fraudulent transfer claims already asserted by the Trustee.” Id. at *12. Here, there is no dispute about the Trustee’s standing to bring fraudulent transfer and preference claims, but only about the additional common law claims he purports to bring on behalf of customers. Fox is therefore inapposite.
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usage.” Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994). Judge Posner explained:
The point is simply that the trustee is confined to enforcing entitlements of the corporation. He has no right to enforce entitlements of a creditor. He represents the unsecured creditors of the corporation; and in that sense when he is suing on behalf of the corporation he is really suing on behalf of the creditors of the corporation. But there is a difference between a creditor’s interest in the claims of the corporation against a third party, which are enforced by the trustee, and the creditor’s own direct – not derivative – claim against the third party, which only the creditor himself can enforce. Id.7 Similarly, in Highland Capital Management LP v. Chesapeake Energy Corp.
(In re Seven Seas Petroleum, Inc.), 522 F.3d 575 (5th Cir. 2008), the Fifth Circuit explained that the terms “general” or “personal” are “best understood as descriptions to be applied after a claim has been analyzed to determine whether it is properly assertable by the debtor or creditor, and not as a substitute for the analysis itself.” 522 F.3d at 588. The Fifth Circuit held that, just as in this Circuit, whether a claim is properly assertable by the estate or by creditors depends, in turn, on “whether under applicable state law the debtor could have raised the claim as of the commencement of the case.” Id. at 584.
Thus, both controlling and persuasive authority, including St. Paul, agree that the crucial inquiry is whether the claim belongs to the debtor or its creditors,
7 The District Court cited and quoted from Steinberg in rejecting the Trustee’s standing arguments (SPA16-17), yet the Trustee’s Brief utterly ignores the Seventh Circuit’s clarification of the “generalized claim” concept.
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and the label of “generalized claim” (to the extent useful at all) may be used to describe a claim only after it has been established that the claim belongs to the debtor. The Trustee’s argument, however, puts the cart before the horse. The
Trustee fails to provide any analysis that would demonstrate that the claims asserted here belong to BLMIS; to the contrary, the claims are expressly brought on behalf of customers, and the very nature of the claims means that, under Barnes, they belong to customers, and not to BLMIS.8 Instead of state law analysis of the sort engaged in by St. Paul, the Trustee simply appends the label of “generalized claim” to the common law claims he seeks to assert, and then argues that the
Trustee must be the one to assert such claims. There is no authority supporting the
Trustee’s approach, and it should be rejected.
Moreover, even if the Trustee’s skewed interpretation of St. Paul were correct, his claims would still fail, because the Trustee does not purport to bring claims on behalf of all creditors of BLMIS, but only on behalf of “customers.”
Trustee Br. at 34, 38. The St. Paul court was clear that the cause of action at issue in that case, an alter ego claim against a debtor’s affiliate, is “an equitable, remedial doctrine that may be asserted by any creditor without regard to the
8 As the District Court held, the aiding and abetting and other tort claims brought by the Trustee – which depend on the breach of duties allegedly owed directly to customers by BLMIS or the defendants – are plainly distinguishable from the “alter ego claims” asserted in St. Paul and Koch, which accrued to the debtor under state law. SPA15.
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specific nature of his relationship with the [debtor] corporation and its alleged alter ego.” 884 F.2d at 698 (emphasis added). The common law claims asserted by the Trustee, on the other hand, are dependent upon the specific nature of the relationship between BLMIS and its customers.9 Thus, in contrast to St. Paul, the claims asserted here could not be asserted by “any creditor” of BLMIS. 884 F.2d at 701; see also Seven Seas, 522 F.3d at 588 (“We also wish to dispel any notion that a claim belongs to the estate or is otherwise only assertable by the trustee merely because it could be brought by a number of creditors, instead of just one.”);
Parmalat, 377 F. Supp. 2d at 421 (trustee lacks standing for claims that seek recovery only for “specific groups of creditors”).
D. Claims Asserted on Behalf of BLMIS Are Barred by the Wagoner Rule and the Doctrine of In Pari Delicto
Even if the Trustee were correct that the customer claims asserted in the
Amended Complaint could be asserted by BLMIS, or if the Trustee had otherwise attempted to assert common law claims belonging to BLMIS, his claims against
9 See, e.g., A969, ¶ 192 (UBS Entities “aided and abetted Madoff’s fraud and breach of fiduciary duty to BLMIS’s customers”) (emphasis added); A1008, ¶ 357 (“Madoff and/or BLMIS owed a fiduciary duty to its BLMIS customers”) (emphasis added); A1030, ¶ 452 (alleging that Luxalpha Directors knew that Madoff was breaching “a fiduciary duty to his customers”) (emphasis added). Moreover, only customers who were deceived by Madoff’s fraud and who could demonstrate injury proximately caused by the conduct of UBS would be able to assert claims. Thus, it is not even “all customers” of BLMIS who might have claims, much less all creditors.
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UBS still would fail. Once again, it is this Court’s Wagoner decision that precludes the Trustee’s claims: “A claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors, not to the guilty corporation.” 944 F.2d at 120. As this Court subsequently explained:
The rationale underlying the Wagoner rule derives from the fundamental principle of agency that the misconduct of managers within the scope of their employment will normally be imputed to the corporation. Because management’s misconduct is imputed to the corporation, and because a trustee stands in the shoes of the corporation, the Wagoner rule bars a trustee from suing to recover for a wrong that he himself essentially took part in. Wight, 219 F.3d at 86-87 (citations omitted); see also Mediators, 105 F.3d at 826
(“the Mediators has no standing to assert aiding-and-abetting claims against third parties for cooperating in the very misconduct that it had initiated”); Hirsch, 72
F.3d at 1094 (the trustee “is precluded from asserting the professional malpractice claims alleged in the Complaint because of the Debtors’ collaboration with the defendants-appellees in promulgating and promoting the Colonial Ponzi schemes”).
The Wagoner rule derives from the common law doctrine of in pari delicto, which “mandates that the courts will not intercede to resolve a dispute between two wrongdoers.” Kirschner v. KPMG LLP, 15 N.Y.3d 446, 464, 938 N.E.2d 941,
950, 912 N.Y.S.2d 508, 517 (2010). In addition, “[t]raditional agency principles play an important role in an in pari delicto analysis.” Id. at 465, 938 N.E.2d at 950,
912 N.Y.S.2d at 517. Here, the Trustee alleges that Bernard Madoff, through
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BLMIS, engaged in “the largest Ponzi scheme in history,” a “50-year, $64 billion fraud.” Trustee Br. at 9, 11. In doing so, Madoff acted as an agent of BLMIS, and his misconduct is imputed to BLMIS. The Trustee, now standing in the shoes of
BLMIS, therefore lacks standing to bring claims on behalf of BLMIS against UBS.
See generally HSBC, 454 B.R. at 37; SPA7-9.
In the court below, the Trustee conceded that common law claims belonging to the debtor would be barred by in pari delicto. Trustee’s Memorandum of Law in Opposition to Motion to Dismiss, dated September 1, 2011 (Dkt. No. 27), at 27.
Now, however, the Trustee strains to avoid the consequences of the Wagoner rule and in pari delicto. His various arguments fail.
1. The Adverse Interest Exception Is Inapplicable
The Trustee contends that the District Court erred in applying Wagoner because (according to the Trustee) Madoff’s conduct was “wholly outside the scope of his agency . . . and entirely for his own and for third parties’ personal benefit and purposes.” Trustee Br. at 40 n.17. Insofar as the Trustee means to invoke the “adverse interest exception” to Wagoner, his argument must be rejected.
First, the exception “is a narrow one and applies only when the agent has
‘totally abandoned’ the principal’s interests.” Mediators, 105 F.3d at 827 (citation omitted); see also Kirschner, 15 N.Y.3d at 466-67, 938 N.E.2d at 952, 912
N.Y.S.2d at 519 (“this most narrow of exceptions” is reserved for cases where “the
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fraud is committed against a corporation rather than on its behalf”). The Trustee’s single, conclusory assertion that Madoff abandoned BLMIS’s interests (A934,
¶ 67) is utterly at odds with the facts alleged throughout the Amended Complaint, which establish that, like any Ponzi scheme, “money sent to BLMIS for investment
. . . was simply used to keep the operation going.” A932, ¶ 59. “So long as the corporate wrongdoer’s fraudulent conduct enables the business to survive – to attract investors and customers and raise funds for corporate purposes – [the adverse interest] test is not met.” Kirschner, 15 N.Y.3d at 468, 938 N.E.2d at 953,
912 N.Y.S.2d at 520.
Second, “the adverse interest exception does not apply to cases in which the principal is a corporation and the agent is its sole shareholder.” Mediators, 105
F.3d at 827. In such cases, the “sole actor” rule “imputes the agent’s knowledge to the principal notwithstanding the agent’s self-dealing because the party that should have been informed was the agent itself albeit in its capacity as principal.” Id.
Here, Bernard Madoff was the “founder, chairman, and chief executive officer” of
BLMIS, and committed his wrongdoing through “domination and control” of
BLMIS. A928, ¶ 48; A1005, ¶ 350. The Trustee makes no distinction between the conduct of Madoff and the conduct of BLMIS. See, e.g., A1007, ¶ 355 (alleging that UBS Entities aided and abetted “Madoff’s and/or BLMIS’s fraud”); A1008,
¶ 357 (“Madoff and/or BLMIS breached that fiduciary duty”); A1013, ¶ 374
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(aiding and abetting “Madoff’s and/or BLMIS’s conversion”); see also A278
(“Madoff was the sole member of the limited liability company and its chairman.
In this capacity, Madoff controlled all of the business activities of BLMIS”); A284
(“There is complete unity of interest and ownership between Madoff and
BLMIS.”).
Accordingly, the adverse interest exception to Wagoner and in pari delicto is inapplicable.
2. A SIPA Trustee Is Not Exempt from Wagoner or In Pari Delicto
Next, the Trustee argues that a SIPA trustee “should not be impeded by the doctrine of in pari delicto.” Trustee Br. at 43. But the Trustee and SIPC cite no authority for exempting SIPA trustees from the same rules that apply to bankruptcy trustees and other estate representatives when asserting common law claims.
Indeed, the New York Court of Appeals has recently reaffirmed the application of in pari delicto despite similar pleas that so-called “innocent” successors should not be tainted with the wrongdoing of former management. Kirschner, 15 N.Y.3d at
475-77, 938 N.E.2d at 957-59, 912 N.Y.S.2d at 524-26.
The Trustee relies principally on Bateman Eichler, Hill Richards, Inc. v.
Berner, 472 U.S. 299 (1985), where the Supreme Court addressed the applicability of in pari delicto as a defense to a cause of action under section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
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Because implied private actions under the federal securities laws were “a most effective weapon in the enforcement” of those laws (472 U.S. at 310 (citing J.I.
Case Co. v. Borak, 377 U.S. 426, 432 (1964)), the Court held that in pari delicto would be recognized as a defense to such claims only if barring suit “would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public.” Id. at 311. Given that it was rooted in the public purposes served by a federal cause of action, the Bateman Eichler test has been applied exclusively in actions alleging federal claims.10
Here, however, the causes of action that the Trustee seeks to pursue are state law claims, which simply do not implicate the federal policies at issue in Bateman
Eichler and cases that follow it. The doctrine of in pari delicto is a state common law defense to state common law claims, as this Court necessarily recognized in certifying questions concerning in pari delicto to the New York Court of Appeals
10 Bateman Eichler itself relied upon the reasoning of Perma Life Mufflers, Inc. v. Int’l Parts Corp., 392 U.S. 134 (1968), where the Court rejected the applicability of in pari delicto as a defense to a federal antitrust claim. The other cases cited by SIPC (see SIPC Br. at 42-43) are likewise focused on claims brought under the federal securities laws. See Pinter v. Dahl, 486 U.S. 622, 635 (1988) (claim under section 12(1) of the Securities Act of 1933; “Bateman Eichler provides the appropriate test for allowance of the in pari delicto defense in a private action under any of the federal securities laws”) (emphasis added); Peltz v. SHB Commodities, Inc., 115 F.3d 1082, 1090 (2d Cir. 1997) (claim under Commodities Exchange Act; “The in pari delicto defense is used sparingly, and is narrowly defined in litigation under federal regulatory statutes.”) (emphasis added); Ross v. Bolton, 904 F.2d 819 (2d Cir. 1990) (claims under RICO and Rule 10b-5).
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in Kirschner v. KPMG LLP, 590 F.3d 186 (2d Cir. 2009). See also Kirschner v.
KPMG LLP, 626 F.3d 673, 677 (2d Cir. 2010) (“The responses from the Court of
Appeals have authoritatively announced New York law on the issues on which we were in doubt.”). Accordingly, Bateman Eichler is irrelevant to the question of whether BLMIS’s wrongdoing serves as a defense to state claims asserted by the
Trustee on behalf of BLMIS.
The analysis is not changed by the fact that the Trustee was appointed pursuant to the federal securities laws. Bankruptcy trustees are, likewise, appointed under federal law, and this Court has never hesitated to apply in pari delicto and the Wagoner rule to bankruptcy trustees. SIPA, of course, vests a SIPA trustee with the “same powers” as a bankruptcy trustee. 15 U.S.C. § 78fff-1(a).
Bankruptcy trustees, like SIPA trustees, have a “duty to maximize the value of the estate.” Weintraub, 471 U.S. at 352. The Trustee cites no case finding a SIPA trustee exempt from Wagoner or in pari delicto. And lower courts in this Circuit have applied Wagoner to bar claims asserted by SIPA trustees on behalf of debtors.
See, e.g., SIPC v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 650-51 (S.D.N.Y.
1999), aff’d in part and vacated in part on other grounds, 222 F.3d 63 (2d Cir.
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2000); Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co.), 280 B.R. 794,
800-02 (Bankr. S.D.N.Y. 2002).11
Moreover, it makes no sense to contend that the federal securities laws would be “impeded” by application of traditional state law defenses to state law claims that the Trustee has chosen to assert. Trustee Br. at 43-44. The Trustee may well have the power under SIPA to bring claims belonging to BLMIS, but nothing in SIPA mandates that any particular state law claim be available or viable, and his power to bring claims “does not imply that the Trustee’s rights are greater than the rights the corporation would have.” Farace, 413 F.3d at 342. In essence, the Trustee contends that because the purpose of the securities laws is to protect investors, any impediment to investor recovery must be eliminated. That is not the law.12
11 The Trustee implies that because SIPA creates a “customer property estate” in addition to a “general estate,” he is somehow granted greater powers than a bankruptcy trustee. Trustee Br. at 41. But even if the Trustee’s premise were correct, his conclusion does not follow; SIPA may create separate pools of assets for particular creditors, but a SIPA trustee’s powers are expressly the “same” as a bankruptcy trustee’s. Moreover, the “customer property estate” is not a separate legal entity, but merely a “fund of assets” in which customers take “priority” over general creditors. Stafford v. Giddens (In re New Times Sec. Servs., Inc.), 463 F.3d 125, 127 (2d Cir. 2006); see also Rosenman Family, LLC v. Picard, 395 F. App’x 766, 768 (2d Cir. 2010). Nothing in SIPA conveys “unique authority” (Trustee Br. at 41) to a trustee to pursue common law claims simply because he is overseeing customer property. 12 The Trustee and SIPC are also wrong in suggesting that application of in pari delicto will leave BLMIS customers with no remedy. Trustee Br. at 44; SIPC [Footnote continued on next page]
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Similarly, it is of no moment that the Trustee is “not a wrongdoer himself,” that Madoff was “ousted from control,” and that only “innocent investors” would benefit from recoveries obtained by the Trustee. Trustee Br. at 44-45. Wagoner, of course, involved the same fact pattern, as do nearly all cases involving bankruptcy trustees, where Wagoner and in pari delicto unquestionably apply.
And although similar arguments have been accepted by courts applying the law of other states, the Trustee’s “innocent successor” argument has been expressly rejected by New York’s highest court.
In Kirschner, the New York Court of Appeals was asked to “revise
New York precedents relating to in pari delicto or imputation for reasons of public policy – specifically . . . to recompense the innocent.” 15 N.Y.3d at 469, 938
N.E.2d at 954, 912 N.Y.S.2d at 521. Like the Trustee here, the litigation trustee in
Kirschner argued that recovery on his common law claims would “benefit blameless unsecured creditors.” Id. at 475, 938 N.E.2d at 958, 912 N.Y.S.2d at
525. The Court of Appeals held, however:
We are not persuaded, however, that the equities are quite so obvious. In particular, why should the interests of innocent stakeholders of
[Footnote continued from previous page] Br. at 43-44. To the extent that any third parties committed torts that injured BLMIS customers, those customers have standing to pursue such claims. Indeed, UBS is being sued by BLMIS customers in separate litigation. A1109. In any event, even if claims by customers or creditors would otherwise be barred, in pari delicto and the Wagoner rule still must be applied. Mediators, 105 F.3d at 825.
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corporate fraudsters trump those of innocent stakeholders of the outside professionals who are the defendants in these cases? . . . . In a sense, plaintiffs’ proposals may be viewed as creating a double standard whereby the innocent stakeholders of the corporation’s outside professionals are held responsible for the sins of their errant agents while the innocent stakeholders of the corporation itself are not charged with knowledge of their wrongdoing agents. Id. at 475, 938 N.E.2d at 958, 912 N.Y.S.2d at 525.
Further, the Trustee’s argument ignores an important policy underlying in pari delicto: “denying judicial relief to an admitted wrongdoer deters illegality.”
Id. at 464, 938 N.E.2d at 950, 912 N.Y.S.2d at 517. “[I]mputation fosters an incentive for a principal to select honest agents and delegate duties with care.” Id. at 466, 938 N.E.2d at 951-52, 912 N.Y.S.2d at 518-19. Stakeholders in the entity are in the best position to ensure honest conduct. The Trustee’s approach, however, “would allow the creditors and shareholders of the company that employs miscreant agents to enjoy the benefit of their misconduct without suffering the harm.” Id. at 476-77, 938 N.E.2d at 959, 912 N.Y.S.2d at 526.
Accordingly, there is no basis and no authority for refusing to apply the
Wagoner rule and the doctrine of in pari delicto to the Trustee’s claims.
3. Wagoner and In Pari Delicto Are Applicable on the Face of the Trustee’s Complaint
Finally, the Trustee is mistaken in contending that the District Court should not have applied in pari delicto on the pleadings and in the absence of discovery.
Trustee Br. at 46. As a question of standing, Wagoner is plainly applicable at the
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pleading stage. See, e.g., Mediators, 105 F.3d at 824 (affirming dismissal “for lack of standing pursuant to Rule 12(b)(6), Fed. R. Civ. P.”). Similarly, Kirschner held that in pari delicto “may be resolved on the pleadings in a state court action in an appropriate case.” 15 N.Y.3d at 459 n.3, 938 N.E.2d at 946 n.3, 912 N.Y.S.2d at
513 n.3.
Here, the critical facts establishing the in pari delicto defense were set forth on the face of the Trustee’s Amended Complaint. The Trustee alleged that Madoff
“perpetrat[ed] the largest financial fraud in history” (A914, ¶ 1); that he falsely claimed to be pursuing a “Split Strike Conversion Strategy” and “concocted a fictitious hedging strategy” (A929-30, ¶¶ 52-53); that he provided customers with account statements that “were entirely fictitious” (A931, ¶ 56); that he used
“customers’ deposits to pay redemptions by other customers” and “to enrich
Madoff, his associates, and his family” (A932, ¶ 59); that he lied to the SEC
(A933, ¶ 64); and that he did all of this knowing that his conduct was criminal
(A936, ¶ 74). On a similar record, Judge Rakoff concluded that the applicability of in pari delicto “can be properly resolved at the pleading stage, since the overwhelming wrongdoing of Madoff and his now-defunct company, Madoff
Securities, is abundantly clear from the face of the Trustee’s own complaint.”
HSBC, 454 B.R. at 37.
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On appeal, the Trustee meekly suggests that there were “complicated factual questions” about UBS’s “comparative fault” that precluded a dismissal on the pleadings. Trustee Br. at 47. But, again, taking the Trustee’s own allegations as true, UBS’s alleged conduct comes nowhere close to exceeding Madoff’s own conduct in relative culpability. At worst, UBS is alleged to have “aided and abetted” Madoff, by having seen “indicia of fraud” but failing to do anything about it and, instead, providing “a façade of legitimacy” to BLMIS. A945; A953. There is no ambiguity about the relative “comparative fault” of the parties: Madoff’s
“50-year, $64 billion fraud” (Trustee Br. at 11) was far more culpable than any wrongdoing arising from UBS’s alleged service on behalf of two investment funds that invested with BLMIS in the last four years before revelation of Madoff’s scheme. It is preposterous for the Trustee to suggest otherwise. See Kirschner, 15
N.Y.3d at 475, 938 N.E.2d at 958, 912 N.Y.S.2d at 525 (“the corporation’s agents would almost invariably play the dominant role in the fraud and therefore would be more culpable than the outside professional’s agents who allegedly aided and abetted the insiders”).
For these reasons, even if the claims asserted here belonged to BLMIS, the
Trustee would be precluded from pursuing them by Wagoner and in pari delicto.
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E. Redington Is No Longer Good Law and Is Otherwise Inapplicable
Despite the clear infirmities in his purported standing either on behalf of
BLMIS customers or on behalf of BLMIS itself, the Trustee pins his hopes on what he claims is the binding authority of this Court’s ruling in Redington – a divided panel decision that was reversed and remanded by the Supreme Court and subsequently vacated and dismissed by this Court for lack of subject matter jurisdiction. As Judges McMahon and Rakoff carefully explained in their decisions, given the reversal by the Supreme Court on the threshold issues in the case, Redington’s discussion of standing is no longer good law.
1. Redington’s Procedural History
In Redington, a SIPA trustee and SIPC jointly alleged that a failed broker’s auditor prepared misleading reports about the broker’s financial affairs, and they brought an action asserting various state law claims, as well as claims alleging violations of section 17 of the Securities Exchange Act, 15 U.S.C. § 78q.
Redington v. Touche Ross & Co., 428 F. Supp. 483, 487-88 (S.D.N.Y. 1977), rev’d, 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 (1979). The district court held that there was no implied private right of action under section 17, dismissed the claims asserted under that statute, and dismissed the state law claims for lack of subject matter jurisdiction. Id. at 488-93.
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On appeal, this Court – over a dissent by Judge Mulligan – reversed on the question of whether section 17 created a private right of action for a broker’s customers. 592 F.2d at 623-24. The majority went on to hold that SIPC, having advanced money to customers, was subrogated to their federal claim under section 17, and that the trustee, as bailee, could pursue that claim on customers’ behalf. Id. at 624-25. The panel remanded and left to the district court the question of “whether to exercise pendent jurisdiction over the plaintiffs’ common-law claims.” Id. at 625.
The Supreme Court reversed, holding that there was no implied private right of action under section 17. Touche Ross & Co. v. Redington, 442 U.S. 560, 568-78
(1979). Having found that the Second Circuit panel “wrongly implied a private federal claim,” the Supreme Court found it “unnecessary to reach” the panel’s other rulings, including those regarding the standing of SIPC and the trustee as subrogee and bailee. Id. at 567 n.9. The Court remanded for further proceedings consistent with its opinion. Id. at 579.
On remand, the same panel of this Court vacated its prior judgment. Order,
Redington v. Touche Ross & Co., Nos. 77-7183 & 77-7186 (2d Cir. Aug. 8, 1979)
(attached hereto as Addendum A). It then unanimously held that there was no basis for federal subject matter jurisdiction over the remaining state law claims,
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and it affirmed the district court’s dismissal of the complaint on that basis.
Redington v. Touche Ross & Co., 612 F.2d 68 (2d Cir. 1979).
2. The Supreme Court’s Reversal on a Threshold Issue Rendered the Panel’s Discussion of Standing Superfluous
Initially, it must be emphasized that even if this Court’s Redington decision remained good law, the Court did not decide the issue presented here – namely, whether a SIPA trustee has standing as a bailee or a subrogee to bring common law claims on behalf of customers of a failed broker-dealer. Rather, Redington addressed only the trustee’s and SIPC’s standing with respect to a cause of action asserted under section 17 of the Securities Exchange Act. See Redington, 592 F.2d at 619 (“we are presented with the question whether a private cause of action exists under section 17 . . . and if so, who may maintain such an action”) (emphasis added); see also Touche Ross, 442 U.S. at 567 (stating that the Second Circuit held that SIPC and the trustee “could assert this implied cause of action [under section 17] on behalf of . . . customers”). The district court in Redington, having found no implied right of action under section 17, had dismissed the state law claims for lack of subject matter jurisdiction, without reaching the question of standing for those claims. 428 F. Supp. at 492-93. The Supreme Court likewise did not address the common law claims, and on remand, this Court dismissed for lack of federal jurisdiction without addressing standing. Thus, at no time did any
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of the courts in Redington consider the issue of standing to bring common law claims.
Although the District Court made this point in its ruling below (SPA28-
29),13 the Trustee repeatedly – but erroneously – insists that Redington involved
“common law determinations of whether a SIPA trustee is a real party in interest to assert state common law claims.” Trustee Br. at 30; see also id. at 25 (“the Second
Circuit’s holdings that a SIPA trustee . . . and SIPC . . . have standing to pursue state law and equitable claims against third parties”), 32 (“Redington I’s holdings on the common law claims”), 33 (“the Second Circuit’s holding that the trustee was a real party in interest to assert common law claims”). Indeed, the Trustee attempts to distinguish other cases relied upon by the District Court on the theory that those cases, supposedly in contrast to Redington, did not involve common law claims. See id. at 31 (“a determination on the existence of a private right of action tied to a federal statute does not end the court’s inquiry into a trustee’s standing to assert state common law claims”). But the Trustee is simply wrong about what
Redington decided. Thus, even if Redington were still good law on the narrow issue of whether a trustee had standing to assert a particular federal cause of action
13 See also HSBC, 454 B.R. at 35 (“Redington does not anywhere hold that a SIPA trustee has standing to pursue common law claims against third parties as bailee of customer property. The precise holding of Redington is limited to standing to bring an implied private right of action under Section 17(a) of the Exchange Act – a private right of action that the Supreme Court found did not exist.”).
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– a cause of action that does not exist – the decision would not bind this Court or any other on the issues raised in this appeal.
Moreover, the Trustee’s arguments about Redington’s authority on the question of standing are mistaken.
As the District Court held (SPA27), in a case like Redington, where there are questions both about whether a private right of action exists and about whether the plaintiff has standing to assert it, “the threshold question clearly” is whether the cause of action exists, “for it is only if such a right of action exists that we need consider whether the [plaintiff] had standing to bring the action.” Nat’l R.R.
Passenger Corp. v. Nat’l Ass’n of R.R. Passengers, 414 U.S. 453, 456 (1974).
Consistent with this rule, the Redington panel properly considered the private right of action question first, and only then addressed the question of standing. “But once the Supreme Court told the Second Circuit that no private right of action existed under federal law, whatever the Second Circuit said about standing was rendered superfluous. Its finding on standing should never have been made; it was not necessary to the determination of the case.” SPA28.
The Trustee argues at length that the Supreme Court’s dismissal of the section 17 claim was for “failure to state a claim,” and not for “lack of subject matter jurisdiction.” Trustee Br. at 27-32. But this distinction misses the point.
Whatever one calls it, the critical fact is that determination of the existence of a
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private cause of action was the “threshold” inquiry. Nat’l R.R., 414 U.S. at 456.
Once that determination was made by the Supreme Court, this Court’s subsequent discussion about who would have standing to bring a non-existent cause of action became unnecessary, and therefore non-binding. See, e.g., Chem One, Ltd. v. M/V
Rickmers Genoa, 660 F.3d 626, 639-40 (2d Cir. 2011) (discussion that was unnecessary for holding in prior case need not be followed); Baraket v. Holder,
632 F.3d 56, 59 (2d Cir. 2011) (what “distinguishes holding from dictum [is] whether resolution of the question is necessary for the decision in the case”); Alsol v. Mukasey, 548 F.3d 207, 218 (2d Cir. 2008) (“the discussion of Simpson’s possession conviction was not necessary to our holding and dictum”); Newdow v.
Rio Linda Union School Dist., 597 F.3d 1007, 1041 (9th Cir. 2010) (when
Supreme Court “reverses a lower court’s decision on a threshold question,” subsequent rulings by lower court are no longer binding; “To hold otherwise would give precedential effect to the determination of an issue that should never have been decided.”); Pierre N. Leval, Judging Under the Constitution: Dicta About
Dicta, 81 N.Y.U. L. Rev. 1249, 1256 (2006) (“If the court’s judgment and the reasoning which supports it would remain unchanged, regardless of the proposition in question, that proposition plays no role in explaining why the judgment goes for the winner. It is superfluous to the decision and is dictum.”). In Redington, the ultimate judgment of this Court was a dismissal for lack of subject matter
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jurisdiction; whether the Court held that a SIPA trustee had standing to bring a non-existent federal claim, or whether it held to the contrary, would not have affected the ultimate ruling in the slightest.
Although the Trustee contends that the panel’s holdings in Redington were
“independent and unrelated to one another” (Trustee Br. at 25), that contention is misguided. Redington’s holdings were not alternative grounds for the panel’s decision; rather, the only reason this Court reached the question of standing to bring a section 17 claim is because it (erroneously) concluded that such a private claim existed. Had it not found an implied right of action, it would not – and should not – have addressed standing. See Nat’l R.R., 414 U.S. at 465 n.13 (“Since we hold that no right of action exists, questions of standing and jurisdiction became immaterial.”). This Court recognized as much on remand, when it entered an order vacating its prior judgment. As the Trustee concedes, when a decision is vacated, “it automatically erase[s] the precedential effect” of the decision. Trustee
Br. at 25; see O’Connor v. Donaldson, 422 U.S. 563, 577 n.12 (1975).
The Trustee tries to distinguish National Railroad from Redington on the ground that National Railroad involved “a single federal statute” and not “state common law claims.” Trustee Br. at 30. As noted above, the Trustee is just wrong, because Redington involved exactly the same situation: The only holding made by the panel in Redington was with respect to the federal claim asserted
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under section 17. The Trustee is also mistaken in asserting that National Railroad is distinguishable because the private right of action and standing questions were
“virtually the same question, or at least inextricably intertwined.” Id. at 31. While the Supreme Court noted that the questions overlapped “in the context of this case”
(414 U.S. at 456), the Court carefully articulated them as distinct questions and explicitly held that, having declined to find a private cause of action, it was not reaching the question of standing. Id. at 465 n.13. Manifestly, the questions were not “inextricabl[e].”
The lack of any binding authority to Redington is further demonstrated by the fact that, upon remand from the Supreme Court, this Court vacated its prior judgment and dismissed all remaining claims for lack of subject matter jurisdiction. While this Court, under some circumstances, could have jurisdiction over the remaining state law claims – and, if it did, it could have made standing decisions with respect to those claims – the Court concluded that there was no basis for such jurisdiction. 612 F.2d at 73.
3. Subsequent Cases Have Questioned Redington’s Authority and Rationale
Judges McMahon and Rakoff are not the first to recognize Redington’s lack of authority.
In Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 557-58
(S.D.N.Y. 1990), Judge Milton Pollack rejected Redington’s reasoning on the
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question of subrogee standing after noting that the Redington decision had been reversed by the Supreme Court. Judge Pollack found Judge Mulligan’s “cogently stated” dissent more persuasive, and followed that reasoning in dismissing a claim purportedly brought on behalf of customers. Id. at 558 & n.15.
Several years later, District Judge (now Chief Judge) Loretta Preska found
“the Mishkin Court’s interpretation of the subrogation powers [of SIPC] more faithful to the letter and purpose of the Act” than the majority’s decision in
Redington, and further found “the dissent’s reasoning in Redington more persuasive than the majority’s” on the issue of bailee standing. BDO Seidman, 49
F. Supp. 2d at 654. Nevertheless, Judge Preska erroneously believed that she was bound by Redington on those two issues, and therefore reluctantly held that the trustee and SIPC had standing. Id. at 653-54. Despite finding standing, Judge
Preska granted the defendant’s motion to dismiss for failure to state a claim. Id. at
658. On appeal, this Court affirmed the dismissal for failure to state a claim, and declined to address the continued authority of Redington. SIPC v. BDO Seidman,
LLP, 222 F.3d 63, 69, 71 (2d Cir. 2000).
The Trustee cites then-Judge Sotomayor’s BDO Seidman decision as an example of this Court’s recognition of Redington as “binding precedent.” Trustee
Br. at 16. But that is not what Judge Sotomayor said; rather, she stated that the
Court would “assume, without deciding” that SIPC had standing as the customers’
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subrogee, and likewise would “assume without deciding” that the trustee had standing to sue on behalf of customers. 222 F.3d at 69, 71. That is not an endorsement of Redington at all, much less as “precedent.” Similarly, the Trustee contends that the Supreme Court recognized Redington’s authority in Holmes v.
SIPC, 503 U.S. 258 (1992). Trustee Br. at 33. But while the Supreme Court observed in passing that “[t]here is support for the proposition that SIPC can assert state-law subrogation rights against third parties” (503 U.S. at 271 n.17), it expressed “no opinion” on that subject (id.), and further stated that the subrogation theory was “fraught with unanswered questions.” Id. at 270 (citing Mishkin, 744 F.
Supp. at 556-57). Like this Court in BDO Seidman, the Supreme Court
“assum[ed], arguendo, that [SIPC] may stand in the shoes of . . . customers,” and then proceeded to reject the claim on other grounds. Id. at 271.
Thus, there is nothing in the subsequent decisions of this Court or the
Supreme Court that in any way reaffirms Redington. And the criticisms of the bailee and subrogee theories expressed by Judges Pollack and Preska have now been further explained by Judges McMahon and Rakoff in the decisions below.
Redington is not binding.
F. The Trustee Lacks Standing as an Alleged Bailee
The Trustee and SIPC advance two entirely different theories concerning the
Trustee’s alleged standing as a bailee of customer property. That the Trustee and
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SIPC, theoretically aligned in interest, cannot even agree on the theory underpinning the bailee argument is a sure indication that the argument lacks a supportable basis.
Even leaving aside these inconsistencies, neither bailment theory survives scrutiny. As the District Court held, “[w]ithout Redington to prop them up, the
Trustee’s arguments collapse under their own weight.” SPA29.
1. The Trustee as Possessor of Customer Property
The Trustee himself offers very little justification or analysis for his alleged standing as a bailee, other than the purported authority of Redington. His entire argument is limited to the assertion that the Trustee’s “possessory interest in customer property,” created when he was appointed under SIPA, allows the
Trustee to bring claims to “redress injury to that property.” Trustee Br. at 21.
As an abstract principle, the Trustee accurately summarizes the law of bailment – namely, that a “bailee has a sufficient possessory interest to permit him to ‘recover for the wrongful act of a third party resulting in the loss of, or injury to, the subject of the bailment.’” United States v. Perea, 986 F.2d 633, 640 (2d Cir.
1993) (quoting Rogers v. Atl., Gulf & Pac. Co., 213 N.Y. 246, 258, 107 N.E. 661
(1915)). But that very principle is the Trustee’s undoing, because without any possessory interest at the time of the alleged tort, a plaintiff lacks standing. And at the time the customer property here was allegedly damaged – i.e., by BLMIS’s
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misuse of customer property and the defendants’ alleged assistance thereof – the
Trustee had no possessory interest. The Trustee arrived on the scene later, and any damage was done before the alleged bailment began.
The law is clear that a bailee may sue for damage to the bailed property
“only if the injury occurs during the term of the bailment.” United States v. Jones,
132 S. Ct. 945, 962 (2012) (Alito, J., concurring). New York law is in accord.
See Schwartz v. Fletcher, 238 A.D. 554, 558, 265 N.Y.S. 277, 282 (1st Dep’t
1933) (“Bailees of personal property are entitled to recover damages thereto while the property is in their possession.”) (emphasis added); Sumner v. Brenner, 53
N.Y.S.2d 250, 251 (App. Term 1945); 9 N.Y. Jur. 2d Bailments and Chattel Leases
§ 115 (2004) (“A bailee . . . may bring an action to recover for the loss of or injury to the bailed property while in his or her possession.”) (emphasis added); accord
King Grain Co. v. Caldwell Mfg. Co., 820 F. Supp. 569, 572 (D. Kan. 1993)
(“bailees are permitted to bring suit against third parties because of their possessory interest in the goods at the time of the damage or conversion”)
(emphasis added); Hudson Transit Corp. v. Antonucci, 137 N.J.L. 704, 708, 61
A.2d 180, 183 (N.J. 1948) (“The bailee’s right to recover damages for the entire injury to the property rests . . . upon his special property therein arising out of the exclusive right of possession and his actual possession or right of possession thereof at the time of such loss and injury . . . .”) (emphasis added).
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Under the Trustee’s bailment theory, the Trustee received customer property that had already been damaged, and therefore he could not sue for the damage, as the District Court held. SPA30. Judge McMahon used an apt analogy: It is as if a driver parked her car in a city garage after the car was damaged in traffic by a stranger; while the garage may become the bailee of the car when the driver parks it, the garage has no right to sue the stranger for damage caused prior to taking lawful possession of the car. SPA30-31.
The Trustee fails to grapple with this obvious flaw in his bailment theory.
He simply dismisses Judge McMahon’s analogy as “inapposite,” without attempting to explain why this is so. Trustee Br. at 33 n.15. And, curiously, he asserts that the District Court’s garage analogy constituted “factual findings” (id.)
– but of course it was no such thing, and was based on accepting as true the
Trustee’s own allegations, which asserted that the harm to customer property occurred before the Trustee was appointed.
In addition, the District Court correctly held that treating SIPA as creating a bailment is “fanciful to begin with,” because “SIPA does not ‘entrust’ possession of the customer fund to anyone.” SPA31; see also 9 N.Y. Jur. 2d Bailments and
Chattel Leases § 1 (2004) (bailment is a “delivery of personalty for some particular purpose”). The Trustee’s job may be to “distribute customer property” (15 U.S.C.
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§ 78fff(a)(1)(B)), but “there is neither a handing over of property nor an expectation of giving it back.” SPA31.
Thus, the Trustee’s bailment theory must be rejected.
2. The Trustee as Successor to BLMIS
SIPC takes a different – but equally flawed – approach. Unlike the Trustee,
SIPC contends that the relevant bailment relationship arose “between customer and broker,” and that the Trustee “assumes the broker-dealer’s position as bailee.”
SIPC Br. at 9; see id. at 37 (“BLMIS therefore was the bailee of the property”), 39
(“the Trustee merely inherits the broker’s prior bailment relationship”). SIPC’s theory fails for at least two reasons.
First, BLMIS could not be a bailee because a bailment requires that the bailee take “lawful possession without present intent to appropriate.” Pivar v.
Graduate School of Figurative Art of N.Y. Academy of Art, 290 A.D.2d 212, 213,
735 N.Y.S.2d 522, 524 (1st Dep’t 2002) (quoting Martin v. Briggs, 235 A.D.2d
192, 197, 663 N.Y.S.2d 184, 187 (1st Dep’t 1997)) (emphasis added); see also 9
N.Y. Jur. 2d Bailments and Chattel Leases § 1 (2004) (same). As the District
Court put it, “a thief can never take the status of a bailee.” A30. This is not simply a rule under New York law, but also has been applied by this Court sitting in
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admiralty. See Seaboard Sand & Gravel Corp. v. Moran Towing Corp., 154 F.2d
399, 402 (2d Cir. 1946).14
Second, if the Trustee is suing as the successor to BLMIS, as SIPC claims, then he is subject to the defenses available against BLMIS, including the Wagoner rule and in pari delicto. SIPC essentially acknowledges as much, citing authority for the proposition that “a third party sued by a bailee for negligence in the handling of bailed property may assert the bailee’s contributory negligence as a defense.” SIPC Br. at 44 (citing 8A Am. Jur. 2d Bailments § 165 (2009) (“[i]n an action brought by a bailee against a third person, the same defenses ordinarily will prevail as would apply in the case of an owner”)). Thus, in pari delicto can be asserted against the Trustee standing in the shoes of the putative bailee.
SIPC argues that in pari delicto should not apply because (SIPC claims)
BLMIS customers, as putative bailors, also would be bound by the misconduct of their bailee and, therefore, would be unjustly deprived of any remedy. SIPC Br. at
44-45. But SIPC’s premise – asserted without citation – is unfounded: Bailors are not bound by the misconduct of their bailee, as the very case cited by SIPC makes
14 Thus, whether the applicable bailment law is New York law or federal common law is irrelevant. Nevertheless, SIPC’s insistence that the relationship between broker-dealers and their customers has been “federalized” must be rejected. SIPC Br. at 34. If SIPC is correct, then it would mean that federal law governs all aspects of that relationship, and state common law claims – such as the breach of fiduciary duty and other state claims that underlie the Trustee’s aiding and abetting claims against UBS – would be preempted.
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clear. See Fischer v. Int’l Ry. Co., 112 Misc. 212, 215, 182 N.Y.S. 313, 315 (Sup.
Ct. Erie County 1920) (“It certainly would seem logical that, where the owner of property loaned is not liable to third parties for the negligence of the bailee, the converse of the proposition should obtain, and that such negligence, when contributory to the negligence of third parties, should not absolve the third parties from liability to the owner of property damaged.”); see also Petro v. Eisenberg,
207 Misc. 380, 382, 138 N.Y.S.2d 705, 707 (Sup. Ct. Queens County 1955). Thus, the purportedly unjust scenario imagined by SIPC cannot come to pass.
SIPC strains to avoid the obstacles to its bailment theory with a long discourse on the provisions, purpose, and provenance of SEC Rule 15c3-3, 17
C.F.R. § 240.15c3-3, which imposes certain requirements on how broker-dealers must maintain control of cash and securities. See SIPC Br. at 18-32. But the discussion of Rule 15c3-3 is beside the point: There is nothing in the text of SIPA or Rule 15c3-3 suggesting, and SIPC cites not a single authority holding, that
Rule 15c3-3 is intended to affect – much less, to determine – whether there is a bailor-bailee relationship between a broker-dealer and its customers. To the contrary, SIPA and Rule 15c3-3 provide protection for customers irrespective of whether a bailment relationship exists. The mere fact that a broker-dealer must segregate customer property is no reason to conclude that SIPA trustees must be granted standing to bring common law claims as bailees on behalf of customers, or
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that the ordinary defenses that third parties would have, such as in pari delicto, would not apply to such claims. Nothing about New York bailment or in pari delicto law is inconsistent with the segregation requirements of Rule 15c3-3 or with the federal goal of protecting customers, and the relevant aspects of the law – that a thief cannot be a bailee, and that a bailee cannot sue when in pari delicto – do not address how property must be maintained by the broker-dealer who receives it from the customer, which is the only thing Rule 15c3-3 covers. The fact that
BLMIS’s wrongful intent forfeits BLMIS’s rights as a bailee does not mean that
BLMIS was exempted from the requirements of Rule 15c3-3 or that customers’ rights against BLMIS (or third parties) are in any way impaired. In the present case, the only impact on customers is that they must pursue their own claims against allegedly responsible third-party tortfeasors.
Accordingly, SIPC’s bailment theory, like the Trustee’s, must be rejected.
G. The Trustee Lacks Standing as an Alleged Subrogee
Without the authority of Redington, the subrogee theory of standing likewise fails.
1. SIPA Limits SIPC’s Subrogation Rights to Net Equity Claims Against the Debtor’s Estate
SIPA provides a limited statutory right of subrogation in favor of SIPC – one which does not grant SIPC the authority to bring common law tort claims on behalf of customers against third parties.
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SIPA requires the Trustee to allocate customer property to customers of the debtor on a ratable basis, to the extent of their “net equities.” 15 U.S.C. § 78fff-
2(c)(1). A customer’s “net equity” is calculated by a mathematical formula set forth in the statute. Id. § 78lll(11). Because the available customer property will frequently be “insufficient to satisfy every customer’s ‘net equity’ claim,” SIPA requires SIPC to advance moneys, up to a defined limit, to enable “the SIPA trustee to satisfy promptly each customer’s valid ‘net equity’ claim.” In re
Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 233 (2d Cir. 2011), petition for cert. filed, 80 U.S.L.W. 3483 (U.S. Feb. 3, 2012); see 15 U.S.C. § 78fff-3(a). To the extent that SIPC advances such moneys, “SIPC shall be subrogated to the claims of such customers with the rights and priorities provided in this chapter.”
15 U.S.C. § 78fff-3(a). Importantly, however, SIPA precludes “SIPC as subrogee” from “assert[ing]” a claim against customer property “until after the allocation thereof to customers.” Id.
This carefully crafted scheme does not contemplate the subrogation rights claimed here by the Trustee and SIPC. Rather, SIPA limits SIPC’s subrogation rights to claims of customers “with the rights and priorities provided in this chapter.” In other words, as Judges Mulligan, Pollack, McMahon and Rakoff concluded, SIPC steps into the shoes of customers only with respect to their net equity claims against the debtor’s estate. Redington, 592 F.2d at 633-34
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(Mulligan, J., dissenting); Mishkin, 744 F. Supp. at 557-58; SPA24; HSBC, 454
B.R. at 33-34.
Nor does the fact that SIPA references “all other rights [SIPC] may have at law or in equity” (15 U.S.C. § 78fff-3(a)) somehow expand SIPC’s rights to include broad rights of equitable subrogation. Not only does SIPA expressly grant subrogation only for net equity claims against the estate, but it establishes a strict priority scheme that precludes SIPA from recovering – or even “assert[ing]” a claim (id.) – as subrogee until customers are made whole. Thus, the “catch-all” phrase on which the Trustee and SIPC rely “cannot be read to contradict a more specific provision of SIPA; otherwise, as noted, SIPC would be permitted to recover before customers’ net equity claims had been paid in full.” HSBC, 454
B.R. at 34; see also Mishkin, 744 F. Supp. at 558; SPA32 (“The Trustee’s theory would effectively permit SIPC to jump the line.”).15
For these reasons, SIPC has no subrogation rights beyond the limited right to pursue net equity claims against the estate (if, but only if, customers’ net equity claims are paid in full).
15 There is no evidence that SIPA’s reference to “all other rights” that SIPC “may have” was intended to grant broad rights of equitable subrogation inconsistent with the statutory subrogation. It could well have meant, for instance, that if SIPC was induced by fraud of a customer to advance funds for that customer, SIPC would retain rights to rescind that payment and obtain return of its money.
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2. Any Equitable Subrogation Rights Would, Likewise, Run Solely Against the Estate for Customers’ Net Equity
Even if SIPC could obtain equitable subrogation rights not provided by the statute, however, it would still not permit the assertion of customers’ tort claims against third parties.
Equitable subrogation provides “a secondary obligor . . . who performs the secondary obligation with the obligee’s rights with respect to the underlying obligation as though that obligation had not been satisfied. In other words, one compelled to pay a debt which ought to have been paid by another is entitled to exercise all the remedies which the creditor possessed against that other.”
Harleysville Worcester Mut. Ins. Co. v. Bank of America, N.A. (In re Suprema
Specialties, Inc.), 370 B.R. 517, 527 (S.D.N.Y. 2007) (internal quotation marks and footnotes omitted; emphasis added); see also In re Schuler, 354 B.R. 37, 40-41
(Bankr. W.D.N.Y. 2006) (“in subrogation, a third party discharges an obligor’s obligation to the obligee and then seeks the right to stand in the obligee’s position, so as to be able to assert the obligee’s former rights against the obligor”) (quoting
23 N.Y. Jur. 2d Contributions, Indemnity and Subrogation § 6 (2001) (emphasis added)).
Here, the obligation satisfied (or partially satisfied) by SIPC was the statutory obligation, imposed by SIPA, of the BLMIS estate to its customers. As noted above, SIPC’s advances were made under 15 U.S.C. § 78fff-3(a), which
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requires such advances “to provide for prompt payment and satisfaction of net equity claims of customers of the debtor.” (Emphasis added.) Thus, the secondary obligor (SIPC) has discharged the obligation (net equity claims) of a primary obligor (BLMIS), and thereby would become subrogated to the claims of the obligees (BLMIS customers) against the primary obligor (BLMIS). In other words, equitable subrogation, even if it were permitted, would provide SIPC with the same rights that are provided by the statute – the customers’ net equity claims against the estate.
The cases cited by the Trustee do not provide otherwise. In Hamlet at
Willow Creek Dev. Co., LLC v. Northeast Land Dev. Corp., the court allowed the party that had paid an obligation owed by another under a payment bond to be subrogated to claims against the primary obligor on the bond. 64 A.D.2d 85, 106,
878 N.Y.S.2d 97, 112 (2d Dep’t 2009). In Allstate Ins. Co. v. Mazzola, this Court similarly noted that the insurance company had paid “a legal obligation that ought to have been met by the third party.” 175 F.3d 255, 258 (2d Cir. 1999).
Simply put, the obligation that SIPC satisfied was a particular statutory obligation imposed on BLMIS by SIPA. No third party, including UBS, had any obligation to pay “net equity claims” to BLMIS customers, and thus, by satisfying
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BLMIS’s obligation, SIPC became subrogated only to net equity claims against the
BLMIS estate, and not to any claims against third parties.16
H. The Trustee Has No Claim for Contribution
The Trustee does not challenge the District Court’s conclusion that neither
SIPA nor federal common law “creates a right to contribution for payments he is required to make under SIPA.” SPA21; see also HSBC, 454 B.R. at 38. Instead, the Trustee argues that he has a state law contribution claim to recover for such payments. Trustee Br. at 57-65. But the Trustee’s argument badly misconstrues the nature of the payment obligation that he has to customers. That obligation is imposed by federal law and, as such, any right to contribution for such payments is a matter of federal law. Because federal law does not provide such a right, and because New York law is inapplicable, the Trustee has no claim for contribution against UBS.
As explained above, the Trustee is obligated under SIPA to distribute customer property in satisfaction of customers’ “net equity claims” against
BLMIS. 15 U.S.C. § 78fff-2(b), (c). “Net equity,” moreover, does not depend on
16 In any event, the Trustee fails to state a subrogation claim because he fails to allege “any individualized information about the claims to which [plaintiff] alleged it was subrogated.” Blue Cross & Blue Shield of New Jersey, Inc. v. Philip Morris USA Inc., 344 F.3d 212, 217-18 (2d Cir. 2003). “At the very least, a subrogation would require [plaintiff] to identify its subrogors and those subrogors’ claims so that defendants would have the opportunity to assert defenses against those claims.” Id. at 218.
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proof of common law tort liability, but is calculated by a mathematical formula set forth in SIPA. Id. § 78lll(11). UBS, by contrast, has no obligation under SIPA to pay “net equity claims” of customers. As the District Court held, “the Banks’ liability to BMIS’s customers, if any, arises, not from SIPA, but from New York tort law.” SPA20.
As a consequence, the Trustee is mistaken in contending that he has a right of contribution based on UBS and BLMIS being “joint tortfeasors,” or having
“joint liability under New York law.” Trustee Br. at 58, 57. A contribution claim exists only where “two or more persons . . . are subject to liability for damages for the same . . . injury to property.” N.Y. C.P.L.R. 1401 (McKinney 2011). Neither the Trustee nor the estate will be subject to “liability for damages for . . . injury,” because the “net equity” payment obligation is a matter of federal statutory formula. And UBS is not liable for the “same . . . injury,” because its liability to customers, if any, has nothing to do with customers’ “net equity” under SIPA.
Although the Trustee purports to assert state law tort claims against UBS, it does not follow that state law supplies the “rule of decision” for his contribution claim. Rather, in making that determination, one must look to the underlying obligation for which the claimant is liable, and on which he seeks contribution.
LNC Invs., Inc. v. First Fidelity Bank, N.A., 935 F. Supp. 1333, 1349 (S.D.N.Y.
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1996) (“The source of a right of contribution under state law must be an obligation imposed by state law.”). This is clear from the cases cited by the Trustee.
In Northwest Airlines, Inc. v. Transp. Workers Union, AFL-CIO, 451 U.S.
77 (1981), the Supreme Court held that no right of contribution existed for an employer’s liability under Title VII of the Civil Rights Act of 1964. In a footnote, the Court acknowledged that courts “have recognized a right to contribution under state law in cases in which state law supplied the appropriate rule of decision,” citing two cases in support, but finding them “inapposite.” 451 U.S. at 97 n.38. In each of those two cases, the underlying liability giving rise to the contribution claim was a state law negligence claim. See United States v. Yellow Cab Co., 340
U.S. 543, 544-46 & n.2 (1951) (underlying claims of negligence under
Pennsylvania and District of Columbia law); Gomes v. Brodhurst, 394 F.2d 465
(3d Cir. 1967) (underlying claim of negligence under Virgin Islands law).
Similarly, in LNC Investments, 935 F. Supp. at 1346, 1348, the court refused to imply a right of contribution for liability imposed by the Trust Indenture Act, but held that, insofar as the claimant could be held liable for breach of a fiduciary duty “imposed by operation of New York common law,” it could seek contribution on that claim.
Finally, in Hill v. Day (In re Today’s Destiny, Inc.), 388 B.R. 737, 750
(Bankr. S.D. Tex. 2008), the debtor’s underlying obligation was based on fraud
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claims filed against the debtor. Liability of the debtor to such claimants thus depended on the establishment of the underlying state law torts, and proof of damages suffered by the claimants. Id. at 755. Indeed, the court in Today’s
Destiny provided the allegedly contributing tortfeasors the right to object to the underlying proofs of claim, which, when resolved, would establish whether the debtor had tort liability. Id.
Here, by contrast, the Trustee is obligated by federal law to distribute customer property to all customers, regardless of whether the customer establishes
(or even asserts) that BLMIS committed a tort, based not on any “injury” suffered by the customer, but solely on the customer’s “net equity.” See, e.g., In re Bernard
L. Madoff Inv. Sec., 654 F.3d at 239 (“[The BLMIS claimants] maintain that SIPA should operate to make them whole from the losses they incurred as a result of
Madoff’s dishonesty. We disagree.”); SIPC v. Charisma Sec. Corp., 371 F. Supp.
894, 899 n.7 (S.D.N.Y.) (“general contract and fraud claims as well as claims for market losses against brokerage houses are not included in the insurance umbrella afforded by SIPC, and . . . only net equities of the customers are recoverable”), aff’d, 506 F.2d 1191 (2d Cir. 1974); In re MV Sec., Inc., 48 B.R. 156, 160 (Bankr.
S.D.N.Y. 1985) (“SIPA does not protect customer claims based on fraud or breach of contract. . . . SIPA’s primary intent and policy are to protect customers who have cash and securities being held for them by a broker dealer, rather than to
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serve as a vehicle for the litigation of claims of fraud or violations of Rule 10b-5.”)
(internal quotation marks and citations omitted). Federal law determines who is to be paid, and how much they are to be paid. In other words, the Trustee is not being
“subject to liability for damages for . . . injury to property” under state law (N.Y.
C.P.L.R. 1401), but is required to distribute money based on a calculation defined by SIPA. And because the applicable federal law does not establish a right to contribution, the Trustee has no such claim against UBS.
II.
SLUSA PRECLUDES THE TRUSTEE’S COMMON LAW CLAIMS
Although the District Court dismissed the Trustee’s common law claims without reaching the question of whether those claims were precluded by SLUSA, this Court can affirm the judgment below on this alternative ground. Hartford
Courant Co. v. Pellegrino, 380 F.3d 83, 90 (2d Cir. 2004). As explained below,
SLUSA applies here to bar the common law claims asserted by the Trustee on behalf of BLMIS customers.
SLUSA was enacted in 1998 to “prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of” the
Private Securities Litigation Reform Act of 1995. Merrill Lynch, Pierce, Fenner &
Smith Inc. v. Dabit, 547 U.S. 71, 82 (2006) (quoting SLUSA, Pub. L. No. 105-353,
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§ 2(5), 112 Stat. 3227 (1998)). The “core provision” of SLUSA (id.) provides that
“[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging – (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” 15 U.S.C.
§ 78bb(f)(1); see also 15 U.S.C. § 77p(b). Accordingly, SLUSA precludes (1) any
“covered class action” (2) based upon state law that (3) alleges misrepresentation or omission of a material fact (4) “in connection with” the purchase or sale of “a covered security.” Romano v. Kazacos, 609 F.3d 512, 518 (2d Cir. 2010).
There is little doubt about most of these elements.
First, the tort claims asserted against UBS are based on state common law.
Second, the Trustee alleges misrepresentations of material fact by BLMIS.
See, e.g., A914, ¶ 1 (“the largest financial fraud in history”); A929-30, ¶¶ 52, 53,
55 (alleging that Madoff represented that he would invest in a basket of common stocks and “concocted a fictitious hedging strategy,” but that he “never made the investments [he] promised clients”). The Trustee further alleges that UBS aided and abetted Madoff’s malfeasance by itself engaging in deceptive conduct that
“mask[ed] BLMIS’s fraud.” A914, ¶ 1; see also A963, ¶ 163 (alleging “deception perpetuated by the UBS Defendants”); A968, ¶¶ 180-81 (alleging that UBS
Entities acted as “window dressing” or “a front”); A1017, ¶ 394 (alleging that UBS
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Entities received money “as a result of perpetuating and participating in a fraudulent scheme”).
Third, Madoff’s alleged misrepresentations were “in connection with” the purchase or sale of “a covered security.” The Supreme Court has held that the “in connection with” requirement should be broadly construed. Dabit, 547 U.S. at
85-86. Under Dabit, “it is enough that the fraud alleged ‘coincide’ with a securities transaction – whether by the plaintiff or by someone else.” Id. at 85.
Here, the Trustee alleges that Madoff misrepresented that he would buy “common stocks that comprised the Standard & Poor’s 100 Index.” A929-30, ¶ 52.17 It is irrelevant that the securities transactions promised by Madoff did not take place.
See, e.g., In re Herald, Primeo, and Thema Sec. Litig., No. 09 Civ. 289 (RMB),
2011 WL 5928952, at *8 (S.D.N.Y. Nov. 29, 2011); In re Beacon Assocs. Litig.,
745 F. Supp. 2d 386, 430 (S.D.N.Y. 2010); Barron v. Igolnikov, No. 09 Civ. 4471
(TPG), 2010 WL 882890, at *4 (S.D.N.Y. Mar. 10, 2010) (“[I]t is not necessary that the purchase or sale [of a covered security] actually transpired; claims based on the alleged failure to buy or sell covered securities fall squarely within
SLUSA’s ambit.”). Thus, nearly every court to have considered the Madoff fraud
17 A “covered security” is one that “satisfies the standards for a covered security specified in paragraph (1) or (2) of section 18(b) of the Securities Act of 1933.” 15 U.S.C. § 78bb(f)(5)(E). Section 18(b), in turn, defines “covered security” to include securities traded on a national securities exchange. Id. § 77r(b). There is no dispute that stocks in the S&P 100 Index are “covered securities.”
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has concluded that it was “in connection with” the purchase or sale of covered securities.18
The lone outlier is Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372
(S.D.N.Y. 2010). As numerous cases disagreeing with or distinguishing Anwar have noted (see, e.g., Kingate, 2011 WL 1362106, at *8-9), Anwar presented circumstances quite different than those alleged here. In Anwar, Judge Marrero found the “in connection with” requirement was not met because the case involved claims by investors in “feeder funds” arising from “misrepresentations and breaches of duties concerning shares purchased in the Funds,” and not concerning covered securities allegedly purchased by Madoff. 728 F. Supp. 2d at 398
(emphasis added). The Anwar court found that the claims against the fund defendants “present[ed] multiple layers of separation between whatever phantom securities Madoff purported to be purchasing and the financial interests Plaintiffs
18 See, e.g., Herald, 2011 WL 5928952, at *8-9; In re Merkin & BDO Seidman Sec. Litig., Nos. 08 Civ. 10922 (DAB), 09 Civ. 6031 (DAB), 09 Civ. 6483 (DAB), 2011 WL 4435873, at *11-12 (S.D.N.Y. Sept. 23, 2011); In re J.P. Jeanneret Associates, Inc., 769 F. Supp. 2d 340, 363 (S.D.N.Y. 2011); In re Kingate Mgmt. Ltd. Litig., No. 09 Civ. 5386 (DAB), 2011 WL 1362106, at *7 (S.D.N.Y. Mar. 30, 2011); Wolf Living Trust v. FM Multi-Strategy Inv. Fund, LP, No. 09 Civ. 1540 (LBS), 2010 WL 4457322 , at *3 (S.D.N.Y. Nov. 2, 2010); Newman v. Family Mgmt. Corp., 748 F. Supp. 2d 299, 312-13 (S.D.N.Y. 2010); Beacon, 745 F. Supp. 2d at 409-11, 430; Barron, 2010 WL 882890, at *4-5; Levinson v. PSCC Servs., Inc., No. 3:09-CV-00269, 2009 WL 5184363, at *7 (D. Conn. Dec. 23, 2009); Backus v. Connecticut Cmty. Bank, N.A., No. 3:09-CV-1256, 2009 WL 5184360, at *6-9 (D. Conn. Dec. 23, 2009).
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actually purchased.” Id. The court also noted that the funds were not “cursory, pass-through entit[ies]” and that a portion of the money the funds received was not invested with Madoff. Id.
Here, unlike Anwar, and just as in Kingate, “Madoff’s fraud is at the heart of the case.” Kingate, 2011 WL 1362106, at *9. The claims asserted here are brought by the Trustee on behalf of direct customers of BLMIS, rather than by investors in feeder funds, and thus there are no “multiple layers of separation” between the fraud and the customers, and no securities at issue other than the covered securities that BLMIS falsely promised to purchase. Indeed, because UBS is alleged to have aided and abetted Madoff’s fraud, proving fraud and misrepresentations by Madoff, about covered securities, are required elements of the Trustee’s case. The notion that Madoff’s fraud is “merely background” to the
Amended Complaint (SIPC Br. at 58), simply is not supported. Madoff’s fraud permeates the Amended Complaint, and is a necessary element of the common law claims asserted by the Trustee.
Finally, this action qualifies as a “covered class action” under SLUSA. A
“covered class action” is any single lawsuit in which “damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members . . . predominate over any questions affecting only individual persons or members.” 15 U.S.C. § 78bb(f)(5)(B).
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Here, the Trustee seeks to bring claims “on behalf of” BLMIS customers, through the bailee, subrogee, and general creditor theories discussed above. His original complaint expressly admitted that he was suing “on behalf of the customer-bailors.” A34, ¶ 14(f). Under the Trustee’s theories, he is not bringing claims solely on behalf of the estate; if he were, the claims would be barred by
Wagoner. Instead, with the exception of his contribution claim, the Trustee is asserting claims standing in the shoes of others. The customers with allowed claims number well in excess of 50. A238. Under such circumstances, this action falls within the express language of SLUSA.
Nevertheless, the Trustee and SIPC have argued that the Trustee counts as but a single person, and that “the Court cannot ‘look through’ that entity to those who might benefit from its action.” SIPC Br. at 54 (citing 15 U.S.C.
§§ 77p(f)(2)(C) & 78bb(f)(5)(D)).
This argument is misguided. UBS does not dispute that the Trustee himself counts as just one person, and that if the claims were brought solely on behalf of the BLMIS estate, SLUSA would not bar the claims even though more than
50 people might “benefit” from the suit. Rather, SLUSA applies because the claims belong to the customers (see Wagoner, 944 F.2d at 120), and are literally brought “on behalf of” the customers.
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The Third Circuit explained this distinction in LaSala v. Bordier et Cie, 519
F.3d 121 (3d Cir. 2008). There, a litigation trust created in bankruptcy for the benefit of creditors attempted to pursue state law claims for aiding and abetting a breach of fiduciary duty, and claims alleging violations of Swiss money-laundering laws. Id. at 127. The court held that the original source of the claims determined the applicability of the “covered class action” definition. Thus, claims that originally belonged to the corporate debtor did not constitute a “covered class action,” even though more than 50 people might benefit from the trust’s prosecution of the claims. Id. at 138. By contrast, claims that were owned by
“individual purchasers” of the debtor’s stock, which were assigned to the trust,
“likely are brought to recover damages ‘on behalf of more than 50 persons,’ 15
U.S.C. § 78bb(f)(5)(B)(i)(I), so they would seem to take the form of a covered class action.” Id. at 137-38.
So, too, here. By his own admission, the claims that the Trustee seeks to assert belong to customers, and he therefore brings this action “on behalf of” more than 50 persons.
For these reasons, even if the Trustee has standing to pursue the customers’ claims, those claims are precluded by SLUSA.
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CONCLUSION
For the foregoing reasons, the judgment of the court below should be affirmed.
Dated: New York, New York April 5, 2012
GIBSON, DUNN & CRUTCHER LLP
By: /s/ Marshall R. King Marshall R. King
200 Park Avenue New York, New York 10166-0193 (212) 351-4000 Attorneys for Defendants-Appellees UBS AG, UBS (Luxembourg) S.A., UBS Fund Services (Luxembourg) S.A., UBS Third Party Management Company S.A., Rene Egger, Alain Hondequin, Hermann Kranz, and Ralf Schroeter
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CERTIFICATE OF COMPLIANCE WITH RULE 32(a)
The undersigned counsel hereby certifies that:
1. This brief complies with the type-volume requirement of Federal Rule of Appellate Procedure 32(A)(7)(B), as modified by this Court’s Order, dated
March 15, 2012, permitting UBS to file an oversized brief of up to 17,500 words, because this brief contains 17,349 words, as determined by the word-count function of Microsoft Word 2010, excluding the parts of the brief exempted by
Federal Rule of Appellate Procedure 32(a)(7)(B)(iii); and
2. This brief complies with the typeface requirements of Federal Rule of
Appellate Procedure 32(a)(5) and the type style requirements of Federal Rule of
Appellate Procedure 32(a)(6) because it has been prepared in a proportionally spaced typeface using Microsoft Word 2010 in 14 point Times New Roman font.
Dated: April 5, 2012
/s/ Marshall R. King Marshall R. King
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ADDENDUM A
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