Neutral As of: July 16, 2018 9:45 PM Z A&G Goldman P’ship v. Picard (In re Bernard L. Madoff Inv. Secs. LLC) United States Court of Appeals for the Second Circuit June 27, 2018, Decided No. 17-512-bk Reporter 2018 U.S. App. LEXIS 17574 *; 2018 WL 3159228 propping-up, disguised, quotation, collapse IN RE: BERNARD L.MADOFF INVESTMENT SECURITIES LLC, Debtor.A & G GOLDMAN PARTNERSHIP, PAMELA GOLDMAN, Appellants, v. Case Summary IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC and Overview Bernard L. Madoff, CAPITAL GROWTH COMPANY, DECISIONS INCORPORATED, FAVORITE FUNDS, JA HOLDINGS: [1]-A suit alleging that an investor in a PRIMARY LIMITED PARTNERSHIP, JA SPECIAL Ponzi scheme and associated entities were liable for LIMITED PARTNERSHIP, JAB PARTNERSHIP, JEMW securities fraud as controlling persons under 15 PARTNERSHIP, JF PARTNERSHIP, JFM U.S.C.S. § 78t(a) was barred by an injunction entered in INVESTMENT COMPANIES, JLN PARTNERSHIP, connection with a Securities Investor Protection Act JMP LIMITED PARTNERSHIP, JEFFRY M. PICOWER trustee's settlement of a fraudulent transfer claim. The SPECIAL CO., JEFFRY M. PICOWER P.C., THE facts alleged did not give rise to a colorable claim that PICOWER FOUNDATION, THE PICOWER INSTITUTE the investor controlled the entity through which the FOR MEDICAL RESEARCH, THE TRUST F/B/O Ponzi scheme was perpetrated, so the substance of the GABRIELLE H. PICOWER, BARBARA PICOWER, allegations amounted to only a derivative fraudulent individually and as Executor of the Estate of Jeffry M. transfer claim. Picower, and as Trustee for the Picower Foundation and for The trust f/b/o Gabrielle H. Picower, Appellees. Outcome Judgment affirmed. Notice: PLEASE REFER TO FEDERAL RULES OF APPELLATE PROCEDURE RULE 32.1 GOVERNING THE CITATION TO UNPUBLISHED OPINIONS. LexisNexis® Headnotes Prior History: [*1] Appeal from a January 25, 2017, judgment of the United States District Court for the Southern District of New York (Woods, J.). Bankruptcy Law > Procedural Matters > Judicial A & G Goldman Partnership v. Capital Growth Co. (In re Review > Bankruptcy Appeals Procedures Bernard L. Madoff Inv. Sec. LLC), 565 B.R. 510, 2017 U.S. Dist. LEXIS 10394 (S.D.N.Y., Jan. 24, 2017) Bankruptcy Law > ... > Judicial Review > Standards of Review > Clear Error Review Core Terms Bankruptcy Law > ... > Judicial Review > Standards of Review > De Novo Standard of Review Parties, allegations, fraudulent transfer, derivative, injunction, trading, securities, investors, withdrawals, HN1[ ] Judicial Review, Bankruptcy Appeals customers, bankruptcy court, complaints, fraudulent, Procedures Trustee's, liquidation, fictitious, funds, harms, counterparty, investments, purported, policies, district In an appeal from a district court's review of a court, securities law, dissemination, transactions, bankruptcy court decision, the court of appeals reviews Page 2 of 8 2018 U.S. App. LEXIS 17574, *1 the bankruptcy court decision independently, accepting Transfers > Intent its factual findings unless clearly erroneous but reviewing its conclusions of law de novo. Bankruptcy Law > ... > Avoidance > Fraudulent Transfers > Value HN4[ ] Fraudulent Transfers, Elements Bankruptcy Law > ... > Examiners, Officers & Trustees > Duties & Functions > Capacities & Roles Property is fraudulently transferred if the debtor made such transfer with actual intent to hinder, delay, or Bankruptcy Law > Claims > Types of defraud any entity to which the debtor was or became, Claims > Definitions on or after the date that such transfer was made, indebted, 11 U.S.C.S. § 548(a)(1)(A), or received less HN2[ ] Duties & Functions, Capacities & Roles than a reasonably equivalent value in exchange for such transfer and one of a number of other requirements is In the bankruptcy context, derivative claims are ones met, § 548(a)(1)(B). that arise from harm done to the estate and that seek relief against third parties that pushed the debtor into bankruptcy. In assessing whether a claim is derivative, a court inquires into the factual origins of the injury and, Securities Law > Civil Liability more importantly, into the nature of the legal claims Considerations > Secondary Liability > Controlling asserted. The way a claim is labeled is not conclusive, Persons since plaintiffs often try, but are not permitted, to plead around a bankruptcy. By contrast, when creditors have HN5[ ] Secondary Liability, Controlling Persons a claim for injury that is particularized as to them, they are exclusively entitled to pursue that claim, and the A claim under § 20(a) of the Securities Exchange Act of bankruptcy trustee is precluded from doing so. Whereas 1934, 15 U.S.C.S. § 78t(a), is a securities fraud claim a derivative injury is based upon a secondary effect that is particularized to the injured party or parties. from harm done to the debtor, an injury is said to be particularized when it can be directly traced to the third party's conduct. Securities Law > ... > Secondary Liability > Controlling Persons > Definition of Control Bankruptcy Law > ... > Avoidance > Fraudulent Securities Law > ... > Secondary Transfers > Elements Liability > Controlling Persons > Elements of Proof HN3[ ] Fraudulent Transfers, Elements HN6[ ] Controlling Persons, Definition of Control Fraudulent transfer is a claim commonly arising in The elements of a claim under § 20(a) of the Securities bankruptcy proceedings. A bankruptcy trustee may Exchange Act of 1934, 15 U.S.C.S. § 78t(a), are (1) a recover from the initial transferee, for the benefit of the primary violation of the securities laws by the controlled estate, property fraudulently transferred within the person, (2) control of the primary violator by the meaning of 11 U.S.C.S. § 548. 11 U.S.C.S. § 550(a). defendant, and (3) that the defendant was, in some Fraudulent transfer is perhaps the paradigmatic meaningful sense, a culpable participant in the example of a claim that is "general" to all creditors in controlled person's fraud. Securities and Exchange bankruptcy; thus, it is usually brought by the trustee, for Commission regulations define "control" as the the benefit of all creditors and seeks to recover property possession, direct or indirect, of the power to direct or of the estate. cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. 17 C.F.R. § 230.405. Bankruptcy Law > ... > Avoidance > Fraudulent Transfers > Elements Bankruptcy Law > ... > Avoidance > Fraudulent Securities Law > Civil Liability Page 3 of 8 2018 U.S. App. LEXIS 17574, *1 Considerations > Secondary Liability > Controlling Parties and Irving H. Picard, the Trustee in the SIPA Persons liquidation—filed adversary proceedings in the SIPA liquidation to enjoin the Florida action, contending that it HN7[ ] Secondary Liability, Controlling Persons violated a permanent injunction and the automatic stay issued in the SIPA liquidation. Id. The bankruptcy court A claim under § 20(a) of the Securities Exchange Act of in the Southern District of New York agreed and 1934, 15 U.S.C.S. § 78t(a), seeks to hold the control enjoined the Florida action, id., which the district court person jointly and severally liable for the primary affirmed, A & G Goldman P'ship v. Capital Growth Co. violation of the securities laws by the controlled person, (In re BLMIS), 565 B.R. 510, 526-27 (S.D.N.Y. 2017). so long as the control person is a culpable participant in This appeal followed. We assume the parties' familiarity the fraud. with the underlying facts, the record of the prior proceedings, and issues on appeal, and repeat them Counsel: FOR APPELLANTS: JOSEPH G. GALARDI, here only as necessary to explain our decision to affirm. (James W. Beasley, Jr., on the brief), Beasley Kramer & Galardi, P.A., West Palm Beach, FL; Joshua J. Angel, The Madoff Ponzi scheme has been described in detail Herrick Feinstein LLP, New York, NY. elsewhere. See Sec. Inv'r Prot. Corp. v. BLMIS (In re BLMIS), 424 B.R. 122, 126-32 (Bankr. S.D.N.Y. 2010). FOR APPELLEE TRUSTEE: DEBORAH H. RENNER As is relevant here, Madoff claimed he was investing (Thomas D. Warren, David J. Sheehan, Ferve E. BLMIS's customers' funds in stocks and then hedging Ozturk, Samuel M. Light, on the brief), Baker & with option trades. In re BLMIS, 654 F.3d 229, 231 (2d Hostetler LLP, New York, NY. Cir. 2011). In reality, Madoff never invested any of the FOR APPELLEES THE PICOWER PARTIES: GARY funds. Id. Instead, BLMIS generated fictitious [*3] STEIN (Marcy Harris, William D. Zabel, Michael Kwon, account statements reflecting trades that were never Jennifer M. Opheim, on the brief), Schulte Roth & Zabel actually completed and profits that were never actually LLP, New York, NY. generated. Id. at 231-32. Because BLMIS was not actually generating profit, it paid customers who Judges: PRESENT: PIERRE N. LEVAL, GERARD E. withdrew funds with the proceeds of other customers' LYNCH, CHRISTOPHER F. DRONEY, Circuit Judges. investments. Id. at 232. Eventually, BLMIS was unable to meet its customers' demands for withdrawals, and the Opinion scheme collapsed. Id. On May 12, 2009, the Trustee filed an adversary proceeding in the SIPA liquidation against the Picower SUMMARY ORDER Parties seeking to recover $6.7 billion in withdrawals Picower made from BLMIS and bringing claims for UPON DUE CONSIDERATION, IT IS HEREBY fraudulent transfer, avoidable preferences, and turnover ORDERED, ADJUDGED, AND DECREED that the under both the Bankruptcy Code and New York law. judgment of the district court is AFFIRMED. The Trustee alleged that Picower benefited from BLMIS's Ponzi scheme and either knew or should have This appeal arises from the Securities Investor known that BLMIS's trading activity was fictitious and Protection Act ("SIPA") liquidation of Bernard L. Madoff that BLMIS was perpetrating a fraud. To support its Investment Securities LLC ("BLMIS"), the entity through contention that Picower either knew or should have which Bernard Madoff perpetrated his infamous Ponzi known about the fraud, the Trustee's complaint cited scheme.