09-01503-brl Doc 106 Filed 04/04/12 Entered 04/04/12 14:12:12 Main Document Pg 1 of 21 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK FOR PUBLICATION -----------------------------------------------------------X In re: No. 08-01789 (BRL) BERNARD L. MADOFF INVESTMENT SIPA LIQUIDATION SECURITIES LLC, (Substantively Consolidated) Debtor. -----------------------------------------------------------X In re: IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Adv. Pro. No. 09-01503 (BRL) Plaintiff, v. PETER B. MADOFF, ESTATE OF MARK D. MADOFF, ANDREW H. MADOFF, INDIVIDUALLY AND AS EXECUTOR OF THE ESTATE OF MARK D. MADOFF, AND SHANA D. MADOFF, Defendants. -----------------------------------------------------------X APPEARANCES: BAKER & HOSTETLER LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 By: David J. Sheehan Tracy L. Cole Timothy S. Pfeifer M. Elizabeth Howe David M. McMillan John Siegal Marc D. Powers Jimmy Fokas Adam B. Oppenheim Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff 09-01503-brl Doc 106 Filed 04/04/12 Entered 04/04/12 14:12:12 Main Document Pg 2 of 21 COHEN & GRESSER LLP 800 Third Avenue New York, New York 10022 Telephone: (212) 957-7600 Facsimile: (212) 957-4514 By: Mark S. Cohen Daniel H. Tabak Attorneys for Proposed Defendant Deborah Madoff COOLEY LLP 1114 Avenue of the Americas New York, New York 10036 Telephone: (212) 479-6000 Facsimile: (212) 479-6275 By: Alan Levine Lawrence C. Gottlieb Laura Grossfield Birger Michael A. Klein Attorneys for Proposed Defendant Stephanie S. Mack DAY PITNEY LLP One Canterbury Green Stamford, Connecticut 06901 Telephone: (203) 977-7300 Facsimile: (203) 977-7301 By: Thomas D. Goldberg Matthew E. Smith Attorneys for Proposed Defendant Susan Elkin PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 1285 Avenue of the Americas New York, New York 10019 Telephone: (212) 373-3000 Facsimile: (212) 757-3990 By: Martin Flumenbaum Stephen J. Shimshak Andrew J. Ehrlich Hannah S. Sholl Attorneys for the Estate of Mark D. Madoff and Andrew H. Madoff individually and as Executor of the Estate of Mark D. Madoff 2 09-01503-brl Doc 106 Filed 04/04/12 Entered 04/04/12 14:12:12 Main Document Pg 3 of 21 Before: Hon. Burton R. Lifland United States Bankruptcy Judge MEMORANDUM DECISION AND ORDER DENYING IN PART AND GRANTING IN PART THE TRUSTEE’S MOTION FOR LEAVE TO FILE A SECOND AMENDED COMPLAINT Query: Given ongoing forensic activity and the restrictions set forth by the Supreme Court in Krupski,1 can the Madoff trustee simply add defendants at any time? Here, inclusion of ex and current spouses of Madoff’s two sons is at play. Before the Court is the motion (the “Motion”) of Irving H. Picard, Esq. (the “Trustee”), trustee for the substantively consolidated Securities Investor Protection Act (“SIPA”) liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff (“Madoff”) seeking leave to file a second amended complaint to (i) add Susan Elkin, Mark Madoff’s first wife; Stephanie S. Mack, Mark Madoff’s widow; and Deborah Madoff, Andrew Madoff’s wife (collectively, the “Spouse Defendants”),2 who allegedly received approximately $115 million in transfers from BLMIS;3 (ii) include $28,948,035 in additional transfers (the “New Transfers”) as to Peter B. Madoff; Andrew H. Madoff, individually, and as Executor of the Estate of Mark D. Madoff;4 the Estate of Mark D. Madoff; and Shana D. Madoff (collectively, the “Family Defendants”); and (iii) clarify that $2,899,000 of the transfers to Shana D. Madoff alleged in the original complaint are now also claimed as transfers to Peter B. Madoff, and $2,500,000 of the 1 Krupski v. Costa Crociere S. p. A., 130 S.Ct. 2485 (2010). 2 Scott Skoller, the husband of Madoff’s niece, Shana Madoff, was originally named in this Motion. The Trustee, however, has since withdrawn the Motion as against Skoller. See Notice of Withdrawal Without Prejudice of Trustee’s Motion for Entry of an Order Pursuant to Rules 15 and 20 of the Federal Rules of Civil Procedure as Incorporated by Rules 7015 and 7020 of the Federal Rules of Bankruptcy Procedure Granting Motion for Leave to File a Second Amended Complaint as Against Proposed Defendant Scott Skoller (Dkt. No. 87). 3 Specifically, the Trustee alleges that the Spouse Defendants received the following amounts in avoidable and recoverable transfers from BLMIS or benefits from such transfers: Deborah Madoff ($67,766,382); Susan Elkin ($14,846,708); and Stephanie Mack ($33,269,358). See Memorandum of Law in Support of Trustee's Motion for Leave to File a Second Amended Complaint (Dkt. No. 71) [hereinafter “Tr. Mem.”]. 4 Mark D. Madoff passed away on December 11, 2010. The parties have stipulated that Mark D. Madoff in the above-captioned adversary proceeding is substituted by the Estate of Mark D. Madoff and Andrew H. Madoff, as Executor. See Stipulation and Order Substituting Party (Dkt. No. 47). 3 09-01503-brl Doc 106 Filed 04/04/12 Entered 04/04/12 14:12:12 Main Document Pg 4 of 21 transfers to Peter B. Madoff alleged in the original complaint are now also claimed as transfers to Shana D. Madoff (these transfers, together with the New Transfers, the “Family Transfers”). The Trustee seeks to add the Spouse Defendants to bring Bankruptcy Claims, Subsequent Transfer Claims and Common Law Claims (all defined below) against them. The heart of the dispute revolves around whether the Trustee has satisfied the relation back standard set forth in Federal Rule of Civil Procedure (“Rule”) 15(c)(1)(C)(ii) to permit him to add the Spouse Defendants in connection with the Bankruptcy Claims. Specifically, the issue is whether the Trustee has demonstrated that but for a mistake on his part, the Spouse Defendants knew or should have known that they would be included in the Trustee’s complaint. The Trustee posits that the Spouse Defendants were on constructive notice that they should have been sued, as (i) this has been a highly publicized case, (ii) the Trustee’s investigation has been ongoing, (iii) the Trustee sought transfers in the original complaint of which the Spouse Defendants were beneficiaries, and (iv) it became clear to the Trustee, upon Mark’s death, that naming only Mark and not Stephanie was a mistake. The Spouse Defendants object, arguing that they reasonably believed their omission from the original complaint was not a mistake but rather a deliberate tactic on the part of the Trustee. Indeed, the Trustee is a sophisticated party who had access to extensive documentation regarding the roles, status, and finances of the Spouse Defendants, as well as ample legal support to review and analyze such documentation. Furthermore, he elected to exclude all of the Spouse Defendants from not only the original complaint but also from the amended complaint, opting instead to sue them in a number of separate adversary proceedings. Under these circumstances, the Court finds that the Trustee has not met the relation back standard under Rule 15. In fact, it would not be unreasonable for the Spouse Defendants to infer that their omission from the original complaint was the result of a strategic decision on the part 4 09-01503-brl Doc 106 Filed 04/04/12 Entered 04/04/12 14:12:12 Main Document Pg 5 of 21 of the Trustee and not a mistake. Accordingly, the Court declines to permit leave to the Trustee to add the Spouse Defendants to pursue the Bankruptcy Claims. With regard to the Subsequent Transfer Claims, the Court grants leave to add the Spouse Defendants because, as these claims are not time barred, the Trustee need not satisfy the relation back standard under Rule 15. With regard to the Common Law Claims of constructive trust and unjust enrichment, the Court grants leave to add Stephanie S. Mack and Deborah Madoff because (i) these claims are not time barred and (ii) the futility of such an amendment is not clear on the face of the proposed second amended complaint, as determining the applicability of in pari delicto to these claims against the Spouse Defendants involves unsettled law. The Trustee also seeks to add and clarify transfers with regard to the Family Defendants. As these transfers relate back under Rule 15 and no one has objected to such relief, the Court permits the Trustee leave to add and clarify them. Accordingly, for the reasons set forth below and at oral argument, the Trustee’s Motion is DENIED in part and GRANTED in part to the extent described herein. BACKGROUND5 The Motion arises in connection with the infamous Ponzi scheme perpetrated by Madoff through his investment company, BLMIS. 1. The Trustee’s Complaints Against The Family And Spouse Defendants The Trustee commenced the instant adversary proceeding on October 2, 2009 by filing a complaint (the “Original Complaint”) against the Family Defendants.6 The Original Complaint 5 For a detailed background of the mechanics of the Madoff Ponzi scheme and the events preceding the Trustee’s complaints, see SIPC v. BLMIS LLC (In re BLMIS), 424 B.R. 122, 125-32 (Bankr. S.D.N.Y. 2010). 6 For a detailed description of the Family Defendants’ involvement in BLMIS, see SIPC v. BLMIS LLC (In re BLMIS), 458 B.R. 87, 101-03 (Bankr. S.D.N.Y. 2011). 5 09-01503-brl Doc 106 Filed 04/04/12 Entered 04/04/12 14:12:12 Main Document Pg 6 of 21 sought to avoid and recover more than $180 million in fraudulent transfers and preferences from BLMIS to the Family Defendants and asserted various common law claims.