Fairfield CA2 Reply · 13-1289-bk(l)in the united states court of appeals for the second circuit in...

13-1289-bk(L)IN THE

United States Court of AppealsFOR THE SECOND CIRCUIT

IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,

IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATIONOF BERNARD L. MADOFF INVESTMENT SECURITIES LLC,

Plaintiff-Appellant,—against—

SECURITIES & INVESTMENT COMPANY BAHRAIN, HAREL INSURANCECOMPANY, LTD., AXA PRIVATE MANAGEMENT, ST. STEPHEN’S SCHOOL, PACIFICWEST HEALTH MEDICAL CENTER, INC. EMPLOYEE’S RETIREMENT TRUST,

Lead Plaintiffs-Appellees,(caption continued on inside cover)

ON APPEAL FROM THE UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF NEW YORK

REPLY BRIEF FOR PLAINTIFF-APPELLANTIRVING H. PICARD, AS TRUSTEE FOR

THE SUBSTANTIVELY CONSOLIDATED SIPA LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES

AND THE ESTATE OF BERNARD L. MADOFF

d

DAVID B. RIVKIN, JR., ESQ.LEE A. CASEY, ESQ.MARK W. DELAQUIL, ESQ.ANDREW M. GROSSMAN, ESQ.BAKER & HOSTETLER LLPWashington Square, Suite 11001050 Connecticut Avenue, NWWashington, DC 20036(202) 861-1500

Attorneys for Plaintiff-Appellant Irving H. Picard, as Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff

Investment Securities and The Estate of Bernard L. Madoff

13-1392-cv(CON)

DAVID J. SHEEHAN, ESQ.DEBORAH H. RENNER, ESQ.BAKER & HOSTETLER LLP45 Rockefeller PlazaNew York, New York 10111(212) 589-4200

Case: 13-1289 Document: 162 Page: 1 06/13/2013 964217 48

PASHA S. ANWAR, on behalf of themselves and all others similarly situatedinvestors in the Greenwich Sentry, L.P. private investment limited partnership,JULIA ANWAR, on behalf of themselves and all others similarly situated investorsin the Greenwich Sentry, L.P. private investment limited partnership, INTER-AMERICAN TRUST, ELVIRA 1950 TRUST, BONAIRE LIMITED, CARLOS GAUCH,LOANA LTD., WALL STREET SECURITIES, S.A., BANCO GENERAL, S.A.,HARVEST DAWN INTERNATIONAL INC., EL PRADO TRADING, OMAWAINVESTMENT CORPORATION, CARMEL VENTURES LTD., TRACONCORP, BLYTHELASSOCIATED CORP., MARREKESH RESOURCES, CENTRO INSPECTION AGENCY,KALANDAR INTERNATIONAL, LANDVILLE CAPITAL MANAGEMENT S.A., 20/20INVESTMENTS, AXA PRIVATE MANAGEMENT, DIVERSIFIED INVESTMENTSASSOCIATES CLASS A UNITS, ABR CAPITAL FIXED OPTION/INCOME STRATEGICFUND LP, HAREL INVESTMENT AND FINANCIAL SERVICES LTD., MIGUELLOMELI, MORNING MIST HOLDINGS LIMITED, JITENDRA BHATIA, GOPALBHATIA, KISHANCHAND BHATIA, JAYSHREE BHATIA, MANDAKINI GAJARIA,ABN AMRO LIFE S.A., BAHIA DEL RIO S.A., BEVINGTON MANAGEMENT, LTD.,CALWELL INVESTMENT S.A., DIAMOND HILLS INC., HEDGE STRATEGY FUNDLLC, KIVORY CORPORATION, NORTH CLUB, INC., PFA PENSION A/S, TAURUSTHE FOURTH LTD., ZENN ASSETS HOLDING, LTD., CARLOS MATTOS,CHANDRASHEKAR GUPTA, DEEPA GUPTA, ULRICH BLASS, ROBERTO CIOCI,SANDRA MARCHI CIOCI, JOHN PAUL DOUGHERTY, E. THOMAS DOUGHERTYNOVELLA, MUNIANDY NALAIAH, LILA NEEMBERRY, PETER A. & RITA M.CARFAGNA IRREVOCABLE CHARITABLE REMAINDER UNITRUST, MOSHEPODHORZER, R. WICKNESWARI V. RATNAM, ENRIQUE SANTOS, ENRIQUESANTOS CALDERON, JACQUELINE URZOLA, JOSEFINA SANTOS URZOLA, FELIPEJ. BENAVIDES, FUNDACION VIRGILIO BARCO, DAVID HOPKINS, CATALINAMEJIA, CESAR MEJIA, R.M. RADEMAKER, THE ALPHA AND OMEGAPARTNERSHIP, LP, RICHMON COMPANY LTD., POSITANO INVESTMENT LTD.,

Plaintiffs-Appellees,

PACIFIC WEST HEALTH MEDICAL CENTER INC. EMPLOYEES RETIREMENTTRUST, On behalf of Itself, PACIFIC WEST HEALTH MEDICAL CENTER INC.EMPLOYEES RETIREMENT TRUST, on Behalf of All Others Similarly Situated,SHIMON LAOR, DAVID I. FERBER, THE KNIGHT SERVICES HOLDINGS LIMITED,on behalf of itself and all others similarly situated, FRANK E. PIERCE, FRANK E.PIERCE IRA, NADAV ZOHAR, on behalf of themselves and all others similarlysituated, RONIT ZOHAR, FAIRFIELD SENTRY LTD., HEADWAY INVESTMENTCORP., BPV FINANCE (INTERNATIONAL) LTD., JOSE ANTONIO PUJALS,individually and in their representative capacities for all those similarly situated,ROSA JULIETA A DE PUJALS, individually and in their representative capacities forall those similarly situated, MARIDOM LIMITED, a Foreign Corporation, RICARDOLOPEZ, STANDARD CHARTERED BANK INTERNATIONAL (AMERICAS) LIMITED,STANCHART SECURITIES INTERNATIONAL, INC., MARIA AKRIBY VALLADOLID,RICARDO RODRIGUEZ CASO, WONG YUK HING DE LOU, MOISES LOUMARTINEZ, JOAQUINA TERESA BARBACHA HERRERO, SAND OVERSEAS


LIMITED, SAND OVERSEAS LIMITED, BLOCKBEND LTD, BAYMALL INVESTMENTSLTD, EASTFORK ASSETS LTD, GERICO INVESTMENTS, INC., ALICIA GAVIRIARIVERA, EDUARDO CHILD ESCOBAR, MAILAND INVESTMENT INC.,

Consolidated Plaintiffs-Appellees,

ARJAN MOHANDAS BHATIA, TRADWAVES, LTD., PARASRAM DARYANI, NEELAMP. DARYANI, VIKAS P. DARYANI, NIKESH P. DARYANI, ASHOKKUMARDAMODARDAS RAIPANCHOLIA, PRERNA VINOD UTTAMCHANDANI, KISHINMOHANDAS BHATIA, SURESH M. BHATIA, BHARAT MOHANDAS, AARVEE LTD.,DILIP DAMODARDAS RAIPANCHOLIA, RAJESHKUMAR DAMODARDASRAIPANCHOLIA, KISHU NATHURMAL UTTAMCHANDANI, RAJENDRAKUMARPATEL, VANDNA PATEL,

All Plaintiffs-Appellees.—against—

FAIRFIELD GREENWICH LIMITED, FAIRFIELD GREENWICH (BERMUDA), PACIFICWEST MEDICAL CENTER EMPLOYEES RETIREMENT TRUST, HAREL INSURANCECOMPANY LTD., MARTIN AND SHIRLEY BACH FAMILY TRUST, NATALIA HATGIS,SECURITIES AND INVESTMENT COMPANY BAHRAIN, DAWSON BYPASS TRUST, ST.STEPHEN’S SCHOOL, WALTER M. NOEL, JR., JEFFREY H. TUCKER, ANDRESPIEDRAHITA, LOURDES BARRENECHE, ROBERT BLUM, CORNELIS BOELE, GREGORYBOWES, VIANNEY D’HENDECOURT, YANKO DELLA SCHIAVA, HAROLD GREISMAN,JACQUELINE HARARY, DAVID HORN, RICHARD LANDSBERGER, DANIEL E. LIPTON,JULIA LUONGO, MARK MCKEEFRY, CHARLES MURPHY, CORINA NOEL PIEDRAHITA,MARIA THERESA PULIDO MENDOZA, SANTIAGO REYES, ANDREW SMITH, PHILIPTOUB, AMIT VIJAYVERGIYA,

Defendants-Appellees,

YANKO DELLAW SCHIAVA, PHILIP TOUB, LOURDES BARRENECHE, CORNELISBOELE, MATTHEW C. BROWN, VIANNEY D’HENDECOURT, HAROLD GREISMAN,JACQUELINE HARARY, DAVID HORN, RICHARD LANDSBERGER, DAVID LIPTON,JULIA LUONGO, MARK MCKEEFRY, MARIA TERESA PULIDO MENDOZO,CHARLES MURPHY, SANTIAGO REYES, ANDREW SMITH, CITCO BANKNEDERLAND N.V. DUBLIN BRANCH, GLOBEOP FINANCIAL SERVICES LLC.,CITCO CANADA INC., PRICEWATERHOUSE COOPERS ACCOUNTANTS N.V.,GREENWICH SENTRY, L.P., FAIRFIELD SENTRY LIMITED, CITGO GLOBALCUSTODY N.V., PRICEWATERHOUSECOOPERS INTERNATIONAL LIMITED,PRICEWATERHOUSECOOPERS LLP (US), PRICEWATERHOUSECOOPERS LLPCHARTERED ACCOUNTANTS, FAIRFIELD GREENWICH (BERMUDA) LIMITED,FAIRFIELD GREENWICH ADVISORS, L.L.C., FAIRFIELD INTERNATIONALMANAGERS, INC., DANIEL LIPTON, JACQUELINE HARARAY, ROBERT BLUM,STANDARD CHARTERED INTERNATIONAL (USA) LTD., STANDARD CHARTEREDPLC, AMERICAN EXPRESS BANK LTD., STANDARD CHARTERED BANKINTERNATIONAL (AMERICAS) LIMITED, a Foreign entity, STANDARDCHARTERED PRIVATE BANK, Foreign entity, and a private banking division of


Standard Chartered Bank, STANDARD CHARTERED BANK, GREGORY BOWES,STANDARD CHARTERED BANK INTERNATIONAL (AMERICAS) LIMITED,

Consolidated Defendants-Appellees,

FAIRFIELD GREENWICH CORP.,

Consolidated Counter Defendant-Appellee,

1-20 JOHN DOES, Defendants,

SECURITIES INVESTOR PROTECTION CORPORATION,Intervenor.


TABLE OF CONTENTS Page

-i-

INTRODUCTION AND SUMMARY OF ARGUMENT .......................... 1 ARGUMENT ............................................................................................ 3

I. A Section 105 Injunction Is Required To Prevent “An Immediate Adverse Economic Consequence” for the BLMIS Estate ......................................................................... 3 A. The Settlement Dissipates Assets Transferred

from BLMIS and Necessary To Satisfy the Trustee’s Recovery Action ............................................. 3

B. An Injunction Is Necessary To Carry Out SIPA’s Requirements and Objectives ....................................... 8

C. The Rule 65 Injunction Standard Is Inapplicable ...... 13 D. Regardless, the Trustee Satisfies the Rule 65

Standard ...................................................................... 15 1. The Trustee Will Suffer Irreparable Harm ....... 15 2. The Trustee Is Likely to Succeed on the

Merits ................................................................. 17 3. The Equities and Public Interest Favor an

Injunction ........................................................... 18 II. The Settlement’s Dissipation of Assets Fraudulently

Transferred from BLMIS Plainly Violates the Automatic Stay ..................................................................... 19 A. Colonial Realty Requires Application of the

Automatic Stay to Any Attempt “To Recover Assets Alleged To Have Been Fraudulently Conveyed by a Bankruptcy Debtor” ........................... 19

B. In Substance, the Anwar Plaintiffs’ Claims Are Property of the Estate ................................................. 27

III. The Trustee Had No Obligation To Rush to Court To Seek To Enjoin the Anwar Action ........................................ 29

CONCLUSION ....................................................................................... 35


TABLE OF AUTHORITIES Page(s)

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CASES

48th St. Steakhouse, Inc. v. Rockefeller Grp., Inc. (In re 48th St. Steakhouse), 835 F.2d 427 (2d Cir. 1987) ............................................................ 2, 28

Adams v. Hartconn Assocs. (In re Adams), 212 B.R. 703 (Bankr. D. Mass. 1997) ................................................. 33

Adelphia Commc’ns Corp. v. Am. Channel, LLC (In re Adelphia Commc’ns Corp.), No. 06-1528, 2006 WL 1529357 (Bankr. S.D.N.Y. June 5, 2006) ...... 16

Apps v. Morrison (In re Superior Homes & Invs., LLC), No. 12-15451, 2013 WL 2477057 (11th Cir. June 10, 2013) ................ 6

Association for Retarded Citizens of Connecticut, Inc. v. Thorne, 30 F.3d 367 (2d Cir. 1994) .................................................................. 14

In re Baldwin–United Corp., 770 F.2d 328 (2d Cir. 1985) ................................................................ 13

Becker v. IRS (In re Becker), 407 F.3d 89 (2d Cir. 2005) .................................................................. 31

Brenntag Int’l Chems., Inc. v. Bank of India, 175 F.3d 245 (2d Cir. 1999) ................................................................ 16

Bronson v. United States, 46 F.3d 1573 (Fed. Cir. 1995) ............................................................. 34

Casse v. Key Bank Nat’l Ass’n (In re Casse), 198 F.3d 327 (2d Cir. 1999) ................................................................ 13

Cedars-Sinai Med. Ctr. v. Shalala, 177 F.3d 1126 (9th Cir. 1999) ............................................................. 12

Celotex Corp. v. Edwards, 514 U.S. 300 (1995) ........................................................................... 4, 5


TABLE OF AUTHORITIES (continued) Page(s)

-iii-

In re Commonwealth Oil Ref. Co., Inc., 805 F.2d 1175 (5th Cir. 1986) ............................................................. 27

Computer Assocs. Int’l, Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992) ................................................................ 14

In re DeLorean Motor Co., 755 F.2d 1223 (6th Cir. 1985) ............................................................... 6

Easley v. Pettibone Michigan Corp., 990 F.2d 905 (6th Cir. 1993) ............................................................... 33

FDIC v. Hirsch (In re Colonial Realty), 980 F.2d 125 (2d Cir. 1992) ........................................................ passim

Fidelity Mortgage Invs. v. Camelia Builders, Inc. (In re Fidelity Mortgage Invs.), 550 F.2d 47 (2d Cir. 1976) .................................................................. 22

Fisher v. Apostolou, 155 F.3d 876 (7th Cir. 1998) ........................................................... 6, 14

Goldin v. Primavera Familienstiftung (In re Granite Partners), 194 B.R. 318 (Bankr. S.D.N.Y. 1996) ........................................... 27, 28

Harley-Davidson, Inc. v. O’Connell, 13 F. Supp. 2d 271 (N.D.N.Y. 1998) ................................................... 32

Hermès Int’l v. Lederer de Paris Fifth Ave., Inc., 219 F.3d 104 (2d Cir. 2000) ................................................................ 31

Highland Capital Mgmt. LP v. Chesapeake Energy Corp. (In re Seven Seas Petroleum, Inc.), 522 F.3d 575 (5th Cir. 2008) ............................................................... 28

In re Jefferson Cnty., Ala., ___ B.R. ___, 2013 WL 1613240 (Bankr. N.D. Ala. Apr. 15, 2013) .................................................................................................... 27



-iv-

Jones v. Confidential Investigative Consultants, Inc., No. 92-1566, 1994 WL 127261 (N.D. Ill. Apr. 12, 1994) .................... 34

Kulhawik v. Holder, 571 F.3d 296 (2d Cir. 2009) ................................................................ 30

Lautenberg Found. v. Picard (In re Bernard L. Madoff Inv. Secs., LLC), No. 11-5421, 2013 WL 616269 (2d Cir. Feb. 20, 2013) ........ 5, 7, 14, 15

In re Lee, 465 B.R. 469 (Bankr. W.D. Ky. 2012) ................................................. 33

Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825 (1988) ............................................................................... 9

Matthews v. Rosene, 739 F.2d 249 (7th Cir. 1984) ......................................................... 33, 34

Official Comm. of Unsecured Creditors v. PSS S.S. Co., Inc. (In re Prudential Lines Inc.), 928 F.2d 565 (2d Cir. 1991) ................................................................ 22

Ostano Commerzanstalt v. Telewide Sys., Inc., 790 F.2d 206 (2d Cir. 1986) ................................................................ 34

Pfizer, Inc. v. Law Offices of Peter G. Angelos (In re Quigley Co., Inc.), 676 F.3d 45 (2d Cir. 2012) .................................................................... 5

Picard v. Stahl (In re Bernard L. Madoff), 443 B.R. 295 (Bankr. S.D.N.Y. 2011) ........................................... 16, 17

Publicker Indus. Inc. v. United States (In re Cuyahoga Equip. Corp.), 980 F.2d 110 (2d Cir. 1992) .................................................................. 5

Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282 (2d Cir. 2003) .................................................. 3, 7, 14, 17



-v-

Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004) ............................................................... 11

Random House, Inc. v. Rosetta Books LLC, 283 F.3d 490 (2d Cir. 2002) ................................................................ 15

In re Refco Inc., 505 F.3d 109 (2d Cir. 2007) ................................................................ 24

Schimmelpenninck v. Byrne (In re Schimmelpenninck), 183 F.3d 347 (5th Cir. 1999) ............................................................... 27

Sosne v. Reinert & Duree, P.C. (In re Just Brakes Corporate Sys., Inc.), 108 F.3d 881 (8th Cir. 1997) ............................................................... 26

Sprint Spectrum L.P. v. Mills, 283 F.3d 404 (2d Cir. 2002) ................................................................ 14

Thornton v. First State Bank of Joplin, 4 F.3d 650 (8th Cir. 1993) ................................................................... 33

In re Unishops, Inc., 494 F.2d 689 (2d Cir. 1974) .................................................................. 5

United States v. Albertson, 645 F.3d 191 (3d Cir. 2011) ................................................................ 12

United States v. Estate of Romani, 523 U.S. 517 (1998) ....................................................................... 10, 11

Watt v. Alaska, 451 U.S. 259 (1981) ............................................................................. 12

Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7 (2008) ................................................................................. 15

Yonkers Racing Corp. v. City of Yonkers, 858 F.2d 855 (2d Cir. 1988) ................................................................ 14



-vi-

STATUTES

11 U.S.C. § 101(5)(A) ............................................................................... 25

11 U.S.C. § 101(10)(A) ............................................................................. 25

11 U.S.C. § 105 ................................................................................ passim

11 U.S.C. § 105(a) .................................................................................... 13

11 U.S.C. § 362(a)(1).......................................................................... 19, 22

11 U.S.C. § 362(a)(3).................................................................... 27, 28, 29

11 U.S.C. § 362(a)(6)................................................................................ 26

15 U.S.C. § 78fff-2(c)(3) ........................................................................... 10

15 U.S.C. § 78lll(2) .................................................................................. 25

15 U.S.C. § 78lll(4) .................................................................................. 10

28 U.S.C. § 1334(b) .................................................................................... 4

28 U.S.C. § 1651 ...................................................................................... 13

RULES

Fed. R. Bankr. P. 7065 ............................................................................ 13

Fed. R. Civ. P. 65 ......................................................................... 13, 14, 15


1

INTRODUCTION AND SUMMARY OF ARGUMENT

In over 100 pages of briefing, Appellees never contest that their

settlement (1) dissipates assets that the Trustee seeks to recover as

fraudulent transfers, (2) precludes the Trustee from collecting in full on

his claims, and (3) necessarily injures the BLMIS estate by depriving it

of those assets for distribution to Madoff’s victims, a group that includes

(through the Fairfield Funds’ customer claims) the Anwar Plaintiffs.

Instead, Appellees argue that there is no legal basis for a Section 105

injunction because those assets have not yet been adjudged property of

the estate—in other words, that they win because they were first.1

Sensibly, Congress and the courts have rejected that view.

Section 105 exists precisely to enjoin actions, such as Appellees’

settlement, that deplete the assets available to a bankruptcy estate and

thereby impair the bankruptcy court’s jurisdiction—literally, its power

to decide claims regarding those assets and effectuate its judgments.

Appellees identify not one case in support of the district court’s holding

that an injunction is unavailable unless and until the Trustee actually

1 Capitalized terms bear the meanings given in the Glossary of the Trustee’s Brief (“Tr. Br.”). In addition, this brief cites to the Plaintiffs-Appellees’ Brief (“P. Br.”) and Defendants-Appellees’ Brief (“D. Br.”).


2

prevails in recovering assets, a view that would deprive Section 105 of

all equitable force. And Appellees do not even attempt to show that the

Fairfield Defendants could comply with SIPA’s mandate to return

fraudulently transferred customer property to the estate after carrying

out the settlement, instead urging the Court to ignore SIPA altogether.

An injunction or stay of the settlement is required to carry out

Congress’s will and prevent immediate economic injury to the estate.

The settlement’s resolution of the Anwar Plaintiffs’ claims is also

barred by the automatic stay. Rather than identify some relevant

distinction from this Court’s controlling decision in Colonial Realty,

Appellees ask the Court to confine that case to its

“unique . . . circumstances” or to read into it (and the stay provision) an

arbitrary and unsupportable exception for claims by parties who are not

“customers” under SIPA. And rather than attempt to distinguish this

Court’s controlling decision in 48th St. Steakhouse that third-party

claims “intertwined” with those of the estate are equally property of the

estate, Appellees ignore it. Lacking any basis in law or logic, these

arguments should be rejected, and the automatic stay applied according

to its terms.


3

ARGUMENT

I. A Section 105 Injunction Is Required To Prevent “An Immediate Adverse Economic Consequence” for the BLMIS Estate

The touchstone of the Section 105 inquiry is whether an action

sought to be enjoined “will have an immediate adverse economic

consequence for the debtor’s estate.” Queenie, Ltd. v. Nygard Int’l, 321

F.3d 282, 287 (2d Cir. 2003). Here, there is no dispute that, if the

settlement proceeds, the Trustee would be unable to recover all assets

fraudulently conveyed to the Fairfield Funds and subsequently to the

Fairfield Defendants. An injunction is required to ensure that the

BLMIS estate is protected from that adverse economic consequence.

A. The Settlement Dissipates Assets Transferred from BLMIS and Necessary To Satisfy the Trustee’s Recovery Action

The Trustee seeks to recover hundreds of millions of dollars in

fraudulent transfers from the Fairfield Defendants, and by their own

admission, the Fairfield Defendants cannot satisfy both the settlement

and the amounts sought in the Trustee’s Recovery Action. A-864–A-

865. A Section 105 injunction is therefore required to prevent injury to

the estate. Appellees’ convoluted attempts to show otherwise are

meritless.


4

Appellees argue that Section 105 is legally unavailable because

the Trustee’s Recovery Action is still being litigated and the Fairfield

Defendants’ assets have not yet been adjudged property of the BLMIS

estate. See P. Br. 32–33 & n.13, 38; D. Br. 29–30 & n.7, 32–33. See also

SPA-22. Appellees characterize this issue in several different ways:

that Section 105 does not create substantive rights, P. Br. 28; D. Br. 31,

that the Trustee does not have “super priority” to the Fairfield

Defendants’ assets, P. Br. 15, 32; D. Br. 33, and that the proceeds

funding the settlement are not customer property, P. Br. 14; D. Br. 33.

Each of these arguments is just a different way of saying that the first

in time to settle or obtain judgment necessarily prevails. That notion is

false.

To begin with, Section 105 provides legal authority to enjoin the

settlement here. In Celotex Corp. v. Edwards, 514 U.S. 300 (1995), the

Supreme Court held that a court’s authority to issue injunctions under

Section 105 extends to suits that are “‘related to cases under title 11.’”

Id. at 307 (quoting 28 U.S.C. § 1334(b)). As Celotex explains, the term

“related to” “suggests a grant of some breadth” and “was a distinct

departure from the jurisdiction conferred under previous Acts.” Id. at


5

307–08.2 The Court also recognized that “related to” jurisdiction may be

very expansive in light of Congress’s purposes, such as to facilitate

Chapter 11 reorganizations. Id. at 310–11. SIPA liquidations likewise

invoke a broad “related to” jurisdiction to vindicate Congress’s intent of

facilitating SIPA’s remedial purposes, notwithstanding whoever

happens to hold customer property when a brokerage fails. See

Publicker Indus. Inc. v. United States (In re Cuyahoga Equip. Corp.),

980 F.2d 110, 114 (2d Cir. 1992).

Appellees ask the Court to break with numerous appellate

decisions that have applied Section 105 to enjoin third-party actions. In

Lautenberg, this Court affirmed a decision enjoining third-party claims

against BLMIS insiders under Section 105, despite that the Trustee’s

avoidance action against them was still pending, where the claims

threatened to divert assets from the estate. Lautenberg Found. v.

Picard (In re Bernard L. Madoff Inv. Secs., LLC), No. 11-5421, 2013 WL

616269, at *2 (2d Cir. Feb. 20, 2013) (summary order). See also Pfizer,

Inc. v. Law Offices of Peter G. Angelos (In re Quigley Co., Inc.), 676 F.3d 2 The Anwar Plaintiffs’ reliance on In re Unishops, Inc., 494 F.2d 689, 690 (2d Cir. 1974), misstates the import of that case by failing to inform this Court of the subsequent change in law.


6

45, 53 (2d Cir. 2012) (stating that third-party actions may be enjoined).

Similarly, the Sixth Circuit held in In re DeLorean Motor Co., 755 F.2d

1223, 1230–31 (6th Cir. 1985), that Section 105 was available to enjoin

the dissipation of the proceeds of certain assets that were alleged to

have been fraudulently transferred from the estate, despite that the

fraudulent transfer claims had not been fully litigated. And in Fisher v.

Apostolou, 155 F.3d 876, 881–82 (7th Cir. 1998), the Seventh Circuit

recognized that preserving jurisdiction over the bankruptcy estate

required enjoining certain claims that were “closely related” but not

“identical” to those that the Trustee was pursuing on behalf of the

estate, even where the Trustee’s claims had not been fully litigated. See

also Apps v. Morrison (In re Superior Homes & Invs., LLC), No. 12-

15451, 2013 WL 2477057, at *2 (11th Cir. June 10, 2013) (affirming

Section 105 injunction of third-party claims that sought assets also

subject to a recovery action by the estate).

Section 105 relief is available here because the BLMIS liquidation

and the Trustee’s Recovery Action are “related to” the Anwar Action.

Indeed, the Anwar Plaintiffs identify the Recovery Action as “Related

Litigation” in their brief. P. Br. 9. The district court’s holding that a


7

Section 105 injunction was legally unavailable finds no real defense,

much less support, in Appellees’ briefing, because it is unsupportable.

Furthermore, on undisputed facts, the Trustee satisfies the

standard for a Section 105 injunction. No party contends that, were the

settlement consummated, the Fairfield Defendants would be able to

satisfy in full the amounts sought by the Trustee’s Recovery Action

claims. Nor does any party dispute that the settlement actually

dissipates assets transferred from BLMIS. Indeed, the Fairfield

Defendants expressly concede as much, D. Br. 8, and the Anwar

Plaintiffs argue only that some portion of the settlement proceeds came

from other sources, P. Br. 14. Accordingly, the settlement causes an

“immediate adverse economic consequence for the debtor’s estate” and

therefore merits injunction under the holdings of Lautenberg and

Queenie. 2013 WL 616269, at *2 (quoting Queenie, 321 F.3d at 287).

Finally, that the Anwar Plaintiffs may receive less from the

Trustee’s net equity payments to the Fairfield Funds than they would

receive through a settlement that excludes all other BLMIS customers

does not undermine the case for an injunction. P. Br. 13. To the


8

contrary, it demonstrates that an injunction is required to prevent

circumvention of SIPA’s priority scheme.

B. An Injunction Is Necessary To Carry Out SIPA’s Requirements and Objectives

That there is a conflict between the Trustee’s Recovery Action

under SIPA and the settlement is, as a factual matter, not genuinely

disputed. Appellees do not even attempt to show that the Fairfield

Defendants could in fact comply with SIPA’s mandate to return

fraudulently transferred customer property to the estate for pro rata

distribution to customers, should the Trustee prevail on his claims,

after carrying out the settlement. Instead, they argue that, even where

a SIPA trustee and a third party both seek the same assets fraudulently

transferred from a failed brokerage, the party that is the first to collect

is the one that wins. P. Br. 43, D. Br. 38–41. Nothing could be further

from Congress’s intentions in enacting SIPA. See Tr. Br. § II.A

(discussing SIPA’s history and purpose).

SIPA preempts conflicting state law claims that, as here, seek to

recover fraudulently transferred customer property also sought by a

SIPA trustee. See Tr. Br. § II.B. The Anwar Plaintiffs’ argument to the

contrary does no more than string together a few cases without ever


9

explaining how allowing their state law claims to proceed at this time is

at all consistent with SIPA’s requirements and purposes. Their

discussion of Mackey v. Lanier Collection Agency & Service, Inc., 486

U.S. 825, 833–34 (1988), is particularly inapt because the Court there

found that Congress’s specific authorization of suits against ERISA

plans necessarily contemplated that judgments in such suits could be

enforced in the traditional manner, i.e., according to state law. SIPA,

by contrast, makes no allowance for third parties’ state law claims. The

Anwar Plaintiffs do not identify the relevance of the other cases from

which they quote general propositions. See P. Br. 44–45. None is

apparent.

The statutory text disposes of the Fairfield Defendants’ sole

argument in opposition to preemption, that customer property “does not

include assets held by third parties.” D. Br. 38–39. To the contrary,

SIPA defines “customer property” to include “proceeds of any such

property [that had been received from or held for customers] transferred

by the debtor, including property unlawfully converted” and, in

particular, property “which, upon compliance with applicable laws,

rules, and regulations, would have been set aside or held for the benefit


10

of customers.” § 78lll(4) (SPA-80–SPA-81) (emphasis added). The

provision cited by the Fairfield Defendants has nothing to do with the

definition of customer property, but addresses the disposition of

recovered customer property, requiring that it be distributed pursuant

to SIPA’s priority scheme. § 78fff-2(c)(3) (SPA-71). The settlement

seeks to circumvent that, too.

SIPA also displaces the settlement’s resolution of the Anwar

Plaintiffs’ Exchange Act claims. Those claims are in conflict with SIPA

because they seek to recover customer property that was fraudulently

transferred from BLMIS and that the Trustee also seeks to recover.3

See Tr. Br. § II.C. Once again, Appellees assert that there is no

potential conflict, without ever explaining how the Fairfield Defendants

could possibly return that property to the BLMIS estate, as SIPA

requires if the Trustee prevails on his claims, after the settlement has

dissipated it. P. Br. 45–46; D. Br. 40.

3 Contrary to the Fairfield Defendants’ assertion, the Trustee does not claim SIPA “repeals” any portion of the Exchange Act. See D. Br. 39–40. When two federal statutes are in conflict, the appropriate inquiry is which Congress intended to govern in those circumstances. United States v. Estate of Romani, 523 U.S. 517, 531–32 (1998) (discussing cases and applying doctrine).


11

Instead, the Fairfield Defendants argue that SIPA and the

Exchange Act are “overlapping” remedies that may proceed in tandem,

D. Br. 40–41, while ignoring the principal limitation on that doctrine: it

applies only “as long as people can comply with both . . . .” Randolph v.

IMBS, Inc., 368 F.3d 726, 731 (7th Cir. 2004). Thus Randolph, upon

which the Fairfield Defendants principally rely, specifically found that

there was no conflict between two assertedly conflicting provisions and

only then, and for that reason, that there was no displacement. Id. at

732–33. Here, by contrast, different parties claim entitlement to the

same assets based on different provisions of federal law. There could be

no plainer conflict than mutually exclusive claims to the same res.

The Fairfield Defendants’ attempt to distinguish Romani fails for

the same reason, given that no party disputes that the settlement

dissipates customer property sought by the Trustee and that the

Fairfield Defendants are unable to satisfy both the settlement and the

amounts sought by the Trustee. See D. Br. 42. As in Romani, any

decision will necessarily determine which of two competing statutes

comes out on top.


12

Finally, the Trustee agrees with the Fairfield Defendants that, to

the extent possible, it is the courts’ duty to give effect to each of two

arguably conflicting statutes. D. Br. 40. The Fairfield Defendants

would do this, however, by simply ignoring SIPA and allowing

application of the Exchange Act to defeat the Trustee’s ability to recover

fraudulently transferred customer property. Id. That is not

harmonization because it improperly discards SIPA’s “sense and

purpose.” Watt v. Alaska, 451 U.S. 259, 267 (1981). By contrast, an

injunction or stay that delays resolution of the Plaintiffs’ Exchange Act

claims until the Trustee’s Recovery Action is complete would avoid any

possible conflict, while giving each statute its maximum effect.4

4 Anwar Plaintiffs’ contention that the Trustee waived his preemption and displacement arguments, P. Br. 41–42, is without merit. The Trustee’s complaint alleged that the settlement was inconsistent with SIPA. A-384, ¶56; A-396, ¶105(a); A-398, ¶109. The Trustee’s opening brief argued the same. Memorandum of Law in Support of Trustee’s Application, § II, 30, Picard v. Fairfield Greenwich Ltd., No. 12-2047 (Bankr. S.D.N.Y. Nov. 29, 2012), ECF No. 3. Regardless, the Anwar Plaintiffs’ surreply specifically addressed preemption and displacement, and the district court ruled on those issues, SPA-26–SPA-29. See United States v. Albertson, 645 F.3d 191, 196 (3d Cir. 2011); Cedars-Sinai Med. Ctr. v. Shalala, 177 F.3d 1126, 1129 (9th Cir. 1999).


13

C. The Rule 65 Injunction Standard Is Inapplicable

When Congress enacted Section 105, it made the considered

decision to authorize “any order . . . that is necessary or appropriate to

carry out the provisions of this title.” 11 U.S.C. § 105(a) (SPA-60)

(emphasis added). This is a different basis for injunctive relief than

that of Civil Rule 65 and Bankruptcy Rule 7065. Appellees’ contention

that the Trustee must satisfy the Rule 65 standard to justify a

preliminary injunction under Section 105 is meritless and conflicts with

Circuit precedent.

In Casse v. Key Bank Nat’l Ass’n (In re Casse), 198 F.3d 327, 336

(2d Cir. 1999), this Court recognized that “the legislative history of

§ 105 reflects congressional intent that the section be similar in effect to

the All Writs Statute, 28 U.S.C. § 1651,” and indicated that it “was

included in the Bankruptcy Code to cover any powers traditionally

exercised by a bankruptcy court that are not encompassed by the All

Writs Statute.” (Quotation marks omitted.) In In re Baldwin–United

Corp., 770 F.2d 328, 339 (2d Cir. 1985), this Court likewise recognized

that “Rule 65 does not apply to injunctions issued under the All-Writs

Act against non-parties whose actions would impair the court’s


14

jurisdiction.” Accordingly, the Rule 65 standard is inapplicable to

requests for injunctive relief under Section 105 to preserve the court’s

jurisdiction. Cf. Computer Assocs. Int’l, Inc. v. Altai, Inc., 982 F.2d 693,

702 (2d Cir. 1992) (applying identical syllogistic reasoning). Tellingly,

Lautenberg does not apply the Rule 65 standard. See 2013 WL 616269,

at *1–2.

Moreover, Rule 65’s general standard does not consider the

fundamental principle reflected in Section 105 and the All Writs Act: a

court is not powerless to protect the legitimate exercise of its

jurisdiction. When the administration of justice is threatened, the court

should act to assert jurisdiction over “‘persons who, though not parties

to the original action or engaged in wrongdoing, are in a position to

frustrate the implementation of a court order or the proper

administration of justice.’” Sprint Spectrum L.P. v. Mills, 283 F.3d 404,

413 (2d Cir. 2002) (quoting Association for Retarded Citizens of

Connecticut, Inc. v. Thorne, 30 F.3d 367, 370 (2d Cir. 1994)); Yonkers

Racing Corp. v. City of Yonkers, 858 F.2d 855, 864 (2d Cir. 1988)). That

is the proper standard, and cases like Queenie, Apostolou, and


15

Lautenberg simply illustrate the factors relevant to its application in

the context of a bankruptcy proceeding.

Finally, Winter v. Natural Resources Defense Council, Inc., 555

U.S. 7 (2008), is not to the contrary. P. Br. 28; D. Br. 29. Addressing

the appropriate standard for Rule 65 injunctions, it is irrelevant to the

antecedent question of whether the Rule 65 standard applies at all.

D. Regardless, the Trustee Satisfies the Rule 65 Standard

The Trustee would be entitled to an injunction even if this Court

were to determine that the Rule 65 standard for an injunction applies.

See Random House, Inc. v. Rosetta Books LLC, 283 F.3d 490, 491 (2d

Cir. 2002) (stating standard). Absent an injunction, the Trustee will be

irreparably harmed because the settlement impedes his recovery of

assets fraudulently conveyed from BLMIS. Moreover, the Trustee is

likely to succeed on the merits of his actions, based on facts here

undisputed. Finally, an injunction would serve the public interest

identified in SIPA: facilitating the orderly liquidation of a failed

brokerage for the principal benefit of its customers.

1. The Trustee Will Suffer Irreparable Harm

The Trustee will suffer irreparable harm absent an injunction for

three reasons. First, the Trustee will be unable to recover all assets


16

fraudulently conveyed from BLMIS if the settlement is satisfied. As

described above, no party disputes that the Fairfield Defendants’ assets

are insufficient to satisfy both the settlement and the amounts sought

by the Trustee. See supra § I.A. Even if partial recovery were possible,

that would still constitute irreparable harm. See Brenntag Int’l Chems.,

Inc. v. Bank of India, 175 F.3d 245, 249–50 (2d Cir. 1999) (monetary

injury is irreparable where, due to insolvency, “parties cannot be

returned to the positions they previously occupied”).

Second, the Trustee will suffer irreparable harm because the

settlement interferes with the bankruptcy court’s jurisdiction over

administration of the BLMIS estate. See Picard v. Stahl (In re Bernard

L. Madoff), 443 B.R. 295, 318–20 (Bankr. S.D.N.Y. 2011); Adelphia

Commc’ns Corp. v. Am. Channel, LLC (In re Adelphia Commc’ns Corp.),

No. 06-1528, 2006 WL 1529357, at *5 (Bankr. S.D.N.Y. June 5, 2006)

(“infringement on [the bankruptcy court’s] jurisdiction constitutes

irreparable harm”).

Third, the Trustee will suffer irreparable harm because the

settlement precludes equitable distribution of property pursuant to

SIPA. Even the Anwar Plaintiffs concede that it would allow some


17

double recovery by them, as the ultimate beneficiaries of the Fairfield

Funds’ allowed customer claims. P. Br. 13. That, too, constitutes

irreparable harm. See Stahl, 443 B.R. at 318 n.24.

2. The Trustee Is Likely to Succeed on the Merits

The Trustee is likely to succeed in the Injunction Action. As

discussed above, the substantive question in this action is whether the

settlement “will have an immediate adverse economic consequence for

the debtor’s estate.” Queenie, 321 F.3d at 287. Because the settlement

depletes funds necessary for the Fairfield Defendants to satisfy the

amounts sought by the Trustee, the injury to the estate is plain and the

Trustee is likely to succeed on the merits. See supra § I.A. Moreover,

the Trustee is likely to succeed on the merits of his motion for

application of the automatic stay. See infra § II; Tr. Br. § III.

And as to the Recovery Action, no party disputes the pre-

bankruptcy transfers that are the basis of the Trustee’s claims against

the Fairfield Defendants. The Anwar Plaintiffs concede that the

Fairfield Defendants had knowledge of Madoff’s fraud, e.g., A-1060–A-

1064, ¶¶217–24, and the Fairfield Defendants elected not to challenge


18

that point here. D. Br. 12 n.4. The merits of the Trustee’s Recovery

Action are uncontested here.

3. The Equities and Public Interest Favor an Injunction

The balance of the equities and the public interest favor an

injunction. The only parties that will benefit from the settlement are

Appellees. But the thousands of persons and entities with allowed

claims in the BLMIS litigation will be prevented from recovering their

net equity share of customer property that is lost as a result of the

settlement, as well as the thousands more who are indirect beneficiaries

of customer claims. And while these customers will not receive any

double recovery, the Anwar Plaintiffs undisputedly will. See P. Br. 13.

Finally, Congress has already determined that the public interest

favors the Trustee’s recovery of fraudulently transferred assets for pro

rata distribution to BLMIS customers, particularly as opposed to a

morass of competing litigation. See Tr. Br. § II.A.


19

II. The Settlement’s Dissipation of Assets Fraudulently Transferred from BLMIS Plainly Violates the Automatic Stay

A. Colonial Realty Requires Application of the Automatic Stay to Any Attempt “To Recover Assets Alleged To Have Been Fraudulently Conveyed by a Bankruptcy Debtor”

Seeking to avoid confrontation of this Court’s decision in Colonial

Realty, Appellees make much of the fact that the first prong of Section

362(a)(1) speaks of an “action or proceeding against the debtor.” P. Br.

19; D. Br. 24. But they ignore that its second prong stays the

prosecution of any attempt to “recover a claim against the debtor,”

language which Colonial Realty specifically held bars a “third-party

action to recover fraudulently transferred property.” FDIC v. Hirsch (In

re Colonial Realty), 980 F.2d 125, 131 (2d Cir. 1992). Colonial Realty

controls in this case because the Anwar Action is, in fact, a third-party

action to recover assets fraudulently transferred from BLMIS to the

Fairfield Funds and subsequently transferred to the Fairfield

Defendants.

The settlement dissipates assets sought by the Trustee in the

Recovery Action. Indeed, the Fairfield Defendants concede that point,

acknowledging that the fees they took includes “monies redeemed from


20

[the] Fairfield Funds’ customer accounts at BLMIS.” D. Br. 8. The

Anwar Plaintiffs do not argue otherwise. See P. Br. 25. Nor could they,

given their repeated statements that the Fairfield Defendants were

“compensated with placement, management, and performance fees

derived from the Funds’ investments with Madoff,” A-1016–A-1026,

¶¶124–31, 135–39, 143–45, “received compensation out of the profits

derived by FGG from the Madoff relationship,” A-1020, ¶132, and were

“paid placement, management, and performance fees derived from the

Funds’ investments with Madoff,” A-1021–A-1026, ¶¶133–34, 140–42,

146. That some portion of the settlement proceeds may have come from

another source—the only factual point that Appellees advance, P. Br.

25; D. Br. 8—is irrelevant and could not somehow defeat application of

the automatic stay to assets that everyone agrees were transferred from

BLMIS.

The Anwar Plaintiffs’ bare assertion that their claims do not

depend on the fraudulent conveyance of assets from BLMIS, P. Br. 21–


21

22, is also belied by their own complaint.5 Central to their claims to

recoup the fees paid to the Fairfield Defendants (including assets

transferred from BLMIS) is that the Fairfield Defendants failed to

disclose their knowledge of Madoff’s fraud and that the proceeds of

investments in BLMIS were “fictitious.” E.g., A-1134, ¶¶356–57; A-

1138–A-1139, ¶¶369–71; A-1142, ¶382; A-1146, ¶390(vi); A-1153–A-

1154, ¶¶416, 420. On that basis, they sought, among other forms of

relief, to collect the Fairfield Defendants’ “improper and unearned fees”

and “to have a constructive trust imposed on the amount of all monies

and other property in the possession of the Fairfield

Defendants . . . which relate to fees paid to them on account of fictitious

profits and assets of the Funds.” A-1135, ¶359; A-1154, ¶420. Had the

transfers from BLMIS not been fraudulent—that is, had BLMIS

operated a legitimate investment fund and transferred assets in

connection with that business—these claims would necessarily fail. The

Anwar Plaintiffs seek to collect these transfers from BLMIS because

they were fraudulent. 5 Quite sensibly, the Fairfield Defendants decline to address the Trustee’s evidence regarding their own knowledge of Madoff’s fraud. D. Br. 12 n.4.


22

Their claims are therefore subject to the automatic stay of Section

362(a)(1), as applied in Colonial Realty. That result is necessary to

achieve the stay’s purpose of “‘insur[ing] that the debtor’s affairs will be

centralized, initially, in a single forum in order to prevent conflicting

judgments from different courts and in order to harmonize all of the

creditors’ interests with one another.’” 980 F.2d at 133 (quoting Fidelity

Mortgage Invs. v. Camelia Builders, Inc. (In re Fidelity Mortgage Invs.),

550 F.2d 47, 55 (2d Cir. 1976)). Were the law otherwise, a bankruptcy

trustee’s ability to muster assets on behalf of creditors would be

seriously hampered in any case involving fraudulent dealings, like a

Ponzi scheme. See Official Comm. of Unsecured Creditors v. PSS S.S.

Co., Inc. (In re Prudential Lines Inc.), 928 F.2d 565, 573 (2d Cir. 1991)

(“One of the principal purposes of the automatic stay is to preserve the

property of the debtor’s estate for the benefit of all the creditors.”).

Ignoring that practical point, Appellees attempt to distinguish

Colonial Realty on various incorrect and incoherent grounds. The most

trivial is the Fairfield Defendants’ contention that Colonial Realty

“involved a ‘unique set of circumstances,’” D. Br. 25 (quoting SPA-12), a

non-argument that fairly reflects the difficulty of identifying any


23

relevant distinction. Equally frivolous is the Anwar Plaintiffs’

contention that this Court found the FDIC’s suit in Colonial Realty to

be “effectively an action ‘against the debtor,’” P. Br. 21; instead, this

Court was quite clear that the FDIC action to recover fraudulently

transferred assets was “properly regarded as undertaken ‘to recover a

claim against the debtor,’” 980 F.2d at 131, just as here.

Appellees’ argument that Colonial Realty is not applicable because

the Anwar Plaintiffs have no “underlying claim” against BLMIS also

fails, as a matter of law and fact. See P. Br. 21; D. Br. 26. As to the

law, Colonial Realty holds that application of the automatic stay turns

on whether a third party’s action seeks “to recover fraudulently

transferred property” and so must be regarded as “an action ‘to recover

a claim against the debtor.’” 980 F.2d at 131–32 (quotation omitted).

Whether or not the third party is also a creditor of the estate is a

distinction absent from the statutory text and, in any case, beside the

point: in either instance, the claim is one against the debtor and the

injury to the estate is the same.

As to the facts, the Anwar Plaintiffs attempt to obfuscate their

position vis-à-vis the BLMIS estate. To begin with, they acknowledge


24

that they are beneficiaries of any pro rata distributions of customer

property that the Funds ultimately receive from the BLMIS estate, but

deny that fact has any particular relevance. P. Br. 27. Yet the cases

they cite stand only for the proposition that such indirect beneficiaries

lack standing to participate directly in bankruptcy proceedings, not the

remarkable proposition that they are free to violate the automatic stay.

See id.

Those cases are also inapt because they concern parties, such as

shareholders, whose claims on the estate are solely derivative. In re

Refco Inc., 505 F.3d 109 (2d Cir. 2007), for example, held that a group of

investors in an entity called “Sphinx” could not participate directly in a

bankruptcy to challenge what they claimed to be an “incestuous” and

unfair settlement between Sphinx and the debtor. Id. at 113. Because

“[o]nly Sphinx, not individual Investors, or even Investors as a group,

could assert a claim against the [debtor],” the investors “cannot claim

that they seek to enforce any rights distinct from those of Sphinx.” Id.

at 117. Accordingly, they lacked standing to challenge the settlement.

By contrast, the Anwar Plaintiffs have direct and distinct claims

on the BLMIS estate. True, they are not “customers,” which SIPA


25

defines as a subset of a failed brokerage’s creditors entitled to special

priority in the distribution of customer property. 15 U.S.C. § 78lll(2)

(SPA-79–SPA-80). But that has no bearing on whether they are

creditors, a broader term defined in the Bankruptcy Code that includes

any person who “has a claim against the debtor” that arose prior to

filing. 11 U.S.C. § 101(10)(A). A “claim,” in turn, is any “right to

payment, whether or not such right is reduced to judgment, liquidated,

unliquidated, fixed, contingent, matured, unmatured, disputed,

undisputed, legal, equitable, secured, or unsecured.” § 101(5)(A).

Having been injured by Madoff’s fraud, and being third-party

beneficiaries of the Fairfield Funds’ relationship with BLMIS, the

Anwar Plaintiffs have claims against BLMIS much like those they

brought and continue to litigate against other third parties, like

PricewaterhouseCoopers and Citco, that they say breached duties to


26

them.6 A-1081–A-1123, ¶¶259–343. They may also have claims under

RICO and other statutes.7

The only difference between these claims and those they have

asserted against other third parties is that BLMIS is insolvent, and so

unsecured claims on it are unlikely to be satisfied. Again, that is no

license to violate the automatic stay—quite the opposite, given that the

stay’s protections are relevant only when a debtor is insolvent and its

creditors are competing for limited assets.8

Finally, Appellees’ contention that the Anwar Plaintiffs’ claims

are “independent” and unavailable to the Trustee, P. Br. 21–22; D. Br.

26, ignores black-letter law that, in determining whether a third-party

6 That is not to say that these are necessarily successful claims. Knowledge of, or willful blindness to, Madoff’s fraud, for example, would defeat such claims. 7 The Fairfield Defendants acknowledge that such claims render the Anwar Plaintiffs “creditors of the ‘general estate’ of BLMIS.” D. Br. 37. 8 By seeking recovery of the same assets sought by the Trustee, the settlement and underlying claims also seek to collect on the Trustee’s claims, prejudicing the Trustee’s ability to pursue his claims on behalf of all BLMIS creditors. The settlement’s attempt to recover from the proceeds of fraudulent transfers received by the Fairfield Defendants is therefore additionally barred by 11 U.S.C. § 362(a)(6). See Sosne v. Reinert & Duree, P.C. (In re Just Brakes Corporate Sys., Inc.), 108 F.3d 881, 884 (8th Cir. 1997).


27

claim is subject to the automatic stay, a court must look to the

substance of a claim, not the plaintiff’s chosen form. In re

Commonwealth Oil Ref. Co., Inc., 805 F.2d 1175, 1187 (5th Cir. 1986);

Schimmelpenninck v. Byrne (In re Schimmelpenninck), 183 F.3d 347,

357 (5th Cir. 1999); Goldin v. Primavera Familienstiftung (In re Granite

Partners), 194 B.R. 318, 325 (Bankr. S.D.N.Y. 1996) (citing cases); In re

Jefferson Cnty., Ala., ___ B.R. ___, 2013 WL 1613240, at *6 (Bankr. N.D.

Ala. Apr. 15, 2013) (“In effectuating the purpose behind the stay, courts

have declined to elevate form over substance.”). Colonial Realty does no

more than apply this general rule to third-party actions that, in

substance, seek to recover assets fraudulently transferred from the

debtor. 980 F.2d at 131–32. See also id. at 127–28 (claim, as pleaded,

was exclusively available to FDIC).

B. In Substance, the Anwar Plaintiffs’ Claims Are Property of the Estate

Appellees similarly elevate form over substance in attempting to

show that the Anwar Plaintiffs’ claims seeking fraudulently transferred

assets are not property of the BLMIS estate. That is, in fact, the

entirety of Appellees’ argument against the application of Section

362(a)(3). P. Br. 22 n.9; D. Br. 28. But their insistence that claims may


28

be property of the estate only if the Trustee can bring them in the form

selected by the Anwar Plaintiffs is mistaken. See Highland Capital

Mgmt. LP v. Chesapeake Energy Corp. (In re Seven Seas Petroleum,

Inc.), 522 F.3d 575, 584 (5th Cir. 2008) (court looks to substance of

claim in applying Section 362(a)(3)); Granite Partners, 194 B.R. at 325

(same).

Finally, Appellees do not even attempt to distinguish this Court’s

controlling decision in 48th St. Steakhouse.9 That case held that “where

a non-debtor’s interest in property is intertwined . . . with that of a

bankrupt debtor,” such that “action taken against the non-bankrupt

party would inevitably have an adverse impact on property of the

bankrupt estate, then such action should be barred by the automatic

stay.” 48th St. Steakhouse, Inc. v. Rockefeller Grp., Inc. (In re 48th St.

Steakhouse), 835 F.2d 427, 431 (2d Cir. 1987). In this instance, the

Anwar Plaintiffs seek to recover the same fraudulent transfers as the

Trustee, and collecting on their claims would necessarily preclude the

Trustee from collecting in full on the estate’s. In these circumstances,

9 The Anwar Plaintiffs do summarize the case, to no apparent end. P. Br. 22.


29

the Anwar Plaintiffs’ claims are inextricably intertwined with the

estate’s and therefore subject to the automatic stay under Section

362(a)(3).

III. The Trustee Had No Obligation To Rush to Court To Seek To Enjoin the Anwar Action

Appellees’ own factual concessions demonstrate that laches is

unavailable here as a matter of law. To begin with, Appellees concede

that the parties were engaged in long-running settlement negotiations,

of the sort that defeat laches. The Fairfield Defendants concede that

three-way settlement negotiations “commenced as early as 2009,” A-

953, ¶5, proceeded through April 2012, D. Br. 13, 46, and did not

“reach[] an impasse” until April 2012, D. Br. 46. The Anwar Plaintiffs

concur, acknowledging that global settlement talks “stretched on for

years.” P. Br. 51. Such negotiations excuse any arguable delay for their

duration. See Tr. Br. 66 (citing cases). That is so for reasons of

equity—one party in settlement negotiations ought not to be able to

wield them as a cudgel against the others—and the strong public

interest in facilitating settlements outside of litigation, a point which

Appellees readily acknowledge. See P. Br. 41; D. Br. 30.


30

Moreover, there is no real dispute that the Anwar Plaintiffs

misled the Trustee in October 2012 to believe that no exclusive

settlement between them and the Fairfield Defendants was imminent

when, in fact, they had already signed a preliminary agreement. See

Tr. Br. 17–18 (citing A-633, ¶17; A-1201–A-1202). The Fairfield

Defendants have never purported to have any knowledge of this

conversation, but do acknowledge that an agreement had been struck at

that time. D. Br. 49. The Anwar Plaintiffs attempt to rebut the

Trustee’s sworn declaration that his counsel had been told that “there

was no settlement,” A-633, ¶17, with a bare assertion in their brief that

their counsel elided the issue by saying that “there was no settlement

that the Trustee’s counsel could be told about” at that time. P. Br. 8–9

n.3. Even were this true, the intent to deceive by creating a false

impression is plain. But in any case, “[a]n attorney’s unsworn

statements in a brief are not evidence,” Kulhawik v. Holder, 571 F.3d

296, 298 (2d Cir. 2009), and no evidence contradicts the Trustee’s sworn

declaration. Under Circuit precedent, which Appellees decline to

address, the Anwar Plaintiffs’ unclean hands eliminate any possible


31

entitlement they may have had to equitable relief. See Hermès Int’l v.

Lederer de Paris Fifth Ave., Inc., 219 F.3d 104, 107 (2d Cir. 2000).

Underlying both the rule that negotiations excuse delay, and the

rule that a party contributing to delay cannot invoke laches, is the basic

principle that laches protects against surprise. See Becker v. IRS (In re

Becker), 407 F.3d 89, 97 (2d Cir. 2005). But Appellees here concede that

they were on notice of the Trustee’s interest in the Fairfield Defendants’

assets, as a result of the parties’ negotiations to reach a global

settlement that satisfied, inter alia, the Trustee’s interest. See P. Br.

51; D. Br. 12–13. Appellees do not dispute this point, only that the

Trustee actually threatened them with litigation. P. Br. 50; D. Br. 45–

46. But the law requires no such thing. See Tr. Br. 65 (citing cases

where notice of an interest defeated laches). Because Appellees could

not possibly have been surprised that the Trustee would sue to protect

the BLMIS estate’s interests against impairment by a settlement that

dissipates the very assets he seeks to recover, there is no basis for

application of laches.

The full weight of Circuit authority therefore recognizes that

notice and negotiation toll any possible risk of laches, see Tr. Br. at 64–


32

67, and Appellees’ failure to identify any contravening authority from

this Circuit or any other court is conspicuous. The single district court

decision cited by Appellees is consistent with Circuit precedent, but

entirely inapt. See P. Br. 51. Harley-Davidson, Inc. v. O’Connell, 13 F.

Supp. 2d 271 (N.D.N.Y. 1998), applied laches against a motorcycle

manufacturer that sued the promoters of Albany’s annual “Harley

Rendezvous” festival for trademark infringement some thirteen years

after learning of the event. Crucially, the negotiations proceeded for

only a few months and were followed by a decade of inactivity, id. at

280, quite unlike the negotiations here, which everyone agrees were

ongoing until a few months before Appellees announced their own

exclusive settlement.10

10 Appellees are incorrect that the Trustee does not contest their contention that counsel to the Trustee was informed that they might seek a bilateral settlement after three-way negotiations reached an impasse in April 2012 and encouraged them to do so. P. Br. 51; D. Br. 13. The Trustee’s counsel testified, in a sworn declaration, that “[a]t no time did the [Fairfield] Defendants or Anwar Representative Plaintiffs ever give any notice to the Trustee of an intention to pursue a settlement which would not include the Trustee.” A-633, ¶16. Regardless, even Appellees do not contend that the period between that alleged communication and the Trustee’s filing suit supports application of laches.


33

Moreover, the Anwar Plaintiffs’ undisputed knowledge of the

ongoing BLMIS liquidation and the automatic stay placed the onus on

them to move to modify the stay, preventing application of laches to the

Trustee’s suit to enforce it. With one possible exception, each case cited

by Appellees has involved actions by the debtor to “withhold[] notice of

the stay,” Easley v. Pettibone Michigan Corp., 990 F.2d 905, 911 (6th

Cir. 1993), such as belated attempts to enforce the stay long after the

bankruptcy case had been closed. E.g., Thornton v. First State Bank of

Joplin, 4 F.3d 650, 653 (8th Cir. 1993) (debtor filed complaint two years

after bankruptcy proceedings concluded); In re Lee, 465 B.R. 469, 470

(Bankr. W.D. Ky. 2012) (“[T]he Debtor should have raised any concerns

. . . while the bankruptcy case was still open.”); Adams v. Hartconn

Assocs. (In re Adams), 212 B.R. 703, 707 (Bankr. D. Mass. 1997) (debtor

reopened bankruptcy case fifteen months after it was closed to seek

rents collected on property abandoned by trustee).

The one possible exception—whether the case had been closed is

unclear—is Matthews v. Rosene, 739 F.2d 249, 251–52 (7th Cir. 1984),

which applied laches to a debtor’s attempt to void a three-year-old

judgment granting a creditor’s counterclaim in a state-court suit


34

initiated by the debtor during his bankruptcy. Whether or not

Matthews remains good law in the Seventh Circuit—the district courts

there have recognized uncertainty on that point, see, e.g., Jones v.

Confidential Investigative Consultants, Inc., No. 92-1566, 1994 WL

127261, at *2 (N.D. Ill. Apr. 12, 1994), perhaps because the case arose

under the superseded 1898 Bankruptcy Act—it is inconsistent with this

Circuit’s precedent holding that, “[s]ince the purpose of the stay is to

protect creditors as well as the debtor, the debtor may not waive the

automatic stay.” Ostano Commerzanstalt v. Telewide Sys., Inc., 790

F.2d 206, 207 (2d Cir. 1986). Indeed, the Federal Circuit has recognized

that this Court has taken a different tack than the Seventh Circuit on

this precise issue. Bronson v. United States, 46 F.3d 1573, 1577 &

nn.11, 14 (Fed. Cir. 1995). Because it was Appellees’ burden to act, the

Trustee cannot be charged with the consequences of their ongoing delay

in failing to seek relief from the automatic stay.

Nor do Appellees demonstrate that an injunction pending

completion of the Recovery Action would cause such great prejudice as

to merit dismissal of the Trustee’s entire case. That a “stay of the

Settlement could lead to its unraveling,” D. Br. 45, only underscores the


35

rashness of Appellees’ choice to surreptitiously strike a bilateral

agreement rather than seek to modify the automatic stay or continue

negotiating a global settlement with the Trustee. The Anwar Plaintiffs’

desire for the settlement’s “cash benefit” is understandable, P. Br. 49,

but if the Fairfield Defendants are unable to satisfy the settlement after

they return fraudulently transferred assets to the BLMIS estate, that is

due to the operation of SIPA, and is not prejudice due to the Trustee’s

purported delay in bringing suit—laches’ sole concern.

CONCLUSION

The district court’s judgment denying the Trustee’s application for

an injunction should be reversed and remanded with instructions to

enjoin the Anwar Plaintiffs and Fairfield Defendants from substantially

depleting the Fairfield Defendants’ assets pending the completion of the

Trustee’s Recovery Action. In the alternative, the Court should vacate

the district court’s denial of the Trustee’s motion to intervene and final

approval of the settlement and order its consideration stayed pending

the completion of the Trustee’s Recovery Action.


36

Dated: June 13, 2013 Respectfully submitted, /s/ David J. Sheehan DAVID J. SHEEHAN DEBORAH H. RENNER BAKER & HOSTETLER LLP 45 Rockefeller Plaza New York, N.Y. 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 [email protected] DAVID B. RIVKIN, JR. LEE A. CASEY MARK W. DELAQUIL ANDREW M. GROSSMAN BAKER & HOSTETLER LLP 1050 Connecticut Ave., N.W. Washington Square, Suite 1100 Washington, D.C. 20036 Telephone: (202) 861-1731 Facsimile: (202) 861-1783 [email protected] Attorneys for Trustee-Appellant


CERTIFICATE OF COMPLIANCE

This brief complies with the type-volume limitation of Fed. R. App.

P. 32(a)(7)(B)(ii) because it contains 6,979 words, excluding the parts of

the brief exempted by Rule 32(a)(7)(B)(iii).

This brief complies with the requirements of Fed. R. App. P.

32(a)(5) and (6) because it has been prepared in a 14-point

proportionally spaced font.

/s/ David J. Sheehan DAVID J. SHEEHAN


CERTIFICATE OF SERVICE

I hereby certify that on June 13, 2013, I electronically filed the

foregoing brief with the Clerk of the Court for the United States Court

of Appeals for the Second Circuit by using the appellate CM/ECF

system. I further certify that I will cause 6 paper copies of this brief to

be filed with the Court.

The participants in the case are registered CM/ECF users and

service will be accomplished by the appellate CM/ECF system.

/s/ David J. Sheehan DAVID J. SHEEHAN


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