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 Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, APRIL 26, 2012 Presenting a live 90-minute webinar with interactive Q&A 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.
Transcript
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
Presenting a live 90-minute webinar with interactive Q&A
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.
11-5207-bk UUnited 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
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
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
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
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
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
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
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
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
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
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
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
Xpedior Creditor Trust v. Credit Suisse First Boston (USA) Inc., 341 F. Supp. 2d 258 (S.D.N.Y. 2004) ............................................................ 64
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
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
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”).
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.
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”).
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.
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.
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.
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.).
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.
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).
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
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).
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).
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,
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”).
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.
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).
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).
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).
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
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).
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
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.
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)).
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.
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).
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.
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”).
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.
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
JOHN F. SAVARESEDOUGLAS K. MAYERSTEPHEN R. DIPRIMAEMIL A. KLEINHAUSLAUREN M. KOFKEJONATHON R. LA CHAPELLEWACHTELL, LIPTON, ROSEN & KATZ51 West 52nd StreetNew York, New York 10019212-403-1000
Attorneys for Defendants-Appellees
On Appeal from the United States District Courtfor the Southern District of New York
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 partiesas 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
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
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
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
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
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
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
Morrison v. National Australia Bank Ltd.,130 S. Ct. 2869 (2010)..................................................................................... 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
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
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
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
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
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.
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 inbarring 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.
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
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)
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 Scholesthat 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.
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
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).
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 Morrisonv. 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.
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
(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).
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.
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., HealthCare 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).
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”).
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.
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
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.
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 & KATZ51 West 52nd Street New York, New York 10019 (212) 403-1000 Attorneys for Defendants-Appellees
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 & KATZ51 West 52nd Street New York, New York 10019 (212) 403-1000
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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.
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.
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.
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)
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.
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.
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.
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.
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
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).
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
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.
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
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.”).
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.
(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.
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.
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.”
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
