BURTON R. LIFLAND, Bankruptcy Judge.
Before the Court is the motion (the "Motion")
For the reasons set forth below and at oral argument, the Motion is hereby GRANTED.
The facts underlying Madoff's notorious Ponzi scheme and this SIPA liquidation are now well known and are comprehensively outlined in prior decisions of this Court, including the March 1, 2010 net equity decision (the "Net Equity Decision"). See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122, 125-33 (Bankr.S.D.N.Y.2010).
In addition to the powers granted by SIPA, the Trustee has the general powers and duties of a bankruptcy trustee. See SIPA § 78fff-1(a), (b). He is charged with assessing claims, recovering and distributing customer property to BLMIS customers and liquidating the assets of BLMIS for the benefit of the estate and its creditors. On December 23, 2008, the
The statutory framework for the satisfaction of customer claims in a SIPA liquidation proceeding provides that customers share pro rata in customer property
On March 1, 2010, after briefing and oral argument, the Court issued its Net Equity Decision approving the Trustee's method of calculating a customer's Net Equity as the amount of cash deposited into the customer's BLMIS account, less any amounts withdrawn from the customer's BLMIS account. See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122, 135, 140 (Bankr. S.D.N.Y.2010). The Court entered an order implementing its Net Equity Decision on March 8, 2010 (the "Net Equity Order"). The Net Equity Decision and Order, in accordance with SIPA and controlling Second Circuit precedent, upheld the Trustee's determination to allow claims in the amount of customers' net investments, denying claims of those customers whose withdrawals exceeded their initial investments and subsequent deposits. The Court's Net Equity Decision and Order held that the fictitious profits listed on customers' last BLMIS account statements as of the Filing Date were not controlling for purposes of determining customers' Net Equity claims.
On March 16, 2010, the Court, on its own motion, joined by the requests of certain parties, certified its Net Equity Order for immediate appeal to the United States Court of Appeals for the Second Circuit pursuant to 28 U.S.C. section 158(d)(2). See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, Adv. Pro. No. 08-01789(BRL), Dkt. No.2022. Oral argument before the Second Circuit on the Net Equity issue has been scheduled for March 3, 2011.
The Trustee has filed two separate actions against the Madoff Defendants seeking
In both actions, the Trustee has alleged that the Madoff Defendants were intimately associated with the Ponzi scheme by virtue of their familial ties to Madoff himself and their positions of authority in BLMIS and its related entities. Ruth, Peter, Andrew, Mark, and Shana Madoff are Madoff's wife, brother, sons, and niece, respectively. In addition, Ruth Madoff was a controller at Madoff Securities International Ltd. ("MSIL"), a British affiliated entity of BLMIS, in which she held a financial interest. In that capacity she had responsibilities for account reconciliation within the fraudulent investment advisory ("IA") business. See Picard v. Ruth Madoff, Adv. Pro. No. 09-1391, Dkt. No. 1, ¶ 6. Peter Madoff was BLMIS's Senior Managing Director and Chief Compliance Officer, Mark and Andrew Madoff were Co-Directors of Trading, and Shana Madoff at times held herself out as Compliance Counsel, in-house Counsel and Compliance Director of BLMIS. Further, Mark Madoff "at times, managed both the Firm's proprietary trading desk and its market-making operations," and Andrew Madoff "supervised trading at the Company, managed the trading floor, and directed many audit and compliance projects for the Company, including the confirmation and reporting of trades." See Picard v. Madoff, et al., Adv. Pro. No. 09-1503, Dkt. No. 1, ¶¶ 7-8.
The Trustee filed his complaint against Ruth Madoff (the "Ruth Madoff Complaint") on July 29, 2009, seeking the return of over $44 million pursuant to SIPA sections 78fff(b), 78fff-1(a), and 78fff-2(c)(3), sections 105(a), 502(d), 541, 542, 544, 548(a), 550(a), and 551 of the Code, the New York Fraudulent Conveyance Act and New York common law. The common law claims sound in conversion and unjust enrichment, and the Trustee seeks the imposition of a constructive trust, an accounting, and compensatory and punitive damages.
On October 2, 2009, the Trustee filed his complaint against Peter, Andrew, Mark and Shana Madoff (the "Madoff Family Complaint," and together with the Ruth Madoff Complaint, the "Trustee's Madoff Complaints") alleging that as senior executives of BLMIS, they were derelict in their duties to protect BLMIS and its customers from acts of mismanagement, and they disregarded their regulatory and compliance duties for their own respective profit, to the detriment of BLMIS and its customers. Specifically, Peter and Shana Madoff failed to perform their duties to "monitor[] BLMIS's operation and ensur[e] its compliance with federal securities laws and regulations and corresponding FINRA
Subsequent to the commencement of this SIPA liquidation, the Third Party Plaintiffs filed their Third Party Actions against the Madoff Defendants, as well as other defendants,
There are four Third Party Actions that are currently active: (i) The Lautenberg Foundation v. Madoff, Case No. 09-CV-00816 (D.N.J.); (ii) Stahl v. Madoff, Index No. 601862/2009 (Sup. Ct. N.Y. Co.); (iii) Abend v. Madoff, Index No. 601861/2009 (Sup. Ct. N.Y. Co.); and (iv) Chavez v. Picard, Case No. 09-MC-0006 (N.D. Tex.).
On February 24, 2009, the Lautenberg Foundation, Joshua S. Lautenberg and Ellen Lautenberg (collectively, the "Lautenberg Plaintiffs") filed a complaint against Peter Madoff in the District Court for the District of New Jersey alleging, inter alia, violations of section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, breach of fiduciary duty, negligent misrepresentation, negligence, and aiding and abetting breach of fiduciary duty (the "Lautenberg Action"). See Affidavit of David J. Sheehan In Support of Trustee's Application for Enforcement of Automatic Stay and Preliminary Injunction ("Sheehan Aff.") (Dkt. Nos. 6-7), Ex. A [hereinafter, "Lautenberg Compl."], ¶¶ 35-62. The complaint seeks compensatory, consequential, and punitive damages, in addition to attorneys' fees and other expenses and interest. Id., pp. 22-23.
The Lautenberg Plaintiffs allege that they suffered these losses as a result of their investment of $8,992,000 with BLMIS "in reliance on the purported superior knowledge, training, skill, honesty, ethics,
On September 9, 2009, the New Jersey District Court dismissed without prejudice the Lautenberg Plaintiffs' claims for negligent misrepresentation and violations of Section 10(b) of the Exchange Act insofar as they were based on affirmative misrepresentations. See Sheehan Aff., Ex. B. The Lautenberg Plaintiffs' claims based on omissions of material facts, however, survived the motion to dismiss. See id., pp. 34-35.
On March 12, 2010, the Lautenberg Plaintiffs filed a motion for summary judgment (the "Summary Judgment Motion"). Id., Ex. C. On April 27, 2010, Peter Madoff filed an opposition to the Summary Judgment Motion and a cross motion to stay the litigation for nine months due to, inter alia, the pending United States Attorney's criminal investigation and difficulties in preparing a defense due to a lack of access to evidence (the "Cross Motion"). Id., Ex. D, pp. 50-58. On May 20, 2010, the Lautenberg Plaintiffs filed their reply to Peter Madoffs Opposition to their Summary Judgment Motion and opposed Peter Madoffs Cross-Motion. Id., Ex. E. The parties are currently scheduled to appear for a status conference before the New Jersey District Court on February 9, 2011. Letter to Judge Lifland dated January 20, 2011 providing an update of the various related actions, p. 2 (Dkt. No. 35) [hereinafter, "Status Letter"].
On June 16, 2009, Stahl and Abend, represented by the same law firm, filed separate actions in the Supreme Court of the State of New York against Mark and Andrew Madoff (the "Stahl Action" and the "Abend Action"), seeking the recovery of deferred compensation and back pay. Stahl and Abend set forth causes of action for fraud, fraudulent omission and failure to pay wages under New York law. Sheehan Aff., Ex. G [hereinafter, "Abend Compl."], ¶¶ 30-46; Id., Ex. H [hereinafter, "Stahl Compl."], ¶¶ 31-47. They essentially allege that Mark and Andrew Madoff knew or should have known about their father's Ponzi scheme, but never informed BLMIS's employees, or misrepresented the legitimacy of the IA business to BLMIS employees, including Stahl and Abend.
Emilio Chavez, Jr. ("Chavez") is currently an inmate at a Texas correctional facility. Although Chavez claims to have "opened several accounts," the Trustee maintains that he never held a BLMIS customer account. Sheehan Aff., Ex. U [hereinafter, "Chavez Compl."], p. 6. On or about March 5, 2009, Chavez commenced an action in the United States District Court for the Northern District of Texas on behalf of fourteen entities, all with an address at 2302 36th Street, Lubbock, Texas.
Six of the third-party actions the Trustee seeks to enjoin are currently temporarily stayed: (i) Retirement Program for Employees of the Town of Fairfield v. Bernard L. Madoff, et al., Case No. 09-CV-5011561 (S) (Conn. Super. Ct.); (ii) Wexler v. KPMG, LLP, Index No. 101615/2009 (Sup. Ct. N.Y. Co.); (iii) Ryan v. Friehling & Horowitz, P.C., Index No. 101616/2009 (Sup. Ct. N.Y. Co.); (iv) Greenberg v. Friehling & Horowitz, P.C., Index No. 650633/2009 (Sup. Ct. N.Y. Co.); (v) McBride v. KPMG International, Index No. 650632/2009 (Sup. Ct. N.Y. Co.); and (vi) FLB Foundation, Ltd. v. Bernard L. Madoff Inv. Sec. LLC, Index No. 101615/2009 (N.Y. Sup. Ct.).
The Retirement Program for Employees of the Town of Fairfield, the Retirement Program for Police Officers and Firemen of the Town of Fairfield (together with The Retirement Program for Employees of the Town of Fairfield, the "Retirement Programs"), and the Town of Fairfield (collectively, the "Fairfield Plaintiffs") commenced an action (the "Fairfield Action") pending before the Superior Court of Connecticut against Madoff, the Madoff Defendants, and various other entities, alleging, inter alia, receipt of fraudulent transfers, statutory theft, aiding and abetting theft, and unjust enrichment. Sheehan Aff., Ex. V [hereinafter, "Fairfield Compl."]. Specifically, they allege that Peter Madoff "either knew or willfully refused to know that [Madoff] and the Feeder Fund Defendants were operating an illegal investment services operation," "intentionally utilized his management authority at BLMIS . . . to help further defendants' criminal scheme," and "intentionally assist[ed]" Madoff to perpetuate the scheme, and that the other named Madoff Defendants received fraudulent transfers from Madoff and BLMIS. Fairfield Compl., 1st Count, ¶¶ 73-74; 18th Count, 90-97; 19th Count, 87-91, 20th Count, 21st Count. As against the Madoff Defendants, the Fairfield Plaintiffs seek avoidance of fraudulent and preferential transfers, and the imposition of a constructive trust over "the illicit proceeds and assets" received. In addition to compensatory and punitive damages, they seek statutory damages and attorneys' fees. Id., p. 69.
In defense of the Fairfield Action, the Madoff Defendants filed motions to dismiss, and the claims against Ruth Madoff were withdrawn in July 2009. The motions to dismiss were granted as to the other Madoff Defendants in a memorandum decision on April 16, 2010. Sheehan Aff., Ex. X (Dec. on Defs' Mots. to Dismiss (#s 145; 148; 162; 164 & 168), Retirement Program for the Employees of the Town of Fairfield, et al. v. Bernard L. Madoff, et al., 09-CV-5011561 (S) (Conn. Super. Ct. 2010)) [hereinafter, Fairfield Motion to Dismiss Decision]. The court held that the Fairfield Plaintiffs lacked standing under Connecticut law to assert their claims against the Madoff Defendants in that they "ha[d] not asserted a `separate and distinct' harm" from that suffered by Maxam Absolute Return Fund, L.P. ("Maxam Fund"), the feeder fund that invested their money with BLMIS, and their claims were thus derivative and commenced without proper authorization. Id., pp. 21-28 ("[A]s to the claims against . . . Peter Madoff, Andrew Madoff and Mark Madoff, the harms claimed by the plaintiffs in those counts are indirect, remote and derivative with respect to those defendants' conduct. Therefore, the plaintiffs lack standing to assert them."). The Fairfield Plaintiffs appealed this decision on May 3, 2010, which is currently pending. The Fairfield Plaintiffs also filed an amended complaint on November 1, 2010. Fairfield Mem., (Dkt. No. 24),
Jay Wexler ("Wexler") alleges that he was an investor in Rye Select Broad Market Prime Fund, L.P. (the "Rye Fund"), which invested in the Tremont Fund, a BLMIS customer. On February 5, 2009, Wexler filed an action in the Supreme Court of the State of New York, New York County, both individually and derivatively on behalf of the Rye Fund, against the Madoff Defendants, Annette Bongiorno ("Bongiorno"), Frank DiPascali ("DiPascali") and certain other entities (the "Wexler Action"). The complaint alleges causes of action against the Madoff Defendants for fraud, aiding and abetting fraud, breach of fiduciary duty, professional negligence, negligent misrepresentation, conversion and unjust enrichment. As to Ruth Madoff, this action was voluntarily dismissed without prejudice on August 17, 2009.
Lawrence Ryan ("Lawrence"), together with his wife Theresa Ryan ("Theresa"), created the Ryan Trust, with Theresa as the trustee. As of November 2008, Theresa, individually and through the Ryan Trust, invested approximately $6.3 million with BLMIS. Plaintiff Daniel Ryan ("Daniel"), Theresa's son, invested over $450,000 with BLMIS. On February 5, 2009, Theresa and Daniel, individually and on behalf of the Ryan Trust, commenced an action in the Supreme Court of New York, New York County against the Madoff Defendants and others, including DiPascali, Bongiorno and the BLMIS accounting firm Friehling & Horowitz, P.C. They amended their complaint on October 22, 2009 to add defendants and additional claims against Andrew, Mark and Peter Madoff (the "Ryan Action").
Matthew Greenberg, Walter Greenberg, Doris Greenberg and the Estate of Leon Greenberg, each of whom held investment accounts at BLMIS, commenced an action in the Supreme Court of New York, County of New York against the Madoff Defendants and others, including Friehling & Horowitz, P.C., DiPascali and Bongiorno (the "Greenberg Action").
Donna M. McBride alleges that she was a member of Beacon Associates LLC II (the "Beacon Fund"). On October 22, 2009, McBride commenced her action in the Supreme Court of New York, County of New York against, inter alia, the Madoff Defendants, both individually and on behalf of the Beacon Fund (the "McBride Action").
The FLB Foundation, Ltd., ("FLB") which held a customer account with BLMIS, commenced an action in the Supreme Court of New York, County of New York on February 18, 2009, and filed an amended complaint on August 11, 2009, against the Madoff Defendants and others, including DiPascali, David Gary Friehling, Eli Bruce Horowitz, Madoff International and Madoff, Ltd. (the "FLB Action"). In defense of the complaint, the relevant Madoff
Collectively, the Wexler, Ryan, Greenberg, McBride and FLB Actions allege claims for aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, aiding and abetting fraud in the inducement, conversion, unjust enrichment, conspiracy to hinder, delay and defraud, false representation, wrongful appropriation of funds and negligence. Id., Ex. BB [hereinafter, "Wexler Amended Compl."], ¶¶ 482-501, 506-516; Ex. EE [hereinafter, "Ryan Amended Compl."], ¶¶ 319-342, 377-387; Ex. FF [hereinafter, "Greenberg Compl."], ¶¶ 312-335; 368-378; Ex. Z [hereinafter, "McBride Compl."], ¶¶ 338-357, 366-384, 404-424; Ex. SS [hereinafter, "FLB Amended Compl."], ¶¶ 30-54. Specifically, they allege that the Madoff Defendants "had actual knowledge of . . . the [BLMIS] fraud based on their roles and responsibilities. . . and their knowledge of the indications of fraud," Wexler Amended Compl., ¶ 412, see also Ryan Amended Compl., ¶ 322, Greenberg Compl., ¶ 315, McBride Compl., ¶ 342, FLB Amended Compl., ¶¶ 26, 27, and that the Madoff Defendants misused BLMIS funds for personal expenses, including vacations, cars, and home purchases, Wexler Amended Compl., ¶ 300, Ryan Amended Compl., ¶ 227, Greenberg Compl., ¶ 224, McBride Compl., ¶ 241, FLB Amended Compl., ¶¶ 27, 54. The plaintiffs are seeking compensatory and punitive damages, disgorgement, restitution of all earnings, profits, compensation and benefits received by the defendants through their unlawful conduct, and attorneys' fees and costs.
On December 1, 2009, defendant JP Morgan Chase sought to stay the Wexler, Ryan, Greenberg and McBride Actions pending the resolution of its motion to dismiss in MLSMK Investments Co. v. JP Morgan Chase & Co. and JP Morgan Bank, NA, 09-CV-4049 (BSJ), which is currently pending before the United States District Court for the Southern District of New York. Id., Exs. GG, HH, II. The New York Supreme Court stayed these actions in orders dated January 25, 2010 and February 1, 2010.
All of the Third Party Plaintiffs have availed themselves of the Court's Claims
Certain of the Third Party Plaintiffs' claims have been denied by the Trustee on the basis that the claimants did not hold a customer account with BLMIS, but only invested with a feeder fund that, in turn, invested with BLMIS. With respect to the Fairfield Action, the Retirement Programs filed a customer claim on March 2, 2009, which was denied. They were investors in Maxam Fund, which has filed its own customer claim that has yet to be determined. With respect to the Wexler Action, Wexler filed a customer claim in the SIPA proceeding on February 6, 2009, which was likewise denied. He was an investor in the Rye Fund, which itself has filed two customer claims that have yet to be been determined. McBride filed two claims in the SIPA proceeding on March 3, 2009, both of which were denied. She was a member of the Beacon Fund, a subsidiary fund of Beacon Associates LLC, which filed a claim that has yet to be determined. In addition, the Trustee denied a customer claim filed by Chavez on February 17, 2009, as he simply never held an account with BLMIS.
These determinations are subject to litigation currently pending before this Court on the Trustee's Motion for an Order to Affirm Trustee's Determinations Denying Claims of Claimants Without BLMIS Accounts in their Names, Namely, Investors in Feeder Funds. (Dkt. No. 2416). This issue in dispute is whether such "indirect investors" qualify as "customers" under SIPA section 78lll(2) entitled to distributions separate from those made to satisfy claims filed by their investment funds (the "Customer Issue"). This Court received over 150 written submissions filed in response to the Trustee's motion on this Customer Issue.
Finally, Defendants Stahl and Abend filed general creditor claims for deferred compensation and back pay on February 24, 2009 and May 22, 2009, respectively. The Trustee is currently investigating both claims. Daniel Ryan filed two customer claims on January 21, 2009 and June 29, 2009, neither of which has been determined. Last, with respect to the FLB Action, the claim filed by FLB on January 21, 2009 was denied on October 19, 2009, as the FLB customer account was overdrawn, or in a negative Net Equity position.
The Trustee seeks to enjoin the Third Party Plaintiffs, all of whom have availed themselves of this Court's jurisdiction, from proceeding with their actions against the Madoff Defendants. Not only do they parrot the Trustee's Madoff Complaints almost word-for-word, but they also seek the same funds from the Madoff Defendants that they should be seeking—and are currently seeking—from the BLMIS estate. Each of the Third Party Plaintiffs purports to be a customer or other creditor of BLMIS, or a so-called BLMIS feeder fund, and the relationships between the Third Party Plaintiffs and the Madoff Defendants are based entirely on each plaintiff's status as such. While titled differently, the Third Party Plaintiffs' claims all arise from the Madoff Defendants' alleged involvement in Madoff's Ponzi scheme and the collapse of BLMIS, and are properly being addressed by the Trustee in this Court. There is simply no basis for certain customers, much less employees or investors in customers, to receive more than their fair share over those who have not yet recovered their investment by suing the Madoff Defendants for fictitious profits and other damages, with no independent basis for their claims. The Third Party Plaintiffs cannot convincingly contend that their causes of action, no matter what form they take, are independent of their claims against the BLMIS estate, and they are therefore bound by the automatic stay.
As a threshold matter, the Third Party Plaintiffs have submitted themselves to the jurisdiction of this Court over the subject of their claims in the Third Party Actions, as they have filed claims with the Trustee in this SIPA liquidation seeking the same relief.
Moreover, in accordance with controlling Second Circuit precedence, this Court has "related to" jurisdiction over third party actions if they might have "any conceivable effect" on the estate. See, e.g., Publicker Indus. Inc. v. United States of America (In re Cuyahoga Equip. Corp.), 980 F.2d 110, 114 (2d Cir.1992); In re Adelphia Commc'ns Corp., 2006 WL
The commencement of a SIPA liquidation operates as an automatic stay of, inter alia, "the commencement or continuation. . . of a judicial, administrative, or other action or proceeding against the debtor," or "any act to obtain possession of. . . or to exercise control over property of the estate." 11 U.S.C. § 362(a)(1), (3); SIPA § 78fff(b) (applying chapter 3 of Title 11). Property of the estate, in turn, includes "all legal or equitable interests of the debtor in property as of the commencement of the case," 11 U.S.C. § 541(a)(1), "wherever located and by whomever held," 11 U.S.C. § 541(a), including causes of action possessed by the debtor at the time of filing. Jackson v. Novak, (In re Jackson), 593 F.3d 171, 176 (2d Cir.2010). The automatic stay is one of the most fundamental bankruptcy protections and applies broadly to "give[] the debtor a breathing spell" and to prevent creditors from "obtain[ing] payment of the[ir] claims in preference to and to the detriment of other creditors." H.R.Rep. No. 595, 95th Cong. 1st Sess. (1977); S.Rep. No. 989, 95th Cong. 2d Sess. 49 (1978), reprinted in 1978 U.S.Code Cong. & Admin. News 1978, pp. 5835, 5963, 6010, 6296-97. In this SIPA proceeding, the stay protects customers of BLMIS by fostering fair, uniform, and efficient distribution of customer property.
The Third Party Plaintiffs violated the stay by usurping causes of action belonging to the estate under sections 362(a)(3) and 541 of the Code. The Trustee has "exclusive standing" to assert causes of action belonging to the estate; "conversely, if the cause of action belongs solely to the shareholders or creditors, the trustee has no standing to assert it." McHale v. Alvarez (In re The 1031 Tax Group, LLC), 397 B.R. 670, 679 (Bankr. S.D.N.Y.2008) (quoting Goldin v. Primavera Familienstiftung, TAG Assocs., Ltd. (In re Granite Partners, L.P.), 194 B.R. 318, 324-25 (Bankr.S.D.N.Y.1996)). The Second Circuit has held that "[i]f a claim is a general one, with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor,
The Third Party Plaintiffs are not seeking to redress a particularized injury or alleging harm caused directly to them by the Madoff Defendants. Rather, the Third Party Actions assert violations of duties owed derivatively to all customers and creditors by virtue of the Madoff Defendants' positions generally at BLMIS, the breach of which resulted in losses to all Madoff victims. Typical of the Third Party Actions are allegations that the Madoff Defendants owed a "duty to protect the clients of BMIS against policies and procedures that would result in misappropriation of investor's [sic] monies," "owed fiduciary duties of loyalty and reasonable care to BMIS investors such as Plaintiffs," "treat[ed] investor monies as a personal family bank account," "had an incentive to entice people like Plaintiffs to continue to invest," and "wrongfully appropriated the plaintiff's funds and [sic] of others who deposited funds," resulting in loss of their investments into BLMIS. Wexler Amended Compl., ¶ 3; Ryan Amended Compl., ¶¶ 208, 210, 213, 270; Greenberg Compl., ¶ 331; FLB Amended Compl., ¶ 41; Fairfield Amended Compl., ¶¶ 51-52, 55, 60, 74, 90. To the extent that misrepresentations are alleged, they were not made directly and solely to the Third Party Plaintiffs and therefore failed to result in any separate and particularized harm. See, e.g., Abend Compl., ¶ 7 ("[T]he Madoff Sons made false statements to plaintiff (and other employees) and failed to disclose Madoff Securities' criminal actions in order to induce plaintiff (and others) to continue to earn legitimate profits.") (emphasis added); Stahl Compl., ¶ 7 (same). Indeed, in the preliminary stages of the Fairfield Action, for example, the Connecticut Superior Court granted a motion to dismiss the first complaint on the bases that, inter alia, there was "no allegation that the [Fairfield Plaintiffs] ever dealt directly with Madoff or any co-defendant family members, or BLMIS itself," but only with the feeder funds in which they invested, and "as to the claims against . . . Peter Madoff, Andrew Madoff and Mark Madoff,
Contrary to the arguments of Stahl and Abend, their claims are not meaningfully different such that they are exempt from the automatic stay. While the specific harm alleged—loss of deferred compensation and back pay—is arguably not derivative of a harm suffered by the debtor such that the debtor owned these causes of action prepetition, the claims are essentially "proceeding[s] against the debtor" that are likewise stayed under section 362(a)(1) of the Code. Stahl and Abend seek to end-run the automatic stay, which prevents them from suing BLMIS directly, by asserting actions against Mark and Andrew Madoff as "employers" standing in the shoes of BLMIS in their roles as supervisors at BLMIS. See e.g., Abend Compl., ¶¶ 2, 4, 43; Stahl Compl., ¶¶ 2, 4, 44; Bihari v. DDJ Capital Mgmt. LLC, 306 B.R. 336, 338 (E.D.Cal.2004) (holding that action against debtor's shareholders, officers and directors for overtime compensation violated the automatic stay because debtor would "necessarily be a major participant" in the action). For example, the alleged misrepresentations by Mark and Andrew Madoff that the IA business was legitimate were the exact same misrepresentations made by their father generally, a co-debtor along with BLMIS in this SIPA liquidation. See Stahl Complaint, ¶¶ 7, 22-24, Abend Complaint, ¶¶ 7, 21-23 (alleging, in essence, that Mark and Andrew knew or should have known about their father's Ponzi scheme, and never told BLMIS employees about it or misrepresented the legitimacy of the IA business to BLMIS employees in order to "perpetuate their father's lawless conduct" and induce the employees to continue to work for the "legitimate" arm of BLMIS). In fact, Stahl and Abend are currently seeking the exact dollar amounts from Andrew and Mark Madoff
To the extent that certain causes of action set forth by the Third Party Plaintiffs in their complaints differ in name from those alleged in the Trustee's Madoff Complaint, those distinctions are irrelevant.
Accordingly, as the claims asserted in the Third Party Actions violate the automatic stay, they are void ab initio with respect to the Madoff Defendants. FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125, 137 (2d Cir.1992) ("[A]ctions taken in violation of the stay are void and without effect.") (citing 48th St. Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th St. Steakhouse, Inc.), 835 F.2d 427, 431 (2d Cir.1987)); accord Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527 (2d Cir.1994).
In addition to violating the automatic stay, the Third Party Actions violate at least one stay order of the District Court in connection with the related, ongoing SEC litigation, as the Third Party Plaintiffs are interfering with potential estate assets. All parties herein received notice of, and are bound by, the District Court's order entered December 15, 2008 (the "December 15, 2008 Stay Order") declaring that "all persons and entities are stayed, enjoined and restrained from directly or indirectly . . . interfering with any assets or property owned, controlled or in the possession of [BLMIS]." SEC v. Bernard L. Madoff, 08-CIV-10791 (LLS), Dkt. No. 4, ¶ IV (reinforcing the automatic stay); see also Order On Consent Imposing Preliminary Injunction Freezing Assets and Granting Other Relief Against Defendants, Dec. 18, 2008, Dkt. No. 8, ¶ IX (the "December 18, 2008 Stay Order") ("[N]o creditor or claimant against [BLMIS], or any person acting on behalf of such creditor or claimant, shall take any action to interfere with the control, possession, or management of the assets subject to the receivership."); Partial Judgment on Consent Imposing Permanent Injunction and Continuing Other Relief, Feb. 9, 2009, Dkt. No. 18, ¶ IV (incorporating and making permanent the December 18, 2008 Stay Order) (the "February 9, 2009 Stay Order," and together with the December 15, 2008 and December 18, 2008 Stay Orders, the "District Court Stay Orders"). Accordingly, the Third Party Actions not only violate the automatic stay, but also directly contravene at least the December 15, 2008 Stay Order.
Section 105(a) of the Code permits the Court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Code]." 11 U.S.C. § 105(a). Section 105(a) is not limitless, and thus "does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law." Solow v. Kalikow (In re Kalikow), 602 F.3d 82, 96 (2d Cir.2010) (internal quotations and citations omitted). However, bankruptcy courts are empowered to utilize their equitable powers under section 105(a) where appropriate "to facilitate the implementation of other Bankruptcy Code provisions." Id. at 97 (quoting Bessette v. Avco Fin. Servs. Inc., 230 F.3d 439, 444 (1st Cir. 2000)).
To the extent section 362(a) and the District Court Stay Orders do not apply in their own right to stay the Third
The Madoff Defendants are precisely the non-debtors against whom third-party actions "will have an immediate adverse economic consequence for the debtor's estate." Queenie, 321 F.3d at 287. The particular defendants targeted by the Third Party Actions are close Madoff family members, key BLMIS employees, and thus central to the Trustee's investigation. The Trustee seeks to recover over $244 million from the Madoff Defendants through his pending adversary proceedings and asserts that, based on his investigation to date, "all assets held by the Madoff Defendants are related to BLMIS customer property."
The Seventh Circuit's decision in Fisher, relying on Second Circuit precedent to
As in Fisher, the Third Party Actions will likely negatively affect the amount of property in the estate and the allocation thereof to customers and creditors, justifying an extension of the automatic stay. The Trustee's Madoff Complaints and the Third Party Actions target "the same limited pool of money, in the possession of the same defendants, as a result of the same acts, performed by the same individuals, as part of the same conspiracy." Id. at 882. Indeed, the Trustee and the Fairfield Plaintiffs, for instance, have one common goal: "to recover the multimillion dollar losses the Town's retirement plans have sustained as a result of defendants' wrongful participation in the notorious fraudulent investment scheme perpetrated by [Madoff]." Fairfield Compl., p. 1. Likewise, the Lautenbergs target Peter Madoff to recover what they have lost in the Ponzi scheme, as do the Chavez, Wexler, Ryan, Greenberg, McBride and FLB Plaintiffs with respect to other Madoff Defendants. See Lautenberg Compl., pp. 22-23; Chavez Compl., pp. 5, 7; Wexler Amended Compl., pp. 261-63; Ryan Amended Compl., pp. 191-92; Greenberg Compl., pp. 189-90; McBride Compl., pp. 215-17; FLB Amended Compl., p. 11. Stahl and Abend similarly seek funds that they were denied as a result of the fraud—the same amounts listed in their proofs of claim before this Court. Stahl Compl., p. 9; Abend Compl., pp. 8-9. The allegations in the Third Party Actions are not only similar to, but in some instances apparently derived from, the Trustee's pending Madoff Complaints. Indeed, for instance, only after the Trustee alleged that the Madoff Defendants "took huge sums of money out of BLMIS to fund personal business ventures and personal expenses such as homes, cars, and boats" did the Ryan and Wexler plaintiffs amend their complaints to include similar allegations. Madoff Family Complaint, ¶ 3; Trustee's Mem. Law, p. 27. While the Trustee endeavors to have this pool of funds returned to the BLMIS estate for pro rata allocation among all Madoff victims, the Third Party Actions seek to divert the funds for themselves and discrete classes of investors and creditors in direct contravention of the SIPA distribution scheme. The proper beneficiaries of any claims asserted against the Madoff Defendants arising from their alleged involvement in the scheme are the customers and creditors of
A substantial threat to this Court's jurisdiction likewise warrants the issuance of a preliminary injunction pursuant to section 105(a) of the Code. Because injunctions under section 105(a) are authorized by statute, they need not comply with traditional requirements of Rule 65.
As the Court presiding over the SIPA liquidation of BLMIS, this Court has sole jurisdiction over the administration and distribution of estate assets to customers and creditors. Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 447, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004) ("Bankruptcy courts have exclusive jurisdiction over a debtor's property, wherever located, and over the estate.") (citing 28 U.S.C. § 1334(e)); see also 15 U.S.C. § 78eee(b)(2)(A)(i), (4) ("Upon the filing of an application with a court for a protective decree . . . such court shall have exclusive jurisdiction of such debtor and its property wherever located. . . ."). The Third Party Plaintiffs' duplicative actions threaten
Finally, the Third Party Actions have already begun interfering with the efficient administration of the estate by placing burdensome procedural and discovery demands upon the Trustee in connection with the Third Party Actions at the expense of the Trustee's obligations to the BLMIS estate. Stahl alone has sought from the Trustee "[a]ll communications sent by the Madoff Sons"; "[a]ll documents and communications relating or referring to the legality of BMIS"; "[a]ll documents and communications relating or referring to the role(s) of the Madoff Sons in the London office of BMIS"; and "[a]ll documents provided by the Madoff Sons to SIPC." Sheehan Affidavit, Ex. O, Nos. 2, 6, 15, 18. The notion that third party claimants' lawsuits should be driving the discovery on Andrew and Mark Madoff's alleged complicity in the Ponzi scheme—ahead of the Trustee's discovery—speaks volumes of the impropriety of these actions at this time. Deadlines for these and other discovery demands are quickly approaching in various jurisdictions and will continue to seriously impair the Trustee's abilities to execute his own discovery on behalf of all Madoff victims unless the Third Party Plaintiffs are preliminarily enjoined.
As set forth herein and at oral argument, the Third Party Actions as against the Madoff Defendants are directly violative of the extant stays, specifically the automatic stay under section 362(a) and at least one of the District Court Stay Orders, and are therefore void ab initio as against these defendants. Additionally, the Third Party Plaintiffs are to be preliminarily enjoined under section 105(a) of the Code from proceeding with the Third Party Actions, or any related action, against the Madoff Defendants, pending final dispositive orders of this Court in the Trustee's Madoff Actions.
The Trustee is directed to submit an order consistent with this memorandum decision.
SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,
v.
BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.
In re: BERNARD L. MADOFF, Debtor.
IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,
v.
RICHARD I. STAHL; REED ABEND; THE LAUTENBERG FOUNDATION, JOSHUA S. LAUTENBERG, ELLEN LAUTENBERG; EMILIO CHAVEZ, JR.; RETIREMENT PROGRAM FOR EMPLOYEES OF THE TOWN OF FAIRFIELD, THE RETIREMENT PROGRAM FOR POLICE OFFICERS AND FIREMEN OF THE TOWN OF FAIRFIELD and THE TOWN OF FAIRFIELD; FLB FOUNDATION, LTD., JAY WEXLER, individually and derivatively on behalf of Rye Select Broad Market Prime Fund, L.P.; DANIEL RYAN and THERESA RYAN, individually and on behalf of the RYAN TRUST; MATTHEW GREENBERG, WALTER GREENBERG and DORIS GREENBERG, individually and on behalf of the Estate of Leon Greenberg; and DONNA MCBRIDE, individually and derivatively on behalf of Beacon Associates LLC II, Defendants.