in re madoff securities - dec. 8 2014 opinion.pdf
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8/10/2019 in re Madoff Securities - Dec. 8 2014 opinion.pdf
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122557bk(L)
Inre:BernardL.MadoffInvestmentSecuritiesLLC
In the
United States Court of AppealsFor the Second Circuit________
AugustTerm,2013
Nos.122557bk(L),122497bk(con),122500bk(con),
122616bk(con),123422bk(con),123440bk(con),
123582bk(con),123585bk(con)
________
INRE:BERNARDL.MADOFFINVESTMENTSECURITIESLLC,
Debtor.
________
IRVINGH.PICARD,TrusteefortheLiquidationofBernardL.
MadoffInvestmentSecuritiesLLC,
PlaintiffAppellant,
SECURITIESINVESTORPROTECTIONCORPORATION,StatutoryIntervenorpursuanttoSecuritiesInvestorProtectionAct,15U.S.C.78eee(d),
IntervenorAppellant,
v.
IDAFISHMANREVOCABLETRUST,PAULS.SHURMAN,inhiscapacityas
cotrusteeoftheIdaFishmanRevocableTrust,WILLIAMSHURMAN,in
hiscapacityascotrusteeoftheIdaFishmanRevocableTrustandas
Executorof
the
estate
of
Ida
Fishman,DefendantsAppellees.
________
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AppealfromtheUnitedStatesDistrictCourt
fortheSouthernDistrictofNewYork.
Nos.11bk7603,12mc0115JedS.Rakoff,Judge.________
Argued:March5,2014
Decided:December8,2014
________
Before:PARKER,LYNCH,andDRONEY,CircuitJudges.
________
AppealfromjudgmentsoftheUnitedStatesDistrictCourtfor
theSouthernDistrictofNewYork (Rakoff,J.). IrvingH.Picard,as
trustee fordebtorBernardL.MadoffSecuritiesLLC,sued toavoid
fictitious profits paidby thedebtor tohundredsofcustomersover
the life of the Ponzi scheme operatedby Madoff. The defendant
customers moved to dismiss certain of these avoidance claims
pursuant to 11 U.S.C. 546(e), which shields from recovery
securitiesrelated payments made by a stockbroker. The district
court
agreed
that
546(e)
barred
the
claims,
dismissed
them,
andcertifiedthedismissalasafinaljudgment. Thetrusteeappealed.
Affirmed.
________
DAVIDJ. SHEEHAN (OrenJ.Warshavsky,TracyL.
Cole, Seanna R. Brown; Howard L. Simon,
Windels Marx Lane & Mittendorf LLP; Matthew
B.Lunn,YoungConawayStargatt&TaylorLLP,onthebrief),BakerHostetlerLLP,NewYork,NY,
for PlaintiffAppellant IrvingH. Picard, Trusteefor
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the Liquidation of Bernard L. Madoff Investment
SecuritiesLLC.
JOSEPHINEWANG,GeneralCounsel(KevinH.Bell,
LaurenT.Attard,on thebrief),Securities Investor
Protection Corporation, Washington, D.C., for
IntervenorAppellant Securities Investor Protection
Corporation, Statutory Intervenor pursuant to
Securities Investor Protection Act, 15 U.S.C.
78eee(d).
RICHARD
LEVY,
JR.
(David
C.
Rose,
on
the
brief),Pryor Cashman LLP, New York, NY, for
DefendantsAppelleesKaraFishbeinGoldman,Steven
Goldman,etal.
P.GREGORYSCHWED(WalterH.Curchack,Daniel
B. Besikof, Michael Barnett, on the brief), Loeb &
LoebLLP,NewYork,NY,forDefendantsAppellees
JonathanM.Aufzien,LisaAufzien,etal.
HELENDAVISCHAITMAN,Becker&Poliakoff,LLP,
New York, NY, for DefendantsAppellees David
Abel,JamesGreiff,etal.
Deborah A. Skakel, Shaya M. Berger, Dickstein
Shapiro LLP, New York, NY, for Defendant
AppelleePetCareRx,Inc.
CaroleNeville,DentonsUSLLP,NewYork,NY,
forDefendants
Appellees
Harold
J.
Hein,
Kelman
PartnersLimitedPartnership,etal.
JenniferL.Young,MatthewA.Kupillas,Millberg
LLP, New York, NY; Parvin K. Aminolroaya,
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SeegerWeissLLP,NewYork,NY,forDefendants
AppelleesGeraldBlumenthal,HaroldA.Thau,etal.
David Parker, Matthew J. Gold, Kleinberg,
Kaplan,Wolff&Cohen,P.C.,NewYork,NY,for
DefendantsAppellees Kenneth Hubbard, Lawrence
Elins,etal.
Parvin K. Aminolroaya, SeegerWeiss LLP, New
York,NYforDefendantsAppelleesDavidJ.Bershad,
BershadInvestmentGroupLP,etal.
Richard A. Kirby, Laura L. Clinton, Martha
RodriguezLopez, K&L Gates LLP, Washington
D.C.,forDefendantsAppelleesChesedCongregations
ofAmerica,LindaBerger,etal.
Philip Bentley, Elise S. Frejka, Kramer Levin
Naftalis & Frankel LLP, New York, NY, for
DefendantsAppellees 10961100 River Road
AssociatesLLC,FredA.DaibesLLC,etal.
MarcyResslerHarris,JenniferM.Opheim,Mark
D. Richardson, Schulte Roth & Zabel LLP, New
York, NY,forDefendantsAppelleesThomasH.Lee,
HHIInvestmentTrust#2,etal.
WilliamP.Weintraub,GregoryW.Fox,Stutman,
Treister & Glatt, PC, New York, NY, for
DefendantsAppelleesJeffreyHinte,RobertNystrom,
etal.
Paul Steven Singerman, Ilyse M. Homer, Isaac
Marcushamer,BergerSingermanLLP,forAmicus
CuriaeNationalAssociationofBankruptcyTrustees.
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Philip D. Anker, Alan E. Schoenfeld, Wilmer
Cutler PickeringHale and Dorr LLP, NewYork,
NY ; Craig Goldblatt, Danielle Spinelli,Shivaprasad Nagaraj, Allison HesterHaddad,
Wilmer Cutler Pickering Hale and Dorr LLP,
Washington, D.C., for Amicus Curiae Securities
IndustryandFinancialMarketsAssociation.
ThomasJ.Moloney,DavidE.Brodsky,Lawrence
B. Friedman, Carmine D. Boccuzzi,Jr., Breon S.
Peace, Charles J. Keeley, Shira A. B. Kaufman,
ClearyGottliebSteen&HamiltonLLP,NewYork,NY, for Amici Curiae HSBC Bank plc, HSBC
Holdingsplc,etal.
Marco E.Schnabl,SusanL. Saltzstein,JeremyA.
Berman, Skadden, Arps, Slate, Meagher & Flom
LLP, New York, NY,forAmicusCuriaeUniCredit
S.p.A.
Franklin
B.
Velie,
Jonathan
G.
Kortmansky,MitchellC.Stein,Sullivan&WorcesterLLP,New
York,NY,forAmicusCuriaeUniCreditBankAustria
AG.
MichaelFeldberg,Allen&OveryLLP,forAmicus
CuriaeABNAmroBankN.V.(presentlyknownasthe
RoyalBankofScotlandN.V.).
JosephCioffi,JamesR.Serritella,Davis&Gilbert
LLP,NewYork,NY,forAmici
Curiae
Natixis
S.A.,
NatixisFinancialProductsLLC,etal.
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6 No.122557bk(L)
Fran M. Jacobs, Duane Morris LLP, for Amicus
CuriaeEastStarSICAV.
MarshallR.King,Gibson,Dunn&CrutcherLLP,
NewYork,NY,forAmiciCuriaeUBSAGandUBS
(Luxembourg)S.A.
MarcJ. Gottridge, Andrew M. Behrman, Hogan
LovellsUSLLP,New York,NY,forAmiciCuriae
BarclaysBank(Suisse)S.A.,BarclaysBankS.A.,and
BarclaysPrivateBank&TrustLimited.
ThomasB.Kinzler,DanielSchimmel,KelleyDrye
& Warren LLP, New York, NY,forAmiciCuriae
CaceisBankFranceandCaceisBankLuxembourg.
Jodi Kleinick, Barry Sher, Mor Wetzler, Paul
Hastings LLP,forAmici Curiae FIM Limited and
FIMAdvisorsLLP.
Eric Fishman, Kerry A. Brennan, Brandon
Johnson, Pillsbury Winthrop Shaw Pittman LLP,New York, NY,forAmicus Curiae Falcon Private
BankLtd.
RichardL.Spinogatti,ProskauerRoseLLP,New
York, NY,forAmici Curiae Grosvenor Investment
Management Ltd., Grosvenor Private Reserve Fund
Limited,etal.
William
J.
Sushon,
Shiva
Eftekhari,
OMelveny
&MyersLLP,NewYork,NY,forAmiciCuriaeCredit
SuisseAG,CreditSuisseAG,NassauBranch,etal.
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DavidJ. Onorato,Jessica R. Simonoff, Susan A.
Higginsshra, Freshfields Bruckhaus Deringer US
LLP, New York, NY, forAmicus
Curiae
Tensyr
Limited.
BrianH.Polovoy,ChristopherR.Fenton,Andrew
Z. Lipson, Shearman & Sterling LLP,forAmicus
CuriaeNomuraInternationalplc.
John Westerman, Mickee Hennessy, Westerman
Ball Ederer Miller & Sharfstein, LLP, Uniondale,
NY,
for
Amici
Curiae
DOS
BFS
Family
PartnershipII,L.P.andDonaldandBetteSteinFamilyTrust.
________
BARRINGTOND.PARKER,CircuitJudge:
Bernard L. Madoff orchestrated a massive Ponzi scheme
through the investment advisory unit of Bernard L. Madoff
InvestmentSecuritiesLLC (BLMIS). After theschemecollapsed,
Irving H. Picard (the Trustee) was appointed trustee for BLMISpursuanttotheSecuritiesInvestorProtectionAct,15U.S.C.78aaa
et seq. (SIPA). UnderSIPA,a trustee isempowered torecover
(orclawback)moneypaidoutbythedebtor,aslongasthemoney
would have been customer property had the payment not
occurred,andthetransferscouldbeavoidedundertheBankruptcy
Code. Id.78fff2(c)(3).
Section546(e)oftheBankruptcyCode,inturn,establishesan
importantexception
to
atrustees
clawback
powers.
See
11
U.S.C.
546(e). Section 546(e) provides generally that certain securities
related payments, such as transfers made by a stockbroker in
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connection with a securities contract, or settlement payment[s]
cannotbeavoidedinbankruptcy.
Invokinghisclawbackpowers,theTrusteesuedhundredsofBLMIScustomerswhowithdrewmorefromtheiraccountsthanthey
had investedand, as a result, profited (whether knowingly or not)
fromMadoffsscheme. TheTrusteecontendsthat,ifBLMIShadnot
preferentially paid these customers, the money would havebeen
customer property available to be distributed ratably to all
customers,includingthosewho,overtime,hadwithdrawnlessthan
theyhadinvested.
Several defendants moved to dismiss the actions on the
ground that the payments received by BLMIS customers were
securitiesrelated payments that cannotbe avoided under 546(e).
The dispositive issue presented by this appeal is whether the
payments that BLMIS made to its customers are the type of
securitiesrelated payments that are shielded by 546(e) from
clawback.
The United States District Court for the Southern District of
NewYork(Rakoff,J.)concludedthatthepaymentswereshieldedby 546(e) and dismissed the relevant claims under Federal Rule of
CivilProcedure12(b)(6). Weagreeandthereforeweaffirm.
BACKGROUND
BecausethisappealisfromdismissalsunderRule12(b)(6),we
assume the truth of all well pleaded facts in the underlying
complaints and draw all reasonable inferences in favor of the
Trustee. SeeGibbons
v.
Malone,703F.3d595,599(2dCir.2013).1
1AccordingtotheTrustee,thehundredsofcomplaintsinthiscasearesubstantiallyidentical
withrespecttotheissuesraisedinthisappeal.TrusteesBr.9n.4.Asaresult,whenwerefer
totheTrusteesallegations,wecitethecomplaintinPicardv.Greiff,Adv.Pro.No.104357
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I
BLMIS
purported
to
execute
a
split
strike
conversionstrategy for customers of its investment advisory unit. This
strategy, had it actually been executed, would have consisted of
timing the market to purchase abasket of stocks on the S&P 100
Index, and then hedging those purchases with related options
contracts. SeeSIPCv.BernardL.MadoffInv.Secs.LLC(InreBernardL.
Madoff Inv. Secs. LLC), 424 B.R. 122, 12930 (Bankr. S.D.N.Y. 2010)
(SIPCv.BLMIS).
In reality, however, BLMISs investment advisory business
conducted no actual securities or options trading onbehalf of itscustomers. Instead, BLMIS deposited customer investments into a
single commingled checking account and, for years, fabricated
customerstatementstoshowfictitioussecuritiestradingactivityand
returns ranging between 10 and 17 percent annually. When
customerssoughttowithdrawmoneyfromtheiraccounts,including
withdrawals of the fictitious profits that BLMIS had attributed to
them, BLMIS sent them cash from the commingled checking
account. TheTrusteeseekstoclawbackfundsfromcustomerswho,
overtime,wereabletotakeoutmoremoneythantheyhadinvestedwithBLMIS.
II
In December 2008, the Madoff scheme was exposed and
liquidation proceedings began in the district court. As a SIPA
trustee, Picard was obligated to collect and set aside a fund of
customer property specifically earmarked to repay BLMIS
customersratablyinproportiontoeachcustomersnetequity.See
15U.S.C.78lll(4),78fff2(c);seealsoInreBernardL.MadoffInv.Secs.
LLC,654F.3d229,233(2dCir.2011)(InreBLMIS). Where,ashere,
thecustomerpropertyfundisnotsufficienttopaycustomersinfull,
(Bankr.S.D.N.Y.Nov.30,2010),J.A.594623.
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SIPAempowersatrusteetoclawbackanytransferredfundswhich,
exceptforsuchtransfer[s],wouldhavebeencustomerproperty.15
U.S.C. 78fff2(c)(3). But a trustee can only claw back thosetransferred funds if and to the extent that [they are] voidable or
voidundertheprovisionsoftheBankruptcyCode. Id.
The Trustee invokes two different theories under the
BankruptcyCodetoavoidtransfersoffictitiousprofitstocustomers.
The Trustees first theory is that certain transfers are voidable as
fraudulent transfers under 11 U.S.C. 548(a)(1)(A) and (B).
Section548(a)(1)(A)appliestotransfersmadewithactual intentto
hinder, delay, or defraud creditors (often referred to as actual
fraud). Section 548(a)(1)(B) applies to transfers made without a
reasonably equivalent value in exchange for such transfer under
certain circumstances. This provision is aimed at constructive
fraud, and does not require proof of fraudulent intent.
Importantly, a trustee can invoke these provisions to recover
paymentsonlyifthepaymentsweremade...within2yearsbefore
thedateofthefilingofthepetition.Id.548(a)(1).
Because544(b)oftheBankruptcyCodepermitsatrusteeto
avoid any transfers that an unsecured creditor could avoid under
applicablestatelaw,theTrusteessecondtheoryisthatthetransfers
maybeclawedbackpursuanttoNewYorksfraudulentconveyance
law. SeeN.Y.Debt.&Cred.L.27376. Thesestatelawprovisions
allow a creditor to avoid a debtors improper transfer of property,
including many of the same kinds of actually and constructively
fraudulent transferscoveredby548(a)(1)(A)and (B). Butunlike
theBankruptcyCode,NewYorksfraudulentconveyancelawhasa
sixyearstatuteoflimitations. SeeN.Y.C.P.L.R.213.
Many
clawback
defendants
moved
to
dismiss
the
Trusteesclaimsasbarredby546(e)oftheBankruptcyCode,whichprevents
a bankruptcy trustee from avoiding certain securitiesrelated
payments made by a stockbroker, including payments made in
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connection with a securities contract and settlement payments.
Section 546(e) is a verybroadlyworded safeharbor provision that
was enacted to minimiz[e] the displacement caused in thecommodities and securities markets in the event of a major
bankruptcyaffectingthoseindustries.EnronCreditorsRecoveryCorp.
v.Alfa,S.A.B.deC.V.(InreEnronCreditorsRecoveryCorp.),651F.3d
329, 334 (2d Cir. 2011) (quoting H. R. Rep. No. 97420, at 2 (1982),
reprintedin1982U.S.C.C.A.N.583,583). Thetheoryunderlyingthis
section isthat,[i]fa firm isrequiredtorepayamountsreceived in
settled securities transactions, it could have insufficient capital or
liquidity to meet its current securities trading obligations, placing
other market participants and the securities markets themselves at
risk. Id. Because 546(e) is expressly inapplicable to claims of
actualfraudbroughtunder548(a)(1)(A),theclawbackdefendants
invoked546(e)todismissonlytheconstructivefraudclaimsunder
548(a)(1)(B)andallNewYorkstatelawclaims.
Theclawbackdefendantsfirstlitigatedtheapplicabilityof
546(e) in twocasesbefore thebankruptcycourt. Thebankruptcy
court(Lifland,Bankr.J.)declinedtoreachtheissue, concludingthat
the question of whether 546(e) applies to the transfers at issue
should notbe determined at the pleading stage of the litigation.
Picardv.Merkin,440B.R.243,26667(Bankr.S.D.N.Y.2010);Picardv.
Madoff,458B.R.87,11516(Bankr.S.D.N.Y.2011).
Following thebankruptcycourtsdecisions, thedistrictcourt
withdrewthebankruptcyreferenceinoneclawbackactiontheKatz
case. After reexamining the issue,Judge Rakoff held that 546(e)
appliedbecause BLMIS was a stockbroker, the account documents
executedby thedefendantcustomersweresecuritiescontracts,and
the
various
payments
BLMIS
made
to
those
customers
were
inconnectionwithsecuritiescontracts,orweresettlementpayments.
Accordingly, Judge Rakoff dismissed all of the clawback claims,
exceptclaimsforactualfraudinvoking548(a)(1)(A). Picardv.Katz,
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may not avoid a transfer that is a . . . settlement
payment,asdefinedinsection...741ofthistitle,made
by[a]...stockbroker...,orthatisatransfermadeby[a] . . . stockbroker . . . in connection with a securities
contract,asdefined insection741(7), . . .exceptunder
section548(a)(1)(A)ofthistitle.
11U.S.C.546(e). ItisnotdisputedthatBLMISwasastockbroker
for the purposes of 546(e). Consequently, this appeal turns on
whether the transfers either were made in connection with a
securitiescontractor weresettlementpayment[s]. Id.
The Trustee argues that 546(e) should not applybecause
BLMISneverinitiated,executed,completed,orsettledthesecurities
transactions contemplated by the customer agreements. He also
contends that the transfers were not made in connection with a
securities contract or settlement payment[s] as those terms are
definedin741. Finally,theTrusteemaintainsthatpermittingthe
application of 546(e) in this case wouldbe tantamount to giving
legaleffecttoMadoffsfraud. SeeInreBLMIS,654F.3d229,235(2d
Cir.
2011).
For
the
following
reasons,
we
reject
these
arguments,which flow from the premise that 546(e) would only apply if
Madoff had actually completed the securities transactions he
purported toeffectuate. Instead,weconcludethat546(e) shields
these transfers from avoidance because they were made in
connection with a securities contract, and were also settlement
payment[s].
I
Section 741(7) of the Bankruptcy Code, to which 546(e)refers, defines securities contract with extraordinarybreadth to
include:
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(i)acontractforthepurchase,saleorloanofasecurity
. . .or . . .option topurchaseorsellanysuchsecurity
...;[or]
...
(vii) any other agreement or transaction that is similar
to an agreement or transaction referred to in this
subparagraph....[or]
...
(x)amasteragreement thatprovides foranagreement
ortransactionreferredtoinclause(i)[or] . . .(vii) ...,
except that such master agreement shallbe considered
tobe a securities contract under this paragraph only
with respect to each agreement or transaction under
suchmasteragreementthat isreferredto in[clauses(i)
through(ix)];or
(xi)anysecurityagreementorarrangement . . .related
to any agreement or transaction referred to in this
subparagraph, including any guarantee or
reimbursementobligationbyortoastockbroker....
11U.S.C.741(7)(A)(i),(vii),(x),(xi).
Thus, the term securities contract expansively includes contracts
forthepurchaseorsaleofsecurities,aswellasanyagreementsthat
aresimilarorrelatedtocontractsforthepurchaseorsaleofsecurities.
Id. This concept isbroadened even fartherbecause 546(e) also
protectsatransfer
that
is
in
connection
with
asecurities
contract.
WhileneithertheBankruptcyCodenorSIPAdefinespurchase
orsale,theSecuritiesExchangeActof1934ofwhichSIPAisapart
defines the terms to include any contract tobuy, purchase, or
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otherwiseacquire...[or]tosellorotherwisedisposeofasecurity.
15 U.S.C. 78c(a)(13)(14) (emphasis added). For the reasons that
follow, we conclude that BLMIS and its customers entered intoagreementsthatsatisfythebroaddefinitionofsecuritiescontracts
under741(7)(A).
The clawback defendants argue that a securities contract
wascreatedby threeof thedocuments thatBLMIScustomerswere
required to execute when opening their accounts. In the first, a
Customer Agreement, each customer authorized BLMIS to
open[] or maintain[] one or more accounts for hisbenefit.J.A.
1257. In a second document, a Trading Authorization, eachcustomerappointedBLMIStobethecustomersagentandattorney
in fact to buy, sell and trade in stocks, bonds, and any other
securitiesinaccordancewith[BLMISs]termsandconditionsforthe
[customers] account. J.A. 1264. And in a third document, an
OptionAgreement,eachcustomerauthorizedBLMIStoengagein
options trading for the customers account. J.A. 126162. The
defendants contend that these three account opening documents
(together, the Account Documents) authorized BLMIS to engage
in securities transactions onbehalf of its customers, although theydid not expressly require BLMIS to conduct anysuch transactions,
andconsequentlyestablishedasecuritiescontract.
We agree. On their face, the Account Documents are
agreementsbywhichBLMISwillacquireordisposeofsecurities
onbehalfofitscustomers. TheCustomerAgreementestablishedthe
brokercustomer relationship, and the Trading Authorization
authorizedBLMIS to trade insecurities for thecustomersaccount.
A214749, A2144. These documents also specify the terms bywhichBLMISwillacquireanddisposeofsecuritiesforthecustomer.
WereitnotfortheAccountDocuments,therewouldbenobasisfor
a customer to make deposits or request withdrawals. Thus, the
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transfersatissueoriginatedwith,andcouldnothavebeenpossible
but for, the relationship created by the Account Documents.
Accordingly, we conclude that they fall within the statutesbroaddefinitionofsecuritiescontract. See741(7)(A)(i).
The function contemplated for the Account Documents also
satisfies the definition of securities contract in 741(7)(A)(x),
whichincludesamasteragreementthatprovidesforanagreement
or transaction referred to in clause (i) [i.e., a contract for the
purchase, sale, or loan of a security]). As the Trustee
acknowledges in hisbrief, master agreement is a term of art in
thesecuritiesindustrymeaningacontractestablishingthemutualundertakingsbetween two counterparties that anticipate executing
future securities transactions with each other. . . . Trustee Br. 43
(citingPaulC.Harding,MasteringtheISDAMasterAgreements(1992
and2002)1927(2ded.2004)). Takentogether,thisispreciselywhat
theAccountDocumentscontemplateandaccomplish. TheTrustees
own complaints further support this conclusion. He alleges that
Madoffpromised[his]clientsthattheirfundswouldbeinvestedina
basket of common stocks within the S&P 100 Index, and hedged
with corresponding options contracts. J.A. 601 21 (emphasisadded). Additionally, because the Account Documents obligate
BLMIS to reimburse its customers upon a request for withdrawal,
theyalsofitthedefinitionofsecuritiescontract in741(7)(A)(xi),
whichincludes,againquiteexpansively,anysecurityagreementor
arrangement related toanyagreementor transaction referred to in
this subparagraph, including any guarantee or reimbursement
obligationbyortoastockbroker.
Yet another indication that Congress intended 546(e) tosweep broadly is supplied by the text of 741(7)(A)(vii) which
expandsthedefinitionofsecuritiescontracttoincludeanyother
agreement or transaction that is similar to a contract for the
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purchase, sale or loan of a security[.] Few words in the English
language are as expansive as any and similar. SeeDeravin v.
Kerik, 335 F.3d 195,204 (2d Cir. 2003) ([R]ead naturally, the wordanyhasanexpansivemeaning,and...solongasCongressdid
not add any language limiting thebreadth of that word, the term
anymustbegivenliteraleffect.(quotingUnitedStatesv.Gonzales,
520U.S.1,5 (1997)). Inordinaryusage, thewordsimilarmeans
having characteristics in common, or alike in substance or
essentials. Websters3dNewIntlDictionary2120(1993). Inlight
of these definitions, we conclude that the relationship between
BLMIS and its customers establishedby the Account Documents
involved agreement[s] that are similar to contracts for the
purchase,saleor loanofasecurity . . . .11U.S.C.741(7)(A)(i),
(vii).
The Trustee advances several arguments why, in his view,
these agreements do not constitute a securities contract and the
transfersatissueshouldnotbeshieldedfromavoidance. Noneare
persuasive. First, the Trustee argues that 546(e) does not apply
because BLMIS never initiated, executed, completed or settled the
securitiestransactionsitpromisedtoengagein. TrusteesBr.2535.Citingourdecision inEnron,theTrusteecontendsthatthepurpose
of 546(e) is to minimiz[e] the displacement caused in the
commodities and securities markets in the event of a major
bankruptcyaffectingthoseindustries. Id.at27(quotingEnron,651
F.3d at 334). Because there are no securities transactions to
unwind, the Trustee argues that no such disruption would occur,
andcorrespondingly,546(e)isinapplicable. TrusteesBr.25.
Thisargumentmisses thepoint. ItdoesnotengagewiththelanguageCongresschose for 741(7)and546(e). Because those
provisionsdo not contain a purchaseorsale requirement,whether
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thebusinessofeffectingsecurities transactions,haveeveryright to
avail themselves of all the protections afforded to the clients of
stockbrokers,includingtheprotectionofferedby546(e).
Second, the Trustee argues that the Account Documents are
notsecuritiescontractsbecausetheydonotspecificallyidentifyany
security,issuer,quantity,price,orothertermsnecessarytodescribe
a security transaction.4 See Trustee Br. 38. This argument
constructsarequirementthatthelawdoesnotcontain. TheTrading
Authorizationidentifiesaspecificcategoryofpublicsecurities(S&P
100stocks)tobetraded.A164621. Nothinginourreadingof
741(7)(A)
indicates
that
any
greater
specificity,
much
less
thedegree of detail called for by the Trustee, is required. To the
contrary, if Congress intended to mandate securities contracts to
identify transactions with the precision the Trustee claims is
required, Congress would hardly have included the reference to
masteragreementsinsubsection(x)oradoptedthebroadsimilar
to catchall in subsection (vii) or the any . . . arrangement . . .
relatedtoanyagreement...languageinsubsection(xi). SeePenn.
DeptofPub.Welfarev.Davenport,495U.S.552,562(1990).
Third,theTrusteearguesthattheAccountDocumentsmerely
authorize BLMIS to conduct securities transactions onbehalf of its
customers,butneverexpresslyobligateBLMIStocarryoutanysuch
transactions. TrusteesBr.3839. Accordingly,theTrusteecontends
that even if customers reasonably expected that BLMIS would
conductsecurities transactionson theirbehalf, thiswouldestablish
an obligation sounding in quasicontract at most,but would not
constitutea truecontractualobligation. Id.at39. Alternatively, the
Trustee argues that the Account Documents establish an agency
4TheSecuritiesInvestorProtectionCorporation(SIPC),alsoanappellant inthiscase,
assumedarguendoforthepurposesofitsbriefthattheAccountDocumentsaresecurities
contracts.SeeSIPCBr.2,14.
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relationship between BLMIS and its customers, similar to that
between a real estatebroker and a homebuyer, and are no more
contracts for the purchase and sale of a security than a real estatebrokerage agreement is a contract for the purchase or sale of a
house. Id.at42.
TheTrusteemightbecorrectthattherecordreflectsnowritten
contract for the purchase or sale of a specific security between
BLMIS and its customers. Further, the Trustee is right that the
Account Documents functionby authorizing BLMIS to act as an
agent for the customer in unspecified expected future securities
transactions.
The
Trustee
is
also
correct
that,
standing
alone,
theAccountDocumentswouldnoteffectuatethepurchaseorsaleofany
particularsecurity.
But,aswehaveseen, thestatutorydefinitionofasecurities
contractisnotlimitedinthewaytheTrusteewouldhaveusreadit,
and to the contrary, encompasses the relationship createdby the
Account Documents. As discussed above, the definition includes
any other agreement . . . that is similar to a contract for the
purchase,sale
or
loan
of
asecurity.
11
U.S.C.
741(7)(A)(i),
(vii)(emphases added). An agreement is a manifestation of mutual
assent on the part of two or more persons, and it has in some
respects a wider meaning than contract, bargain or promise.
Restatement (Second) of Contracts 3 (1979), 3 cmt. a. The
Account Documents established that BLMIS and its customers
manifest[ed] their mutual assent that BLMIS would conduct
securities transactions on the customersbehalf pursuing a specific
investmentstrategy. See id.3. Thisis,inourview,anagreement
sufficiently similar to a contract for the purchase or sale of asecuritytofallwithin thecatchallprovisionof741(7)(A)(vii). Of
course, BLMIS secretly intended to violate the agreementby using
the deposits to fund the ongoing Ponzi scheme. But this is of no
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moment, because [a]n agreement is a manifestation of mutual
assent, and [t]he conduct of a party may manifest assent even
thoughhedoesnotinfactassent.Id.3,19(3)(emphasisadded).
We similarly have little difficulty concluding that the
paymentsBLMIS made to itscustomersweremadeinconnection
with thesecuritiescontracts identifiedabove. In thecontextof
546(e),atransferisinconnectionwithasecuritiescontract if it is
related to or associated with the securities contract. See
Websters3dNewIntlDictionary481(1993)(definingconnection
as relationship or association in thought); cf. Shaw v. DeltaAir
Lines,Inc.,
463
U.S.
85,
97
(1983)
(interpreting
relates
to
to
mean
a
connection with or reference to). Here, BLMIS promised its
customers that itwould transactsecurities,andBLMISscustomers
deposited money relying on that promise. This agreement
constitutes a securities contract as defined in the statute and the
customers subsequent withdrawals from their accounts were
thereforerelatedto,andassociatedwith,thissecuritiescontract.
SIPC argues that Ponzi scheme payments,by definition, are
notin
connection
with
asecurities
contract.
SIPCs
Br.
16.
SIPCcontends that in order for the payments to havebeen made in
connection with a securities contract, there must necessarily have
been some relation or connection between the payment and the
contract. Id.at2728. AccordingtoSIPC,althoughthepaymentsof
fictitious profits were purported to havebeen made in connection
withtheagreements,theywerenotinfactmadeinconnectionwith
theagreementsbecausetheagreementswereeitherirrelevantorthe
paymentswerenotauthorizedbytheagreements. Id.at2830.
We are not persuaded. Section 546(e) sets a lowbar for the
requiredrelationshipbetweenthesecuritiescontractandthetransfer
sought to be avoided. Congress could have raised the bar by
requiringthatthetransferbemadepursuantto,orinaccordance
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withthetermsof,orasrequiredby,thesecuritiescontract,butit
didnot. Instead,Congressmerelyrequiredthatthetransferhavea
connectiontothesecuritiescontract,whichthesepaymentsdo.
CertainlySIPCandtheTrusteearecorrectthatthesetransfers
were also made in connection with a Ponzi scheme and, as a
result,werefraudulent.See id.at29. Indeed,BLMISsconductwas
inflagrantbreachoftheagreementsitmadewithitscustomers. But
thefactthatapaymentwasmadeinconnectionwithaPonzischeme
doesnotmeanthatiswasnotatthesametimemadeinconnection
with a (breached) securities contract. After all, a transfer canbe
connectedto,
and
can
be
made
in
relation
to,
multiple
documents
or
purposessimultaneously.
II
We also conclude that the transfers constituted settlement
payments, which provides another basis to shield the transfers
from avoidance under 546(e). As described above, 546(e)
provides that a trustee may not avoid a transfer that is a . . .
settlement payment, as defined in . . . this title, madeby [a] . . .
stockbroker. Section 741(8) defines settlement payment as apreliminary settlement payment, a partial settlement payment, an
interim settlement payment, a settlement payment on account, a
final settlement payment, or any other similar payment commonly
usedinthesecuritiestrade.
The Trustee again contends that these transfers did not
constitutesettlementpayment[s]becauseBLMISneverengagedin
actual securities trading. But we have held that the statutory
definitionshouldbebroadlyconstrued toapply tothe transferofcashorsecuritiesmadetocomplete[a]securitiestransaction.Enron,
651F.3dat334 (citationsomitted). That iswhat theBLMISclients
received. Each time a customer requested a withdrawal from
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BLMIS, he or she intended that BLMIS dispose of securities and
remitpaymenttothecustomer.SeeN.Y.U.C.C.8501(b)(1)&cmt.2
(brokers written crediting of securities to a customers accountcreates an enforceable securities entitlement). The statutory
definition andEnron compel the conclusion that, for example, if I
instructmybrokertosellmysharesofABCCorporationandremit
thecash,thatpaymentisasettlementevenifthebrokermayhave
failed to execute the trade and sent me cash stolen from another
client. As the district court correctly concluded, because the
customer granted BLMIS discretion to liquidate securities in their
accounts to the extent necessary to implement their sell orders or
withdrawal requests,each transfer in respectofasuchanorderor
requestconstitutedasettlementpayment.
III
Finally, we disagree with the Trustees contention that
affirmingthedistrictcourtsdecisionwouldbeinconsistentwithour
decisioninInreBLMIS,654F.3d229(2dCir.2011). There,wefaced
the question of how to calculate each BLMIS customers net
equity,as
that
term
is
defined
in
SIPA.
Id.
at
233.
Wesaid
that
itwouldbeabsurdtocalculatecustomersnetequityusingBLMISs
fictitiousaccountstatements,becausethatwouldhavethe...effect
of treating fictitious and arbitrarily assigned paper profits as real
and would give legal effect to Madoffs machinations. Id. at 235.
According to the Trustee, this case is similar. The Trustee argues
that, to allow customers to retain the fictitious profits Madoff
arbitrarilybestowed on them amounts to giving legal effect to his
fraud. TrusteesBr.5155.
This argument, albeit compelling, is ultimately not
convincing. Inourearlierdecision,weinterpretednetequityina
mannerthatwouldharmonizeitwiththeSIPAstatutoryframework
as a whole. See In re BLMIS, 654 F.3d at 237. Section 546(e),
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however, ispartoftheBankruptcyCode,notSIPA,andwasnot in
issue in In re BLMIS. This is importantbecause, in enacting the
Bankruptcy Code, Congress struck careful balances between theneedforanequitableresultforthedebtoranditscreditors,andthe
needforfinality. SeeInreCenturyBrassProds.,Inc.,22F.3d37,40(2d
Cir.1994). Forexample,abankruptcytrusteecanrecoverfraudulent
transfersunder548(a)(1)onlywhenthetransferstookplacewithin
two years of the petition date. And avoidance claims must be
brought two years after the entry of the order for relief at the
latest. 11U.S.C.546(a). Thesestatutesoflimitationsreflectthat,at
a certain point, the need for finality is paramount even in light of
countervailingequityconsiderations. Similarly,byenacting546(e),
Congressprovidedthat,foraverybroadrangeof securitiesrelated
transfers, the interest in finality is sufficiently important that they
cannotbe avoidedby abankruptcy trustee at all, except as actual
fraudulenttransfersunder548(a)(1)(A). Weareobligedtorespect
the balance Congress struck among these complex competing
considerations.
CONCLUSION
ThejudgmentofthedistrictcourtisAFFIRMED.
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