for the second circuit - madofftrustee€¦ · for the second circuit in re: bernard l. madoff...

11-5051-bkIN THE

United States Court of AppealsFOR 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—

(caption continued on inside cover)

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

REPLY BRIEF FOR PLAINTIFF-APPELLANT IRVING H. PICARD, AS TRUSTEE FOR THE SUBSTANTIVELY CONSOLIDATED

SIPA LIQUIDATION OF BERNARD L. MADOFF INVESTMENTSECURITIES LLC AND BERNARD L. MADOFF

d

DAVID J. SHEEHANOREN J. WARSHAVSKYDEBORAH H. RENNERLAN HOANGCARRIE A. LONGSTAFFBAKER & HOSTETLER LLP45 Rockefeller PlazaNew York, New York 10111(212) 589-4200

Attorneys for Plaintiff-AppellantIrving H. Picard, as Trustee for the Substantively ConsolidatedSIPA Liquidation of Bernard L.Madoff Investment Securities LLCand Bernard L. Madoff

Case: 11-5051 Document: 139 Page: 1 04/26/2012 591929 48

UBS FUND SERVICES (LUXEMBOURG) SA, ACCESS INTERNATIONAL ADVISORSLLC, ACCESS INTERNATIONAL ADVISORS EUROPE LIMITED, ACCESSINTERNATIONAL ADVISORS LTD., ACCESS PARTNERS (SUISSE) SA, ACCESSMANAGEMENT LUXEMBOURG SA (f/k/a ACCESS INTERNATIONAL ADVISORS(LUXEMBOURG) SA) as represented by its Liquidator MAITRE FERNANDENTRINGER, ACCESS PARTNERS SA, as represented by its Liquidator MAITREFERNAND ENTRINGER, PATRICK LITTAYE, CLAUDINE MAGON DE LAVILLEHUCHET (a/k/a CLAUDINE DE LA VLLLEHUCHET) in her capacity asExecutrix under the Will of THIERRY MAGON DE LA VILLEHUCHET (a/k/a RENETHIERRY DE LA VILLEHUCHET), CLAUDINE MAGON DE LA VILLEHUCHET (a/k/aCLAUDINE DE LA VILLEHUCHET) individually as the sole beneficiary under theWill of THIERRY MAGON DE LA VILLEHUCHET (a/k/a RENE THIERRY DE LAVILLEHUCHET), PIERRE DELANDMETER, THEODORE DUMBAULD, LUXALPHASICAV, as represented by its Liquidators MAITRE ALAIN RUKAVINA AND PAULLAPLUME, ROGER HARTMANN, RALF SCHROETER, RENE EGGER, ALAINHONDEQUIN, HERMANN KRANZ, BERND (a/k/a BERNARD) STIEHL,GROUPEMENT FINANCIER LTD., UBS AG, UBS (LUXEMBOURG) SA, MAITREALAIN RUKAVLNA AND PAUL LAPLUME, in their capacities as liquidators andrepresentatives of LUXALPHA SICAV, UBS THIRD PARTY MANAGEMENTCOMPANY SA,

Defendants-Appellees,—and—

SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor.


TABLE OF CONTENTS

Page

-i-

PRELIMINARY STATEMENT .............................................................................. 1

I. THE TRUSTEE DERIVES STANDING FROM SIPA TO ASSERT COMMON LAW CLAIMS AGAINST UBS/AIA ............. 5

II. ST. PAUL SUPPORTS THE TRUSTEE’S STANDING TO ASSERT COMMON LAW CLAIMS ................................................. 6

A. St. Paul Applies Here ................................................................. 8

B. Caplin Is Consistent With the Trustee’s Position .................... 10

III. THE TRUSTEE, AS THE REAL PARTY IN INTEREST, HAS MET THE PRUDENTIAL STANDING REQUIREMENTS ............................................................................. 12

IV. UBS/AIA MISSTATES THE PRECEDENTIAL EFFECT OF THE REDINGTON CASES ............................................................... 13

A. The Holdings in Redington I, Redington II and Redington III .............................................................................................. 13

B. The Second Circuit’s August 8, 1979 Order Does Not Affect Its Prior Holding on Standing ....................................... 15

V. RULE 15c3-3 AND SIPA CREATE A BAILMENT RELATIONSHIP THAT PERMITS THE TRUSTEE TO BRING COMMON LAW CLAIMS TO RESTORE CUSTOMER PROPERTY ................................................................. 18

A. Bailment by Operation of Law ................................................ 19

B. SIPA’s Continuation of the Bailment ...................................... 21

VI. WAGONER SHOULD NOT APPLY TO THE TRUSTEE ............... 22

A. Equity Dictates That Wagoner and In Pari Delicto Should Not Impede the Trustee’s Common Law Claims ........ 22

B. UBS/AIA’s Reliance on Kirschner and Wagoner Is Misplaced ................................................................................. 25

VII. SIPC HAS STANDING AS SUBROGEE TO BRING COMMON LAW CLAIMS AGAINST THIRD PARTIES .............. 27


TABLE OF CONTENTS (continued)

Page

-ii-

VIII. THE TRUSTEE HAS STANDING TO ASSERT A CONTRIBUTION CLAIM ................................................................ 29

A. SIPA Does Not Bar the Trustee’s Contribution Claim ............ 29

B. The Trustee Properly Pleads a Claim for Contribution ........... 31

IX. THE TRUSTEE IS EXEMPT FROM SLUSA .................................. 32

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


TABLE OF AUTHORITIES Page(s)

-iii-

CASES

Air Line Pilots Ass’n, Int’l v. Am. Nat’l Bank & Trust Co. of Chi. (In re Ionosphere Clubs, Inc.), 156 B.R. 414 (S.D.N.Y. 1993) ........................................................................... 10

Allen v. Wright, 468 U.S. 737 (1984) ............................................................................................ 12

Allstate Ins. Co. v. Stein, 1 N.Y.3d 416 (2004) ........................................................................................... 29

Ancile Inv. Co. v. Archer Daniels Midland Co., 784 F. Supp. 2d 296 (S.D.N.Y. 2011) .......................................................... 18, 19

Appleton v. First Nat’l Bank of Ohio, 62 F.3d 791 (6th Cir. 1995) .......................................................................... 17, 28

Bankr. Servs., Inc. v. Ernst & Young (In re CBI Holding Co.), 529 F.3d 432 (2d Cir. 2008) ............................................................................... 23

Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) ...................................................................................... 23, 24

In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) ............................................................................... 25

Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130 (2d Cir. 2005), rev’d on other grounds, 551 U.S. 264 (2007) .................................................................................................................. 16

Blue Cross & Blue Shield of New Jersey, Inc. v. Philip Morris USA Inc., 344 F.3d 212 (2d Cir. 2003) ............................................................................... 29

Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972) ...................................................................................... 10, 11

Cent. Pines Land Co. v. United States, 274 F.3d 881 (5th Cir. 2001) .............................................................................. 16

Cohain v. Klimley, 2010 WL 3701362 (S.D.N.Y. Sept. 20, 2010) ..................................................... 7


TABLE OF AUTHORITIES (continued) Page(s)

-iv-

In re Enron Corp., 2003 Bankr. LEXIS 2262 (Bankr. S.D.N.Y. Jan. 22, 2003) .............................. 21

Ferris, Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 286 B.R. 109 (Bankr. D. Minn. 2002), aff’d, 2003 WL 1824937 (D. Minn. Apr. 7, 2003) .................................................................................. 6, 19, 20

Fox v. Picard, 2012 WL 990829 (S.D.N.Y. Mar. 26, 2012) .................................................. 8, 10

Giddens v. Blair (In re A.R. Baron & Co.), 280 B.R. 794 (Bankr. S.D.N.Y. 2002) ........................................................... 17,27

Hill v. Spencer Sav. & Loan Ass’n (In re Bevill, Bresler & Schulman, Inc.), 83 B.R. 880 (D.N.J. 1988) .................................................................................... 6

Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995) ......................................................................... 11, 26

Holmes v. SIPC, 503 U.S. 258 (1992) ............................................................................................ 16

Horwitz v. Sheldon (In re Donald Sheldon & Co.), 148 B.R. 385 (Bankr. S.D.N.Y. 1992) ............................................................ 6, 20

Johnson v. Yellow Cab Transit Co., 321 U.S. 383 (1944) ............................................................................................ 23

Kagan v. St. Vincents Catholic Med. Ctrs. of N.Y. (In re St. Vincents Catholic Med. Ctrs. of N.Y.), 449 B.R. 209 (S.D.N.Y. 2011) ............................................................................. 9

Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010) ......................................................................................... 26

Koch Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339 (7th Cir. 1987) ........................................................................ 9, 11

In re Kummer, 93 A.D.2d 135 (2d Dept. 1983) .......................................................................... 14



-v-

L.A. and G.A. v. Granby Bd. of Educ., 227 F. App’x 47 (2d Cir. 2007) .......................................................................... 16

LaSala v. Bank of Cyprus Pub. Co., 510 F. Supp. 2d 246 (S.D.N.Y. 2007) ................................................................ 34

LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008) ............................................................................... 34

Lawyers’ Fund for Client Protection v. JPMorgan Chase Bank, N.A., 80 A.D.3d 1129 (3d Dept. 2011) ........................................................................ 29

Lee v. Marsh & McLennan Cos., 2007 WL 704033 (S.D.N.Y. Mar. 7, 2007) ........................................................ 34

In re Lehman Bros. Holdings, 445 B.R. 143 (Bankr. S.D.N.Y. 2011) .......................................................... 20, 21

LNC Invs., Inc. v. First Fidelity Bank, Nat’l Ass’n, 935 F. Supp. 1333 (S.D.N.Y. 1996) ................................................................... 31

Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) ............................................................................................ 12

McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465 (1960) ........................................................................................... 23

McKenny v. McGraw (In re Bell & Beckwith), 937 F.2d 1104 (6th Cir. 1991) ............................................................................ 28

Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822 (2d Cir. 1997) ......................................................................... 11, 26

Merrill Lynch Mortg. Capital, Inc. v. FDIC, 293 F. Supp. 2d 98 (D.D.C. 2003) ...................................................................... 21

Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531 (S.D.N.Y. 1990) ..................................................................... 17



-vi-

Muchnick v. Thompson Corp. (In re Literary Works in Elec. Databases Copyright Litig.), 509 F.3d 136 (2d Cir. 2007) ............................................................................... 16

Murphy v. Arlington Cent. Sch. Dist. Bd. of Educ., 402 F.3d 332 (2d Cir. 2005), rev’d on other grounds, 548 U.S. 291 (2006) .................................................................................................................. 16

Nat’l Asbestos Workers Med. Fund v. Philip Morris, Inc., 74 F. Supp. 2d 221 (E.D.N.Y. 1999) .................................................................. 17

Nat’l Corp. for Hous. P’ship v. Liberty State Bank, 836 F.2d 433 (8th Cir. 1988) .............................................................................. 21

Nortex Trading Corp. v. Newfield, 311 F.2d 163 (2d Cir. 1962) ............................................................................... 31

Peltz v. SHB Commodities, Inc., 115 F.3d 1082 (2d Cir. 1997) ............................................................................. 23

PenneCom B.V. v. Merrill Lynch & Co., 372 F.3d 488 (2d Cir. 2004) ............................................................................... 23

Pereira v. Farace, 413 F.3d 330 (2d Cir. 2005) ............................................................................... 11

Pereira v. Marshall & Sterling, Inc. (In re Payroll Express Corp.), 2005 WL 2438444 (Bankr. S.D.N.Y. Mar. 30, 2005) .................................... 7, 13

Picard v. Fox, 429 B.R. 423 (Bankr. S.D.N.Y. 2010), aff’d, 2012 WL 990829 (S.D.N.Y. Mar. 26, 2012)................................................................................................... 7, 9

Picard v. Stahl, 443 B.R. 295 (Bankr. S.D.N.Y. 2011), aff’d, 11-cv-02246 (AKH) (S.D.N.Y. Dec. 5, 2011) ................................................................................... 7, 9

Picard v. Taylor (In re Park South Sec. LLC), 326 B.R. 505 (Bankr. S.D.N.Y. 2005) ................................................................ 17



-vii-

Redington v. Touche Ross & Co., 592 F.2d 619 (2d Cir. 1978) ........................................................................passim

Redington v. Touche Ross & Co., 612 F.2d 68 (2d Cir. 1979) .......................................................................... 13, 15

Redington v. Touche Ross & Co., 428 F. Supp. 483 (S.D.N.Y. 1977) ............................................................... 13, 14

RGH Liquidating Trust v. Deloitte & Touche LLP, 17 N.Y.3d 397 (2011) ......................................................................................... 34

Roland v. Green, 2012 WL 898557 (5th Cir. Mar. 19, 2012) .......................................................... 5

Rosenman Family, LLC v. Picard, 395 F. App’x 766 (2d Cir. 2010) .......................................................................... 5

Rozsa v. May Davis Grp., 152 F. Supp. 2d 526 (S.D.N.Y. 2001) ................................................................ 19

SEC v. Albert & Maguire Sec. Co., 560 F.2d 569 (3d Cir. 1977) ............................................................................... 13

SEC v. Ambassador Church Fin./Dev. Grp., Inc., 679 F.2d 608 (6th Cir. 1982) .............................................................................. 19

SEC v. First Sec. Co. of Chi., 507 F.2d 417 (7th Cir. 1974) ................................................................................ 6

SEC v. Packer, Wilbur & Co., 498 F.2d 978 (2d Cir. 1974) ............................................................................... 24

Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) ........................................................................passim

Silverman v. Meister Seelig & Fein, LLP (In re Agape World, Inc.), 2012 WL 566303 (Bankr. E.D.N.Y. Feb. 21, 2012) .............................. 30, 31, 32

SIPC v. BDO Seidman, LLP, 222 F.3d 63 (2d Cir. 2000) ........................................................................... 16, 27



-viii-

SIPC v. BDO Seidman LLP, 49 F. Supp. 2d 644 (S.D.N.Y. 1999) .................................................................. 27

SIPC v. Nappy (In re Nappy), 269 B.R. 277 (Bankr. E.D.N.Y. 1999) ............................................................... 17

Smith v. Arthur Andersen LLP, 421 F.3d 989 (9th Cir. 2005) .............................................................................. 34

Sprint Commc’ns Co. v. APCC Servs., Inc., 554 U.S. 269 (2008) ............................................................................................ 12

St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) ........................................................................passim

Steinberg v. Buczynski, 40 F.3d 890 (7th Cir. 1994) .................................................................................. 9

Stroman Realty Inc. v. Wercinski, 513 F.3d 476 (5th Cir. 2008) .............................................................................. 15

In re Sunpoint Sec., Inc., 377 B.R. 513 (Bankr. E.D. Tex. 2007) ............................................................... 17

In re Terrorist Attacks on September 11, 2001, 2011 WL 4903584 (S.D.N.Y. Oct. 14, 2011) ..................................................... 17

Tese-Milner v. Beeler (In re Hampton Hotel Investors, L.P.), 289 B.R. 563 (Bankr. S.D.N.Y. 2003) ................................................................ 13

Touche Ross & Co. v. Redington, 442 U.S. 560 (1979) ............................................................................... 13, 14, 15

United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94 (2d Cir. 2010), rev’d on other grounds, __U.S. __, 131 S. Ct. 1885 (2011) ......................................................................................................... 17

United States v. Blackstone Med., 647 F.3d 377 (1st Cir. 2011) ............................................................................... 17



-ix-

United States v. Perea, 986 F.2d 633 (2d Cir. 1993) ............................................................................... 22

Valley Forge Christian Coll. v. Ams. United for Separation of Church & State, Inc., 454 U.S. 464 (1982) ............................................................................................ 12

Wight v. BankAmerica Corp., 219 F.3d 79 (2d Cir. 2000) ................................................................................. 26

STATUTES

11 U.S.C. § 101(10)(A) .............................................................................................. 5

11 U.S.C. § 102(2) ..................................................................................................... 5

11 U.S.C. § 541 .......................................................................................................... 5

11 U.S.C. § 726(a) ................................................................................................... 22

15 U.S.C. § 77p(b) ................................................................................................... 33

15 U.S.C. § 77p(f)(2)(A)(i) ...................................................................................... 33

15 U.S.C. § 77p(f)(2)(C) .......................................................................................... 33

15 U.S.C. § 78fff(a) ............................................................................................. 6, 12

15 U.S.C. § 78fff(a)(1) ......................................................................................... 5, 20

15 U.S.C. § 78fff(b) ................................................................................................. 13

15 U.S.C. § 78fff-1(a) .............................................................................................. 13

15 U.S.C. § 78fff-1(a)(3) ......................................................................................... 18

15 U.S.C. § 78fff-2 ..................................................................................................... 6

15 U.S.C. § 78fff-2(c) .......................................................................................... 5, 18

15 U.S.C. § 78fff-2(c)(1) ..................................................................................... 6, 28

15 U.S.C. § 78fff-2(f)............................................................................................... 18



-x-

15 U.S.C. § 78fff-3(a) .................................................................................... 5, 27, 28

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

15 U.S.C. § 78lll(2)(B) ............................................................................................ 24

15 U.S.C. § 78lll(4) .................................................................................... 5, 6, 20, 21

15 U.S.C. § 78lll(4)(D) ............................................................................................ 18

15 U.S.C. § 78u-4 ..................................................................................................... 33

N.Y. C.P.L.R. 1401 (McKinney 2012) .................................................................... 30

Securities and Exchange Act of 1934, 15 U.S.C. § 78a et seq. ............... 3, 13, 19, 32

SIPA Amendments of 1978, P.L. 95-283, 92 Stat. 249 (1978) ............................... 21

OTHER AUTHORITIES

17 C.F.R. § 240.15c3-3 .......................................................................... 18, 19, 20, 21

17 C.F.R. § 240.15c3-3(b) ....................................................................................... 19

17 C.F.R. § 240.15c3-3(e) ................................................................................. 19, 21

Michael P. Jamroz, The Customer Protection Rule, 57 Bus. Law. 1069 (2001-02) ....................................................................................................... 19, 20

S. Rep. No. 105-182 (1998) ..................................................................................... 33

S. Rep. No. 90-1218 (1970) ..................................................................................... 25


Irving H. Picard, as trustee (the “Trustee”) pursuant to the Securities

Investor Protection Act, 15 U.S.C. § 78aaa et seq. (“SIPA”), for the liquidation of

the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”),

substantively consolidated with the estate of Bernard L. Madoff (“Madoff”),

submits this reply in further support of the within appeal to reverse in its entirety

the District Court’s Rule 54(b) Judgment, embodying the November 1, 2011

Order, and to remand this matter for further proceedings.1

PRELIMINARY STATEMENT

Over 2,400 customers lost more than $19 billion in principal due to

Madoff’s fraud. The Trustee’s Amended Complaint (the “Complaint”) alleges that

UBS,2 Access,3 Groupement Financier Ltd. (“Groupement”) (hereinafter,

1 This appeal, Docket No. 11-5051, has been designated for in-tandem treatment with appeals in Docket Nos. 11-5044, 11-5207 and 11-5175. See Docket No. 11-5051 Order, ECF No. 85. The Trustee respectfully incorporates herein his arguments set forth in his briefs in those in-tandem appeals. 2 “UBS” includes UBS AG, UBS (Luxembourg) S.A., UBS Fund Services (Luxembourg) S.A., UBS Third Party Management Company S.A., Roger Hartmann, Ralf Schroter, Rene Egger, Bernd Stiehl, Alain Hondequin, and Hermann Kranz. 3 “Access” includes Access International Advisors LLC, Access International Advisors Europe Limited, Access International Advisors Ltd., Access Partners (Suisse) S.A., Access Management Luxembourg S.A., Access Partners S.A., Patrick Littaye, Claudine Magnon de la Villehuchet (in her capacities as Executrix and sole beneficiary of the Will of Thierry Magnon de la Villehuchet), Pierre Delandmeter, and Theodore Dumbauld.


2

collectively, “UBS/AIA”)4 and Luxalpha SICAV (“Luxalpha”)5 played a critical

role in perpetuating Madoff’s fraud and deepening the insolvency of BLMIS. In

addition to actively marketing the Luxalpha and Groupement feeder funds and

providing an air of legitimacy to Madoff’s operations—operations which they had

reason to know were fraudulent—UBS/AIA further facilitated the fraud by

outwardly presenting itself as custodian and administrator of the funds, while in

reality delegating the custodial responsibility to Madoff himself and then relying

solely on Madoff to verify his own trades. Yet, UBS/AIA contends that the

Trustee cannot seek to hold it liable for enabling Madoff’s fraud.

For this extraordinary position, UBS/AIA seeks shelter in this Court’s

Wagoner decision, the state-law defense of in pari delicto and SLUSA. But

Wagoner has no application to a liquidation under SIPA, and in pari delicto has no

application to causes of action that seek to vindicate the interests protected by

SIPA. Nor can SLUSA be read to bar the Trustee’s action. UBS/AIA must be

held to account. And the law—correctly interpreted—agrees.

4 Access and Groupement adopt the arguments set forth in UBS’s brief. Accordingly, the Trustee refers to these defendants collectively as UBS/AIA. 5 Luxalpha joins in the briefs filed by UBS and Access with respect to arguments seeking to affirm the dismissal of the contribution claim. The Trustee’s arguments to the contribution claim and all other claims as to UBS/AIA are asserted herein as to Luxalpha.


3

Beginning in the 1930s, Congress recognized that customers of a broker-

dealer needed protection. The Securities and Exchange Act of 1934 (“the ’34

Act”) was designed to protect customers from rogue broker-dealers. With

section 60(e) of the Chandler Act of 1938, Congress attempted to protect

customers from failed broker-dealers. But that was not enough. After a spate of

broker-dealer collapses, Congress enacted SIPA. With SIPA, Congress delineated

the property right of customers of a failed broker-dealer—a pro rata share of a

fund of customer property from which customers could be compensated—which is

wholly distinct from the rights of all other creditors. Congress’s stated goal was

plain: customers should be able to invest without fear that a registered broker-

dealer, like Madoff, will fail, leaving them penniless.

SIPA recognizes that when customers invested, they transferred possession,

but not title, of their money to BLMIS. BLMIS never owned that money. Rather,

BLMIS was legally bound to hold that money in reserve for its customers. In a

SIPA liquidation, moneys in the reserve account become customer property in

which all customers with an allowed claim share on a pro rata basis.

What is the relationship between a SIPA trustee and the fund of customer

property? In Redington, this Court called it a “bailment.” Regardless of what this

relationship is called, Redington is a judicial expression of Congressional intent

that the Trustee is the proper party to maximize customer property. That judicial


4

expression makes sense and has been followed by every court except the two

courts whose decisions are on appeal.

BLMIS’s customers were injured by UBS/AIA’s conduct. These

recoverable damages are reflected in the shortfall of customer property. It is in

this context that the Trustee’s standing to restore customer property must be

analyzed.

Upon commencement of this proceeding, SIPA ensured that all customers

who lost their principal investment would share pro rata in any recovery of

customer property. Given that the Trustee brings this action to restore customer

property, Wagoner and Caplin have no application. Rather, it is this Court’s

decision in St. Paul—which held generalized claims must be brought by the

Trustee, not by individual customers—that controls.

Allowing the Trustee to fulfill his mandate and maximize the recovery to

customers falls squarely within the reasoning of Redington and St. Paul, and

ensures that customers will not be left to individually prosecute or abandon claims

for lack of resources to pursue them. SIPA already provides that the Securities

Investor Protection Corporation (“SIPC”) bears these costs. Suggesting that each

customer who lost money—even those bankrupted by Madoff—must maintain

his/her own suit against those that facilitated Madoff’s fraud not only runs afoul of

St. Paul, but also SIPA’s mission as an investor protection statute.


5

SIPA aims to fully return customer property to customers. This Court

should reverse the decision below, and allow the Trustee to fulfill his statutory

mandate.

I. THE TRUSTEE DERIVES STANDING FROM SIPA TO ASSERT COMMON LAW CLAIMS AGAINST UBS/AIA

A SIPA liquidation and a Chapter 7 liquidation have important distinctions.

See, e.g., 15 U.S.C. §§ 78fff(a)(1), 78fff-3(a). In a Chapter 7 liquidation, a

debtor’s estate is comprised solely of the debtor’s property, subject to creditors’

claims. See 11 U.S.C. §§ 101(10)(A), 102(2), 541. In a SIPA liquidation, the

estate includes property that never belonged to the debtor. Prior to the insolvency,

each individual customer’s property is held by the debtor “for safekeeping . . . [or]

for the purpose of purchasing securities.” 15 U.S.C. § 78lll(2). Upon insolvency,

the property of individual customers left with the debtor becomes “customer

property,”6 from which all customers, as defined by SIPA, share on a pro rata

basis. 15 U.S.C. §§ 78fff-2(c), 78lll(4). Therefore, customers in a SIPA

proceeding are not traditional creditors. Only when customers and SIPC are made

whole do the protections of SIPA yield to the traditional bankruptcy paradigm

6 The Trustee referred to “customer property” and “customer property estate” in his principal brief; the two terms are interchangeable. See, e.g., Rosenman Family, LLC v. Picard, 395 F. App’x 766, 768 (2d Cir. 2010).


6

under title 11. 15 U.S.C. § 78fff-2(c)(1). Until that point, a SIPA trustee proceeds

to maximize distributions to customers.

A SIPA trustee’s mandate is to make customers financially whole. As such,

any shortfall in customer property can be supplemented by certain assets that are

otherwise property of the debtor’s general estate. See 15 U.S.C. § 78lll(4); Ferris,

Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 286 B.R. 109, 129, 132

(Bankr. D. Minn. 2002), aff’d, 2003 WL 1824937 (D. Minn. Apr. 7, 2003);

Horwitz v. Sheldon (In re Donald Sheldon & Co.), 148 B.R. 385, 390 (Bankr.

S.D.N.Y. 1992). The shortfall at the commencement of this SIPA liquidation was

more than $19 billion.

II. ST. PAUL SUPPORTS THE TRUSTEE’S STANDING TO ASSERT COMMON LAW CLAIMS

SIPA effectively socializes to all customers the injury caused by UBS/AIA’s

actions. See 15 U.S.C. §§ 78fff-2, 78lll(2) (customers share pro rata in recovery of

customer property). As such, a SIPA trustee has the unique obligation to represent

the interests of customers—as a whole—in redressing their common injury,

namely the depletion of customer property. See, e.g., 15 U.S.C. § 78fff(a); SEC v.

First Sec. Co. of Chi., 507 F.2d 417, 420 (7th Cir. 1974); Hill v. Spencer Sav. &

Loan Ass’n (In re Bevill, Bresler & Schulman, Inc.), 83 B.R. 880, 886 (D.N.J.

1988).


7

Redington7 called this relationship a bailment. The Trustee and SIPC have

explained why this characterization is correct. Regardless of the nomenclature

used, however, a SIPA trustee acts to restore depleted customer property. As set

forth in St. Paul, and in subsequent reaffirmations of its holding,8 when a “creditor

shares in an injury common to all creditors,” a cause of action to redress such

injury belongs to the estate and may be asserted only by the trustee who has

standing to bring generalized claims. St. Paul Fire & Marine Ins. Co. v. PepsiCo,

Inc., 884 F.2d 688, 698-704 (2d Cir. 1989). Here, the Trustee seeks to redress a

“common” injury—the loss of customer property caused by UBS/AIA’s

participation in Madoff’s fraud—and to restore that customer property in which the

customers will share pro rata. Because this action arises in a SIPA liquidation, the

depletion of the customer property is the “generalized” injury as contemplated by

St. Paul. See Pereira v. Marshall & Sterling, Inc. (In re Payroll Express Corp.),

2005 WL 2438444, at *7 (Bankr. S.D.N.Y. Mar. 30, 2005) (dissipation of assets

due to artificially extending the life of an insolvent business is a generalized injury

that should be redressed by a trustee).

7 The Redington Cases are defined infra at 13 & n.14. 8 E.g., Cohain v. Klimley, 2010 WL 3701362, at *10 (S.D.N.Y. Sept. 20, 2010); Picard v. Stahl, 443 B.R. 295, 311-12 (Bankr. S.D.N.Y. 2011), aff’d, 11-cv-02246 (AKH) (S.D.N.Y. Dec. 5, 2011) (summary order, ECF No. 26); Picard v. Fox, 429 B.R. 423, 431 (Bankr. S.D.N.Y. 2010), aff’d, 2012 WL 990829 (S.D.N.Y. Mar. 26, 2012).


8

A. St. Paul Applies Here

UBS/AIA argues that St. Paul merely allows a trustee to assert an alter ego

claim that belongs to a debtor and its holding on a trustee’s standing to bring

generalized claims is a “snippet” that is taken “out of context.” (UBS Br. 16-17,

20.) However, St. Paul considered not only a trustee’s right to bring alter ego

claims, but also a trustee’s right to bring “other claims of creditors against third

parties to a bankruptcy proceeding. . . .” 884 F.2d at 696. This Court concluded

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 trustee is the proper

person to assert the claim, and the creditors are bound by the outcome of the

trustee’s action.” Id. at 701. But UBS/AIA contends that St. Paul focuses on

“who owns the claims at issue,” not on whether such claims are generalized or

particularized. (UBS Br. 18.) This argument only demonstrates that UBS/AIA

misunderstands that “who owns the claims at issue” turns on whether such claims

are particularized or generalized.9

St. Paul undercuts UBS/AIA’s contention that the customers (and not the

Trustee) have the right to bring claims because they (and not the BLMIS estate) are

9 UBS/AIA’s contention that not all customers can prove injury confuses the concepts of injury and damages. A claim is nevertheless generalized even if not all injured customers can prove damages. Fox v. Picard, 2012 WL990829, at *9 (S.D.N.Y. Mar. 26, 2012).


9

the ultimate beneficiaries of those claims.10 St. Paul held that such generalized

claims cannot be asserted by each individual creditor because a race to the

courthouse would ensue. St. Paul, 884 F.2d at 700-01. Relying on the Bankruptcy

Code’s automatic stay provisions, St. Paul reasoned that creditors who assert their

claims first would obtain payment in preference to, and to the detriment of, other

creditors. Id.; see also Kagan v. St. Vincents Catholic Med. Ctrs. of N.Y. (In re St.

Vincents Catholic Med. Ctrs. of N.Y.), 449 B.R. 209, 217 (S.D.N.Y. 2011).

The bankruptcy court, as affirmed by two different district court judges, has

relied on St. Paul to enjoin individual customer lawsuits against third parties who

assisted in Madoff’s fraud. Stahl, 443 B.R. at 312-13; Fox, 429 B.R. at 431-32.

The bankruptcy court held that the claims against alleged Madoff co-conspirators

and family members sought to redress an injury common to all BLMIS customers

and thus belonged “exclusively to the Trustee.” Stahl, 443 B.R. at 312; Fox, 429

B.R. at 432.

10 If some customers were harmed by UBS/AIA’s violations of duties owed specifically to those customers alone, they may proceed to redress their own injuries. See Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994) (“[T]here 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.”); Koch Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1348 (7th Cir. 1987) (“A cause of action is ‘personal’ if the claimant himself is harmed and no other claimant or creditor has an interest in the cause.”). The Trustee’s lawsuit does not involve such individualized claims.


10

In Fox v. Picard, rejecting the argument that the customers’ tort claims were

not estate property, the district court explained that “property of the estate” is a

broad term and nominal titles do not determine whether a claim is “duplicative or

derivative of a claim that is the property of the Trustee.” 2012 WL 990829, at *10

(S.D.N.Y. Mar. 26, 2012) (citing United States v. Whiting Pools, Inc., 674 F.2d

144, 150 & n.10 (2d Cir. 1982)). Only the Trustee could proceed with those

claims. Id.; see also Air Line Pilots Ass’n, Int’l v. Am. Nat’l Bank & Trust Co. of

Chi. (In re Ionosphere Clubs, Inc.), 156 B.R. 414, 439 (S.D.N.Y. 1993).

The holdings of St. Paul and its progeny as applied here are clear: the

Trustee is the proper party to bring generalized claims that benefit customers,

whether those claims arise under the common law or the Bankruptcy Code.

B. Caplin Is Consistent With the Trustee’s Position

St. Paul does not contravene Caplin v. Marine Midland Grace Trust Co.,

406 U.S. 416 (1972). This Court in St. Paul explicitly distinguished Caplin,

delineating limits applicable here. St. Paul, 884 F.2d at 700-01. Caplin was

concerned that the established “elaborate” scheme “with respect to indenture

trustees and reorganization proceedings” did not include certain rights the

reorganization trustee was attempting to assert. Caplin, 406 U.S. at 428. By

contrast, here, as the St. Paul Court observed, “there is no elaborate congressional

scheme to control . . . state tort law.” St. Paul, 884 F.2d at 700.


11

Caplin was also concerned with the risk of inconsistency between the

bankruptcy trustee’s action and the “independent actions that [debenture holders]

might bring themselves,” finding that a “question would arise as to who was bound

by any settlement.” See Caplin, 406 U.S. at 431-32. Just as in St. Paul, there is

no danger of inconsistency here because the Trustee has exclusive standing to

bring the generalized claims. St. Paul, 884 F.2d at 700. “[T]hose who are barred

from bringing [an] action [for generalized injury] in an independent proceeding

should and will, under bankruptcy law, be bound by the outcome of the trustee’s

suit.” Id.; see also Koch, 831 F.2d at 1346-50.11

11 UBS/AIA cites to several cases to advance its position. These cases, however, are either consistent with the Trustee’s position or are inapplicable here. Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1093 (2d Cir. 1995) and Pereira v. Farace, 413 F.3d 330, 342 (2d Cir. 2005) both stand for the proposition that a trustee does not have standing to bring individualized claims of creditors. Wagoner’s reliance on Caplin is inapplicable in light of St. Paul’s analysis of individualized claims. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991); St. Paul, 884 F.2d at 700. In Mediators, Inc. v. Manney (In re Mediators, Inc.), the Court found that an action brought on behalf of the estate was improper because “the debtor’s assets would be depleted to enforce rights possessed by third parties . . . .” 105 F.3d 822, 826 (2d Cir. 1997). This crystalizes another distinction of a SIPA liquidation: the costs of litigation are borne by SIPC, not the debtor’s estate. Id.


12

III. THE TRUSTEE, AS THE REAL PARTY IN INTEREST, HAS MET THE PRUDENTIAL STANDING REQUIREMENTS

Because the Trustee is statutorily appointed to marshal and restore customer

property, he is the proper party to pursue these claims.12 Standing ensures that

there is an actual case or controversy over which there can be a legitimate exercise

of federal power, and that the proper party pursues redress for the injury. Lujan v.

Defenders of Wildlife, 504 U.S. 555, 560-61 (1992); Valley Forge Christian Coll.

v. Ams. United for Separation of Church & State, Inc., 454 U.S. 464, 475 (1982).

A court may look to prudential considerations to determine whether a plaintiff is

the proper party to maintain an action. See Valley Forge, 454 U.S. at 475-76.

Standing is not—and should not be—mechanically examined. See Allen v. Wright,

468 U.S. 737, 751 (1984) (prudential considertations incorporate “concepts

concededly not susceptible of precise definition”). Prudential considerations

permit, for example, “[t]rustees [to] bring suits to benefit their trusts” and

“assignees in bankruptcy [to] bring suit to benefit bankruptcy estates.” Sprint

Commc’ns Co. v. APCC Servs., Inc., 554 U.S. 269, 287-88 (2008). None of the

arguments advanced by UBS/AIA to the contrary are applicable.

Indeed, the primary mandate of the Trustee is to maximize the recovery for

BLMIS customers. See 15 U.S.C. § 78fff(a). A SIPA trustee alone can pursue the

12 UBS/AIA’s reliance on Wagoner for standing is misplaced in a SIPA liquidation as set forth supra Points I and II and infra Point VI.


13

generalized claims necessary here to fulfill this mandate. Rather than limit his

ability to assert claims, all of the prudential considerations discussed herein compel

that the Trustee be permitted to assert these common law claims.13

IV. UBS/AIA MISSTATES THE PRECEDENTIAL EFFECT OF THE REDINGTON CASES

This Court should reject UBS/AIA’s contrived interpretation of Redington I,

Redington II and Redington III (the “Redington Cases”).14 The holdings of the

Redington Cases are clear: a SIPA trustee, as the bailee of customer property, and

SIPC, as subrogee of customer claims, have standing to pursue common law

claims against third parties.

A. The Holdings in Redington I, Redington II and Redington III

In the Redington Cases, the trustee and SIPC brought an action asserting

multiple state law claims and claims under section 17(a) of the ’34 Act. Redington

v. Touche Ross & Co., 428 F. Supp. 483, 486 (S.D.N.Y. 1977). The district court 13 By contending that the Trustee’s authority is constrained by 15 U.S.C. § 78fff-1(a), UBS/AIA ignores that the Trustee has all of the powers of a bankruptcy trustee as well. See 15 U.S.C. § 78fff(b); see also SEC v. Albert & Maguire Sec. Co., 560 F.2d 569, 574 (3d Cir. 1977). This includes asserting common law claims. See, e.g., Tese-Milner v. Beeler (In re Hampton Hotel Investors, L.P.), 289 B.R. 563, 578-79 (Bankr. S.D.N.Y. 2003) (aiding and abetting breach of fiduciary duty); In re Payroll Express Corp., 2005 WL 2438444, at *1 (negligence, misrepresentation, unjust enrichment and accounting). 14 The Trustee refers to the Redington Cases as follows: Redington v. Touche Ross & Co., 592 F.2d 619 (2d Cir. 1978) (“Redington I”); Touche Ross & Co. v. Redington, 442 U.S. 560 (1979) (“Redington II”); and Redington v. Touche Ross & Co., 612 F.2d 68 (2d Cir. 1979) (“Redington III”).


14

found no private right of action under section 17(a) and declined to exercise

pendent jurisdiction over the remaining claims. Id. at 491-92. The Second Circuit

reversed the dismissal. Redington I, 592 F.2d at 619. It found that “SIPC and the

trustee are appropriate parties to seek (between them) total recovery of the

customers’ damages,” and further stated, “we hold that both SIPC and the Trustee

may maintain this action,” comprised mainly of common law claims. Id. at 625

(emphasis added). It remanded the case to reconsider pendent jurisdiction. Id.

UBS/AIA argues that Redington I’s holdings on bailee and subrogee

standing were contingent upon its holding concerning a private right of action

under section 17(a). (UBS Br. 39.) Nothing in Redington I supports this

conclusion. In fact, Redington I explicitly held otherwise: “[N]one of the above

considerations apply to an action brought by the Trustee as bailee of the property

of Weis’ customers,” because the Trustee may “sue on behalf of the

customer/bailors any wrongdoer whom they could sue themselves.” Id.; see also

In re Kummer, 93 A.D.2d 135, 160-62 (2d Dept. 1983). The court also found,

looking only at SIPA, that SIPC had standing as subrogee. Redington I, 592 F.2d

at 624.

The Supreme Court in Redington II decided only “whether customers of

securities brokerage firms . . . have an implied cause of action for damages under

§ 17(a) . . . .” 442 U.S. at 562. The Supreme Court never found a lack of standing


15

to assert the common law claims; this is reflected in its remand to the Second

Circuit “for a decision on the Trustee’s alternative bases for jurisdiction.”

Redington III, 612 F.2d at 70. Had there been no standing to assert the common

law claims, there would have been no reason to remand.

In Redington III, the Second Circuit considered exercising pendent

jurisdiction. Id. at 71. Though it decided not to do so, it acknowledged: “Of

course, our conclusion will not prejudice the Trustee’s right to maintain suit in

state court, where he has previously filed suit in order to preserve his rights in this

case.” Id. at 70 n.3.

The Redington Cases all either explicitly or implicitly recognize the standing

of a SIPA trustee as the bailee of customer property, and SIPC, as subrogee of

customer claims, to pursue common law claims against third parties.15

B. The Second Circuit’s August 8, 1979 Order Does Not Affect its Prior Holding on Standing

UBS/AIA, for the first time, points to an order entered by the Second Circuit

court clerk following the Supreme Court’s Redington II decision. UBS/AIA

argues that the order deprives Redington I of all precedential value.16 (UBS Br.

15 Despite UBS/AIA’s contention to the contrary, Redington II did not make a threshold determination that affected the other holdings of Redington I. (Tr. Br. 26-32.) 16 UBS/AIA ignores the difference between the Supreme Court vacating a judgment and the Supreme Court reversing on other grounds. See Stroman Realty


16

43.) But that order vacated Redington I’s prior judgment—not Redington I’s

opinion. UBS/AIA also ignores that this Court has held generally, and in the

specific context of Redington I, that it “is bound by a decision of a prior panel

unless and until its rationale is overruled, implicitly or expressly, by the Supreme

Court or this court en banc.” SIPC v. BDO Seidman, LLP, 222 F.3d 63, 69 (2d Cir.

2000). Utilizing this order to functionally vacate the prior opinion undercuts the

integrity of precedent. Both the Supreme Court and this Court have treated

Redington I as precedent. See Holmes v. SIPC, 503 U.S. 258, 271 n.17 (1992)

(citing Redington I and noting that it was reversed on other grounds); BDO

Seidman, 222 F.3d at 69. Moreover, this Court has recognized the continuing

precedential effect of cases that have been reversed on other grounds by the

Supreme Court, even if this Court later vacated its judgment. See, e.g., Muchnick

v. Thompson Corp. (In re Literary Works in Elec. Databases Copyright Litig.), 509

F.3d 136, 142 n.7 (2d Cir. 2007) (citing Billing v. Credit Suisse First Boston Ltd.,

426 F.3d 130, 143-44 & n.14 (2d Cir. 2005), rev’d on other grounds, 551 U.S. 264

(2007)). Likewise, decisions reversed on other grounds are frequently relied on as

authority for their other holdings.17

Inc. v. Wercinski, 513 F.3d 476, 488-89 (5th Cir. 2008); Cent. Pines Land Co. v. United States, 274 F.3d 881, 894 n.57 (5th Cir. 2001). 17 See, e.g., L.A. and G.A. v. Granby Bd. of Educ., 227 F. App’x 47, 50 (2d Cir. 2007) (citing Murphy v. Arlington Cent. Sch. Dist. Bd. of Educ., 402 F.3d 332,


17

UBS/AIA’s misplaced reliance on the order is an affront to existing

precedent relied upon not only by these courts, but also by other courts citing

Redington I as authority.18 See Appleton v. First Nat’l Bank of Ohio, 62 F.3d 791,

799 (6th Cir. 1995); In re Terrorist Attacks on September 11, 2001, 2011 WL

4903584, at *2 (S.D.N.Y. Oct. 14, 2011); Nat’l Asbestos Workers Med. Fund v.

Philip Morris, Inc., 74 F. Supp. 2d 221, 228-29 (E.D.N.Y. 1999); In re Sunpoint

Sec., Inc., 377 B.R. 513, 550 (Bankr. E.D. Tex. 2007); Picard v. Taylor (In re Park

South Sec. LLC), 326 B.R. 505, 517-18 (Bankr. S.D.N.Y. 2005); Giddens v. Blair

(In re A.R. Baron & Co.), 280 B.R. 794, 805 (Bankr. S.D.N.Y. 2002); SIPC v.

Nappy (In re Nappy), 269 B.R. 277, 297 n.23 (Bankr. E.D.N.Y. 1999).

Redington I’s holdings that a SIPA trustee, as bailee of customer property,

and SIPC, as subrogee of allowed customer claims, have standing to pursue state

law claims against third parties remain binding precedent.

334 n. 2, 336 (2d Cir. 2005), rev’d on other grounds, 548 U.S. 291 (2006)); United States v. Blackstone Med., 647 F.3d 377, 385 (1st Cir. 2011) (citing United States ex rel. Kirk v. Schindler Elevator Corp., 601 F. 3d 94, 113-14 (2d Cir. 2010), rev’d on other grounds, __U.S. __, 131 S. Ct. 1885 (2011)). 18 Not even Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 557 (S.D.N.Y. 1990), upon which UBS/AIA relies, stated that Redington I was vacated.


18

V. RULE 15c3-3 AND SIPA CREATE A BAILMENT RELATIONSHIP THAT PERMITS THE TRUSTEE TO BRING COMMON LAW CLAIMS TO RESTORE CUSTOMER PROPERTY

The Redington I Court correctly concluded that a SIPA trustee could bring

common law claims to restore customer property as bailee. In addition to being

binding precedent, the Redington I Court’s view is consistent with the concept of a

bailment under SIPA and a SIPA trustee’s rights and obligations with respect to the

bailment.

SIPA independently creates a bailment relationship between the Trustee and

the customers, giving the Trustee a possessory interest in customer property that

allows him to recover, marshal and return that property to the customers. 15

U.S.C. §§ 78fff-1(a)(3), 78fff-2(c), (f). The absence of the term bailment in SIPA

does not alter the fact that the bailment arises by virtue of the statutory

trustee/customer relationship.19 The timing of the injury also is irrelevant because,

under the remedial SIPA scheme, the Trustee’s status as representative of customer

property is retroactive in scope.20

19 A bailment “may arise from the bare fact of the thing coming into the actual possession and control of a person fortuitously, or by mistake as to the duty or ability of the recipient to effect the purpose contemplated by the absolute owner.” Ancile Inv. Co. v. Archer Daniels Midland Co., 784 F. Supp. 2d 296, 307 (S.D.N.Y. 2011) (quoting Martin v. Briggs, 663 N.Y.S.2d 184, 187-88 (1st Dept. 1997)). 20 In particular, 15 U.S.C. § 78lll(4)(D) allows the Trustee to treat the property in his possession as if he possessed it prior to the liquidation and handled it properly.


19

A. Bailment by Operation of Law

The Trustee’s position is consistent with SIPC’s position that Rule 15c3-3

also creates a bailment. BLMIS was a broker-dealer subject to SEC rules. SIPA

specifically amended the ’34 Act to authorize the SEC to promulgate Rule 15c3-3,

which recognizes and codifies the bailment relationship between the broker-dealer

and the customer. See 17 C.F.R. § 240.15c3-3; see also Rozsa v. May Davis Grp.,

152 F. Supp. 2d 526, 532 (S.D.N.Y. 2001); Michael P. Jamroz, The Customer

Protection Rule, 57 Bus. Law. 1069, 1071 (2001-02).

Rule 15c3-3 creates a bailment by operation of law by requiring a broker-

dealer to segregate customer funds in special reserve accounts and safeguard

securities held by the broker-dealer for the accounts of customers.21 See 17 C.F.R.

§ 240.15c3-3(b), (e); Ancile, 784 F. Supp. 2d at 307 (implied-in-law bailment does

not require express statement of parties’ intent to formalize bailment relationship).

Madoff’s intent to enter into a bailment relationship is irrelevant. See SEC v.

Ambassador Church Fin./Dev. Grp., Inc., 679 F.2d 608, 614 (6th Cir. 1982) (“It is Likewise, SIPA allows the Trustee to look back pre-liquidation and pursue his duty to recover and marshal customer property as if it had been injured in his possession. See In re MJK Clearing, 286 B.R. at 132. 21 Agreements between BLMIS and its customers, which specifically provided, “the transactions shall be subject . . . to the rules and regulations of . . . the Securities and Exchange Commission,” required that BLMIS segregate and hold the property entrusted to it by the customers as directed by Rule 15c3-3 and return that property, or its equivalent, to the customers upon demand. This is sufficient to create a bailment by operation of law. See Ancile, 784 F. Supp. 2d at 307.


20

not likely that Congress . . . intended to make eligibility for protection depend on

whether the broker complied with rules of the SEC . . . .”).

In the event of a SIPA liquidation, the bailment relationship created by Rule

15c3-3 continues. The assets required to be segregated under Rule 15c3-3 become

“customer property,” which the Trustee is required to recover, marshal and return

to customers to satisfy their claims. See 15 U.S.C. §§ 78fff(a)(1), 78lll(4); see also

In re Donald Sheldon, 148 B.R. at 390 (SIPA requires trustee to correct broker-

dealer’s failure to comply with Rule 15c3-3 by reallocating general estate assets to

customer property); In re MJK Clearing, 286 B.R. at 131 (same). The SIPA

designation of customer property is the seamless continuation of Rule 15c3-3,

taking effect the moment the broker-dealer failed. See, e.g., In re Lehman Bros.

Holdings, 445 B.R. 143, 191 (Bankr. S.D.N.Y. 2011). In fact, the primary purpose

of Rule 15c3-3 is to facilitate liquidations of insolvent broker-dealers and protect

customer assets in the event of a SIPA liquidation through a clear demarcation in

Rule 15c3-3 of specifically identifiable customer property. See Jamroz, 57 Bus.

Law. at 1071.


21

B. SIPA’s Continuation of the Bailment

SIPA was amended in 1978 to, among other things, harmonize the statute

with Rule 15c3-3. See SIPA Amendments of 1978, P.L. 95-283, 92 Stat. 249

(1978). The two provisions work in tandem. See, e.g., In re Lehman Bros., 445

B.R. at 191 (describing the interplay between “the two complementary regulatory

regimes of SIPA and Rule 15c3-3”). Rule 15c3-3 requires broker-dealers to

maintain cash or qualified securities in special reserve accounts for the exclusive

benefit of customers. 17 C.F.R. § 240.15c3-3(e). The commingling of funds is

irrelevant to the existence of a bailment under Rule 15c3-3. Bailed money is

fungible and the “identical” money need not be returned. See, e.g., Nat’l Corp. for

Hous. P’ship v. Liberty State Bank, 836 F.2d 433, 436 (8th Cir. 1988) (ancient rule

regarding return of the identical money “has been liberalized in the case of

bailment of fungible goods”); see also Merrill Lynch Mortg. Capital, Inc. v. FDIC,

293 F. Supp. 2d 98, 107 (D.D.C. 2003); In re Enron Corp., 2003 Bankr. LEXIS

2262, at *9 (Bankr. S.D.N.Y. Jan. 22, 2003). SIPA, in turn, deems that the

securities and other assets set aside for customers is customer property. 15 U.S.C.

§ 78lll(4).

Taken together, SIPA and Rule 15c3-3 create a seamless bailment

relationship between a broker-dealer, its customers and, if the broker-dealer fails,

the SIPA trustee. The Trustee has standing to pursue common law claims against


22

UBS/AIA based upon this bailment relationship. See, e.g., United States v. Perea,

986 F.2d 633, 640 (2d Cir. 1993).

VI. WAGONER SHOULD NOT APPLY TO THE TRUSTEE

Wagoner and in pari delicto have traditionally been applied to prevent

debtors from asserting claims against other wrongdoers. But because the Trustee,

as bailee, asserts common law claims to redress generalized injury to customer

property, not injury to BLMIS, neither Wagoner nor in pari delicto apply. Unlike

a Chapter 7 liquidation in which the debtor retains assets remaining after all

allowed claims are paid in full, see 11 U.S.C. § 726(a), SIPA precludes Madoff,

the BLMIS general estate and any wrongdoers from participating in the customer

fund. 15 U.S.C. § 78lll(2). Moreover, the equities described below also allow the

Trustee to proceed with the common law claims.

A. Equity Dictates That Wagoner and In Pari Delicto Should Not Impede the Trustee’s Common Law Claims

UBS/AIA’s invocation of in pari delicto is dubious in light of its

participation in and profiting from Madoff’s scheme and the Trustee’s statutory

remedial role of recovering for injury to customers. UBS/AIA knowingly

prolonged and expanded the Ponzi scheme. It claims, however, that it should

escape liability because “at worst,” it aided and abetted Madoff’s fraud by “failing

to do anything about” the fraud it saw and “providing a façade of legitimacy.”

(UBS Br. 36.) UBS/AIA’s unclean hands preclude it from invoking in pari delicto


23

to block the Trustee’s common law claims. PenneCom B.V. v. Merrill Lynch &

Co., 372 F.3d 488, 493 (2d Cir. 2004). To permit UBS/AIA to benefit from its

wrongdoing would trample the interests of “right and justice.” See Johnson v.

Yellow Cab Transit Co., 321 U.S. 383, 387 (1944).

Wagoner should not be mechanically applied to bar this SIPA Trustee from

pursuing claims solely for the benefit of injured customers. Wagoner is grounded

in the state law concept of in pari delicto; it is an equitable doctrine, not, as

UBS/AIA contends, an absolute defense. In pari delicto must be flexibly applied

to achieve a fair and just result. See, e.g., Peltz v. SHB Commodities, Inc., 115

F.3d 1082, 1090 (2d Cir. 1997) (in pari delicto should be applied with restraint);

McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465, 470-71 (1960).

The in pari delicto analysis does not end, as UBS/AIA argues, with

Madoff’s orchestration of his scheme, culminating in BLMIS’s insolvency. To

apply in pari delicto properly, a court must consider the equities between the

parties, as animated by the relevant facts, and not simply accept the bald assertions

of a party that seeks the protection of in pari delicto. See, e.g., Bateman Eichler,

Hill Richards, Inc. v. Berner, 472 U.S. 299, 309-10 (1985); Bankr. Servs., Inc. v.

Ernst & Young (In re CBI Holding Co.), 529 F.3d 432, 449-53 (2d Cir. 2008).

Public policy should also weigh in the court’s determination, “however

reprehensible the acts of the parties may be.” Bateman Eichler, 472 U.S. at 307.


24

The equities among Madoff, UBS/AIA, the Trustee, and the customers should

weigh in the balance here.

The Trustee is not a wrongdoer, a fact UBS/AIA does not challenge. SIPA

charges the Trustee with restoring customer property. Only BLMIS customers

who were not wrongdoers will be able to receive customer property because SIPA

expressly denies SIPC protection to any customer who “acted improperly or

illegally.” 15 U.S.C. § 78lll(2); SEC v. Packer, Wilbur & Co., 498 F.2d 978, 984

(2d Cir. 1974). SIPA also empowers the Trustee to equitably subordinate claims to

ensure that wrongdoers do not receive distributions of customer property. 15

U.S.C. § 78lll(2)(B).

To best “protect[ ] . . . the investing public and the national economy

through the promotion of a high standard of business ethics . . . in every facet of

the securities industry,” the Supreme Court has declined to apply the in pari delicto

defense when it would frustrate a Congressional purpose in laws that protect the

investing public. See Bateman Eichler, 472 U.S. at 315 (internal quotations

omitted).

Congress enacted SIPA:

to protect individual investors from financial hardship; to insulate the economy from the disruption which can follow the failure of major financial institutions; and to achieve a general upgrading of financial responsibility


25

requirements of brokers and dealers to eliminate, to the maximum extent possible, the risks which lead to customer loss.

S. Rep. No. 90-1218, at 4 (1970). Divesting the Trustee of the ability to pursue

claims against those complicit in harming Madoff’s customers frustrates SIPA’s

intent.22

B. UBS/AIA’s Reliance on Kirschner and Wagoner Is Misplaced

A large-scale fraud requires many willing enablers. As the Trustee’s

Complaint details, without the flow of funds from new investors UBS/AIA

ensnared, Madoff’s Ponzi scheme would have collapsed. (A-914-17, ¶¶ 1-7; A-

1005-17, ¶¶ 349-97; A-1032, ¶¶ 462-66); see also Net Equity, 654 F.3d at 232.

UBS portrays itself as a mere service provider, when it in fact had knowledge of

Madoff’s fraud, alongside Access and its affiliates, helped to market Madoff and

infuse BLMIS with fresh capital, and continued to profit from the fraud. (A-914-

17, ¶¶ 1-7; A-941-71, ¶¶ 91-197; A-974-987, ¶¶ 209-254; A-1005-17, ¶¶ 349-97;

A-1032, ¶¶ 462-66.) UBS/AIA’s invocation of Kirschner and Wagoner to sanitize

its wrongdoing should not be permitted.

Kirschner considered whether equities favored shifting financial

responsibility for a corporation’s misconduct to its third-party professionals.

22 The Court’s ruling need only address the equities of this SIPA liquidation; it need not create a rule that could disrupt the equities in other cases. See In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 238 (2d Cir. 2011) (“Net Equity”).


26

Kirschner v. KPMG LLP, 15 N.Y.3d 446, 475 (2010). The court was not

persuaded that the “interests of innocent stakeholders of corporate fraudsters

[should] trump those of innocent stakeholders of the [defendant] outside

professionals.” Id. It concluded that the costs of the fraud should not be shifted

away from the debtor, because doing so would not deter third-party professionals

from misconduct or negligence. Id. at 475-77.

Here, however, the balance of equities and federal policy considerations are

far different. SIPA ensures that neither Madoff, BLMIS stakeholders, nor other

wrongdoers will receive customer property. 15 U.S.C. § 78lll(2). Applying in pari

delicto here would pass the financial responsibility for the fraud to the customers

and would allow UBS/AIA to reap a windfall. This would not deter, but rather

would encourage, others to turn a blind eye to illicit conduct.

UBS/AIA also attempts to align itself with negligent third parties sued in

Wagoner and its progeny, arguing that these cases provide a complete defense.

(UBS Br. 25-26.) But none of these cases involved a SIPA liquidation; in each, the

stakeholders of the fraudster could have benefited if in pari delicto had not been

imposed. See Kirschner, 15 N.Y.3d at 471; Wight v. BankAmerica Corp., 219 F.3d

79, 86 (2d Cir. 2000); In re Mediators, 105 F.3d at 824-25; Hirsch, 72 F.3d at


27

1094.23 Here, only innocent customers whom SIPA intends to protect will benefit

if in pari delicto is not imposed.

Neither Wagoner nor in pari delicto should bar the Trustee’s common law

claims for damages.

VII. SIPC HAS STANDING AS SUBROGEE TO BRING COMMON LAW CLAIMS AGAINST THIRD PARTIES

UBS/AIA contorts the broad language of the statute and contrives

restrictions to sustain its position that the Trustee, as assignee of SIPC’s

subrogation rights, is limited to only statutory subrogation and cannot pursue

claims for equitable subrogation against third parties. This interpretation directly

contradicts the express language of SIPA’s subrogation statute.

As set forth in detail in the Trustee’s principal brief, (Tr. Br. 50-54), section

78fff-3(a) of SIPA expressly provides that SIPC’s subrogation rights against the

debtor’s estate are “in addition to all other rights it may have at law or in equity.”

15 U.S.C. § 78fff-3(a) (emphasis supplied). The “in addition to” language is an

express acknowledgment that the Trustee has the right not only to statutory

23 UBS/AIA points to In re A.R. Baron, 280 B.R. at 802 and SIPC v. BDO Seidman LLP, 49 F. Supp. 2d 644 (S.D.N.Y. 1999), but neither case applies Wagoner to a SIPA trustee suing to redress a generalized injury. In re A.R. Baron, a SIPA liquidation, acknowledges that had the trustee properly pleaded his bailment relationship, his claims would not be subject to Wagoner or in pari delicto. 280 B.R. at 802. BDO Seidman applied Wagoner only to claims the trustee asserted on behalf of the debtor, recognizing the trustee’s standing as bailee to assert claims on behalf of the customers. 49 F. Supp. 2d at 651, 654.


28

subrogation, but also the right to equitable subrogation. These “other rights”

include the right to pursue a claim for equitable subrogation against third parties

who helped cause the customers’ injury. See Appleton, 62 F.3d at 800; Tr. Br. 52-

53.

UBS/AIA’s argument that SIPC is not yet entitled to assert the claim for

subrogation is likewise unfounded. To date, SIPC has advanced approximately

$800 million to the Trustee pursuant to SIPA § 78fff-3(a) to satisfy or partially

satisfy customers’ net equity claims. (Tr. Br. 55.) Sections 78fff-3(a) and 78fff-

2(c)(1) simply dictate when the Trustee may allocate customer property of the

debtor to SIPC, not whether SIPC can bring common law claims against third

parties to restore customer property. The Trustee is subrogated to that amount and

has standing to pursue third parties to recover those amounts, even if he must await

reimbursement pursuant to the allocation scheme. See McKenny v. McGraw (In re

Bell & Beckwith), 937 F.2d 1104, 1107-10 (6th Cir. 1991) (holding that SIPC’s

right to recover advances with each ratable distribution of customer property

despite net equity claims not being fully satisfied “comports with SIPA’s

distribution scheme while concurrently upholding SIPA’s limit on SIPC’s

obligation to satisfy customer losses”). Allowing SIPC to pursue its equitable

subrogation claims now will enhance the amount of customer property that may be

recovered. By contrast, if SIPC were required to wait until all customer net equity


29

claims are fully satisfied, SIPC’s claims as an equitable subrogee could be time-

barred. See Allstate Ins. Co. v. Stein, 1 N.Y.3d 416, 420-23 (2004).

In a final effort to defeat the Trustee’s standing as subrogee, UBS/AIA

asserts that the Trustee must identify every subrogor and their claims. UBS/AIA

cites to Blue Cross & Blue Shield of New Jersey, Inc. v. Philip Morris USA Inc.,

344 F.3d 212 (2d Cir. 2003), a tobacco case, where claims asserted on behalf of a

large number of injured people required individualized inquiries. (UBS Br. 58

n.16.) This case is not applicable to SIPC’s right to sue and the Trustee’s right by

assignment to sue. Here, the customers were all injured in the same way by the

same acts and omissions of UBS/AIA. See Lawyers’ Fund for Client Protection v.

JPMorgan Chase Bank, N.A., 80 A.D.3d 1129, 1131 (3d Dept. 2011)

(distinguishing tobacco cases because the “separate claims asserted on behalf of

the injured persons involved such a high degree of individualized injury . . . that

they could not properly be considered to be subrogated claims.”). See supra Point

III.

VIII. THE TRUSTEE HAS STANDING TO ASSERT A CONTRIBUTION CLAIM

A. SIPA Does Not Bar the Trustee’s Contribution Claim

The Trustee’s contribution claim, which he is pursuing on behalf of the

estate, is not predicated on violations of SIPA. Rather, it arises from New York

law, which plainly authorizes one joint tortfeasor to seek contribution from


30

another. See N.Y. C.P.L.R. 1401 (McKinney 2012). UBS/AIA confuses the issue

by arguing that SIPA does not explicitly provide the Trustee with a right to bring a

contribution claim for SIPA-mandated customer payments. This analysis

misapprehends SIPA’s function, the law of contribution, and the Trustee’s claims.

Nothing in SIPA prohibits the Trustee from bringing contribution claims.24

See, e.g., Silverman v. Meister Seelig & Fein, LLP (In re Agape World, Inc.), 2012

WL 566303, at *18 (Bankr. E.D.N.Y. Feb. 21, 2012) (that Bankruptcy Code does

not expressly authorize trustee to seek contribution does not limit trustee’s right to

bring contribution action). SIPA therefore does not abrogate the right, under New

York law, to bring contribution claims based on common liability for the same

injury. The Trustee is asserting claims based on, inter alia, UBS/AIA’s aiding and

abetting Madoff’s breach of fiduciary duty and fraud, which subjected the estate to

liability for billions of dollars in customer claims. (A-1005-1007-10, ¶¶ 349-63.)

As a result, the Trustee is entitled to seek contribution from UBS/AIA, which

contributed to the harm to BLMIS customers.

UBS/AIA argues that where a federal statutory scheme compels payment,

the Trustee must look to federal law for contribution rights. (UBS Br. 58, 61; LAF

Br. 10-11.) The Trustee has addressed this faulty contention. (Tr. Br. 58-62.) See

24 In recovering the property of the estate, the Trustee has the right to assert causes of action including a claim for contribution under state law. (Tr. Br. 64.)


31

LNC Invs., Inc. v. First Fidelity Bank, Nat’l Ass’n, 935 F. Supp. 1333, 1349

(S.D.N.Y. 1996). While the Trustee pays customer claims in accordance with a

federal statutory scheme, “the duty to follow the statutory mandate seemingly has

little to do with whether a trustee may seek contribution for the benefit of the

estate.” In re Agape, 2012 WL 566303, at *18. Here, the Trustee’s contribution

claims, pursuant to New York statute, are based on violations of New York tort

law. Thus, the “rules of decision” are grounded in New York law.

B. The Trustee Properly Pleads a Claim for Contribution

UBS/AIA argues that the Trustee has failed to plead and cannot establish the

requisite elements of a claim for contribution under New York law.25 UBS/AIA

ignores New York law. New York state and federal courts have long recognized

the right to seek contribution from joint tortfeasors regardless of the source of the

compulsion to pay. The customer claims are the functional and legal equivalent to

complaints against the estate. See Nortex Trading Corp. v. Newfield, 311 F.2d 163,

164 (2d Cir. 1962) (filing of a proof of claim is analogous to commencing an

action in a bankruptcy case).

25 Contrary to Luxalpha’s assertions (LAF Br. 9 n.3), the Trustee has alleged facts sufficient to establish the requisite tort liability for a contribution claim under the New York statute, particularly in light of allegations against Luxalpha’s board. (See A-992, ¶¶ 266-68.)


32

UBS/AIA’s argument that there is no right of contribution for payments

mandated by statute is mistaken. The Trustee’s compulsion to pay under SIPA

arises only after a Trustee reviews and determines a customer’s claim and does not

invalidate the contribution claims. See Agape, 2012 WL 566303, at *18.

To date, the Trustee has recovered or has entered into agreements to recover

over $9 billion in customer property and has distributed approximately $330

million to injured customers, separate from SIPC advances. The Complaint clearly

details that UBS/AIA bears responsibility for at least some of those losses, and

Luxalpha has filed customer claims. (A-993-994.) At this time, the Trustee is

entitled to assert a contribution claim even though apportionment of liability

remains a factual question to be determined later.

IX. THE TRUSTEE IS EXEMPT FROM SLUSA

Though not ruled on below, UBS/AIA presses the argument that the

Trustee’s common law claims are preempted by the Securities Litigation Uniform

Standards Act (“SLUSA”). UBS/AIA is wrong; the Trustee is appointed under

SIPA, which is a part of the ’34 Act. The notion that his claim could be precluded

by the same law under which he is appointed is nonsensical.

SLUSA was enacted to prevent class action lawyers from circumventing the

stringent requirements of the Private Securities Litigation Reform Act of 1995

(“PSLRA”) by filing in state court meritless shareholder “strike suits” alleging


33

violations of state law. 15 U.S.C. § 78u-4. SLUSA bars a “covered class action”

based on state law that alleges “untrue statement[s] or omission[s] of a material

fact in connection with the purchase or sale of a covered security.” 15 U.S.C.

§ 77p(b). A “covered class action” is a lawsuit in which “(i) damages are sought

on behalf of more than 50 persons . . . or . . . (ii) one or more named parties seek to

recover damages on a representative basis on behalf of themselves and other

unnamed parties similarly situated. . . .” 15 U.S.C. § 77p(f)(2)(A)(i).

SLUSA provides an “Entity Exception,” which applies here. When an

“entity is not established for the purpose of participating in the action,” a lawsuit

brought by that entity is simply not a “covered class action,” and is not barred by

SLUSA. 15 U.S.C. § 77p(f)(2)(C) (emphasis added). Congress made clear that

this exception is particularly applicable to a trustee:

[T]he class action definition has been changed from the original text . . . to ensure that the legislation does not cover instances in which a person or entity is duly authorized by law, other than a provision of state or federal law governing class action procedures, to seek damages on behalf of another party or entity. Thus a trustee in bankruptcy, a guardian, a receiver, and other persons or entities duly authorized by law . . . to seek damages on behalf of another person or entity would not be covered by this provision.

S. Rep. No. 105-182, at 6 (1998) (emphasis added).

SLUSA is not applicable here because the Trustee was not appointed for the

“purpose of participating in this action.” Before UBS or its tortious activity was


34

even known to the Trustee, he was appointed by the Hon. Louis L. Stanton,

U.S.D.J., pursuant to SIPA, to preside over the BLMIS liquidation for all purposes,

including liquidating and preserving existing assets of the estate, reviewing and

determining more than 16,000 filed claims, and litigation where appropriate. See

Lee v. Marsh & McLennan Cos., 2007 WL 704033, at *4 (S.D.N.Y. Mar. 7, 2007)

(trustee established to represent estate for all purposes entitled to entity exception);

see also Smith v. Arthur Andersen LLP, 421 F.3d 989, 1007-08 (9th Cir. 2005)

(nothing in SLUSA suggests Congress intended to deprive a trustee from bringing

securities law claims on behalf of estate); RGH Liquidating Trust v. Deloitte &

Touche LLP, 17 N.Y.3d 397, 413 (2011) (“[t]he Liquidating Trust was not a device

created by plaintiffs or their attorneys to circumvent SLUSA . . . .”). Under these

circumstances, it is inappropriate to “look through” the estate and “count” the

beneficiaries of the Trustee’s actions.26 LaSala v. Bank of Cyprus Pub. Co., 510 F.

Supp. 2d 246, 268-69 (S.D.N.Y. 2007); see also Roland v. Green, 2012 WL

898557 (5th Cir. Mar. 19, 2012).

For these reasons, and those set forth in the Trustee’s brief in the district

court, SLUSA does not bar the Trustee’s common law claims.

26 UBS/AIA cannot distinguish LaSala v. Bordier et Cie, 519 F.3d 121, 133-34 (3d Cir. 2008). There, even after the bankruptcy trustee assigned the claims to the litigation trust, they were not barred by SLUSA because the claims would have been protected by the entity exception had the bankruptcy trustee asserted them. Id. at 136.


35

CONCLUSION

For the foregoing reasons, the Trustee respectfully requests that this Court

reverse in its entirety the District Court’s Rule 54(b) Judgment, embodying the

November 1, 2011 Order, and remand the matter for further proceedings.

Date: New York, New York Respectfully submitted,

April 26, 2012 /s/ Oren J. Warshavsky David J. Sheehan Oren J. Warshavsky

Deborah H. Renner Lan Hoang Carrie A. Longstaff BAKER & HOSTETLER LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 Attorneys for Irving H. Picard, Trustee

for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff


CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME LIMITATION, TYPEFACE

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Word 2010 in 14-point Times New Roman font.

Date: New York, New York Respectfully submitted, April 26, 2012

/s/ Oren J. Warshavsky David J. Sheehan Oren J. Warshavsky

Deborah H. Renner Lan Hoang Carrie A. Longstaff BAKER & HOSTETLER LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 Attorneys for Irving H. Picard, Trustee

for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff


for the second circuit - madofftrustee€¦ · for the second circuit in re: bernard l. madoff...

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