Anwar et al v. Fairfield Greenwich Limited et al
MANDATE & OPINION of USCA (Certified Copy) as to #1106 Notice of Appeal, filed by Irving H. Picard USCA Case Number 13-1392. Ordered, Adjudged and Decreed that the judgment of the District Court is AFFIRMED in accordance with the opinion of this court. Catherine O'Hagan Wolfe, Clerk USCA for the Second Circuit. Issued As Mandate: 09/03/2014. (Attachments: #1 OPINION)(nd)
13‐1289‐bk (L) 13‐1392‐cv (CON); 13‐1785
Picard v. Fairfield Greenwich; Picard v. Schneiderman
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2013
(Argued: October 10, 2013 Decided: August 8, 2014)
Docket No. 13–1785
Docket No. 13–1289
(consolidated with 13–1392)
Irving H. Picard, Trustee for the
Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff
Investment Securities LLC and the
Estate of Bernard L. Madoff,
Irving H. Picard, Trustee for the
Liquidation of Bernard L. Madoff
Investment Securities LLC,
Fairfield Greenwich Limited, et al.,
Securities Investor Protection
Securities & Investment Co. Bahrain,
Harel Insurance Co., Ltd., AXA
Private Management, St. Stephenʹs
School, Pacific West Health Medical
Center, Inc. Employeeʹs Retirement
Eric T. Schneiderman, Bart M.
Schwartz, Ralph C. Dawson, J. Ezra
Merkin, and Gabriel Capital
SACK, CHIN, and DRONEY, Circuit Judges.
The trustee charged with recovering assets on
behalf of creditors and customers of Bernard L. Madoff
and his investment firm sought to block the settlement
of three lawsuits brought against third parties, which
the trustee argued would undermine his ability to
recoup fraudulent transfers executed by the debtor. In
two separate cases, which we hear in tandem on appeal,
the district court (Victor Marrero and Jed S. Rakoff,
Judges) dismissed the trusteeʹs claims for declaratory
and injunctive relief. Because we conclude that these
claims fail on the merits, the judgments of the district
DAVID J. SHEEHAN, Baker & Hostetler
LLP, New York, NY (Deborah H. Renner,
Tracy L. Cole, Keith R. Murphy, Baker &
Hostetler LLP, New York, NY; David B.
Rivkin, Jr., Lee A. Casey, Mark W.
DeLaquil, Andrew M. Grossman, Baker &
Hostetler LLP, Washington, DC, of counsel),
for Appellant Irving H. Picard.
STUART H. SINGER, Boies, Schiller &
Flexner LLP, Ft. Lauderdale, FL (David A.
Barrett, Howard L. Vickery, II, Boies,
Schiller & Flexner LLP, New York, NY;
Robert C. Finkel, Wolf Popper LLP, New
York, NY; Victor E. Stewart, Lovell Stewart
Halebian Jacobson LLP, New York, NY, of
counsel), for Lead Plaintiffs–Appellees
Representative Anwar Plaintiffs.
MARC G. CUNHA, Simpson Thacher &
Bartlett LLP, New York, NY (Peter E.
Kazanoff, Jeffrey L. Roether, Jeffrey E.
Baldwin, Nicholas S. Davis, of counsel), for
Defendants‐Appellees Fairfield Greenwich
Limited, et al.
BRIAN SUTHERLAND, for Eric T.
Schneiderman, Attorney General of the
State of New York, New York, NY (James
C. McCarroll, Jordan W. Siev, Michael J.
Venditto, Reed Smith LLP, New York, NY;
Judith A. Archer, David L. Barrack, Jami
Mills Vibbert, Fulbright & Jaworski LLP,
New York, NY, of counsel), for Appellees Eric
T. Schneiderman, Bart M. Schwartz, Ralph C.
ANDREW J. LEVANDER, Dechert LLP,
New York, NY (Neil A. Steiner, of counsel),
for Defendants–Appellees J. Ezra Merkin and
Gabriel Capital Corporation.
NATHANAEL S. KELLY, Washington, DC
(Josephine Wang, Kevin H. Bell, of counsel),
for Intervenor Securities Investor Protection
SACK, Circuit Judge:
Irving H. Picard (the ʺTrusteeʺ), trustee for the
liquidation of Bernard L. Madoff Investment Securities
LLC (ʺBLMISʺ) and of the bankruptcy estate of Bernard
L. Madoff, initiated adversary proceedings seeking to
block the settlement of three lawsuits, none of which
involved BLMIS or the Madoff estate as a party. The
suits in question were brought by and on behalf of
investors in so‐called ʺfeeder fundsʺ—funds that
channeled investments to Madoffʹs Ponzi scheme—
against the funds themselves and other persons and
entities affiliated with them. The Trustee asserts that
the settlements in these cases would hinder his ability to
recoup fraudulent transfers he alleges BLMIS made to
the settling defendants. In two separate proceedings,
which we review in tandem on appeal, the district court
(Victor Marrero and Jed S. Rakoff, Judges) dismissed the
Trusteeʹs claims for declaratory and injunctive relief.
Picard v. Fairfield Greenwich Ltd., 490 B.R. 59 (S.D.N.Y.
2013) (Victor Marrero, J.); Picard v. Schneiderman, 491
B.R. 27 (S.D.N.Y. 2013) (Jed S. Rakoff, J.). Because we
conclude that the Trustee is not entitled to declaratory
relief and that the district court did not abuse its
discretion in denying his requests for injunctive relief,
The facts of the infamous Ponzi scheme
orchestrated by Bernard Madoff have been set forth in
detail elsewhere. See, e.g., Sec. Investor Prot. Corp. v.
Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff
Inv. Sec. LLC), 424 B.R. 122, 125–33 (Bankr. S.D.N.Y.
2010). We repeat them here only insofar as we think
necessary to explain our decision in this appeal. The
schemeʹs success depended in part on the efforts of
independent investment managers who channeled
billions of dollars through financial vehicles—so‐called
ʺfeeder fundsʺ—that invested largely or exclusively in
BLMIS. While the money flowed from BLMIS, feeder
fund investors enjoyed strong (albeit illusory1) returns,
and the fundsʹ managers collected substantial fees as a
result. After the discovery of the fraud and Madoffʹs
December 2008 arrest by federal authorities in
connection with it, the funds collapsed, leaving their
investors with the specter of huge losses and
precipitating litigation against the funds and their
managers, auditors, custodians, and others. While
investors pursued causes of action for, among other
things, fraud and breach of fiduciary duty, the Trustee
filed his own legal actions on behalf of the BLMIS
estate, seeking to ʺclaw backʺ2 (i.e., obtain the return of)
money Madoff had paid out as ʺreturnsʺ to the funds.
Where, as in the cases here on appeal, feeder fund
investors sought assets from the same entities or
individuals as did the Trustee, the risk arose that their
claims might conflict.
The returns were ʺillusoryʺ because they were not, in fact,
returns on investments; they were payments made by
BLMIS in order to maintain the appearance of success and
further the fraud. The use of later‐acquired funds to pay off
earlier investors is essential to the pyramid‐like structure of
a Ponzi scheme. See, e.g., Gowan v. The Patriot Grp., LLC (In re
Dreier LLP), 452 B.R. 391, 424–25 (Bankr. S.D.N.Y. 2011).
2 The terms ʺclaw backʺ and ʺclawbackʺ were apparently
first used in this context by the Bankruptcy Court for the
Southern District of New York in 2005. See Enron Corp. v.
Ave. Special Situations Fund II, LP (In re Enron Corp.), 333 B.R.
205, 227 (Bankr. S.D.N.Y. 2005). They first appeared in one
of our opinions last year. See Commodity Futures Trading
Commʹn v. Walsh, 712 F.3d 735, 743‐44, 755 (2d Cir. 2013)
(referring to ʺclawback actionsʺ to recover funds from the
ʺwinnersʺ in a Ponzi scheme).
The Feeder Fund Litigation
a. The Anwar Action
In December 2008, a group of investors including
Pasha S. Anwar (the ʺAnwar Plaintiffsʺ) filed a class
action on behalf of individuals and entities who
invested in four feeder funds founded and operated by
the Fairfield Greenwich Group (the ʺAnwar Actionʺ).
These funds had, in turn, invested most of the Anwar
Plaintiffsʹ money with BLMIS. In their Second
Consolidated Amended Complaint, filed on September
29, 2009, the Anwar Plaintiffs alleged various federal
securities law violations, as well as common law tort,
breach of contract, and quasi‐contract causes of action
against the funds, Fairfield Greenwich Group, and a
number of affiliated individuals (collectively, the
ʺFairfield Defendantsʺ).3 See Second Consolidated
Amended Compl., Anwar v. Fairfield Greenwich Ltd., No.
09‐cv‐118 (VM) (S.D.N.Y. filed Sep. 29, 2009), ECF No.
273. These defendants filed a motion to dismiss, which
the district court denied in two separate opinions. See
Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 354,
356–57, 372 (S.D.N.Y. 2010) (Marrero, J.) (holding that
New Yorkʹs Martin Act, N.Y. Gen. Bus. Law §§ 352–359,
did not preempt common law causes of action); Anwar
v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 401‐02
(S.D.N.Y. 2010) (Marrero, J.) (concluding that the
plaintiffs had standing to pursue individual, direct
claims against the Fairfield Defendants on various legal
Sometime in 2010, the plaintiffs and the
defendants in the Anwar Action began settlement talks.
These negotiations intensified in May 2012 while the
The complaint also named as defendants professional
service providers who audited, administered, or served as
custodians of the funds.
parties proceeded with discovery, and culminated
several months later with an agreement in principle
among the parties. The parties then presented a
proposed settlement agreement to the district court,
which preliminarily approved it on November 30, 2012.
The agreement contemplated a $50.25 million payment
to the Anwar Plaintiffs by the Fairfield Defendants, and
a $30 million escrow fund funded by the Fairfield
defendants to support any future settlement or
judgment amounts the Fairfield Defendants might pay
On November 29, 2012, the eve of the district
courtʹs preliminary approval of the partiesʹ proposed
agreement, the Trustee instituted an adversary
proceeding in the United States Bankruptcy Court for
the Southern District of New York seeking to block the
settlement (the ʺAnwar Stay Applicationʺ). Picard v.
Fairfield Greenwich Ltd., Adv. Pro. No. 12‐2047 (Bankr.
S.D.N.Y. filed Nov. 29, 2012). The Anwar Stay
Application sought a declaration that the settlement and
the Anwar Action itself violated the automatic stay
provisions of the Bankruptcy Code and the Securities
Investor Protection Act (ʺSIPAʺ), as well as one or more
of the stay orders issued by the district court in
connection with the Madoff liquidation,4 and that the
In the principal case initiating the liquidation, the United
States District Court for the Southern District of New York
(Louis L. Stanton, J.) issued two orders cited by the Trustee,
staying any interference with ʺany assets or property owned,
controlled or in possession ofʺ Madoff and BLMIS. Order,
¶ IV, In re Bernard L. Madoff Investment Securities LLC, Civ.
08–10791 (S.D.N.Y. Dec. 15, 2008), ECF No. 4; see also Partial
Judgment on Consent, ¶ IV, In re Bernard L. Madoff
Investment Securities LLC, Civ. 08–10791 (S.D.N.Y. Feb. 9,
2009), ECF No. 18.
Anwar Action was therefore void ab initio. Id. ¶ 105.
The Stay Application also contained a request that the
bankruptcy court exercise its powers under section
105(a) of the Bankruptcy Code, 11 U.S.C. § 105(a),5 to
preliminarily enjoin the Anwar Action until the Trustee
had completed his efforts to recoup the proceeds of
specified alleged fraudulent transfers from the Fairfield
Defendants. Anwar Stay Application, ¶¶ 108, 110. On
February 6, 2013, the district court granted the Anwar
Plaintiffsʹ motion to withdraw the reference to the
bankruptcy court in the stay action. Picard v. Fairfield
Greenwich Ltd., 486 B.R. 579 (S.D.N.Y. 2013); see 28 U.S.C.
Pursuing a parallel strategy, the Trusteeʹs counsel
wrote to the court seeking to intervene in the Anwar
Action directly. On March 7, treating this letter as a
motion to intervene, the court denied it. The court also
denied the Trusteeʹs subsequent request to supplement
On March 20, 2013, the district court issued one of
the two decisions now before us on appeal, denying the
Anwar Stay Application in its entirety and directing
that the adversary proceeding be closed. See Picard v.
Fairfield Greenwich Ltd., 490 B.R. 59 (S.D.N.Y. 2013)
(Marrero, J.) (the ʺAnwar Stay Rulingʺ). Shortly
thereafter, the court issued a final judgment and order
The subsection reads in full:
The court may issue any order, process, or judgment
that is necessary or appropriate to carry out the
provisions of [the Bankruptcy Code]. No provision of
this title providing for the raising of an issue by a
party in interest shall be construed to preclude the
court from, sua sponte, taking any action or making
any determination necessary or appropriate to
enforce or implement court orders or rules, or to
prevent an abuse of process.
accepting the settlement of the Anwar Action and
dismissing the claims against the Fairfield Defendants
b. People v. Merkin and Schwartz v. Merkin
In April 2009, New Yorkʹs Attorney General (the
ʺNYAGʺ) brought suit in New York state court claiming
that Ezra Merkin and his investment company, Gabriel
Capital Corp.—together, the ʺMerkin Defendantsʺ—had
violated New Yorkʹs Martin Act, its Executive Law, and
its Not for Profit Corporation Law by making material
misrepresentations and omissions to investors in
several feeder funds. See Compl., People v. Merkin, No.
450879/2009 (N.Y. Sup. Ct. filed Apr. 6, 2009).
Specifically, the NYAGʹs complaint alleged that Merkin
breached his fiduciary duties to investors by collecting
management fees ʺwhile turning all, or a substantial
portion, of [the investorsʹ] funds over to Madoff and
others.ʺ Id. ¶ 6. The NYAG also named the feeder
funds themselves (the ʺMerkin Fundsʺ) as relief
defendants.6 See Am. Compl., People v. Merkin, No.
450879/2009 (N.Y. Sup. Ct. filed May 28, 2009).
In September 2010, Bart M. Schwartz, the receiver
for two of the Merkin Funds, Ariel Fund Ltd. and
Gabriel Capital, L.P. (both relief defendants in the
NYAGʹs suit), also filed suit against the Merkin
defendants in state court. See Compl., Schwartz v.
Merkin, No. 651516/2010 (N.Y. Sup. Ct. filed Sept. 16,
2010). Schwartzʹs complaint alleged on behalf of fund
investors that the Merkin Defendants had breached
their fiduciary duties of candor and disclosure,
fraudulently misrepresented the nature of the work
performed by various investment managers, and
collected exorbitant fees. Id. ¶¶ 1–14.
6 The Merkin Funds included Ascot Partners, L.P., Ascot
Fund, Ltd., Ariel Fund, Ltd., and Gabriel Capital, L.P.
After several years of litigation, on June 13, 2012,
the NYAG and Schwartz executed a joint settlement of
their claims with the Merkin Defendants for $410
million. Several weeks later, the Trustee instituted an
adversary proceeding (the ʺNYAG Stay Applicationʺ)
substantially similar to the Anwar Stay Application,
seeking to enjoin and declare void the joint settlement
and the underlying suits. See Compl., Picard v.
Schneiderman, Adv. Pro. No. 12‐1778 (Bankr. S.D.N.Y.
filed Aug. 1, 2012). As Judge Marrero had done with
respect to the Anwar Stay Application, Judge Rakoff
withdrew the reference to the bankruptcy court. See
Picard v. Schneiderman, 492 B.R. 133 (S.D.N.Y. 2013); see
28 U.S.C. § 157(d). On April 15, 2013, in the second of
the judgments here on appeal, the court denied the
NYAG Stay Application in its entirety and directed that
the adversary proceeding be dismissed with prejudice
and the case closed. See Picard v. Schneiderman, 491 B.R.
27 (S.D.N.Y. 2013) (Rakoff, J.) (the ʺNYAG Stay Rulingʺ).
The Fraudulent Conveyance Litigation
While the feeder fund litigation was in progress,
the Trustee instituted actions against the Merkin
Defendants and Merkin Funds and against the Fairfield
Defendants alleging that they had received fraudulent
conveyances from BLMIS. See Picard v. Merkin, Adv.
Pro. No. 09‐1182 (Bankr. S.D.N.Y. filed May 7, 2009);
Picard v. Fairfield Sentry Ltd., Adv. Pro. 09‐01239 (Bankr.
S.D.N.Y. filed May 18, 2009). In Merkin, the Trustee
sought $33 million from the Ariel and Gabriel funds,
and $460 million from a third fund and the Merkin
Defendants. Although the Merkin Funds were ʺnet
losersʺ in Madoffʹs scheme, the Trustee sought the
entire value of the transfers they received within the
applicable ʺclaw‐back periodʺ on the theory that the
Merkin Defendants knew of the fraud. The allegations
against the Fairfield Defendants were similar, but the
amount sought was some $3.2 billion. Both cases are
The District Court Decisions
The Trustee made nearly identical arguments in
both stay application proceedings. He asserted that: (1)
the feeder fund litigation and the proposed settlements
implicated property of BLMIS and the Madoff estate
within the meaning of the Bankruptcy Codeʹs automatic
stay provisions, see 11 U.S.C. § 362(a)(1), (3), (6), the
SIPA, see 15 U.S.C. § 78eee(b)(2)(B), and two district
court orders, and should therefore be declared void ab
initio; (2) whether the feeder fund litigation implicated
the automatic stay or not, a preliminary injunction
under section 105(a) was appropriate; and (3) the
Securities Investor Protection Act preempted the feeder
fund litigation to the extent the actions interfered with
the Trusteeʹs ability to return funds to BLMIS
customers. The district court, in each case, rejected all
of the Trusteeʹs arguments on the merits and ruled that
the stay applications were barred in any event by
laches. The Trustee appeals.
Standard of Review
The scope of the automatic stay is a question of
law subject to de novo review. United States v.
Colasuonno, 697 F.3d 164, 173 (2d Cir. 2012); see also Fed.
Deposit Ins. Corp. v. Hirsch (In re Colonial Realty Co.), 980
F.2d 125, 130 (2d Cir. 1992). But because ʺ[i]t is an
axiom of appellate procedure that we
review . . . questions of fact for clear error,ʺ we review
the factual findings underlying a legal determination
for clear error only. United States v. Rajaratnam, 719 F.3d
139, 153 (2d Cir. 2013); accord Guzzo v. Cristofano, 719
F.3d 100, 109 (2d Cir. 2013) (concluding that an
ʺessentially factualʺ component of mixed question of
fact and law is subject to review for clear error (internal
quotation marks omitted)).
ʺWe review the denial of a preliminary injunction
for abuse of discretion.ʺ Christian Louboutin S.A. v. Yves
Saint Laurent Am. Holdings, Inc., 696 F.3d 206, 215 (2d
Cir. 2012) (internal quotation marks omitted). ʺA
district court abuses its discretion . . . when its decision
rests on an error of law or a clearly erroneous factual
finding, or when its decision cannot be located within
the range of permissible decisions.ʺ WPIX, Inc. v. ivi,
Inc., 691 F.3d 275, 278 (2d Cir. 2012), cert. denied, 133 S.
Ct. 1585 (2013).
Finally, we review a courtʹs interpretation of the
SIPA de novo, considering the views of the Securities
Investor Protection Corporation (ʺSIPCʺ) ʺonly to the
extent that they have the power to persuade.ʺ In re
Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 234 (2d Cir.
2011) (internal quotation marks and brackets omitted),
cert. dismissed, 132 S. Ct. 2712, cert. denied, 133 S. Ct. 24,
and 133 S. Ct. 25 (2012).
II. Denial of the Trusteeʹs Request for
The Trustee argues that the Anwar and NYAG
Actions are barred by the Bankruptcy Codeʹs automatic
stay and by two orders issued by the district court at the
outset of the Madoff liquidation (the ʺStay Ordersʺ).
The automatic stay and the Stay Orders apply only to
property of the Madoff estate and to lawsuits directed
against Madoff or BLMIS. See 11 U.S.C. § 362(a)(1), (3),
(6); Order, ¶ IV, In re Bernard L. Madoff Investment
Securities LLC, Civ. 08–10791 (S.D.N.Y. Dec. 15, 2008),
ECF No. 4; see also Partial Judgment on Consent, ¶ IV
(S.D.N.Y. Feb. 9, 2009), ECF No. 18. The district court in
both proceedings concluded that the Actions involved
neither estate property nor suits against the debtors,
and that they were therefore not stayed. For the reasons
explained below, we agree.
Section 362—the automatic stay—protects
bankruptcy estates by restraining any formal or
informal action or legal proceeding that might dissipate
estate assets or interfere with the trusteeʹs orderly
administration of the estate. See 3 Collier on
Bankruptcy ¶ 362.03 (Alan N. Resnick & Henry J.
Sommer eds., 16th ed. 2014). ʺ[S]o central is the § 362
stay to an orderly bankruptcy process that actions taken
in violation of the stay are void and without effect.ʺ
Colonial Realty, 980 F.2d at 137 (internal quotation marks
omitted). The Trustee in this case relies on provisions
(1) the commencement or continuation,
including the issuance or employment of
process, of a judicial, administrative, or
other action or proceeding against the
debtor that was or could have been
commenced before the commencement of
the case under this title, or to recover a
claim against the debtor that arose before
the commencement of the case under this
title; [. . .]
(3) any act to obtain possession of property
of the estate or of property from the estate
or to exercise control over property of the
estate; [. . .]
(6) any act to collect, assess, or recover a
claim against the debtor that arose before
the commencement of the case under this
11 U.S.C. § 362(a). The Stay Orders do not, by their own
terms, expand the scope of these provisions. See Order,
¶ IV, In re Bernard L. Madoff Investment Securities LLC,
Civ. 08–10791, (S.D.N.Y. Dec. 15, 2008), ECF No. 4
(enjoining interference with ʺany assets or property
owned, controlled or in the possession ofʺ Madoff or
BLMIS); Partial Judgment on Consent, ¶ IV (S.D.N.Y.
Feb. 9, 2009), ECF No. 18 (incorporating Order on
Consent, ¶ IX (S.D.N.Y. Dec. 18, 2008), ECF No. 8
(enjoining interference with ʺthe control, possession, or
management of the assets subject to the receivershipʺ)).
The Trustee asserts that the Anwar and NYAG
Actions run afoul of these provisions and orders in two
ways. First, he argues that, regardless of their form, the
Actions are in substance claims to recover fraudulent
conveyances, which are treated as claims against a
debtor and stayed by section 362(a)(1). Second, the
Trustee asserts that the Actions are so ʺintertwinedʺ
with the estateʹs own fraudulent conveyance claims that
they constitute impermissible attempts to ʺexercise
control over property of the estate.ʺ7 See 11 U.S.C.
Whether the Actions are ʺIntertwinedʺ with
We address the Trusteeʹs latter argument—that
the Actions are intertwined with estate property—first.
On appeal, the Trustee has apparently withdrawn the
argument in the Stay Applications that the Actions seek
literally to ʺobtain possession of property of the estate,ʺ in
contravention of section 362(a)(3). That argument is
squarely foreclosed by our decision in Colonial Realty, which
held that fraudulently conveyed property ʺis not to be
considered property of the estate until it is recovered.ʺ 980
F.2d at 131 (quoting In re Saunders, 101 B.R. 303, 305 (Bankr.
N.D. Fla. 1989)).
In the only case cited by the Trustee on this point, 48th
St. Steakhouse, Inc. v. Rockefeller Grp. Inc. (In re 48th St.
Steakhouse, Inc.), 835 F.2d 427 (2d Cir. 1987), cert. denied,
485 U.S. 1035 (1988), we upheld the stay of a lessorʹs
attempt to terminate a prime lease where the sub‐lessee
was a debtor in bankruptcy. A sublease held by a
debtor is considered property of the estate. See 11
U.S.C. § 541(a)(1). And under New York law, the
termination of a prime lease automatically terminates a
sublease. 48th St. Steakhouse, Inc., 835 F.2d at 430–31.
We reasoned that ʺ[i]f action taken against [a] non‐
bankrupt party [like a prime lessee] would inevitably
have an adverse impact on property of the bankrupt
estate [the sublease], then such action should be barred
by the automatic stay.ʺ Id. at 431 (emphasis added).
But an adverse impact on a debtor that occurs by
operation of law—such as the termination of the prime
lease in 48th St. Steakhouse—is distinct from one which
the Trustee merely argues is, as a factual matter, likely
to occur. See Official Comm. of Unsecured Creditors v. PSS
Steamship Co. (In re Prudential Lines Inc.), 928 F.2d 565,
574 (2d Cir. 1991) (applying 48th St. Steakhouse to bar an
action that would have the ʺlegal effect of diminishing or
eliminating property of the bankrupt estateʺ (emphasis
added)). We decline to extend our holding in 48th St.
Steakhouse to automatically stay actions taken against
third parties that are only factually likely, as opposed to
legally certain, to impact estate property.
Whether the Actions Plead Fraudulent Conveyance
Whether the Actions are in fact efforts to ʺplead
aroundʺ the stay is a question that merits more
attention. If the Actions are fraudulent conveyance
claims in disguise, they fall within the scope of the
automatic stay. See 11 U.S.C. § 362(a)(1); Marshall v.
Picard (In re Bernard L. Madoff Inv. Sec. LLC), 740 F.3d 81,
94 (2d Cir. 2014) (ʺ[A]ppellantsʹ purported tort claims
are, in essence, disguised fraudulent transfer actions,
which belong exclusively to the Trustee.ʺ). The district
court concluded that the Anwar and NYAG Actions
were distinct from the Trusteeʹs fraudulent conveyance
claims because they were based on duties owed directly
by the defendants to the plaintiffs. See Anwar Stay
Ruling, 490 B.R. at 68 (concluding that the Anwar
Plaintiffsʹ claims are ʺin no way contingent on the
[defendantsʹ] possible liability to the BLMIS estateʺ);
NYAG Stay Ruling, 491 B.R. at 36 (concluding that the
NYAGʹs and Schwartzʹs claims ʺare independent claims
based on separate facts, theories, and duties than the
Trusteeʹs fraudulent transfer claims against Merkinʺ).
A fraudulent conveyance (or fraudulent transfer)
action seeks to recover or avoid transfers that
wrongfully reduce the pool of assets available to
creditors. See generally 5 Collier on Bankruptcy ¶ 548.01
(Alan N. Resnick & Henry J. Sommer eds., 16th ed.
2014). Under the Code, a transfer may qualify as
ʺfraudulentʺ either because it was made with ʺactual
intent to hinder, delay, or defraudʺ a creditor, see 11
U.S.C. § 548(a)(1)(A), or because the transfer was made
in exchange for less than the ʺreasonably equivalent
valueʺ of the property transferred and other statutorily
specified conditions obtained, see id. (a)(1)(B); see also
N.Y. Debt. & Cred. Law §§ 273–76 (defining actual and
constructive fraudulent conveyances); Sharp Intʹl Corp.
v. State Street Bank & Trust Co. (In re Sharp Intʹl Corp.),
403 F.3d 43, 53–57 (2d Cir. 2005) (applying New Yorkʹs
fraudulent conveyance statute).
Although an action for fraudulent conveyance is
brought against the transferee, the fraud is the debtorʹs.
As we explained in Colonial Realty, ʺ[a]bsent a claim
against the debtor, there is no independent basis for the
action against the transferee.ʺ Colonial Realty, 980 F.2d
at 131–32 (quoting Saunders, 101 B.R. at 305–06). Thus, a
bankruptcy trustee may recover transferred property or
its value from the person to whom it was originally
conveyed without showing that the transferee was
culpable in any fraud.8 See 11 U.S.C. § 550(a)(1). This
focus on the debtor explains why ʺa third‐party action
to recover fraudulently transferred property is properly
regarded as undertaken ʹto recover a claim against the
debtorʹ and subject to the automatic stay pursuant to
§ 362(a)(1).ʺ Colonial Realty, 980 F.2d at 131–32; see also
11 U.S.C. § 362(a)(6). In order to qualify as ʺdisguised
fraudulent transfer actions,ʺ therefore, the complaints
against the Fairfield and Merkin Defendants would
have to be contingent on Madoff or BLMISʹs wrongful
transfer of the funds sought by the Actions. They are
The Anwar complaint alleges breaches of duty
owed by and fraudulent misrepresentations made by
the Fairfield Defendants—not Madoff. See Second
Consolidated Am. Compl., ¶¶ 354–425, Anwar v.
Fairfield Greenwich Ltd., No. 09‐cv‐118 (VM) (S.D.N.Y.
filed Sep. 29, 2009), ECF No. 273. The complaint alleges,
among other things, that the Fairfield Defendants
fraudulently induced the Anwar Plaintiffs to invest in
the defendant funds, violated federal securities law,
recklessly and negligently misrepresented the nature of
their investment strategy and their diligence of Madoff,
and breached fiduciary and contractual duties. Id.
Although the complaint includes factual allegations
regarding Madoffʹs fraud, the legal bases for the claims
leveled against the Fairfield Defendants are
Although the good faith of a subsequent transferee may
be a defense to a trusteeʹs suit for recovery, see 11 U.S.C.
§ 550(b), suits against initial and subsequent transferees are
predicated on the debtorʹs fraud.
independent of any liability Madoff or BLMIS may have
to the Anwar Plaintiffs. Nor do the allegations depend
in substance on the fact that Madoff may have
wrongfully transferred funds to the Fairfield
The distinction between the NYAGʹs complaint
and a fraudulent conveyance action is even starker. See
Compl., People v. Merkin, No. 450879/2009 (N.Y. Sup. Ct.
filed Apr. 6, 2009). The NYAG alleges that J. Ezra
Merkin fraudulently held himself out as an ʺinvesting
guruʺ when he was in fact no more than a ʺglorified
mailbox,ʺ turning over virtually all of the assets in the
Merkin Funds to Madoff. Id. ¶¶ 1—2. According to the
complaint, Merkin not only fraudulently collected
management fees for work he let Madoff perform with
virtually no supervision, but he also engaged in self‐
dealing by steering non‐profit organizations to which
he owed fiduciary duties toward the feeder funds. Id.
¶¶ 3–6. The complaint alleges breaches of fiduciary
duty, the making of fraudulent misrepresentations with
respect to the sale of securities, and other violations of
New York statutes and common law. See id. ¶¶ 121–34.
While Madoffʹs fraud may be a ʺbut‐forʺ cause of the
enormous losses suffered by Merkinʹs clients, none of
the Merkin Defendantsʹ liability to the plaintiffs
depends on the wrongfulness of Madoffʹs conduct, or
on the fact that Madoff or BLMIS may have transferred
funds to the Merkin Defendants. The allegations in
Schwartz v. Merkin are substantially similar. See Compl.,
Schwartz v. Merkin, ¶¶ 1–14, No. 651516/2010 (N.Y. Sup.
Ct. filed Sept. 16, 2010). The Trusteeʹs claim that the
Anwar and NYAG Actions covertly seek the recovery of
fraudulent conveyances thus finds no support in the
allegations of the complaints, and the Actions cannot be
characterized as ʺagainst the debtorʺ on that basis.
The Trustee urges that the Actions are
indistinguishable from fraudulent transfer claims
because they seek the return of management fees, which
the defendants paid themselves out of funds transferred
as ʺreturnsʺ from BLMIS, ʺon the basis that the
[defendants] had actual or constructive knowledge of
Madoffʹs fraud.ʺ Anwar Action Appellant Br. at 56;
NYAG Action Appellant Br. at 58. This, he argues, is
ʺthe same basis as the avoidance action brought by the
Trustee on behalf of all BLMIS creditors.ʺ Anwar
Action Appellant Br. at 56–57; NYAG Action Appellant
Br. at 58. We disagree.
First, as we explained in Cumberland Oil Corp. v.
Thropp, 791 F.2d 1037 (2d Cir.), cert. denied, 479 U.S. 950
(1986), one complaint is not duplicative of another
solely because it recites some or all of the same facts.
The plaintiff in Cumberland entered into an oil
exploration contract with a company called Benchmark
based on the representations of its president, Thropp.
Id. at 1038–39. Contrary to those representations,
Benchmark was not only in financial distress, but also
soon began a series of transfers to Thropp and his father
which stripped it of the resources necessary to fulfill its
obligations under the agreement. Id. at 1039–40. After
Benchmark filed for bankruptcy, Cumberland brought
suit against the Thropps for fraud. The district court
dismissed the complaint, reasoning that the asset‐
stripping allegations were substantially identical to
fraudulent transfer claims. Id. at 1041. We disagreed,
explaining that even if Cumberland pled the same facts
that would have been invoked in a fraudulent
conveyance action, the company alleged that it was the
victim of a fraud perpetrated by the Thropps—a distinct
legal claim that was neither the property of
Benchmarkʹs bankruptcy estate nor was discharged by
Benchmarkʹs emergence from bankruptcy. Id. at 1042–
Nor are the Actions brought on the ʺsame basisʺ
as the Trusteeʹs fraudulent conveyance claims. The
defendantsʹ alleged knowledge of Madoffʹs fraud is
relevant here only to their liability for breaches of duties
they owed directly to the plaintiffs. These independent
duties distinguish the Actions from the Trusteeʹs own
claims and place them—like the fraud claims in
Cumberland—outside the scope of the automatic stay.
See Variable‐Parameter Fixture Dev. Corp. v. Morpheus
Lights, Inc., 945 F. Supp. 603, 608 (S.D.N.Y. 1996) (ʺ[A]
stay clearly cannot be extended to [a] non‐debtorʺ
where ʺthe non‐debtorʹs liability rests upon his own
breach of duty.ʺ (internal quotation marks omitted))
(citing A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th
Cir.), cert. denied, 479 U.S. 876 (1986)).
In the alternative, the Trustee appeals to the
background bankruptcy policy disfavoring individual
litigation that allows one creditor to ʺsteal a marchʺ on
the others. See Martin‐Trigona v. Champion Fed. Sav. &
Loan Assʹn, 892 F.2d 575, 577 (7th Cir. 1989). He notes
that the plaintiffs in both Actions are creditors of the
Madoff estate. But the plaintiffsʹ right to enforce duties
owed to them is not qualified by the fact that they may
also have claims against the Madoff estate.
It is well settled that ʺwhen creditors . . . have a
claim for injury that is particularized as to them, they
are exclusively entitled to pursue that claim, and the
bankruptcy trustee is precluded from doing so.ʺ Hirsch
v. Arthur Andersen & Co., 72 F.3d 1085, 1093 (2d Cir.
1995); see also Caplin v. Marine Midland Grace Trust Co. of
N.Y., 406 U.S. 416, 428 (1972) (ʺ[N]owhere in the
statutory scheme is there any suggestion that the trustee
in reorganization is to assume the responsibility of
suing third parties on behalf of [creditors].ʺ). The
injuries alleged by the plaintiffs in both Actions are
alleged to have been caused directly by the non‐debtor
defendants—not by Madoff or BLMIS. That renders
them ʺparticularizedʺ and outside the Trusteeʹs
purview. Marshall, 740 F.3d at 89 (ʺ[A]n injury is said to
be ʹparticularizedʹ when it can be ʹdirectly traced to the
third partyʹs conduct.ʹʺ (brackets omitted) (quoting St.
Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688,
704 (2d Cir. 1989))). The Actions are therefore not
voided by, and the settlements not subject to, the
III. Denial of the Trusteeʹs Claims for Section
105 Injunctive Relief
In addition to a declaration that the Actions are
void, the Trustee seeks an order preliminarily enjoining
the settlements. Whether or not the claims asserted in
the Actions are subject to the terms of the automatic
stay, a bankruptcy court has jurisdiction over any suit
that ʺmight have any ʹconceivable effectʹ on the
bankruptcy estate.ʺ Pfizer Inc. v. Law Offices of Peter G.
Angelos (In re Quigley Co.), Inc., 676 F.3d 45, 57 (2d Cir.
2012) (quoting Publicker Indus. v. United States (In re
Cuyahoga Equip. Corp.), 980 F.2d 110, 114 (2d Cir. 1992)),
cert. denied, 133 S. Ct. 2849 (2013). Section 105(a) of the
Bankruptcy Code empowers a court to ʺissue any order,
process, or judgment that is necessary or appropriate to
carry out the provisions of this title.ʺ 11 U.S.C. § 105(a);
see also full text at footnote 5, supra. Thus, we have held
that a court has the power pursuant to section 105(a) to
enjoin claims against a non‐debtor third party where
those claims are derivative, Marshall, 740 F.3d at 93, or
otherwise ʺpose the specter of direct impact on the res
of the bankrupt estate,ʺ Quigley, 676 F.3d at 58; see also
Nev. Power Co. v. Calpine Corp. (In re Calpine Corp.), 365
B.R. 401, 409 n.20 (S.D.N.Y. 2007) (ʺCourts consistently
have found that section 105 may be used to stay actions
against non‐debtors even where section 362 otherwise
would not provide such relief, recognizing that section
105 grants broader authority than section 362.ʺ). The
question is, essentially, ʺwhether the direct result of a
suit against a third party will be the removal of assets
from the bankruptcy estate.ʺ Quigley, 676 F.3d at 58.
Of course, a courtʹs authority to issue an
injunction is only the first step of the inquiry; we must
also be satisfied that the party seeking injunctive relief
is entitled to it. See id. at 58 n.14. The parties in this case
could not agree—and the district court did not decide—
on the standard for obtaining a preliminary injunction
under section 105(a). The appellees in both cases urge
us to apply the standard applicable to requests for
injunctive relief under Federal Rule of Civil Procedure
65 (incorporated into adversary proceedings in
bankruptcy by Bankruptcy Rule 7065), which requires
that ʺ[a] plaintiff seeking a preliminary injunction must
establish that he is likely to succeed on the merits, that
he is likely to suffer irreparable harm in the absence of
preliminary relief, that the balance of equities tips in his
favor, and that an injunction is in the public interest.ʺ
See Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20
(2008). The Trustee asserts to the contrary that he need
only show that the actions he seeks to enjoin would
ʺhave an immediate adverse economic consequence for
the debtorʹs estate.ʺ Queenie, Ltd. v. Nygard Intʹl, 321
F.3d 282, 287 (2d Cir. 2003) (stating that, while ʺ[t]he
automatic stay can apply to non‐debtors, [it] normally
does so only when a claim against the non‐debtor will
have an immediate adverse economic consequence for
the debtorʹs estateʺ).
Like the district court in both cases before us on
appeal, we decline to decide this issue of apparent first
impression. Instead, we conclude that the Trustee is
incapable of establishing either that the settlements
would in fact have an ʺimmediate adverse economic
consequenceʺ for the BLMIS estate, id., or that the estate
ʺis likely to suffer irreparable harm in the absence of
preliminary relief,ʺ Winter, 555 U.S. at 20; see also id. at
22 (ʺ[P]laintiffs seeking preliminary relief [must]
demonstrate that irreparable injury is likely in the
absence of an injunction.ʺ (emphasis in original)). The
reasons for this are common to both appeals.
The purported harm here is the effect that the
Trustee claims the settlements of the Anwar and NYAG
Actions would have on his ability to collect on
judgments he hopes to win in his pending fraudulent
conveyance actions against the Fairfield and Merkin
Defendants. Assuming that the Trustee could show
that the settlements would have such an impact, he
cannot show that this impact would be ʺimmediate,ʺ
under Queenie, or ʺlikelyʺ under the test articulated in
The impact of the settlements could not be
ʺimmediateʺ because the Trusteeʹs fraudulent
conveyance actions are actively being litigated; the
Trustee therefore lacks a judgment entitling him to any
part of the assets of the Fairfield or Merkin Defendants.
Nor does the Trustee enjoy a statutory right to those
assets. Our case law is clear that assets targeted by a
fraudulent conveyance action do not become property
of the debtorʹs estate under the Bankruptcy Code until
the Trustee obtains a favorable judgment. Colonial
Realty, 980 F.2d at 131.
The SIPA, invoked by the Trustee and the
intervenor SIPC, does not alter this rule. A SIPA trustee
has no greater legal interest in unadjudicated
fraudulent transfers than does a trustee in bankruptcy.
The Act merely engrafts special features onto the
familiar framework of a liquidation proceeding under
Chapter 7 of the Bankruptcy Code, see 15 U.S.C. §
78fff(b), to address the concerns peculiar to the orderly
liquidation of a brokerage. Just as in an ordinary, non‐
SIPA bankruptcy, a SIPA trustee stands in the shoes of a
liquidating firm. See Picard v. JPMorgan Chase & Co. (In
re Bernard L. Madoff Inv. Sec. LLC), 460 B.R. 84, 91
(S.D.N.Y. 2011) (JPMorgan I), affʹd, 721 F.3d 54 (2d Cir.
2013) (JPMorgan II); see also JPMorgan II, 721 F.3d at 71
(ʺAs a general rule, SIPA vests trustees with the same
powers and title with respect to the debtor and the
property of the debtor as a trustee in a case under Title
11.ʺ (internal quotation marks and ellipsis omitted)).
But because money held by a broker on behalf of its
customers is not the brokerʹs property under state law,
it would not be recoverable by a trustee in an ordinary
bankruptcy. Picard v. Estate of Chais (In re Bernard L.
Madoff Inv. Sec. LLC), 445 B.R. 206, 237–38 (Bankr.
S.D.N.Y. 2011). SIPA circumvents this problem through
a statutorily created legal fiction that confers standing
on a SIPA trustee by treating customer property as
though it were ʺproperty of the debtorʺ in an ordinary
liquidation. Id. at 238; see 15 U.S.C. § 78fff–2(c)(3). The
meaning, purpose, and effect of this provision are in no
way inconsistent with the rule we adopted in Colonial
Realty. See Estate of Chais, 445 B.R. at 238 (agreeing with
prior decisions concluding that the ʺlimited purposeʺ of
SIPA section 78fff–2(c)(3) ʺis to create this legal fictionʺ).
Because the Trusteeʹs interests here are contingent
at best, it was not an abuse of discretion to deny him
injunctive relief on the basis that he failed to establish
any ʺimmediate adverse economic consequenceʺ to the
For essentially the same reasons, it was not an
abuse of discretion to deny the Trustee an injunction if
the denial was based on the conclusion that he could
not establish a likelihood of irreparable harm. The
Trustee has not shown that it is ʺlikelyʺ as opposed to
ʺpossibleʺ that he would (a) win the fraudulent
conveyance actions, and then (b) be unable to recover a
judgment as a result of the Anwar and NYAG
settlements. See Winter, 555 U.S. at 22 (ʺIssuing a
preliminary injunction based only on a possibility of
irreparable harm is inconsistent with our
characterization of injunctive relief as an extraordinary
remedy that may only be awarded upon a clear
showing that the plaintiff is entitled to such relief.ʺ).
The Trusteeʹs fraudulent conveyance actions have
been pending for more than four years. The bankruptcy
court recently heard oral argument on the motions to
dismiss the third amended complaint in the Trusteeʹs
fraudulent conveyance action against the Merkin
Defendants and Funds, and discovery is not scheduled
to conclude until October 2014. See Seventh Am. Case
Mgmt. Plan, Picard v. Merkin, Adv. Pro. No. 09–1182
(Bankr. S.D.N.Y. Apr. 22 2014), ECF No. 208. The action
against the Fairfield Defendants seems to be even
further from resolution. See Stip. Extending Time to
Move, Answer or Otherwise Respond to Trusteeʹs
Complaint, Picard v. Fairfield Sentry Ltd., Adv. Pro. 09–
1239 (Bankr. S.D.N.Y. Jun. 27, 2014), ECF No. 151.
To be sure, there is the possibility, particularly in
the case against the Fairfield Greenwich Group, that the
defendants will not be able both to satisfy a possible
future fraudulent conveyance judgment and to pay the
settlement amount. But it is ʺan extraordinary exercise
of discretion to use [section 105] to stay a third party
action not involving the debtor,ʺ In re G.S.F. Corp., 938
F.2d 1467, 1474 (1st Cir. 1991) (quoting In re Brentanoʹs
Inc., 36 B.R. 90, 92 (S.D.N.Y. 1984)), abrogated in part on
other grounds, Conn. Natʹl Bank v. Germain, 503 U.S. 249
(1992), and the mere possibility that a third‐party action
will have some effect on a debtorʹs estate is not enough
to satisfy either the Queenie or Winter standards. The
district court reasonably found that it was not likely
that the Trustee would both prevail in his fraudulent
conveyance actions and find himself unable to collect
the resulting judgment as a result of the challenged
settlements. It was therefore not an abuse of discretion
for the court to deny the Trusteeʹs requests for
preliminary injunctive relief on the grounds that he
could not show that the BLMIS estate was likely to
suffer irreparable harm if the settlements went forward
For the foregoing reasons, the judgments of the
district court are AFFIRMED.
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