Irving H. Picard v. Saul B. Katz et al

Filing 28

NOTICE of RECENT AUTHORITY re: 20 MOTION to Dismiss THE AMENDED COMPLAINT OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT.. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Attachments: # 1 Exhibit A, # 2 Exhibit B)(Wagner, Karen)

Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
Telephone:
[phone]
Facsimile:
[phone]
Attorneys for the Sterling Defendants
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------- x
:
SECURITIES INVESTOR PROTECTION
:
CORPORATION,
:
:
Plaintiff-Applicant,
:
:
- against :
:
BERNARD L. MADOFF INVESTMENT
:
SECURITIES LLC,
:
:
:
Defendant.
:
----------------------------------- x
In re:
:
:
:
BERNARD L. MADOFF,
:
:
Debtor.
:
----------------------------------- x
IRVING H. PICARD,
:
:
:
Plaintiff,
:
:
- against :
:
SAUL B. KATZ, et al.
:
:
Defendants.
:
----------------------------------- x

Adv. Pro. No. 08-01789 (BRL)
SIPA LIQUIDATION
(Substantively Consolidated)

Adv. Pro. No. 10-05287 (BRL)

NOTICE OF RECENT AUTHORITY

The Sterling Defendants respectfully submit this notice of recent authority to
inform the Court of two recent decisions that further support the Sterling Defendants’
pending motion to dismiss the amended complaint or, in the alternative, for summary
judgment (“Sterling Motion”) and that reject arguments advanced by the Trustee and
SIPC.
I.

Bankruptcy Code Section 546(e) Must Be Afforded Its Plain Meaning
In In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., No. 09-5122-

bk(L), 2011 U.S. App. LEXIS 13177 (2d Cir. June 28, 2011) (“Enron”), attached hereto
as Exhibit A, the United States Court of Appeals for the Second Circuit ruled that
transfers sought to be avoided as fraudulent or preferential—Enron’s pre-petition
payments to redeem its own commercial paper prior to maturity—were “settlement
payments” exempted from avoidance under the plain meaning of the Bankruptcy Code’s
statutory safe harbor, 11 U.S.C. § 546(e) (“Section 546(e)”), and the definition of
“settlement payment” under 11 U.S.C. § 741(8). The Court emphasized the breadth of
the Section 546(e) safe harbor, which was advocated by the Securities and Exchange
Commission (“SEC”) as amicus curiae. Enron, 2011 U.S. App. LEXIS 13177, at *3-4,
*15-19. Because the Court found Section 546(e)’s language unambiguous, its analysis
began and ended with its plain meaning. In particular, the Court rejected the argument
that Section 546(e) did not apply because the “systemic risks that motivated Congress’s
enactment of the safe harbor” were not implicated by the redemption of commercial
paper, noting as to the analogous risk presented by a leveraged buyout that “undoing
long-settled leveraged buyouts would have a substantial impact on the stability of the
financial markets, even though only private securities were involved and no financial

intermediary took a beneficial interest in the exchanged securities during the course of
the transaction.” Id. at *26-27 (emphasis added).
The Sterling Motion involves a later, and even more broadly worded, iteration of
Section 546(e). Applying the Second Circuit’s plain meaning interpretation to the current
language of Section 546(e) mandates application of the safe harbor to the transfers the
Trustee seeks to avoid in his Complaint. Further, the rejection by the Circuit of the claim
that Section 546(e) cannot apply where “none of the potential disruptions to the market
occasioned by undoing settled purchases and sales . . . could or would occur” equally
requires rejection of the argument that the safe harbor cannot apply in this case because
BLMIS traded no securities. (Trustee Opp. at 90-91; see also SIPC Opp. at 17-18.)
II.

Avoidance of BLMIS Transfers Requires Complicity in Madoff’s Fraud
A decision from New York’s highest state court, Commodity Futures Trading

Commission v. Walsh, No. 91, 2011 N.Y. LEXIS 1704 (N.Y. June 23, 2011) (“Walsh”),
attached hereto as Exhibit B, further supports the Sterling Defendants’ position that a
transfer may not be avoided as fraudulent where consideration is given unless
participation in the fraud can be established. In Walsh, the New York Court of Appeals
decided two questions certified to it by the Second Circuit to help resolve a dispute
between the ex-wife of an alleged fraudster and the Commodity Futures Trading
Commission (“CFTC”) and the SEC, who sought disgorgement from the ex-wife of the
proceeds of her husband’s fraud that were transferred to her as part of the couple’s
divorce settlement. Id. at *1-2. The wife argued that she was entitled to retain the
transferred property because she was an innocent and unknowing recipient of the assets
for which she gave fair consideration. Id. at *5-6. In response to the certified questions,

2

the New York Court of Appeals held (i) that proceeds of fraud can become “marital
property” under New York law and (ii) that a spouse can provide “fair consideration” for
such marital assets, precluding disgorgement. Id. at *11, *20.
To conclude that the proceeds of fraud can become marital property, the Court of
Appeals relied on the long-standing principle of New York law that “money obtained by
fraud or felony cannot be followed by the true owner into the hands of one who has
received it bona fide and for a valuable consideration in due course of business.” Id. at
*12 (quoting Stephens v. Bd. of Educ. of Brooklyn, 79 N.Y. 183, 186 (1879)). Such a
principle is grounded in “New York’s concern for finality in business transactions”:
“[T]o permit in every case of the payment of a debt an inquiry as to the
source from which the debtor derived the money, and a recovery if shown
to have been dishonestly acquired, would disorganize all business
operations and entail an amount of risk and uncertainty which no
enterprise could bear.” Id. at *13 (quoting Banque Worms v.
BankAmerica Int’l, 77 N.Y.2d 362, 372 (1991)).
Although Walsh was not a fraudulent transfer case, the principles applied by the
Court of Appeals apply here to undercut any argument that the transfers by BLMIS to its
customers were transfers of “other people’s money” that can be recovered as intentional
fraudulent transfers. Because money is fungible, it cannot be followed into an innocent
party’s hands—it can be followed only into the hands of a participant in a fraud. See id.
at *12-13 & n.5. As the New York Court of Appeals stated, it was not “unsympathetic to
the interests of parties who were fraudulently deprived of their investments and who,
understandably, seek the return of a portion of their stolen monies,” but the victims of a
fraud can pursue disgorgement only where it is demonstrated that the transferee was
“aware of or participated in the fraud or otherwise failed to act in good faith,” such as by

3

colluding to enter into a divorce agreement intended to conceal money from its rightful
owner. Id. at *21-22.
Dated: New York, New York
July 1, 2011
DAVIS POLK & WARDWELL LLP
By: s/ Karen E. Wagner
Karen E. Wagner
Dana M. Seshens
450 Lexington Avenue
New York, New York 10017
Telephone: [phone]
Facsimile: [phone]

Of Counsel:
Robert B. Fiske, Jr.
Robert F. Wise, Jr.

Attorneys for the Sterling Defendants

4