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

Filing 46

MEMORANDUM OF LAW in Support re: 45 MOTION TO DIRECT ENTRY OF FINAL JUDGMENT UNDER FEDERAL RULE OF CIVIL PROCEDURE 54(b) AND FOR CERTIFICATION UNDER 28 U.S.C. § 1292(b) re: 40 Memorandum & Opinion, Set Hearings,,,,,,.. Document filed by Securities Investor Protection Corporation. (Attachments: # 1 Certificate of Service)(Bell, Kevin)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------------- :
SECURITIES INVESTOR PROTECTION
:
CORPORATION,
:
:
Plaintiff-Applicant,
:
:
v.
:
:
BERNARD L. MADOFF INVESTMENT
:
SECURITIES LLC,
:
:
Defendant.
:
-------------------------------------------------------------- :
In re:
:
BERNARD L. MADOFF,
:
:
Debtor.
:
-------------------------------------------------------------- :
IRVING H. PICARD, Trustee for the Liquidation :
of Bernard L. Madoff Investment Securities LLC, :
:
Plaintiff,
:
:
v.
:
:
SAUL B. KATZ, et al.,
:
:
Defendants.
:
-------------------------------------------------------------- :

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

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

Case No. 1:11-cv-03605-JSR

MEMORANDUM OF LAW OF
THE SECURITIES INVESTOR PROTECTION CORPORATION
IN SUPPORT OF TRUSTEE’S MOTION FOR CERTIFICATION OF ORDER FOR
INTERLOCUTORY APPEAL OR FOR ENTRY OF SEPARATE FINAL JUDGMENT
SECURITIES INVESTOR PROTECTION CORPORATION
805 Fifteenth Street, N.W., Suite 800
Washington, D.C. 20005
Telephone: [phone]
JOSEPHINE WANG
General Counsel
KEVIN H. BELL
Senior Associate General Counsel for Dispute Resolution
CHRISTOPHER H. LAROSA
Associate General Counsel
LAUREN T. ATTARD
Staff Attorney

TABLE OF CONTENTS
PAGE
STATEMENT OF THE ISSUE .......................................................................................................1
STATEMENT OF THE FACTS .....................................................................................................2
SUMMARY OF THE ARGUMENT ..............................................................................................2
ARGUMENT ...................................................................................................................................4
I.

THE ORDER OF PARTIAL DISMISSAL SATISFIES THE
CONDITIONS NECESSARY FOR INTERLOCUTORY REVIEW
UNDER 28 U.S.C. §1292(b) ...................................................................................4
A. Applicable Law ..................................................................................................4
B. Analysis..............................................................................................................6
1. Controlling Question of Law .......................................................................6
2. Substantial Ground for Difference of Opinion ............................................8
A. Section 546(e) ........................................................................................8
B. Section 78fff-2(c)(3) ............................................................................11
C. Section 548(c) ......................................................................................12
3. Ultimate Termination of Litigation............................................................13

II.

THE COURT’S ORDER OF PARTIAL DISMISSAL SATISFIES ALL
OF THE CRITERIA NECESSARY UNDER FEDERAL RULE 54(b) FOR
ENTRY OF FINAL JUDGMENT AS TO COUNTS 2 THROUGH 10 ...............13
A. Applicable Law ................................................................................................13
B. Analysis............................................................................................................15
1. Separate Claims .........................................................................................15
2. Final Determination of Claims...................................................................16
3. No Just Reason for Delay ..........................................................................16

CONCLUSION ..............................................................................................................................18
-i-

TABLE OF AUTHORITIES
CASES:

PAGE

In re Adler, Coleman Clearing Corp., 263 B.R. 406 (S.D.N.Y. 2001) ...........................8, 9, 10, 17
Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11 (2d Cir. 1997) .................15, 18
Baumgarten v. County of Suffolk, 2010 WL 4177283 (E.D.N.Y. October 15, 2010) ...............5, 10
In re Bayou Hedge Fund Litig., 2007 WL 2363622 (S.D.N.Y. August 16, 2007) ..................14, 15
In re Bevill, Bresler & Schulman, Inc., 94 B.R. 817 (D.N.J. 1989) ..............................................12
Brown v. Bullock, 294 F.2d 415 (2d Cir. 1961) ...............................................................................5
Consub Delaware, LLC v. Schahin Engenharia Limitada,
476 F.Supp.2d 305 (S.D.N.Y. 2007), aff’d, 543 F.3d 104 (2d Cir. 2008) .......................4, 5
Curtiss-Wright Corp. v. General Elec. Co., 446 U.S. 1 (1980) .....................................................15
Ginnett v. Computer Task Group, Inc., 962 F.2d 1085 (2d Cir. 1992) ....................................14, 15
In re Grafton Partners, L.P., 321 B.R. 527 (9th Cir. BAP 2005)...........................................7, 9, 10
Grand Rivers Enters. Six Nations, Ltd. v. Pryor, 425 F.3d 158 (2d Cir. 2005) .............................14
Hogan v. Consol. Rail Corp., 961 F.2d 1021 (2d Cir. 1992).........................................................14
Info. Res. Inc. v. Dun & Bradstreet Corp., 294 F.3d 447 (2d Cir. 2002) ......................................14
Johnson v. Neilson (In re Slatkin), 525 F.3d 805 (9th Cir. 2008) ....................................................9
Klinghoffer v. S.N.C. Achille Lauro, 921 F.2d 21 (2d Cir. 1990) ................................................4, 5
Koehler v. Bank of Bermuda Ltd., 101 F.3d 863 (2d Cir. 1996) .....................................................4
Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 125 S.Ct. 460 (2004) ...............................7
In re Lloyd’s American Trust Fund Litig.,
1997 WL 458739 (S.D.N.Y. Aug. 12, 1997) .................................................................5, 10
Michigan State Housing Development Authority v. Lehman Brothers Holdings Inc.,
Case No. 11-cv-3392 (JGK) (S.D.N.Y.) .......................................................................... 8-9

-ii-

TABLE OF AUTHORITIES
(cont.)
CASES:

PAGE

Picard v. Merkin (In re Bernard L. Madoff Inv. Secs., Inc.),
440 B.R. 243 (Bankr. S.D.N.Y. 2010) ...........................................................................8, 10
Picard v. Merkin (In re Bernard L. Madoff Investment Securities LLC),
2011 WL 3897970 (S.D.N.Y. 2011) ..............................................................................9, 13
Picard v. Taylor (In re Park South Securities, LLC),
326 B.R. 505 (Bankr. S.D.N.Y. 2005) ........................................................................ 12, 17
Santiago v. Pinello, 647 F.Supp.2d 239 (E.D.N.Y. 2009) .........................................................5, 10
S.E.C. v. Credit Bancorp, Ltd., 103 F.Supp.2d 223 (S.D.N.Y. 2000) .............................................5
Transp. Workers Union of Am., Local 100, AFL-CIO v. New York City Transit Auth.,
358 F.Supp.2d 347 (S.D.N.Y. 2005)....................................................................................5
Weber v. United States Trustee, 484 F.3d 154 (2d Cir. 2007) .........................................................4
Wider v. Wootton, 907 F.2d 570 (5th Cir. 1990) .............................................................................9
In re Worldcom, Inc., 2003 WL 21498904 (S.D.N.Y. June 30, 2003) ........................................ 4-5

-iii-

TABLE OF AUTHORITIES
(cont.)
STATUTES AND RULES:

PAGE

Securities Investor Protection Act, as amended, 15 U.S.C. '
78bbb..............................................................................................................................................12
78eee(d)............................................................................................................................................1
78fff(b) ...........................................................................................................................................12
78fff-2(c)(3) ......................................................................................................................... 7, 11-12
United States Bankruptcy Code, 11 U.S.C. §
502(d) .................................................................................................................1, 2, 6, 7, 11, 16, 17
510(c) .............................................................................................................................................15
546(e) ................................................................................................... 1, 2, 3, 6, 7, 8-10, 15, 16, 17
548(a)(1)(A) .............................................................................................................................10, 15
548(c) ....................................................................................................................... 1, 2, 6, 8, 12-13
550..................................................................................................................................................11
550(a) .............................................................................................................................................10
28 U.S.C. '
1292(b) ......................................................................................................................... 1, 2, 4-14, 18
Federal Rules of Civil Procedure
54(b) ............................................................................................................................. 1, 2, 3, 13-18
PUBLICATIONS AND TREATISES:
6 Collier on Bankruptcy, ¶ 749.02[1] (16th ed. 2011) ............................................................. 11-12

-iv-

Pursuant to Section 78eee(d) of the Securities Investor Protection Act, 15 U.S.C. §§78aaa
et seq. (“SIPA”), the Securities Investor Protection Corporation (“SIPC”) submits this
memorandum of law in support of the motion (“Motion”) of Irving H. Picard, trustee for the
consolidated liquidation of Bernard L. Madoff Investment Securities, Inc. (“BLMIS”) and
Bernard L. Madoff, for entry of an order under 28 U.S.C. § 1292(b) specifying that this Court’s
September 27, 2011 Opinion and Order, Dkt. No. 40 (“Order of Partial Dismissal”), dismissing
Counts 2 – 10 of the Amended Complaint “involves a controlling question of law as to which
there is substantial ground for difference of opinion” and that “an immediate appeal from the
order may materially advance the ultimate termination” of this litigation; or, in the alternative,
for entry, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, of a final judgment as
to Counts 2 – 10 of the Amended Complaint.
STATEMENT OF THE ISSUES
The Trustee’s Motion raises the following issues:
1. Whether the Court should enter an order providing that, for purposes
of 28 U.S.C. § 1292(b), its September 27, 2011 Order of Partial
Dismissal involves a controlling question of law as to which there is
substantial ground for difference of opinion and from which an
immediate appeal from the order may materially advance the ultimate
termination of this litigation, where: (1) the Court’s decisions
regarding the applicability in this action of Sections 502(d) and 546(e)
of the Bankruptcy Code (11 U.S.C.), and regarding the “good faith”
standard applicable under Bankruptcy Code Section 548(c) (11
U.S.C.), are inconsistent with other decisions of this Court and of other
courts in and outside of this jurisdiction; and (2) reversal of this
Court’s order would enable the Court to try Counts 1 – 11 of the
Amended Complaint in a single proceeding, and thus would avoid the
need for two expensive and duplicative trials.
2. Whether, in the alternative, and pursuant to Rule 54(b) of the Federal
Rules of Civil Procedure, the Court should enter a final judgment as to
Counts 2 – 10 of the Amended Complaint, where each of the causes of
action asserted through each of those counts constitutes a separate

“claim” within the meaning of Rule 54(b) and where there is no just
reason for delay in the entry of final judgment as to those claims.
STATEMENT OF THE FACTS
The facts pertinent to the Trustee’s Motion are summarized in the Trustee’s
memorandum in support of his Motion.
SUMMARY OF THE ARGUMENT
The Court’s Order of Partial Dismissal has created substantial uncertainty in the law
affecting the hundreds of avoidance suits brought by the Trustee as part of the BLMIS
liquidation. The Order has led to confusion as to what customer property the Trustee can
recover, disrupted the claims review process in the BLMIS liquidation proceeding by injecting
uncertainty into the calculation of the amounts that customers now are owed, and created
disarray in the timing of the distribution of customer property.

The disruption to the

administration of the BLMIS liquidation proceeding is real, palpable, and immediate. To correct
this situation, and to enable the Second Circuit to provide finality as to this Court’s decision,
SIPC respectfully requests that the Court either certify its Order of Partial Dismissal for
interlocutory review pursuant to 28 U.S.C. § 1292(b), or enter a final judgment pursuant to Rule
54(b) as to Counts 2 through 10 of the Trustee’s Amended Complaint.
The Order of Partial Dismissal satisfies all of the criteria necessary for certification under
28 U.S.C. § 1292(b). The questions decided by the Court – involving the application, as a matter
of law, of Bankruptcy Code Sections 546(e) and 502(d) in a SIPA proceeding, and the standard
to be applied in determining “good faith” under requirements of Code Section 548(c)’s “good
faith” defense in a SIPA proceeding – are “pure” questions of law, which can be resolved
without extensive study of the record in this case. A reversal of the Court’s Order, which would
reinstate the claims asserted through Counts 2 through 10 of the Amended Complaint, would
2

have a significant impact on the conduct of this litigation. There is also substantial ground for a
difference of opinion as to those questions. The Court’s Order is in conflict with other decisions
of this Court, of the Bankruptcy Court, and of other courts around the country. Finally, should
the Court’s Order be reversed on appeal, the resolution on appeal could allow the claims asserted
through Counts 2 through 10 to be tried together with those asserted through Counts 1 and 11,
thereby shortening the overall time for trial and avoiding expensive and duplicative proceedings.
The Court’s Order of Partial Dismissal also would support the entry of a separate final
judgment pursuant to Rule 54(b). Through its Order, the Court dismissed Counts 2 through 10,
an unquestionably final disposition. Further, as the Court’s dismissal of Counts 2 through 9 was
predicated upon Bankruptcy Code Section 546(e), a provision not applicable by its express terms
to the remaining claims (Counts 1 and 11) before the Court, appellate review of the Court’s
Order would not be affected by, or interfere with, the Court’s disposition of the latter claims.
Finally, there is no just reason for delay in the entry of final judgment as to Counts 2
through 10, and instead, substantial harm to be had in the absence of an immediate appeal. As
noted, a delayed appeal would put the Trustee and the Court at risk of duplicative trials, and
would delay any potential recovery by the Trustee on Counts 2 through 10 for the benefit of
customers. More significantly, delay would leave in limbo the legal status of most of the
avoidance claims asserted by the Trustee in literally hundreds of other lawsuits, creating
uncertainty concerning the scope of the Trustee’s prospective recoveries, to the detriment of the
customer/victims of BLMIS and Madoff. Rather than perpetuate that state of affairs, the Court
respectfully is urged to enter a final judgment as to Counts 2 through 10 pursuant to the authority
conferred under Rule 54(b).

3

ARGUMENT
I.

A.

THE ORDER OF PARTIAL DISMISSAL SATISFIES
THE CONDITIONS NECESSARY FOR
INTERLOCUTORY REVIEW UNDER 28 U.S.C. § 1292(b)

Applicable Law

28 U.S.C. § 1292(b) provides that a federal court of appeals may accept for immediate
review an interlocutory order entered by a federal district court where the latter court certifies
that the subject interlocutory order “involves a controlling question of law as to which there is
substantial ground for difference of opinion and that an immediate appeal from the order may
materially advance the termination of the litigation.” See 28 U.S.C. § 1292(b). See also Weber
v. United States Trustee, 484 F.3d 154, 159 (2d Cir. 2007) (“Weber”). Congress passed Section
1292(b) in order to ensure that the courts of appeals would be able to rule on “ephemeral
questions of law” that might otherwise escape appellate review, and to ensure “prompt resolution
of knotty legal problems” and to mitigate the risk of protracted litigation. See Weber, 484 F.3d
at 159; Koehler v. Bank of Bermuda Ltd., 101 F.3d 863, 864-66 (2d Cir. 1996); Klinghoffer v.
S.N.C. Achille Lauro, 921 F.2d 21, 23-24 (2d Cir. 1990).
Consistent with the foregoing, an order qualifies under Section 1292(b) for certification
for interlocutory review if it: (1) involves a “question of law” which is “controlling;” (2) there is
a “substantial ground for difference of opinion” as to that question; and (3) an immediate appeal
would materially advance the ultimate termination of the litigation. See, e.g., Consub Delaware,
LLC v. Schahin Engenharia Limitada, 476 F.Supp.2d 305, 309 (S.D.N.Y. 2007), aff’d, 543 F.3d
104 (2d Cir. 2008) (“Consub Delaware”). For purposes of Section 1292(b), a “question of law”
is a “pure question of law that the reviewing court could decide quickly and cleanly without
having to study the record.” See, e.g., In re Worldcom, Inc., 2003 WL 21498904, at *10

4

(S.D.N.Y. June 30, 2003). See also Baumgarten v. County of Suffolk, 2010 WL 4177283, at *1
(E.D.N.Y. October 15, 2010) (“Baumgarten”). That question is “controlling,” inter alia, if
reversal of the district court’s order could significantly affect the conduct of the action. See, e.g.,
Consub Delaware, 476 F.Supp.2d at 309; S.E.C. v. Credit Bancorp, Ltd., 103 F.Supp.2d 223, 227
(S.D.N.Y. 2000) (“Credit Bancorp.”). The impact that an appeal may have on other cases is also
a factor that a court may take into account in deciding whether a question is “controlling.” See
Klinghoffer, 921 F.2d at 24; Brown v. Bullock, 294 F.2d 415, 417 (2d Cir. 1961) (Friendly, J.).
A “substantial ground for difference of opinion” exists when there is “genuine doubt as to
whether the district court applied the correct legal standard in its order.” See, e.g., Consub
Delaware, 476 F.Supp.2d at 309.
(E.D.N.Y. 2009) (“Pinello”).

See also Santiago v. Pinello, 647 F.Supp.2d 239, 243

Such doubt may exist where, e.g., “(1) there is conflicting

authority on the issue, or (2) the issue is particularly difficult and of first impression for the
Second Circuit.” See In re Lloyd’s American Trust Fund Litig., 1997 WL 458739, at **4-5
(S.D.N.Y. Aug. 12, 1997); Baumgarten, 2010 WL 4177283, at *1; Pinello, 647 F.Supp.2d at 243.
Finally, although, technically, the question of whether there is a controlling question of
law is distinct from the question of whether certification would advance the ultimate termination
of the litigation, in practice, the two questions are closely related. See Credit Bancorp, 103
F.Supp.2d at 227. Where reversal of the district court’s order would have a significant effect on
the action, it is likely that one such effect would be either to “advance the time for trial or shorten
the time required for trial,” as this third prong of the Section 1292(b) certification test requires.
See, e.g., Consub Delaware, 476 F.Supp.2d at 310; Transp. Workers Union of Am., Local 100,
AFL-CIO v. New York City Transit Auth., 358 F.Supp.2d 347, 350 (S.D.N.Y. 2005).

5

B.

Analysis

Application of the foregoing test to the Court’s Order of Partial Dismissal is
straightforward, and the Court’s decisions regarding the applicability of Bankruptcy Code
(“Code”) Sections 546(e) and 502(d) to this proceeding, and its construction of the “good faith”
standard under Code Section 548(c), satisfy all of the elements necessary to certify that order for
interlocutory review.
1. Controlling Question of Law
There is no doubt that each of the issues decided by the Court under these Code sections
presents a pure question of law and that reversal of the Court’s Order of Partial Dismissal would
have a substantial effect on the conduct of this action.
The Court dismissed the Trustee’s preference and fraudulent transfer claims in Counts 2
through 9 of the Amended Complaint on the ground that those claims are barred by the “safe
harbor” created through Code Section 546(e). The Court predicated its decision exclusively on
its reading of the “literal language” of that section. (See Order of Partial Dismissal at 5-6.)
Moreover, although the Court found that BLMIS never actually placed any securities
trades, the Court nevertheless concluded, without analysis, that the transfers in question were
“settlement payments” made in connection with such trades. (Id. at 7). In like manner, although
the Court found that, at all times relevant to the Amended Complaint, BLMIS and Madoff were
engaged in “the special kind of fraud known as a ‘Ponzi scheme,’ by which the customers of
Madoff Securities … were paid their profits from new monies received from customers, without
any actual securities trades taking place,” the Court found, again without comment or analysis,
that BLMIS was a “stockbroker” and that the subject transfers were made in connection with
“securities contracts” within the meaning of Section 546(e), even though the “securities

6

contracts” were non-existent. (See Order of Partial Dismissal at 4, 6). Finally, despite the lack
of clarity as to how the terms “stockbroker,” “settlement payment,” and “securities contract”
could be made to apply to fictitious, non-existent activity, the Court refused to countenance any
resort to legislative history to illuminate either the meaning of the terms in this context or of the
purposes underlying Section 546(e) as a whole, and declined to read those terms in their full
statutory context or in light of the statutory purpose.

Cf., Grafton, 321 B.R. at 532

(“[A]scertaining the meaning of ‘settlement payment’ is a ‘holistic endeavor’ that requires us to
consider the entire statutory scheme associated with its enactment and to reject plausible
readings of isolated terms that are not compatible with the rest of the law” (citing Koons Buick
Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 60, 125 S.Ct. 460, 466-67 (2004)).
All of the foregoing issues are “pure” questions of law, whose resolution would not
require the Court of Appeals to study any part of the record beyond the Trustee’s Amended
Complaint and this Court’s Order of Partial Dismissal. Further, should the appellate court
reverse this Court’s decision regarding the applicability of Section 546(e), Counts 2 through 9 of
the Amended Complaint would be reinstated, and thereby have a substantial impact on the
conduct of this lawsuit. The Section 546(e) issues thus constitute “controlling” questions of law
for purposes of 28 U.S.C. § 1292(b).
The same is true of the Court’s dismissal of Count 10 of the Amended Complaint. The
Court dismissed that count on the ground that Bankruptcy Code Section 502(d) does not apply in
this lawsuit because it is inconsistent with, and therefore overridden by, Section 78fff-2(c)(3) of
SIPA. Without doubt, that issue is purely one of law, and does not require any consultation of
the record to resolve. Here too, a reversal of the Court’s dismissal of Count 10 would reinstate
that count, and thus have a substantial impact on this suit.

7

The Court’s decision regarding the effect of SIPA and the securities laws on the
applicable “good faith” standard under Bankruptcy Code Section 548(c) is also a pure question
of law requiring no reference to the record for resolution. Further, as the Court substituted a
“willful blindness” standard for the “inquiry notice” standard otherwise applicable under Section
548(c) – distinct standards whose difference, according to the Court, “is essentially the
difference between an objective standard and a subjective standard” (Order of Partial Dismissal
at 13) – a reversal of the Court’s decision would restore the “inquiry notice” standard, and thus
affect significantly the evaluation of evidence of the Defendants’ intent. That impact is more
than sufficient to render “controlling” the legal questions decided by the Court under Code
Section 548(c).
2. Substantial Ground for Difference of Opinion
There is also a substantial ground for difference of opinion as to the Court’s decisions
under all of the foregoing Bankruptcy Code sections.
A.

Section 546(e)

The Court’s finding that, as a matter of law, Code Section 546(e) may bar avoidance
claims brought by a SIPA trustee is unsupported by prior precedent, and has been rejected by
another division of this Court and by the Bankruptcy Court in this jurisdiction. See In re Adler,
Coleman Clearing Corp., 263 B.R. 406, 480 (S.D.N.Y. 2001) (Marrero, J.) (“Adler Coleman”);
Picard v. Merkin (In re Bernard L. Madoff Inv. Secs., Inc.), 440 B.R. 243, 267 (Bankr. S.D.N.Y.
2010) (Lifland, J.) (“Merkin”).1 Likewise, the same courts, along with others outside this

1

Indeed, in a different case, this District Court even saw fit to leave safe harbor questions to
the Bankruptcy Court for at least initial resolution, in acknowledgment of the fact that “the
bankruptcy court has well-recognized expertise in interpreting the Code that would be useful to
this court in analyzing … safe harbor provisions at issue ….” See Michigan State Housing
8

jurisdiction, have rejected the application of the Section 546(e) bar/safe harbor in cases where a
putative “stockbroker” was actually operating a Ponzi scheme. See Picard v. Merkin (In re
Bernard L. Madoff Investment Securities LLC), 2011 WL 3897970, at *12 (S.D.N.Y. 2011)
(Wood, J.); Adler Coleman, 263 B.R. at 474-85; Merkin, 440 B.R. at 266-68; Johnson v.
Neilson, (In re Slatkin), 525 F.3d 805, 817 (9th Cir. 2008); Wider v. Wootton, 907 F.2d 570, 573
(5th Cir. 1990) (“Wider”); In re Grafton Partners, L.P., 321 B.R. 527 (9th Cir. BAP 2005)
(“Grafton”). In so doing, the courts have often found that the terms “stockbroker,” “settlement
payment,” and “securities contract” in Section 546(e) are ambiguous; that resort to legislative
history is appropriate to resolve that ambiguity; and that the legislative history to Section 546(e)
demonstrates that Congress did not intend those terms to encompass Ponzi scheme operators or
transfers made in connection with such schemes. See Adler Coleman, 263 B.R. at 474-85;
Merkin, 440 B.R. at 266-68. See also Johnson, 525 F.3d at 817; Wider, 907 F.2d at 573;
Grafton, 321 B.R. at 527-41. In fact, in an avoidance suit arising out of the BLMIS liquidation,
this Court went even further, finding not only that the terms “stockbroker” and “securities
contract” do not encompass Ponzi scheme operators and investments, respectively, but that there
could be no substantial difference of opinion on that point. See Merkin, 2011 WL 3897970 at
*12. In this regard, the language of some of the decisions from the courts in this jurisdiction
bears emphasis:
[N]othing in the language, legislative history or statutory intent of
§ 546(e) may reasonably be construed to countenance the use of
the stockholder defense…[where]…the effect…would be to apply
the statute, not as a shield to protect truly bona fide trades of
parties uninvolved in any misconduct, but as a device employed by
the perpetrator, and/or its principals or beneficiaries, to affirm and
______________________________
Development Authority v. Lehman Brothers Holdings Inc., Case No. 11-cv-3392 (JGK)
(S.D.N.Y.), Transcript of September 14, 2011 Hearing, at 62-63.
9

enforce a fraud the existence of which depends, as an integral
component of the scheme, upon payments that are sought to be
immunized as “settlement” or “margin” payments.
Courts
confronted with claims to extend the application of § 546(e) so as
to give effect to fraudulent schemes have rejected the effort.
Adler Coleman, 263 B.R. at 485. And, as stated by the court in Merkin, 440 B.R. at 267-268
(internal citations omitted):
[A]pplication of section 546(e) to the Initial Transfers must be
rejected as contrary to the purpose of the safe harbor provision and
incompatible with SIPA. Section 546(e) was intended to promote
stability and instill investor confidence in the commodities and
securities markets. Courts have held that to extend safe harbor
protection in the context of a fraudulent securities scheme would
be to “undermine, not protect or promote investor
confidence…[by] endorsing a scheme to defraud”…and therefore
contradict the goals of the provision. Further, in the context of a
SIPA proceeding, applying the safe harbor provision would
eliminate most avoidance powers granted to a trustee under SIPA,
negating its remedial purpose… Simply stated, the transfers sought
to be avoided emanate from Madoff’s massive Ponzi scheme, and
the safe harbor provision “does not insulate transactions like these
from attack.”
Moreover, the courts also insist that the scope of the terms “stockbroker,” “settlement
payment,” and “securities contract” can only be understood in the full statutory context and in
light of Section 546(e)’s statutory purpose. See Adler Coleman, 263 B.R. at 474-85; Merkin,
440 B.R. at 266-68; Grafton, 321 B.R. at 527-41. These conflicting precedents are more than
sufficient to create a “substantial ground for difference of opinion” under the law of this
jurisdiction.2

See Lloyd’s American, 1997 WL 458739, at **4-5; Baumgarten, 2010 WL

4177283, at *1; Pinello, 647 F.Supp.2d at 243.

2

For the reasons discussed in the Trustee’s memorandum, the Court’s dismissal of the Trustee’s
claims based on Bankruptcy Code Section 550(a) also should be the subject of interlocutory
review. As it now stands under the Court’s order, the Trustee may recover fraudulent transfers
from an initial transferee under Section 548(a)(1)(A), but cannot avoid a subsequent transfer of
10

B.

Section 78fff-2(c)(3)

SIPC respectfully submits that this Court’s decision that Section 78fff-2(c)(3) overrides
Bankruptcy Code Section 502(d) is based on a misreading of Section 78fff-2(c)(3). According to
the Court, Section 78fff-2(c)(3) provides that “[s]ecurities customers who have received
avoidable transfers may still seek to pursue those transfers as creditors of the SIPA estate” (see
Order of Partial Dismissal at 16 [emphasis added]), and is therefore inconsistent with Code
Section 502(d), which provides for the automatic disallowance of the claim of a creditor who
received an avoidable transfer and who has not returned the transferred property to the
bankruptcy estate. But Section 78fff-2(c)(3) says nothing about customers, and instead provides
that the trustee may recover avoidable transfers. See SIPA § 78fff-2(c)(3).
Moreover, the purpose of Section 78fff-2(c)(3) was to expand, not limit, the trustee’s
avoidance powers by deeming “customer property” to have been property of the debtor,
regardless of its characterization under state law. As one commentator has explained:
A customer receiving a voidable transfer is deemed to be a creditor
for purposes of avoidance, and the property so transferred is
deemed to have been property of the debtor. The customer is not
an actual creditor, and, under virtually all state and federal
securities laws, the property does not belong to the debtor prior to
transfer. The purpose of this legal fiction is to enable the trustee to
fit the transfer into the provisions of the avoidance sections of the
[Bankruptcy] Code. The legal fiction prevents a customer from
using a technical reading of the avoidance provisions of the
[Bankruptcy] Code to retain securities that would otherwise be
recoverable by the trustee. The overall purpose of…15 U.S.C. §
78fff-2(c)(3) is to prevent one or more customers from depriving
other customers of assets by keeping these assets out of the pool
available for distribution to customers on a ratable basis.

______________________________
the same property under Section 550, a result that contravenes both the plain language and clear
purposes of those provisions.
11

6 Collier on Bankruptcy, ¶ 749.02[1] at p. 749-4 (16th ed. 2011). See also Picard v. Taylor (In re
Park South Securities, LLC), 326 B.R. 505, 512-13 (Bankr. S.D.N.Y. 2005) (SIPA trustee had
standing to pursue avoidance actions against customers to whom debtor transferred funds from
other customers’ accounts); In re Bevill, Bresler & Schulman, Inc., 94 B.R. 817, 825-26 (D.N.J.
1989) (granting summary judgment to SIPA trustee in action to avoid transfer of securities from
debtor’s common safekeeping account to customers’ individual accounts at other institutions).
The absence of support for the Court’s decision, and the existence of substantial contrary
authority, create a substantial ground for difference of opinion.
C.

Section 548(c)

The Court’s decision under Code Section 548(c) falls into the same category. In electing
to substitute a “willful blindness” standard for the “inquiry notice” standard otherwise applicable
in determining “good faith” under Section 548(c), the Court relied on the securities laws,
explaining that “a securities investor has no duty to inquire about his stockbroker, and SIPA
creates no such duty.” (See Order of Partial Dismissal at 14.) But the Court ignored the fact that
SIPA expressly incorporates the avoidance provisions of the Bankruptcy Code by reference, to
the extent consistent with SIPA, and also provides that SIPA shall be treated as part of the
Securities Exchange of 1934 – in effect, as part of the securities laws – “except as otherwise
provided” in SIPA. See SIPA §§ 78bbb, 78fff(b). By incorporating the avoidance provisions,
SIPA effectively displaces any securities law inconsistent with those provisions.3

3

As both the Trustee and SIPC discussed in detail in the supplemental memoranda in opposition
to the Defendants’ motion to dismiss, the securities laws do impose duties upon securities
investors not meaningfully different from those created by Section 548(c)’s “inquiry notice”
standard.

12

Further, there is no support in the case law for the Court’s decision. On the contrary,
another division of this Court recently reaffirmed the applicability of the “inquiry notice”
standard in determining good faith in another avoidance suit brought by the Trustee is the
BLMIS liquidation. See Picard v. Merkin (In re Bernard L. Madoff Investment Securities LLC),
2011 WL 3897970, at *10 (S.D.N.Y. 2011) (upholding the Bankruptcy Court’s construction of
“good faith” because “the Trustee pleaded facts allowing the reasonable inference that the Funds
(defendants) ‘knew or should have known of the Madoff fraud and helped to perpetuate it’”
(emphasis added)). The conflict between the decisions of this Court in the same liquidation
proceeding creates a substantial ground for a difference of opinion.
3. Ultimate Termination of Litigation
Finally, it is equally clear that immediate review of the Court’s Order of Partial Dismissal
would materially advance the ultimate termination of this litigation.

Should the Order be

reversed, Counts 2 – 10 of the Amended Complaint would be reinstated and the claims asserted
therein could be tried together with the claims asserted in Counts 1 and 11. By enabling the
Court to conduct a single trial, and to avoid expensive and duplicative trials involving many of
the same facts, immediate review would “shorten the time for trial” and thus materially
contribute to the early resolution of this case.
II.

A.

THE COURT’S ORDER OF PARTIAL DISMISSAL SATISFIES
ALL OF THE CRITERIA NECESSARY UNDER FEDERAL RULE 54(b)
FOR ENTRY OF FINAL JUDGMENT AS TO COUNTS 2 THROUGH 10
Applicable Law

When an action presents more than one claim, Rule 54(b) of the Federal Rules of Civil
Procedure permits a federal district to enter a separate final judgment as to one or more of those
claims “if the court expressly determines that there is no just reason for delay.” See Fed R. Civ.

13

P. 54(b). Specifically, the rule requires as conditions of entry of such a judgment that: (1) there
are multiple claims or parties; (2) at least one of the claims or the rights and liabilities of at least
one party has been finally determined; and (3) there is no just reason for delay. See Grand
Rivers Enters. Six Nations, Ltd. v. Pryor, 425 F.3d 158, 164-65 (2d Cir. 2005); Info. Res. Inc. v.
Dun & Bradstreet Corp., 294 F.3d 447, 451 (2d Cir. 2002); In re Bayou Hedge Fund Litig., 2007
WL 2363622, at *3 (S.D.N.Y. August 16, 2007) (“Bayou Hedge Fund”). The rule was adopted
as part of an effort to mitigate some of the adverse effects of the liberal joinder provisions,
enabling the district courts in complex cases with multiple claims and parties to avoid the
unnecessary prejudice to the parties that otherwise would be caused by forcing a deferral of
appeal until the conclusion of all proceedings in the trial court. See Ginnett v. Computer Task
Group, Inc., 962 F.2d 1085, 1094-95 (2d Cir. 1992) (“Ginett”).
In this jurisdiction, a cause of action may be the subject of a separate final judgment
under Rule 54(b) only if it constitutes a separate “claim” within the meaning of the rule. See
Bayou Hedge Fund, 2007 WL 2363622, at *7. A cause of action generally qualifies as a separate
“claim” if resolution of the remaining claims before the district court could not affect appellate
review of the dismissed claim. See, e.g., Ginett, 962 F.2d at 1095 (noting that claims are
inseparable where, in reviewing the appealed claim, the appellate court “would necessarily have
to reach the merits of one or more of the claims not appealed” or where the “district court’s
disposition of one or more of the remaining claims could render [the appellate court’s] opinion
advisory or moot”); Hogan v. Consol. Rail Corp., 961 F.2d 1021, 1026 (2d Cir. 1992); Bayou
Hedge Fund, 2007 WL 2363622, at *4.
In determining whether “there is no just reason for delay” within the meaning of Rule
54(b), the “proper guiding star is…‘the interest of sound judicial administration.’” Ginett, 962

14

F.2d at 1095 (quoting Curtiss-Wright Corp. v. General Elec. Co., 446 U.S. 1, 8 (1980)). In this
regard, the Second Circuit has explained that, “[g]enerally, a district court may properly make a
finding that ‘there is no just reason for delay’…where a plaintiff might be prejudiced by a delay
in recovering a monetary award…or ‘where an expensive and duplicative trial could be avoided
if, without delaying prosecution of the surviving claims, a dismissed claim were reversed in time
to be tried with the other claims.’” Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106
F.3d 11, 16 (2d Cir. 1997). See also Bayou Hedge Fund, 2007 WL 2363622, at *6.
B.

Analysis

The dismissal of Counts 2 through 10 of the Amended Complaint should be entered as a
separate, final judgment pursuant to Rule 54(b). Adjudication of Counts 1 and 11 will not affect
appellate review of Counts 2 through 10, and no purpose would be served by delaying final
resolution of these important claims.
1. Separate Claims
Counts 2 through 10 are separate “claims” from the remaining claims – Counts 1 and 11
– because the resolution of these remaining claims could not affect appellate review of Counts 2
through 10. See, e.g., Ginett, 962 F.2d at 1095. Counts 2 through 9 were dismissed on the basis
of Bankruptcy Code Section 546(e), which, on its face, does not pertain to Count 1 (actual
fraudulent transfers under Bankruptcy Code section 548(a)(1)(A)) or Count 11 (equitable
subordination of claims under Bankruptcy Code section 510(c)). See Bankruptcy Code § 546(e)
(stating that the safe harbor applies to avoidable transfers except those “under section
548(a)(1)(A) of this title”); see also Order of Partial Dismissal, at 8, n.4 (explaining that after
finding that the safe harbor of 546(e) is applicable, the only remaining claims are Counts 1, 10
and 11). As appellate review of Counts 2 through 9 would require only an examination of

15

Section 546(e) and its relationship to SIPA, and as those issues cannot arise in connection with
Counts 1 and 11, resolution of the latter counts can have no impact on appellate review of the
former.
Appellate review of Count 10 also would not be affected by disposition of Counts 1 and
11. Through Count 10, the Trustee asserts a claim for the disallowance, pursuant to Bankruptcy
Code Section 502(d), of the Defendants’ customer claims. Again, Appellate review of the
Court’s dismissal of that claim would require the Court of Appeals to consider the relationship
between Section 502(d) and SIPA. As the Trustee’s Section 502(d) claim is not an avoidance
claim or a claim for equitable subordination, however – and raises none of the issues presented
by those claims – appellate review of this Court’s dismissal of the Section 502(d) claim could not
be affected by this Court’s disposition of the Trustee’s avoidance and equitable subordination
claims.
2. Final Determination of Claims
Pursuant to this Court’s Order of Partial Dismissal, Counts 2 through 10 were dismissed.
See Order of Partial Dismissal at 17. Accordingly, these claims have been finally determined for
purposes of Rule 54(b).
3. No Just Reason for Delay
The impact of the Court’s Order of the instant litigation, along with numerous other
avoidance actions brought by the Trustee, collectively involving billions of dollars, makes clear
that there is no just reason for delay in the entry of a final judgment as to Counts 2 through 10,
followed by an immediate appeal of that judgment, and indeed, that substantial prejudice will
result if such action is not taken.

16

In this case, absent entry of a separate final judgment, or a certification for interlocutory
review, the parties will be put to the expense, and the Court, to the inconvenience and misuse of
its resources, of two duplicative trials if the Court’s dismissal of Counts 2 through 10 is reversed.
Any monetary recovery by the Trustee – and, through the Trustee, by the customers victimized
by BLMIS - on the claims asserted in those counts would be delayed, causing significant
prejudice to the Trustee and, more importantly, to customers.
That prejudice would be enormously magnified by the scope of the BLMIS liquidation
and the related avoidance actions brought by the Trustee. Recoveries by the Trustee, and
distributions to the customer/victims of BLMIS and Madoff, depend upon resolution of those
avoidance actions, numbering over 900 according to the Trustee’s most recent Interim Report.
Of these 900-plus actions, at least 95% are directed at customers who received fictitious profits4
and, under well-established law, were clearly required to return those profits to the Trustee.
Until the Order of Partial Dismissal was entered, the law of this jurisdiction regarding the
applicability of Sections 546(e) and 502(d) in SIPA liquidations was settled. See, e.g., Adler
Coleman, 263 B.R. at 474-85; Park South, 326 B.R. at 512-13.
That situation has now changed dramatically. Section 546(e), if applicable, destroys
every preference action, every constructive fraud action, and every avoidance action under state
law brought by the Trustee in this case. Similarly, if section 502(d) does not apply in this case,
the pool of allowed claims may increase significantly, thus raising the aggregate amount of those
claims, and lowering the ratable share of the fund of “customer property” allocable to each

4

See Trustee’s Fifth Interim Report for the Period Ending March 31, 2011, dated May 16, 2011,
Case No. 08-01789, Docket No. 4027, at ¶¶ 95, 99 (Bankr. S.D.N.Y.).
17

customer claimant. The Trustee may not be able to distribute funds that he has collected until
there is certainty as to the value of the claims eligible to share in a distribution.
In the absence of clarity on these issues – which can only be provided by the Second
Circuit - the Court’s Order creates enormous uncertainty concerning the law applicable to the
Trustee’s avoidance suits and to the Trustee’s prospects for recovery for the benefit of
customers. At this point, no one – not the Trustee, and certainly not the BLMIS victims – can
predict the amount of customer property available for distribution, and that is a situation that
should not be permitted to persist to the detriment of customers and the administration of the
liquidation proceeding. Indeed, prompt appellate review of these issues could result in allowing
any dismissed claims to be “reversed in time to be tried with the other claims” not only in this
litigation, but in the litigation of the other 900-plus avoidance actions. See Advanced Magnetics,
Inc. v. Bayfront Partners, Inc., 106 F.3d at 16. Accordingly, no just cause exists for delaying
final disposition of Counts 2 through 10.
CONCLUSION
For the foregoing reasons, the Court should enter an order under 28 U.S.C. § 1292(b)
providing that its Order of Partial Dismissal involves a controlling question of law as to which
there is substantial ground for difference of opinion and from which an immediate appeal from
the order may materially advance the ultimate termination of this litigation. In the alternative,
pursuant to Federal Rule 54(b), the Court should enter an order directing the Clerk to enter final
judgment as to Counts 2 – 10 of the Amended Complaint on the grounds that each of those
counts asserts a “claim” separate from the remaining claims made through the Amended

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Complaint, and that there is no just reason for delay in the entry of final judgment as to the
claims made through Counts 2 – 10.
Dated: October 7, 2011
Washington, D.C.
Respectfully submitted,
JOSEPHINE WANG
General Counsel
/s/ Kevin H. Bell
KEVIN H. BELL
Senior Associate General Counsel for Dispute
Resolution
CHRISTOPHER H. LAROSA
Associate General Counsel
LAUREN T. ATTARD
Staff Attorney
SECURITIES INVESTOR
PROTECTION CORPORATION
805 15th Street, N.W. - Suite 800
Washington, D.C. 20005
Telephone: [phone]
E-mail: [e-mail]
[e-mail]
[e-mail]
[e-mail]

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