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

Filing 49

NOTICE of Memorandum of Law in Support of Defendants' Opposition to Trustee's Request for a Jury Trial. 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. (Wagner, Karen)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
IRVING H. PICARD,
:
:
Plaintiff,
:
:
11-CV-03605 (JSR)
- against :
:
SAUL B. KATZ, et al.,
:
:
Defendants.
:
:
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MEMORANDUM OF LAW IN SUPPORT OF
DEFENDANTS’ OPPOSITION TO TRUSTEE’S
REQUEST FOR A JURY TRIAL

TABLE OF CONTENTS
PAGE
ARGUMENT.......................................................................................................................1
I.

THE TRUSTEE IS NOT ENTITLED TO A JURY TRIAL ...................................1
A.
B.

II.

No Jury Trial Right Attaches to the Fraudulent Conveyance Claims..........2
No Jury Trial Right Attaches to the Equitable
Subordination Claims...................................................................................6

THE TRUSTEE MUST WAIVE HIS EQUITABLE SUBORDINATION
CLAIMS IF HE IS ALLOWED TO TRY HIS FRAUDULENT
CONVEYANCE CLAIMS TO A JURY.................................................................7

CONCLUSION....................................................................................................................8

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TABLE OF AUTHORITIES
CASES
PAGE
Germain v. Connecticut National Bank, 988 F.2d 1323 (2d Cir. 1993) ......................3, 6, 7
Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) ...........................................1, 3, 5, 6
HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) ..................................................6
In re 3DO Co., 2004 U.S. Dist. LEXIS 25367 (N.D. Cal. Apr. 27, 2004) ..........................7
In re CBI Holding Co., Inc., 529 F.3d 432 (2d Cir. 2008)...................................................1
In re Enron Corp., 319 B.R. 122 (Bankr. S.D. Tex. 2004)..................................................4
In re Hallahan, 936 F.2d 1496 (7th Cir. 1991)....................................................................3
In re Jensen, 946 F.2d 369 (5th Cir. 1991)...................................................................... 3-4
In re Lafayette Hotel P’ship, 227 B.R. 445 (S.D.N.Y. 1998)..............................................6
Katchen v. Landy, 382 U.S. 323 (1966)...............................................................................2
Langenkamp v. Culp, 498 U.S. 42 (1990) (per curiam) ......................................................2
Local Loan Co. v. Hunt, 292 U.S. 234 (1934) .....................................................................2
CONSTITUTIONAL PROVISIONS
U.S. Const. amend. VII........................................................................................................1

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Defendants respectfully submit this memorandum of law in opposition to the
anticipated demand by Plaintiff Irving H. Picard (“Trustee”) for a jury trial in this action.
The Seventh Amendment does not afford the Trustee the right to a jury trial in this case.
ARGUMENT
I.

THE TRUSTEE IS NOT ENTITLED TO A JURY TRIAL
The Seventh Amendment of the United States Constitution provides that “[i]n

suits at common law, where the value in controversy shall exceed twenty dollars, the
right of trial by jury shall be preserved.” See U.S. Const. amend. VII. The Supreme
Court has interpreted “suits at common law” to mean suits in which legal rather than
equitable rights are to be determined. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41
(1989). The Court has developed a two-pronged test to determine whether a jury trial
right attaches to a particular claim: first, whether the claim would have been deemed
legal or equitable in 18th-century England; and second, whether the remedy sought is
legal or equitable in nature. Id. at 42 & n.4; see also In re CBI Holding Co., Inc., 529
F.3d 432, 466 (2d Cir. 2008).
The Trustee is not entitled to a jury trial under this test.
The two claims remaining in this case, one for fraudulent conveyance and one for
equitable subordination—and indeed the nine claims that were dismissed—arise solely
under the Bankruptcy Code. Prior to its filing under the Securities Investor Protection
Act (“SIPA”), Bernard L. Madoff Investment Securities LLC (“BLMIS”) had no right to
assert any of these claims. The Trustee’s ability to do so now derives solely from
BLMIS’ status as a debtor in bankruptcy. Bankruptcy proceedings are inherently

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proceedings in equity. Local Loan Co. v. Hunt, 292 U.S. 234, 240 (1934). Consequently,
no jury trial right attaches to these claims.
A.

No Jury Trial Right Attaches to the Fraudulent Conveyance Claims

The Supreme Court has several times addressed the right of a non-debtor
defendant to a jury trial in a bankruptcy avoidance action. The outcome in each case has
depended largely upon whether the defendant had filed a claim in the underlying
bankruptcy proceedings and thereby submitted to the equitable jurisdiction of the
Bankruptcy Court. Those decisions compel the conclusion that a debtor has no jury trial
right as to a claim it acquired only as a result of its own invocation of bankruptcy
jurisdiction.
In Katchen v. Landy, 382 U.S. 323 (1966), a preference defendant had filed a
claim against the estate. The Supreme Court held that any right to a jury trial was thereby
lost. “[A]lthough petitioner might be entitled to a jury trial on the issue of preference if
he presented no claim in the bankruptcy proceeding and awaited a federal plenary action
by the trustee, when the same issue arises as part of the process of allowance and
disallowance of claims, it is triable in equity.” Id. at 336 (citation omitted); see also
Langenkamp v. Culp, 498 U.S. 42, 44-45 (1990) (per curiam) (“[A] creditor’s right to a
jury trial on a bankruptcy trustee’s preference claim depends upon whether the creditor
has submitted a claim against the estate.”).
In Granfinanciera, however, the fraudulent conveyance defendants had not filed
claims. Because the defendants would have been entitled to a jury trial had no
bankruptcy been filed, and because they had not filed claims against the estate, the

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Supreme Court held that the defendants retained their jury trial rights. See 492 U.S. at
47-48, 56-59.
A debtor, of course, has submitted itself to the jurisdiction of the Bankruptcy
Court. Few courts have been presented with a debtor’s demand for a jury—because a
debtor seldom has any such right. Indeed, at least one circuit has held that the “Seventh
Amendment confers no right to a jury trial on a debtor . . . who files voluntarily for
bankruptcy and is a defendant in an adversary proceeding.” In re Hallahan, 936 F.2d
1496, 1505-06 (7th Cir. 1991) (noting the injustice that would result if a creditor were
held to be stripped of a jury trial right as a result of filing a claim while the debtor
retained such a right). Where the defendant is a creditor that has filed a claim against the
estate, no court has found that a debtor has a jury trial right as to a claim arising from the
Bankruptcy Code.
In the rare cases in which a debtor was granted a jury trial, the right has generally
been found to have attached to state law causes of action that were owned by, and
brought for the benefit of, the debtor itself. For example, in Germain v. Connecticut
National Bank, 988 F.2d 1323 (2d Cir. 1993), the bankruptcy trustee brought state law
causes of action belonging to the debtor against a creditor that had filed a claim. See id.
at 1325-26. The Second Circuit held that the debtor possessed, and retained, a jury trial
right for these claims. Contrasting these claims with “equitable” bankruptcy relief such
as “the restitution of fraudulent transfers under 11 U.S.C. § 548,” the Court noted that the
debtor did not “charge [the creditor] with violating any Bankruptcy Code provision,” id.
at 1328, nor seek any bankruptcy relief, id. at 1329. See also In re Jensen, 946 F.2d 369,
374 (5th Cir. 1991) (debtor retained jury trial right for state law claims brought against
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“non-creditor third parties to augment the bankruptcy estate” and bankruptcy filing did
not transform pre-petition legal claims into equitable ones).
Here, the circumstances are very different. The Trustee is asserting claims that
were never owned by BLMIS. Prior to its SIPA filing, BLMIS had no right to avoid its
own transfers to its customers on fraudulent conveyance grounds, and, thus, had no jury
trial right in connection with any such claim. Any jury trial right, therefore, would have
to derive from the federal statutes that became operative because of the filing—SIPA and
the Bankruptcy Code. But these statutes grant no right to a jury trial. On the contrary,
the claims under these statutes were granted to the Trustee not for the benefit of BLMIS,
but to give effect to the equitable objectives of the Bankruptcy Code, for the benefit of
creditors.
No decision supports the existence of a debtor’s jury trial right under these
circumstances. Indeed, in a closely analogous case, the debtor’s lack of any such right
was confirmed. In In re Enron Corp., 319 B.R. 122 (Bankr. S.D. Tex. 2004), a
representative of the debtor sought a jury trial for adjudication of preference claims
assigned to it by the debtor. Noting that “Enron did not possess any of the avoidance
claims before it filed its bankruptcy petition,” id. at 126, the Court in that case held:
“A defendant in an avoidance action has the right to a jury trial unless it
has waived that right. A defendant waives its right to a jury trial on an
avoidance action by filing a proof of claim. But, the trustee has no right to
a jury trial in an avoidance action to begin with. And the trustee has no
authority to invoke the right to a jury trial on behalf of a defendant who
chooses not to ask for a jury trial. And, if the trustee had a right to a jury
trial, the trustee must waive that right by invoking the avoidance process
because it directly addresses the property of the bankruptcy estate, the
eventual amount of claims against the estate, and the distribution of the
property of the bankruptcy estate, all of which involve the equitable
bankruptcy process for which there is no right to a jury trial.” Id. at 127.
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Further, while the Trustee may be expected to argue that this case falls within the
scope of Granfinanciera, the facts here differ crucially from those that animated that
decision.
First, in Granfinanciera, the defendant, who was not a creditor and never
submitted to bankruptcy jurisdiction, sought a jury trial—not the debtor. Here, in sharp
contrast, the suit is brought by the Trustee against creditors who have filed claims.
Therefore, Katchen and Langencamp are the more analogous precedents.
Second, it does not appear that the fraudulent conveyance suit in Granfinanciera
was the focal point of the bankruptcy proceeding. Under such circumstances, the
Supreme Court, for purposes of analyzing the Seventh Amendment right of a defendant
that had not filed a claim, found that fraudulent conveyance actions “are quintessentially
suits at common law that more nearly resemble state-law contract claims brought by a
bankrupt corporation to augment the bankruptcy estate than they do creditors’
hierarchically ordered claims to a pro rata share of the bankruptcy res,” and concluded
that such claims “appear matters of private rather than public right.” 492 U.S. at 56
(citation omitted).
Here, it is becoming increasingly obvious that the Trustee’s more than 900
avoidance actions against creditors, of which this is one, are part of a litigation campaign
that is not only central to the BLMIS bankruptcy proceeding, but also does seek the
hierarchical reordering of creditor claims. The Trustee’s own words belie any contention
that he is endeavoring to augment the estate by recovering assets transferred outside of
the creditor body. He has repeatedly stated that his claims against customers are the

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largest asset in the estate, (Trustee’s Mem. in Opp’n to the Sterling Defs. Mot. to Dismiss
or, in the Alternative, for Summ. J. at 1), and of the over 900 actions commenced by the
Trustee, “at least 95% are directed at customers.” (Mem. of Law of SIPC in Support of
Trustee’s Mot. for Certification of Order for Interlocutory Appeal or for Entry of
Separate Final J. at 17). Through these avoidance claims the Trustee seeks “the
adjustment of economic benefits and burdens and to implement a distribution scheme for
the public good,” and he admonishes customers that they must “socialize” their losses.
(Letter from Oren J. Warshavsky to the Hon. Jed S. Rakoff (Oct. 10, 2011), Picard v.
Hein, 11-CV-04936 (JSR), doc. no. 14.) In the Trustee’s view, therefore, the litigations
fall outside the scope of the Supreme Court’s description of a “private” litigation. See
Granfinanciera, 492 U.S. at 56; Germain, 988 F.2d at 1331-32. For this reason as well,
the Seventh Amendment does not afford the Trustee the right to try his fraudulent transfer
claims to a jury.
B.

No Jury Trial Right Attaches to the
Equitable Subordination Claims

The Trustee’s equitable subordination claims, asserted under Section 510(c) of the
Bankruptcy Code, plainly sound in equity rather than in law. HBE Leasing Corp. v.
Frank, 48 F.3d 623, 634 (2d Cir. 1995) (“Equitable subordination is distinctly a power of
federal bankruptcy courts, as courts of equity, to subordinate the claims of one creditor to
those of others.” (emphasis added)); In re Lafayette Hotel P’ship, 227 B.R. 445, 453 n.6
(S.D.N.Y. 1998) (“Section 510(c) of the Bankruptcy Code provides for the subordination
of claims that are otherwise allowable when equity principles would be offended by
allowing such claims to be on par with those of other creditors.” (emphasis added)).

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Consequently, the Seventh Amendment does not provide for a jury trial in connection
with this claim.
II.

THE TRUSTEE MUST WAIVE HIS EQUITABLE SUBORDINATION
CLAIMS IF HE IS ALLOWED TO TRY HIS FRAUDULENT
CONVEYANCE CLAIMS TO A JURY
Finally, even if the Trustee could claim a jury trial right as to his fraudulent

transfer claims, the Trustee would be required to waive his equitable subordination
claims if he chose to exercise that right.
In Germain, the defendant was concerned that if the trustee obtained a jury verdict
on its state law causes of action, the debtor would in the future use the verdict as a basis
for equitable subordination of the creditor’s claims against the estate, even though the
trustee had no jury trial right as to that claim. See 988 F.2d at 1329 n.7, 1332. The Court
was hesitant to issue an advisory opinion, but assumed “that the Trustee ha[d] waived his
right subsequently to seek equitable subordination of [the creditor’s] claim.” Id.; see also
In re 3DO Co., C-03-05023-CW, 2004 U.S. Dist. LEXIS 25367, at *8-9, 20 (N.D. Cal.
Apr. 27, 2004) (reasoning that the Second Circuit’s analysis in Germain “would have
changed” had the trustee brought an equitable subordination claim and relying on
Germain for the proposition that, where equitable claims “cannot be resolved without
resolution of the legal claims, the legal claims are converted to equitable claims and lose
their status as claims that should be treated to a jury”).
Here, the Trustee is pursuing both avoidance and equitable subordination claims.
Germain thus requires that if he had any jury trial right, which he does not, he would
have to waive his equitable subordination claims or give up his right to a jury trial with
respect to his avoidance claims.
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CONCLUSION
For the reasons set forth above, Defendants respectfully request that the Court
find the Seventh Amendment inapplicable to the Trustee’s two remaining claims in this
action.

Dated: New York, New York
October 14, 2011
DAVIS POLK & WARDWELL LLP
By: /s/ Karen E. Wagner
Karen E. Wagner
Dana M. Seshens
Andrew Ditchfield
450 Lexington Avenue
New York, New York 10017
Telephone:
[phone]
Facsimile:
[phone]

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

Attorneys for Defendants

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