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

Filing 51

NOTICE of Memorandum of Law in Support of the Trustee's Right To A Jury Trial. Document filed by Irving H. Picard. (Sheehan, David)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re:

Adv. Pro. No. 08-01789 (BRL)

BERNARD L. MADOFF,

SIPA LIQUIDATION
Debtor.

IRVING H. PICARD, Trustee for the Liquidation
of Bernard L. Madoff Investment Securities LLC,

(Substantively Consolidated)
Adv. Pro. No. 10-5287 (BRL)

Plaintiff,
Case No. 11-Civ-03605 (JSR)
v.
SAUL B. KATZ, et al.,
Defendants.

MEMORANDUM OF LAW IN SUPPORT OF THE
TRUSTEE’S RIGHT TO A JURY TRIAL

TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ................................................................................................... 1
ARGUMENT ................................................................................................................................. 2
I.

THE TRUSTEE’S RIGHT TO A JURY TRIAL IN THIS ACTION IS
INVIOLABLE ....................................................................................................... 2
A.

II.

The Trustee’s Fraudulent Transfer Action is an Action at Law ................ 3

THE TRUSTEE’S FRAUDULENT TRANSFER ACTION MUST BE
TRIED TO A JURY............................................................................................... 4
A.
B.

III.

This Court’s Adjudication of the Trustee’s Fraudulent Transfer
Action Is an Exercise in Law, Not Equity ................................................. 4
The Trustee Has Not Waived His Right to a Jury Trial ............................. 6

COMMON FACTUAL ISSUES MUST BE TRIED TO A JURY ....................... 7

CONCLUSION .............................................................................................................................. 9

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TABLE OF AUTHORITIES
Page(s)
CASES
Bankr. Servs., Inc. v. Ernst & Young (In re CBI Holding Co.),
529 F.3d 432 (2d Cir. 2008).......................................................................................................5
Beacon Theatres, Inc. v. Westover,
359 U.S. 500 (1959) ...............................................................................................................2, 7
Billing v. Ravin, Greenberg & Zackin, P.A.,
22 F.3d 1242 (3d Cir. 1994).......................................................................................................6
Brown v. Sandimo Materials,
250 F.3d 120 (2d Cir. 2001).......................................................................................................2
Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry,
494 U.S. 558 (1990) ...................................................................................................................2
Curtis v. Loether,
415 U.S. 189 (1974) ...................................................................................................................2
Dairy Queen, Inc. v. Wood,
369 U.S. 469 (1962) ...............................................................................................................1, 3
Dimick v. Schiedt,
293 U.S. 474 (1934) ...................................................................................................................2
Germain v. Conn. Nat’l Bank,
988 F.2d 1323 (2d Cir. 1993).............................................................................................4, 6, 7
Granfinanciera, S.A. v. Nordberg,
492 U.S. 33 (1989) .....................................................................................................1, 3, 4, 5, 6
Heyman v. Kline,
456 F.2d 123 (2d Cir. 1972).......................................................................................................7
Jacob v. City of New York,
315 U.S. 752 (1942) ...................................................................................................................2
In re Jensen,
946 F.2d 369 (5th Cir. 1991) .....................................................................................................6
Katchen v. Landy,
382 U.S. 323 (1966) ...............................................................................................................5, 6
Langenkamp v. Culp,
498 U.S. 42 (1990) .....................................................................................................................5

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TABLE OF AUTHORITIES
(contined)
Page(s)
Magers v. Bonds (In re Bonds Distrib. Co.),
No. 98–6044 (WLS), 2000 WL 33682815 (Bankr. M.D.N.C. Nov. 15, 2000) .........................7
Notinger v. Brown (In re Simply Media, Inc.),
No. 06-11539 (JMD), 2007 WL 4264514 (Bankr. D.N.H. Nov. 28, 2007) ..............................7
Pernell v. Southall Realty,
416 U.S. 363 (1974) ...................................................................................................................3
Reliability Research, Inc. v. Computer Assocs. Int’l, Inc.,
851 F. Supp. 58 (E.D.N.Y. 1993) ..............................................................................................7
STATUTES
11 U.S.C. § 502(d) ...........................................................................................................................5
11 U.S.C. § 548 ................................................................................................................1, 3, 4, 5, 8
15 U.S.C. §§ 78aaa, et seq. ..............................................................................................................6
28 U.S.C. § 1292(b) .........................................................................................................................3
RULES
Fed. R. Civ. P. 38(a) ........................................................................................................................3
OTHER AUTHORITIES
U.S. Const. amend. VII .......................................................................................................... passim

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In Suits at common law, where the value in controversy shall exceed
twenty dollars, the right of trial by jury shall be preserved, and no fact
tried by a jury, shall be otherwise re-examined in any Court of the
United States, than according to the rules of common law.
— U.S. Const. Amend. VII
PRELIMINARY STATEMENT
Saul Katz, Fred Wilpon, and the other Defendants ask this Court to deprive the Trustee of
the most fundamental right in American jurisprudence in order to avoid having their liability
determined by a jury of their peers. The right to a jury trial is a fundamental right of a litigant in
an Article III court seeking monetary relief. The Seventh Amendment guarantees a party a trial
by jury in an action grounded in law. Here, the Trustee’s causes of action that seek to recover a
money judgment are “unquestionably legal.” Dairy Queen, Inc. v. Wood, 369 U.S. 469, 476
(1962). Therefore, the Trustee’s right to a jury trial on his fraudulent transfer causes of action is
protected by the Seventh Amendment. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 64 (1989)
(holding that fraudulent transfer claims under section 548 of the Bankruptcy Code are legal
claims and can be tried to a jury). The Defendants cannot curtail the Trustee’s constitutional
right to a jury trial.
Nor can the Defendants cherry pick the features of Article I and Article III courts that suit
them. Only a few months ago, the Defendants succeeded in withdrawing this action from the
Bankruptcy Court. The Defendants have invoked Article III, arguing that the issues underlying
these causes of action are beyond the jurisdiction of the Bankruptcy Court. However, because
the Seventh Amendment protects the Trustee’s right to a jury trial on the legal claims withdrawn
by the Court, the Defendants cannot now argue that the process of determining proofs of claim,
which is before the Bankruptcy Court, somehow affects the legal nature of these causes of

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action. Equitable considerations tied to the determination of proofs of claim are not before this
Court and thus have no bearing on the Trustee’s right to have a jury determine the issues here.
Despite the Defendants’ trepidation to submit to a jury’s judgment, the Trustee’s
constitutional right remains. Nothing here impedes on this fundamental right. The Trustee has
timely demanded a jury trial. A jury must decide whether the Defendants impermissibly profited
from Madoff’s fraud and whether these transfers of other people’s money should be returned to
the estate.
ARGUMENT
I.

THE TRUSTEE’S RIGHT TO A JURY TRIAL IN THIS ACTION IS
INVIOLABLE
The Seventh Amendment guarantees a party’s right to a jury trial of legal claims.

“[W]here the value in controversy . . . exceed[s] twenty dollars,” a party’s “right of trial by jury”
is sacrosanct. U.S. Const. amend. VII. Courts must “jealously guard” a party’s right to a jury
trial of legal claims as a “fundamental feature of [the American] system of federal
jurisprudence.” Brown v. Sandimo Materials, 250 F.3d 120, 127 (2d Cir. 2001) (quoting Jacob
v. City of New York, 315 U.S. 752, 752 (1942)). Attempts to abrogate a party’s right to a jury
trial must be “scrutinized with the utmost care,” Dimick v. Schiedt, 293 U.S. 474, 486 (1934),
and must be rejected whenever legal rights and remedies, enforceable in an action for damages in
courts of law, are implicated. Curtis v. Loether, 415 U.S. 189, 194 (1974); see also Chauffeurs,
Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558, 565 (1990); Beacon Theatres, Inc.
v. Westover, 359 U.S. 500, 501 (1959).
The Trustee has demanded a jury trial of his fraudulent transfer claims. The statement
that “[t]he right of trial by jury as declared by the Seventh Amendment to the Constitution—or as
provided by a federal statute—is preserved to the parties inviolate,” reflects this protection of a

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litigant’s fundamental jury trial right. Fed. R. Civ. P. 38(a). The Defendants, who moved to
withdraw the reference of this case to an Article III court, now seek to do away with the
Trustee’s right to a jury trial of Count One of his Amended Complaint.
A.

The Trustee’s Fraudulent Transfer Action is an Action at Law

The Trustee has the right to a jury trial of Count One of his Amended Complaint, which
seeks to recover fraudulent transfers from many of these Defendants. 1 See Granfinanciera, 492
U.S. at 64. As in Granfinanciera, because the Trustee’s fraudulent transfer action seeks a
monetary judgment, it is an action at law, not in equity, and must be tried by a jury:
[A] plaintiff is entitled to return of any funds transferred in violation of 11 U.S.C.
§ 548, and because a judge lacks equitable discretion to refuse to enter an award
for less than the amount of the transfer, any distinction that might exist between
“damages” and monetary relief under a different label is purely semantic, with no
relevance to the adjudication of [a] Seventh Amendment claim.
Id. at 49 n.7. See also, e.g., Pernell v. Southall Realty, 416 U.S. 363, 370 (1974) (“[W]here an
action is simply for the recovery . . . of a money judgment, the action is one at law.”); Dairy
Queen, 369 U.S. at 476 (“[I]nsofar as the complaint requests a money judgment it presents a
claim which is unquestionably legal.”). In Granfinanciera, the Supreme Court established that
fraudulent transfer actions are legal in nature because: (1) similar claims were brought in courts
of law before the merger of English courts of law and equity; (2) such claims seek monetary, not
equitable, relief; and (3) Congress did not eviscerate the legal nature of fraudulent transfer claims
by permitting them to be adjudicated in bankruptcy court. 492 U.S. at 43, 49 n.7, 52.

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The Trustee’s motion seeking certification of this Court’s Order dismissing Counts Two
through Ten of the Trustee’s Amended Complaint is currently pending. Notice of Motion to
Direct Entry of Final Judgment Under Fed. R. Civ. P. 54(b) and for Certification Under 28
U.S.C. § 1292(b) filed on Oct. 7, 2011. The majority of the dismissed counts sought to avoid and
recover fraudulent and preferential transfers, sought monetary damages, and were therefore
claims at law that would be triable to a jury.

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“[P]urely taxonomic changes” to a legal claim, such as the Bankruptcy Code’s use of
common law principles to establish a cause of action for the recovery of fraudulent transfers
under section 548, do not “eliminate a party’s Seventh Amendment right to a jury trial.” Id. at
60-61. A party’s right to a jury trial of fraudulent transfer claims therefore remains. Id. at 43, 49
n.7, 52.
II.

THE TRUSTEE’S FRAUDULENT TRANSFER ACTION MUST BE TRIED TO A
JURY
The Seventh Amendment protects the Trustee’s right to a jury trial of his fraudulent

transfer causes of action against each of the Defendants. This Court, upon the Defendants’
motion, withdrew the reference of the Trustee’s action. Because the Trustee asserts fraudulent
transfer causes of action in an Article III court, he has an absolute right to a jury trial.
The process of determining proofs of claim, which remains before the Bankruptcy Court,
does not affect the Trustee’s right to a jury trial. Rather, the determination of these proofs of
claim, would depend upon, not dictate, the outcome of this proceeding. In moving to withdraw
the reference, the Defendants demanded that this Court adjudicate the Trustee’s action. See
Mem. of Law in Support of the Sterling Defendants’ Mot. to Withdraw the Reference, No. 11
Civ. 03605 (JSR) (S.D.N.Y. filed May 26, 2011).
Second Circuit law preserves the Trustee’s right to a jury trial even if the Trustee
commences his action in the Bankruptcy Court. See Germain v. Conn. Nat’l Bank, 988 F.2d
1323, 1329-30 (2d Cir. 1993).
A.

This Court’s Adjudication of the Trustee’s Fraudulent Transfer Action Is an
Exercise in Law, Not Equity

The withdrawal of the reference has divorced the adjudication of the Trustee’s fraudulent
transfer causes of action from the administration of customer claims in the bankruptcy
proceeding. In adjudicating these causes of action, this Court will determine the Trustee’s legal
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remedies against the Defendants. Granfinanciera, 492 U.S. at 49. The Trustee’s fraudulent
transfer action, like that in Granfinanciera, is based in section 548 of the Bankruptcy Code.
The claims determination process does not affect this analysis because that process is
pending in the Bankruptcy Court. The hypothetical effect of a fraudulent transfer action on the
determination of the Defendants’ claims against the estate is not before this Court. 2 This
analysis is entirely consistent with the Supreme Court’s decision in Katchen v. Landy, 382 U.S.
323 (1966) and its progeny. 3 Those cases do not control because they involved actions
proceeding in the Bankruptcy Court. However, their reasoning explains why the Trustee has a
right to jury trial.
The Katchen Court held that an avoidance action becomes part of the claims
determination process because it operates as an objection to that claim under the predecessor to
section 502(d) of the Bankruptcy Code. Id. at 334. Congress expressly commanded the
bankruptcy court to determine proof of claims, and that process cannot be delayed by a lengthy
trial of the interrelated legal action for a money judgment. Id. Furthermore, once the bankruptcy
judge determines the underlying facts, a jury trial on the legal elements “would be a meaningless
gesture.” Id. at 334. The bankruptcy judge’s findings would be res judicata on all relevant facts.
Id. Thus, allowing the bankruptcy judge to determine the equitable element of an action
promotes judicial economy. Id. at 334-35.

2

Moreover, while the Trustee disagrees with this Court’s ruling that the Bankruptcy Court lacks
the ability to disallow customer claim under section 502(d) in a SIPA proceeding, he notes that
where that claim has been dismissed, the fraudulent transfer action cannot be part of the claims
determination process, and therefore cannot be deemed equitable by virtue of Defendants’ proofs
of claim. See Katchen, 382 U.S. at 333-34.
3

See Langenkamp v. Culp, 498 U.S. 42, 43 (1990); Bankr. Servs., Inc. v. Ernst & Young (In re
CBI Holding Co.), 529 F.3d 432, 466 (2d Cir. 2008).

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Unlike in Katchen, the trial of the Trustee’s legal action in this Court is far from a
“meaningless gesture.” In fact, the opposite is true: factual findings in this proceeding will be
res judicata in the claims determination proceedings in the Bankruptcy Court. In this case, the
determination of the Defendants’ customer claims is not before this Court. That process will
occur in due course in the main SIPA 4 proceeding before Judge Lifland.
Nor are Katchen’s forum shopping concerns present here. The Katchen Court reasoned
that because the creditor-defendant submitted himself to the jurisdiction of the bankruptcy court
by filing a proof of claim, he could not then seek refuge in an Article III court on issues arising
out of his proof of claim. Id. at 333 n.9. This rationale cannot be used against the Trustee. The
Trustee’s fraudulent transfer action is already before an Article III court. This fact is of the
Defendants’ making, not the Trustee’s.
B.

The Trustee Has Not Waived His Right to a Jury Trial

Like any other litigant in an action at law, a bankruptcy trustee has the right to a jury trial.
The Second Circuit has specifically rejected the argument that the filing of a bankruptcy petition
constitutes a waiver of a trustee’s right to a jury trial in actions at law. Germain, 988 F.2d at
1329-30; see also In re Jensen, 946 F.2d 369, 374 (5th Cir. 1991) (“Nor do we find that the
petition for bankruptcy somehow ‘waives’ the debtor's jury trial right.”); Billing v. Ravin,
Greenberg & Zackin, P.A., 22 F.3d 1242, 1251 n.14 (3d Cir. 1994) (rejecting the theory that the
bankruptcy petition waives the trustee’s right to a jury trial where otherwise available). 5

4

15 U.S.C. §§ 78aaa, et seq.

5

While a creditor is sometimes said to “waive” its right to a jury trial in bankruptcy court by
filing a proof of claim against the estate, this is a misuse of terminology. A creditor’s loss of its
right to a jury trial in those circumstances is not founded on waiver. Granfinanciera, 492 U.S. at
59 n.14 (“It warrants emphasis that this rationale differs from the notion of waiver. . . .”);
Germain, 988 F.2d at 1329 (stating that loss of jury right through filing a proof of claim is not
based on waiver). To the extent a creditor’s forfeiture of its jury right is considered “waiver,”
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III.

COMMON FACTUAL ISSUES MUST BE TRIED TO A JURY
Even if the causes of action against the Defendants who filed proofs of claims are

considered equitable, the Trustee’s right to a jury trial against those Defendants who did not file
proofs of claim is unassailable. When legal claims, such as the Trustee’s fraudulent transfer
claims, and equitable issues, such as the Trustee’s determination of the Defendants’ proofs of
claim, are grounded in common factual issues, the legal claims must first be tried to a jury.
Heyman v. Kline, 456 F.2d 123, 130 (2d Cir. 1972) (“When legal and equitable claims are tried
together, common questions of fact must be decided by a jury in order to preserve the integrity of
the Seventh Amendment guarantee.”); see also Beacon Theatres, 359 U.S. at 508 (reversing
denial of demand for a jury in a case involving a mix of legal and equitable causes of action);
Notinger v. Brown (In re Simply Media, Inc.), No. 06-11539 (JMD), 2007 WL 4264514, at *3
(Bankr. D.N.H. Nov. 28, 2007) (stating that if a legal claim and an equitable claim have common
issues of fact, the legal claim must be decided first by a jury).
Where there is a right to a jury trial, judicial determination of factual issues common to a
related equitable claim violates the Seventh Amendment. This is because such determinations
would be binding in the jury trial, thereby eviscerating the jury trial right. See In re Simply
Media, 2007 WL 4264514, at *5 (“[An] action must be structured and tried in a manner that
preserves the right to a jury trial with respect to the legal claim and issues of common facts must
be tried to a jury with the bankruptcy court being bound by those findings.”) (quoting Magers v.
Bonds (In re Bonds Distrib. Co.), No. 98–6044 (WLS), 2000 WL 33682815, at *4 (Bankr.
M.D.N.C. Nov. 15, 2000); see also Reliability Research, Inc. v. Computer Assocs. Int’l, Inc., 851

this does not apply to a trustee. Germain, 988 F.2d at 1330 n.8 (“We do not agree[] that each
time a creditor is deemed to have waived the right to a jury trial, the same presumption must hold
for the trustee.”).

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F. Supp. 58, 61 (E.D.N.Y. 1993) (partially denying motion to strike plaintiff’s jury demand and
noting that “[i]n order to preserve the right to a jury trial where legal and equitable claims
overlap, the jury must not only decide the legal claims, but also must determine issues of fact
common to both.”) (internal citations omitted).
Thirty-nine of the Defendants have not filed a proof of claim in the SIPA proceeding.
The Trustee has sued four of these Defendants under section 548(a)(1)(A) of the Bankruptcy
Code. 6 Two of these Defendants, Sterling American Advisors II LLP and Sterling Acquisitions
LLC are entities owned in part by Saul Katz, Fred Wilpon, and other Defendants. In addition,
Madoff used Sterling American Property V LP, another Defendant that did not file a proof of
claim, to invest in Sterling’s real estate ventures. The legal claims against these Defendants
involve numerous issues of fact common to the claims against the other Defendants. A jury must
decide:
•

Whether BLMIS was operating as a Ponzi scheme when it made fraudulent
transfers to the Defendants;

•

Whether BLMIS made fraudulent transfers to the Defendants with actual intent to
hinder, delay, or defraud creditors;

•

Whether the Defendants received the contested transfers from BLMIS in good
faith (given, for example, their investigation of Ponzi insurance); and

•

Whether the Sterling Partner Defendants’ lack of good faith can be imputed to all
other Defendants under principles of agency, equitable ownership, and/or piercing
of the corporate veil.

These facts are common to all Defendants and underlie both the legal and equitable claims
involved in the Trustee’s action. The determinations of these facts cannot be siloed.

6

See Decl. of Matthew Cohen, dated October 14, 2011, ¶¶ 2-3, Ex. A.

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CONCLUSION
For all of the foregoing reasons, the Trustee is entitled to a jury trial in this action.

Dated: New York, New York
October 14, 2011

BAKER & HOSTETLER LLP
/s/ David J. Sheehan
Baker & Hostetler LLP
David J. Sheehan
Email: [e-mail]
Fernando A. Bohorquez, Jr.
Email: [e-mail]
Regina L. Griffin
Email: [e-mail]
Geoffrey A. North
Email: [e-mail]
45 Rockefeller Plaza
New York, New York 10111
Telephone: [phone]
Facsimile: [phone]
Attorneys for Irving H. Picard, Trustee for
the Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff Investment
Securities LLC and Bernard L. Madoff

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