Irving H. Picard v. Saul B. Katz et al
Filing
78
OPINION AND ORDER re: #101314 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 filed by Irving H. Picard. For the foregoing reasons, the Trustee's motion is denied in its entirety, but Count 9 of the Amended Complaint is hereby reinstated to the limited extent described above. The Clerk of the Court is hereby directed to close item number 45 on the docket of this case. (Signed by Judge Jed S. Rakoff on 1/17/2012) (cd) Modified on 1/24/2012 (jab).
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------x
IRVING H. PICARD,
Plaintiff,
11 Civ. 3605 (JSR)
-vSAUL B. KATZ, et al.,
------ ---- ---
OPINION AND ORDER
Defendants.
--- ----
--x
JED S. RAKOFF, U.S.D.J.
No
principle
of
federal
jurisprudence
efficacious than the "final judgment rule,
II
has
proved
more
by which a district
court's interim rulings may not normally be appealed until the case
is over and final judgment rendered.
Naturally, any party that loses
an important interim ruling wants to appeal immediately, believing
that a parade of horribles will follow if the district court s supposed
f
error is not immediately corrected.
But, as many state jurisdictions
have learned to their detriment, the result of permitting interim
appeals
vexatious
and
uncertainty, and endless delay.
duplicative
litigation,
prolonged
Since, moreover, interim appeals are
typically taken before a full record is developed,
the appellate
courts that permit them must rule without the broader perspective that
comes from knowing the whole story.
Whether on the ballfield or in
court, "it ain't over till it's over" l is both shrewd observation and
sound advice.
1
Universally attributed to the great Yogi Berra.
1
Here,
plaintiff
Irving H.
Picard
(the
\\Trustee")
seeks
to
immediately appeal this Court's Opinion and Order of September 27,
2011 (the "Decision"), which dismissed as a matter of law certain of
the Trustee's claims against the defendants and narrowed certain
others. 2
Specifically, he moves to have the Court certify the three
key rulings of the Decision for interlocutory appeal under 28 U. S. C.
§
1292(b), or at least to have the Court, pursuant to Federal Rule
of Civil Procedure 54(b), enter a final judgment as to those claims
that have been dismissed so that they may be immediately appealed.
For the reasons that follow,
the motion is denied.
The three rulings from the Decision that the Trustee seeks to
immediately appeal are the following:
the plain terms of
§
546 (e) of the Bankruptcy Code barred the Trustee
from recovering under
-
First, the Court ruled that
§§
544 (b), 547 (b), and 548 (a) (l) (B) of the Code
i. e., sections authorizing the avoidance of transfers made without
intent to defraud or avoidable under various state laws
certain
\\settlement payments" and transfers \\in connection with a securities
contract" made to the defendants by Bernard L.
Securities LLC (\\Madoff Securities") . 3
Madoff Investment
Second, the Court ruled that,
with respect to certain of the remaining claims, the Trustee could
2
Full familiarity with the Decision is here presumed.
Madoff securities was identified in the Trustee's Amended
Complaint ("Am.Cmpl.") as a registered securities broker.
Am.Cmpl.
~ 29.
The Decision further held that the Trustee could still recover
transfers if they involved actual intent to defraud, § 548 (a) (l) (A) I
provided they were not barred by the two-year federal statute of
limitations.
3
2
not recover on a theory of negligence, and that the defendants could
therefore establish that they had received the transfers from Madoff
Securities in "good faith" under
they did not
know of,
Securities' fraud.
548 (c) of the Code by showing that
§
or wilfully blind themselves
to,
Madoff
Third, the Court ruled that the Trustee could not
disallow the defendants' own claims to the Madoff Securities estate
because 15 U.S.C.
§
78fff-2(c) (3)
treats customers who received
fraudulent transfers as creditors of such an estate.
Although the trial that will
finally decide this adversary
proceeding is firmly set for March 19, 2012, the Trustee seeks, in
effect, to "stop the music" and take these rulings up on interlocutory
appeal.
"Federal practice is strongly biased against interlocutory
appeals.
Appeals
from
interlocutory
orders
prolong
judicial
proceedings, add delay and expense to litigants, burden appellate
courts, and present issues for decisions on uncertain and incomplete
records,
tending
opinions.
22251325,
II
to
weaken
the
precedential
value
of
judicial
In re September 11 Litig., No. 21 MC 97 (AKH) , 2003 WL
at *1
(S.D.N.Y. Oct.
I,
2003).
The Second Circuit has
therefore held that "only 'exceptional circumstances [will] justify
a departure from the basic policy of postponing appellate review until
after the entry of a final judgment. '
/I
Klinghoffer v. S. N. C. Achille
Lauro Ed Altri Gestione Motonave Achille Lauro in Amministrazione
Straordinaria,
~brand
921 F.2d 21,
25
(2d Cir.
1990)
v. Livesay, 437 U.S. 463, 475 (1978)).
3
(quoting Coopers
&
The Trustee neverthe
s seeks to obtain an interlocutory appeal
of some or all of the three aforementioned rulings through either or
both of two routes.
As to the claims dismissed as a result of the
first of the three rulings, the Trustee seeks to have the Court enter
"final" (and therefore appealable) judgment on those claims pursuant
to Rule 54(b), Fed. R. Civ. P., which states:
When an action presents more than one
claim for relief--whether as a
claim, counterclaim, crossclaim, or
third-party claim--or when multiple
parties are involved, the court may
direct entry of a final judgment as
to one or more, but fewer than all,
claims or parties only if the court
expressly determines that there is
no just reason for delay. (emphasis
added)
As the plain language of this provision makes evident, entry of final
judgment under Rule 54(b) should be made sparingly and only
when there
no just reason for delay.
See generally Harriscom
Svenska AB v. Harris Corp., 947 F.2d 627, 629 (2d Cir. 1991).
Alternatively, the Trustee seeks to certify all three rulings
for interlocutory appeal pursuant to 28 U.S.C.
§
states:
When a district judge, in making in
a civil action an order not otherwise
appealable under this section, shall
be of the opinion that such 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
ultimate
termination
of
the
Ii tigation, he shall so state in
4
1292(b),
which
writing
added)
in
such
order.
(emphasis
The caselaw further makes clear that, similarly to Rule 54(b),
certification under
circumstances.
§
1292 (b)
is
Klinghoffer,
II
justified only in
921
F. 2d
21
at
"exceptional
25.
Moreover,
a
district judge has" 'unfettered discretion to deny certification' of
an order
interlocutory appeal even when a party has demonstrated
that the criteria of 28 U.S.C.
§
1292(b) are met.
Gulino v. Bd. of
1I
Educ., 234 F. Supp. 2d324, 325 (S.D.N.Y. 2002) (quotingNat'lAsbestos
Workers Med.
Fund v.
Philip Morris,
Inc.,
71 F. Supp. 2d 139,
162
(E.D.N. Y. 1999)).
After careful consideration, the Court concludes that the Trustee
has
ent
ly
failed
to
demonstrate
the
kind
of
extraordinary
circumstances that would warrant this Court in granting his motion
under either Rule 54(b) or § 1292(b).
Indeed, with the trial of this
case firmly set to begin just two months from now, the main effect of
granting the Trustee's motion would be to materially delay, rather than
materially advance
I
the
ultimate
termination of
the
litigation.
Although the Trustee makes much of the supposed impact of the Decision
on
other
adversary
proceedings
he
has
brought,
proceedings is remotely as far advanced as this one.
none
of
those
When the trial
of this proceeding is completed and final judgment entered, just a few
months from now, an appellate court will be able to review, on a full
record, not just the three rulings of which the Trustee now complains,
5
but all relevant rulings in this complicated and important proceeding,
thus
materially
proceedings
advancing
to
a
far
the
greater
entire
extent
set
of
than
Madoff
would
the
adversary
piecemeal
interlocutory appeal sought by the instant motion. 4
Although
the
Trustee's motion,
foregoing
points
are
sufficient
to
deny
the
it should also be noted that the factual record
developed at the forthcoming trial of this case will likely have
relevance to many of the issues that the Trustee seeks by his motion
to put before the Court of Appeals.
For example, the Trustee argues
that the Court should not have found that the "Account Agreements"
between Madoff
Securities and the defendants,
Amended Complaint at
under
§
~~
1103 -1104, qualified as
II
referenced in the
securi ties contracts"
741 (7) as a matter of law, but should rather have waited until
the specific agreements and the context in which they were made were
before the Court.
Yet, these very agreements and the context in which
they were made will likely be presented as evidence at trial as part
of the defendants' affirmative defense under
§
548(c), providing the
Court of Appeals with a better basis for evaluating the Trustee's
argument.
Similarly, the Trustee seeks to argue on appeal that, even though
Madoff Securities was a registered securities broker-dealer, it did
not qualify as a stockbroker for purposes of
§
546(e) because the
4 The Court might also enter final judgment as a result of either
party's motion for summary judgment, when it will likely resolve such
remaining legal issues as how to calculate the amount of "profits" that
6
Bankruptcy Code defines a stockbroker as one "engaged in the business
of effecting transactions in securities," 11 U.S.C.
whereas
the
Amended
Complaint
alleges
that
the
§
101(53A) (B),
part
of
Madoff
Securities' business that involved the defendants here, namely, its
investment advisory business,
never purchased securities for the
defendants' accounts.
~
Am. Cmpl.
31.
While in the Court's view, this
attempt to subdivide and parse Madoff Securities' business presents
its own difficulties
of
§
would a customer be deprived of the benefit
546(e) if the broker faked the trades in that customer's account
but made trades in other such accounts, or if the broker faked 90% of
the purported trades in that customer's account but executed the other
10%? -
the evidence at trial will likely make clear not only what part
of Madoff Securities' business was fake and what part real, but also,
and more importantly in the Court's view, whether Madoff Securities
was fairly viewed by the defendants and other customers as engaged in
the business of effecting transactions in securities.
Put another
way, if the proof at trial shows that Madoff Securities held itself
out as a stockbroker as defined by
§
101(53A) (B) and the defendants,
as they allege, had no reason to suppose otherwise, the Trustee, acting
on behalf of the estate, may well be barred from contending otherwise
with respect to the application of
More
generally,
the
Trustee
§
546(e).
has
himself
argued
in
related
proceedings before this Court that the states of mind of defendants
defendants received.
See Decision at 11 n.6.
7
may be relevant to how § 546 (e) should be interpreted and applied.
See
pages 13 14 of the Trustee's Memorandum of Law in Opposi tion to Herald
Fund SPC's Motion to Withdraw the Reference, in 11 Civ. 6541 (JSR).
Because the states of minds of the defendants in the instant case will
be one of the key issues in the forthcoming trial, the factual record
thus developed will be useful for assessing even those issues now
raised by the Trustee.
Without multiplying examples,
the point is that the factual
record developed at the upcoming trial will both inform the very issues
the Trustee seeks to raise on interlocutory appeal and will help to
materially advance the determination of other issues common to many
of the related adversary proceedings. This provides still another
ground for denying the entry of premature and partial final judgment
under Rule 54(b) and for denying certification under § 1292(b).
One other point bears mention.
In his papers in opposition to
the defendants' motion to dismiss that was the subj ect of the Decision,
the Trustee's primary argument concerning the language of
§
546 (e) was
that a securities contract did not exist unless the parties had "a
specific agreement
to buy,
sell or loan a
particular security.
/I
Trustee's Memorandum in Opposi tion to the Sterling Defendants' Motion
to Dismiss or, in the Alternative, for Summary Judgment dated July 8,
2011 at 90.
This argument was easily refuted by examination of the
relevant statutory provisions of the Bankruptcy Code.
§
741 (7) (A) (x)
In particular,
defines "securities contract" to include "a master
8
agreement that provides for [a contract for the purchase
of a
security],"
and
§
741 (7) (A) (xi)
I
sale
I
or loan
further includes within the
def ini tion "any securi ty agreement or arrangement . . . related to any
agreement or transaction referred to in this subparagraph, including
any guarantee or reimbursement obligation by or to a stockbroker."
Both
definitions
thus
include
agreements
that
do
not
specify
particular securities.
Now, however, under the guise of trying to justify the requirement
of
§
1292{b)
opinion,
that there be a "substantial ground for difference of
the Trustee attempts to insert new arguments into the record
II
that were never advanced in the papers preceding the Decision.
This
is a dubious practice at best; but ultimately it is of no moment, as
the new arguments are no more persuasive than the old ones.
Specifically, the Trustee argues that a brokerage customer is not
entitled to the "safe harbor" protections of § 546{e), even if she
believes
she
is
dealing
with
a
stockbroker,
if
the
purported
stockbroker, though licensed as such and holding himself out as such,
is
really
conducting
a
"Ponzi
scheme.
II
The
Court
has
already
mentioned above some of the difficulties with this interpretation,
such as
the difficulties in drawing the line between a
licensed
stockbroker whose Ponzi scheme is all-encompassing and one who fakes
only part of his business, or only part of his trades within a given
line of business, or only part of his trades for a given customer, etc.
But a more fundamental problem arises from the fact that, as already
9
set forth in the Decision,
not
just
for
§
546 (e) on its face provides a safe harbor
stockbrokers
but
also
for
investors.
Thus,
an
interpretation that would prohibit its availability to fraudulent
stockbrokers would make no sense if also applied to frustrate the
reasonable expectations of those brokers' customers.
See generally,
Todd D. Rakoff, Statutory Interpretation as a Multifarious Enterprise,
104 Nw. L. Rev. 1559 (2010).
None of the cases on which the Trustee relies is relevant to the
issue of whether a licensed stockbroker engaged in a Ponzi scheme
should or should not be considered a stockbroker in determining whether
or not to apply
§
546(e) on behalf of customers.
Slatkin, 525 F.3d 80S, 817 (9th Cir. 2008)
, In re
("It is undisputed that
Slatkin was not a licensed stockbroker. 1/) ; Wider v. Wootton, 907 F. 2d
570, 571 (5th Cir. 1990) (" [Cohen] was not a licensed stockbroker-his
license was suspended in the mid-1970s after making discretionary
trades without prior approval.") .
The Trustee's purported reliance on Judge Marrero's interesting
dec
2001)
ion in In re Adler, Coleman Clearing Corp., 263 B.R. 406 (S.D.N.Y.
further demonstrates the point.
considered a
In Adler Coleman, the court
situation in which applying
§
546 (e)
threatened to
potentially allow the entity that had committed the fraud to reap
benefits from the fraud by making transfers to insiders and other
related persons based on fict
The court,
ious trades.
Id. at 420 - 21, 440, 485.
invoking the doctrine of "absurd results,"
10
. at 478
1
concluded that, notwithstanding the literal language of § 546 (e) , such
a result could not be permitted.
only effect of
§
Id. at 485.
Here, by contrast, the
546(e), as construed by the Decision in this case,
is to preserve the safe harbor for returns on securit
that the Trustee cannot avoid under
§
548(a) (1) (A).
whereas Adler Coleman implied a fraud exception to
s investments
In other words,
§
546(e) in order
to prevent the defrauder from reaping benefits from its fraud,
Decision focused on
exemption
of
§
§
the
546 (e) 's explicit fraud exception-namely, its
548 (a) (1) (A)
from
the
safe
harbor-in
determine what transfers third parties may keep.
order
to
There is nothing
about the Decision's result that is in any way absurd, and Adler Coleman
is therefore inapplicable. 5
The other case that the Trustee especially emphasizes,
Kimba Wood's recent decision in Picard v. Merkin,
Judge
2011 WL 3897070
if anything,
was,
an application by the Receiver of certain Madoff
ironically,
supports this Court's view.
6
(S.D.N.Y. 2011),
Merkin
Securities defendants for leave to take an interlocutory appeal from
a decision of the Bankruptcy Court, on a motion to dismiss, that held
The Court therefore need not reach the issue of whether the court
in Adler Coleman correctly applied the extremely limited doctrine of
\\
re
ts." More generally, Judge Marrero's view that "in
prospecting profoundly into words in search of the sense of particular
legislation," one must "not surrender purpose to literalness, id. at
478, is reminiscent of the "legal process" mode of statutory
interpretation that the Supreme Court in recent years has repeatedly
rejected in favor
,yes, literalness.
6 Merkin was decided on August 31, 2011, or less than three weeks before
the Decision, and neither the Court nor, apparently, the parties were
aware of it until shortly after the Decision was rendered.
11
5
/I
that it was premature to determine at that stage whether, for purposes
of applying § 546 (e), Madoff Securities qualified as a "stockbroker"
that had \\ securi ties contracts" with its customers.
. at *12.
All
that Judge Wood held, in her brief analysis, was that the Receiver,
by
ling to cite any cases
that
established that
there
was a
substantial ground for difference of opinion over whether it was
improper to defer these determinations until after the pleading stage,
had failed to make out a case for allowing an interlocutory appeal.
Id.
The real lesson of Merkin,
therefore,
is that
interlocutory
appeals of the issues here presented are not to be lightly granted.
Moreover, if anything I the underlying determination by the Bankruptcy
Court not to reach these issues at the pleading stage, while different
from the approach taken in the Decision, is still an impl
it rej ection
of the Trustee's argument that there is an automatic "Ponzi scheme"
exception to the application of
§
546 (e).
Furthermore, neither Judge
Wood nor the Bankruptcy Court had occasion to consider most of the
specific issues on which the Decision is focused, such as whether a
court must take customers' viewpoints and reasonable reliance into
account when interpreting
§
546 (e) , or whether, regardless of the issue
of "securities contracts," payments from Madoff Securit
customers constituted "settlement payments" under the Code.
s to its
See
In
re Enron Creditors Recovery Corp., 651 F.3d 329,336-38 (2d Cir. 2011).
Without elaborating
further,
12
the
point
is
that neither
the
Trustee's new arguments nor the authorities he presents persuades the
Court that there is a "substantial ground for difference of opinion"
with respect to the Decision's interpretation of
§
546{e).
The same
holds true, even more plainly, with respect to the other issues raised
by the Decision, see supra, as to which the Trustee is unable to muster
any persuasive caselaw to the contrary.
The Trustee has, however, brought to the Court's attention one
oversight in the Decision the Court now undertakes to correct.
Count
9 of the Trustee's Amended Complaint sought to recover subsequent
transfers pursuant to 11 U.S.C.
prohibits avoidance under
under
§
550{a).
§§
544{b) & 550{a).
Section 546{e)
544{b), but does not address avoidance
§
Section 550(a) permits avoidance of a subsequent
transfer "to the extent that a[n initial] transfer is avoided under
section . . . 548."
Thus, since the Court concluded that the Trustee
could avoid a transfer under
§
548 (a) (I) {A} (involving actual intent) ,
it should have further concluded that the Trustee could also avoid to
the same extent subsequent transfers of the same funds under
§
550 (a) •
Applying this analysis, the Court would have dismissed Count 9 only
in part.
of
final
The correct response to this error, however, is neither entry
judgment
under
interlocutory appeal under
Rule
§
54{b)
nor
certification
on
an
1292 (b), but instead reconsideration of
the Court's decision to dismiss Count 9 in full.
Undertaking such
reconsideration sua sponte, the Court now hereby reinstates Count 9
in part, but only insofar as it seeks to avoid subsequent transfers
13
under
§
550(a)
wherever the Trustee could have avoided an initial
transfer under
reinstatement
§
of
548{a) (1) (A).
the
partial
It should also be noted that the
Count
will
in
no
respect
warrant
re-opening discovery nor change the trial date, which remains fixed
and firm.
For the foregoing reasons, the Trustee's motion is denied in its
entirety, but Count 9 of the Amended Complaint is hereby reinstated
to the limited extent described above.
The Clerk of the Court is
hereby directed to close item number 45 on the docket of this case.
SO ORDERED
~~D'J'
Dated: New York, New York
January 17, 2012
14
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