Posted by Kathy Bazoian Phelps
Irving Picard, the trustee in the SIPA bankruptcy proceeding of Bernard L. Madoff Investment Securities, LLC, has asked the Second Circuit Court of Appeals to overturn two decisions from the Southern District of New York dismissing his common law claims against financial institutions that had done business with Madoff. In both decisions, Picard’s claims were dismissed for lack of standing.
In the first, District Judge Jed Rakoff dismissed Picard’s claims against HSBC Bank and others for unjust enrichment, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty for failing to adequately investigate Madoff Securities despite “myriad red flags and indicia of fraud.” Picard v HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011). Judge Rakoff relied on two principles in dismissing Picard’s claims. First, under Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416 (1972), a bankruptcy trustee lacks standing to pursue claims on behalf of the estate’s creditors because the trustee stands in the shoes of the estate and not the creditors. Second, under Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991), a bankruptcy trustee lacks standing to bring a claim that is barred by the in pari delicto doctrine. Judge Rakoff rejected Picard’s several attempts to overcome these obstacles, calling them “convoluted.” 454 B.R. at 29.
In the other decision, District Judge Colleen McMahon dismissed similar claims against JPMorgan Chase Bank, UBS AG and others. Picard v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011). Judge McMahon relied on the same propositions, which she stated were “convincingly established in Judge Rakoff's recent opinion and equally applicable here[.]” 460 B.R. at 91.
Picard’s response to these rulings in his appeals to the Second Circuit is broad and comprehensive. In his briefs filed on February 16, 2012, he argues:
· A SIPA trustee has standing to sue as a bailee of customer property, and the SIPC has standing to sue as a subrogee of customers’ claims.
· A SIPA trustee has exclusive standing to assert common law causes of action that generally affect all customers.
· The District Court erred in applying Wagoner to divest the trustee of standing to assert common law claims, because -
o Wagoner is not applicable to a SIPA trustee.
o A SIPA trustee is appointed to restore the customer property estate.
o In pari delicto does not apply to a SIPA trustee who proceeds on behalf of the customer property estate.
· SIPA authorizes the SIPC to pursue equitable and statutory subrogation claims against third-party tortfeasors.
· The District Court erroneously dismissed the trustee’s state law claim for contribution against the defendants.
On the issue of in pari delicto, Picard argues that the Supreme Court decision in Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985), supports the position that “[a] SIPA trustee who seeks to recover assets for the benefit of a debtor’s customers should not be impeded by the doctrine of in pari delicto.” In Bateman, the Court held:
[A] private action for damages in these circumstances may be barred on the grounds of the plaintiff's own culpability only where (1) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and (2) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public. “in pari delicto should not interfere with enforcement of securities laws and protection of the investing public.”
Bateman at 310.
As Picard noted:
Given the nature of the Trustee’s appointment, the policy concerns underlying in pari delicto are absent here. The Trustee is, of course, not a wrongdoer himself. Further, the Trustee is the only party who can assert claims to redress damage to the customer property estate. . . By imputing Madoff’s wrongdoing to the Trustee, the District Court impeded the Trustee’s duties and powers under SIPA and his right to assert common law claims to redress the harm JPMC inflicted upon the customer property fund.
In summary on the in pari delicto argument, Picard states, “The Trustee should not be burdened with the inequitable imposition of a doctrine intended to admonish wrongdoers. The Trustee is not a wrongdoer, fraudster or criminal.”
The Second Circuit’s resolution of these important issues will impact not only Madoff’s victims, but also potentially the victims of the countless other current and future Ponzi schemes.
Picard’s briefs can be downloaded here in pdf format.