In re Bernard L. Madoff Investment Securities LLC , 395 F. App'x 766 ( 2010 )

09-5296-bk
In re Bernard L. Madoff Investment Securities LLC
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON
OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE
32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH
THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY
NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals
for the Second Circuit, held at the Daniel Patrick Moynihan
United States Courthouse, 500 Pearl Street, in the City of
New York, on the seventh day of October, two thousand and
ten.
PRESENT: JON O. NEWMAN,
GUIDO CALABRESI
RICHARD C. WESLEY,
Circuit Judges.
ROSENMAN FAMILY, LLC,
Plaintiff-Appellant,
-v.- 09-5296-bk
IRVING H. PICARD, as Trustee for the SIPA Liquidation of
Bernard L. Madoff Investment Securities LLC, SECURITIES
INVESTOR PROTECTION CORPORATION,
Defendants-Appellees. *
*
The Clerk of the Court is directed to amend the
official caption to conform with the caption above.
FOR APPELLANT: HOWARD KLEINHENDLER, Wachtel & Masyr, LLP,
New York, NY.
FOR APPELLEE: DAVID J. SHEEHAN, Seanna R. Brown, Baker &
Hostetler, LLP, New York, NY.
HERMANT SHARMA, Securities Investor
Protection Corporation, Washington D.C.
Appeal from the United States District Court for the
Southern District of New York (Buchwald, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
AND DECREED that the judgment of the district court be
AFFIRMED.
Plaintiff-Appellant Rosenman Family, LLC (“Appellant”
or “Rosenman”) appeals from a decision of the United States
District Court for the Southern District of New York
(Buchwald, J.), Rosenman Family, LLC v. Picard, 420 B.R. 108(S.D.N.Y 2009), which affirmed a decision of the United
States Bankruptcy Court for the Southern District of New
York (Lifland, J.), entered on February 24, 2009, granting a
motion to dismiss the Rosenman Complaint, Securities
Investor Protection Corp. v. Bernard L. Madoff Investment
Securities LLC, 401 B.R. 629 (Bankr. S.D.N.Y. 2009). We
assume the parties’ familiarity with the underlying facts,
the procedural history, and the issues presented for review.
The courts below prematurely determined that Rosenman
qualified as a “customer” under the Securities Investor
Protection Act (“SIPA”), 15 U.S.C. § 78aaa et seq. We make
no such determination at this time. However, we agree with
the district court that the $10 million at issue qualifies
as debtor property covered by SIPA. Therefore, Rosenman’s
complaint seeking declaratory and injunctive relief for the
immediate return of the $10 million was properly dismissed. 1
When considering a motion to dismiss under Federal Rule
12(b)(6), a court must accept all factual allegations in the
complaint as true, even if the allegations are doubtful in
fact. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555
(2007); see also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949
(2009) (“To survive a motion to dismiss, a complaint must
contain sufficient factual matter, accepted as true, to
state a claim to relief that is plausible on its face.”)
(internal quotation marks omitted). On review of a
dismissal under Fed. R. Civ. Pro. 12(b)(6), we accept all
factual allegations in the complaint as true and draw all
reasonable inferences in favor of the plaintiff. Kassner v.
2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir.
2007).
1
We review de novo the district court's conclusions of
law. See In re New Times Secs. Serv., Inc., 463 F.3d 125,
127 (2d Cir. 2006).
2
The courts below detailed the relevant history and
purposes of SIPA as well as the structure of a SIPA
liquidation proceeding. Generally, SIPA liquidations
involve two kinds of claimants: customers and general
unsecured creditors. To protect customers of failed
brokerages, their claims are satisfied from a customer
property estate, 2 which is separate from the general estate
used to satisfy the claims of general unsecured creditors.
See In re Adler Coleman Clearing Corp., 195 B.R. 266, 270
(Bankr. S.D.N.Y. 1996). To effectuate its purposes, SIPA
accords “those claimants in a SIPA liquidation proceeding
who qualify as ‘customers’ of the debtor priority over the
distribution of ‘customer property.’” In re New Times Secs.
Serv., Inc., 463 F.3d 125, 127 (2d Cir. 2006). Customer
property can further be supplemented “out of a special
[Securities Investor Protection Corporation (‘SIPC’)] fund
capitalized by the general brokerage community,” id., which
may provide up to $500,000 for each customer. 15 U.S.C. §
78fff-3.
To qualify as a customer, a claimant must have
2
SIPA defines customer property, in relevant part, as:
“cash and securities . . . at any time received, acquired,
or held by or for the account of a debtor from or for the
securities accounts of a customer, and the proceeds of any
such property transferred by the debtor, including property
3
“deposited cash with the debtor for the purpose of
purchasing securities.” 15 U.S.C § 78lll. 3 “[T]he critical
aspect . . . is the entrustment of cash or securities to the
broker-dealer for the purposes of trading securities." In
re New Times, 463 F.3d at 128 (quoting Appleton v. First
Nat'l Bank of Ohio, 62 F.3d 791, 801 (6th Cir. 1995)); see
also In re ESM Gov’t Secs., Inc., 812 F.2d 1374, 1376 (11th
Cir. 1987) (“[I]t is the act of entrusting the cash to the
debtor for the purpose of effecting securities transactions
that triggers the . . . provisions.” (emphasis in original)
(citing Secs. Investor Prot. Corp. v. Exec. Secs. Corp., 556
F.2d 98 (2d Cir. 1977)); Secs. Investor Prot. Corp. v.
Stratton Oakmont, Inc., 229 B.R. 273, 279 (Bankr. S.D.N.Y.
1999) (“SIPA protects customers of registered broker-dealers
who have entrusted to those broker-dealers cash . . . for
the purpose of trading and investing.”). Other claimants to
assets in the estate generally qualify only as general
unsecured creditors and do not receive the benefit of
unlawfully converted.” 15 U.S.C. § 78lll(4).
3
15 U.S.C. § 78lll was amended by the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Pub. L. No. 111-
203, 124 Stat 1376, as of July 21, 2010. Even if the
amendments were to apply retroactively, they do not affect
the analysis of the present case because the operative
definition above — “any person who has deposited cash with
the debtor for the purpose purchasing securities” — remains
intact. 15 U.S.C. § 78lll(b)(2)(B)(i). SIPA citations are
4
supplemental funds from SIPC.
In all of the above cases, the courts were concerned
with whether the putative investor attained customer status
and thus qualified for preferred liquidation benefits under
SIPA. They took for granted the preliminary question of
whether the relationship between the claimant and the debtor
gave rise to SIPA coverage in the first place.
In the present case, Appellant claims it is neither a
customer nor a general creditor because, it asserts, the
debtor never acquired title to the $10 million it wired to
the debtor. Because the money never became the debtor’s
property, Appellant argues, it cannot form part of the
bankruptcy estate; rather, Appellant claims, the money was
stolen or embezzled. But none of the facts alleged in
Appellant’s complaint support such a conclusion, or any
other conclusion that would exclude this money from the
debtor’s property under either New York or bankruptcy law.
The $10 million was voluntarily transferred by the
Appellant, was never diverted by the debtor, cf. In re
Newpower, 233 F.3d 922 (6th Cir. 2000), and remained with
the debtor. Accordingly, we need not consider whether New
York or bankruptcy law applies. Under either, given the
to the statute prior to its amendment.
5
allegations in the complaint, the $10 million is part of the
debtor’s estate.
This also means that the funds are subject to SIPA. The
complaint shows Appellant’s intent to invest in the
investment advisory fund of Bernard L. Madoff Investment
Securities LLC (“BLMIS”). Appellant’s $10 million deposit
in BLMIS’ JPMorgan Chase Bank account (“Chase Account”) was
executed for that purpose, even if Appellant contemplated
that any such investment would not take place until January
2009 (less than a month after the deposit), and even if
Appellant believed that further authorization would be
required to effectuate the investment.
Furthermore, four days after Appellant deposited the
$10 million, BLMIS sent Appellant a “Confirmation” form
containing a customer account number and stating that, on
behalf of Appellant’s account, BLMIS had “sold short $10
million in U.S. Treasury Bills that mature on March 26,
2009.” 4 Complaint ¶ 12. The statement contained an
identification number for the transaction. Id. ¶ 13.
Neither the fact that Appellant did not authorize this
purported trade nor the fact that the trade never actually
occurred negate Appellant’s SIPA status. See In re Klein,
4
Treasury Bills are “securities” as defined by SIPA. 15
6
Maus & Shire, Inc., 301 B.R. 408, 419 (Bankr. S.D.N.Y 2003)
(“The fact that the property is missing, perhaps due to
unauthorized trading, does not affect ‘customer’ status.”)
(citations omitted); see also Sec’s and Exchange Comm’n v.
S. J. Salmon & Co., Inc., 375 F.Supp. 867, 871 (S.D.N.Y.
1974) (holding that “[m]isappropriation would, of course,
include the use of the customers' money to effect
unauthorized purchases of securities” and thus, if the
particular purchase of securities was found to be
unauthorized, the claimant “would possess a valid customer
claim”).
Appellant’s phone call with Madoff expressing interest
in investing in the BLMIS fund, Appellant’s wiring of the
funds in accordance with that phone call, the confirmation
of BLMIS’ purported (though fraudulent) purchase of
securities for Appellant’s account, and the absence of any
objection to that purported trade by Appellant all lead to
the conclusion that Appellant willingly transferred its
money to BLMIS in contemplation of engaging in ongoing
business dealings with the brokerage.
In light of this conclusion, we need not discuss
Appellant’s other arguments. We similarly need not decide
U.S.C § 78lll(14).
7
today whether the $10 million in the Chase account qualifies
for the added protection given to customers or is general
creditor property under SIPA. Either way, SIPA governs.
To be clear, we are not holding that Appellant is
entitled to customer status under SIPA, a ruling that cannot
fairly be made in the absence of general creditors; we are
holding only that the allegations are sufficient to invoke
SIPA coverage, that the disputed money is property of the
bankruptcy estate, and that the issue of whether Appellant
is entitled to customer status remains to be determined.
For the foregoing reasons, the judgment of the district
court is hereby AFFIRMED.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
8