Picard v. JPMorgan Chase & Co. (In Re Bernard L. Madoff Investment Securities LLC)

11-5044; 11-5051; 11-5175; 11-5207
In re: Bernard L. Madoff Investment Securities
Picard v. JP Morgan Chase & Co., 11-5044
Picard v. Egger, 11-5051
Picard v. UniCredit Bank Austria AG, 11-5175
Picard v. HSBC Bank PLC, 11-5207
1 UNITED STATES COURT OF APPEALS
2
3 FOR THE SECOND CIRCUIT
4
5 August Term, 2012
6
7
8 (Argued: November 21, 2012 Decided: June 20, 2013)
9
10 Docket Nos. 11-5044
11 11-5051
12 11-5175
13 11-5207
14
15 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
16
17 IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC.
18
19 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
20
21 IRVING H. PICARD,
22
23 Plaintiff-Appellant,
24
25 - v.-
26
27 JPMORGAN CHASE & CO., JPMORGAN CHASE BANK, N.A., J.P. MORGAN
28 SECURITIES LLC, J.P. MORGAN SECURITIES LTD.,
29
30 Defendants-Appellees,
31
32 and
33
34 SECURITIES INVESTOR PROTECTION CORPORATION,
35
36 Intervenor.
37
38 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
39
1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
2
3 IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
4
5 Debtor.
6
7 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
8
9 IRVING H. PICARD,
10
11 Plaintiff-Appellant,
12
13 and
14
15 SECURITIES INVESTOR PROTECTION CORPORATION,
16
17 Intervenor,
18
19 - v.-
20
21 UBS FUND SERVICES (LUXEMBOURG) SA, ACCESS INTERNATIONAL
22 ADVISORS LLC, ACCESS INTERNATIONAL ADVISORS EUROPES LIMITED,
23 ACCESS INTERNATIONAL ADVISORS LTD., ACCESS PARTNERS (SUISSE)
24 SA, ACCESS MANAGEMENT LUXEMBOURG SA, as represented by its
25 Liquidator MAITRE FERDINAND ENTRINGER, FKA ACESS
26 INTERNATIONAL ADVISORS LUXEMBOURG SA, ACCESS PARTNERS SA, as
27 represented by its Liquidator MAITRE FERDINAND ENTRINGER,
28 PATRICK LITTAYE, CLAUDINE MAGON DE LA VILLEHUCHET, in her
29 capacity as Executrix under the WILL OF THIERRY MAGON DE LA
30 VILLEHUCHET (AKA Rene Thierry de la Villehuchet),
31 individually and as the sole beneficiary under the WILL OF
32 THIERRY MAGON DE LA VILLEHUCHET (AKA Rene Thierry de la
33 Villehuchet), AKA CLAUDINE DE LA VILLEHUCHET, PIERRE
34 DELANDMETER, THEODORE DUMBAULD, LUXALPHA SICA V, as
35 represented by its Liquidators MAITRE ALAIN RUKAVINA and
36 PAUL LAPLUME, ROGER HARTMANN, RALF SHROETER, RENE EGGER,
37 ALAIN HONDEQUIN, HERMANN KRANZ, BERNARD STIEHL, GROUPEMENT
38 FINANCIER LTD., UBS AG, UBS (LUXEMBOURG) SA, MAITRE ALAIN
39 RUKAVINA, in his capacity as liquidator and representative
40 of LUXALPHA SICA V, PAUL LAPLUME, in his capacity as
41 liquidator and representative of LUXALPHA SICA V, UBS THIRD
42 PARTY MANAGEMENT COMPANY SA,
43
44 Defendants-Appellees.
2
1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
2
3 IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
4
5 Debtor.
6
7 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
8
9 IRVING H. PICARD,
10
11 Plaintiff-Appellant,
12
13 - v.-
14
15 HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A.,
16 HSBC BANK BERMUDA LIMITED, HSBC FUND SERVICES (LUXEMBOURG)
17 S.A., HSBC PRIVATE BANK (SUISSE) S.A., HSBC PRIVATE BANKING
18 HOLDINGS (SUISSE) S.A., HSBC BANK (CAYMAN) LIMITED, HSBC
19 SECURITIES SERVICES (BERMUDA) LIMITED, HSBC BANK USA, N.A.,
20 HSBC INSTITUTIONAL TRUST SERVICES (BERMUDA) LIMITED, HSBC
21 SECURITIES SERVICES (IRELAND) LIMITED, HSBC INSTITUTIONAL
22 TRUST SERVICES (IRELAND) LIMITED, HSBC HOLDINGS PLC,
23 UNICREDIT S.p.A., PIONEER ALTERNATIVE INVESTMENT MANAGEMENT
24 LIMITED, UNICREDIT BANK AUSTRIA AG, ALPHA PRIME FUND
25 LIMITED,
26
27 Defendants-Appellees,
28
29 and
30
31 SECURITIES INVESTOR PROTECTION CORPORATION,
32
33 Intervenor.
34
35 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
36
37 IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
38
39 Debtor.
40
41 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
42
43
44
3
1 IRVING H. PICARD,
2
3 Plaintiff-Appellant,
4
5 - v.-
6
7 HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A.,
8 HSBC BANK BERMUDA LIMITED, HSBC PRIVATE BANK (SUISSE) S.A.,
9 HSBC PRIVATE BANKING HOLDINGS (SUISSE) S.A., HSBC BANK
10 (CAYMAN) LIMITED, HSBC SECURITIES SERVICES (BERMUDA)
11 LIMITED, HSBC BANK USA, N.A., HSBC INSTITUTIONAL TRUST
12 SERVICES (BERMUDA) LIMITED, HSBC SECURITIES SERVICES
13 (IRELAND) LIMITED, HSBC INSTITUTIONAL TRUST SERVICES
14 (IRELAND) LIMITED, HSBC HOLDINGS PLC, HSBC FUND SERVICES
15 (LUXEMBOURG) S.A.,
16
17 Defendants-Appellees,
18
19 SECURITIES INVESTOR PROTECTION CORPORATION,
20
21 Intervenor.
22
23 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
24
25 Before: JACOBS, Chief Judge, WINTER and CARNEY,
26 Circuit Judges.
27
28 A trustee appointed pursuant to the Securities Investor
29 Protection Act appeals from the dismissal of his claims
30 brought on behalf of the debtor and the debtor’s customers,
31 asserting that various financial institutions and other
32 defendants aided and abetted the debtor’s fraud. The United
33 States District Court for the Southern District of New York
34 (McMahon and Rakoff, JJ.) held that the claims were barred
35 by the doctrine of in pari delicto and that the trustee
36 lacked standing to pursue claims on behalf of customers. We
37 affirm.
4
1 OREN J. WARSHAVSKY (David J.
2 Sheehan, Deborah H. Renner, Lan
3 Hoang, Geoffrey A. North on the
4 brief) Baker & Hostetler LLP,
5 New York, New York for
6 Plaintiff-Appellant.
7
8 CHRISTOPHER H. LAROSA (Josephine
9 Wang, Kevin H. Bell, on the
10 brief) Securities Investor
11 Protection Corporation,
12 Washington, D.C. for Intervenor
13 Securities Investor Protection
14 Corporation.
15
16 JOHN F. SAVARESE (Douglas K.
17 Mayer, Stephen R. DiPrima, Emil
18 A. Kleinhaus, Lauren M. Kofke,
19 Jonathon R. La Chapelle on the
20 brief) Wachtell, Lipton, Rosen &
21 Katz, New York, New York for
22 Defendant-Appellee JPMorgan
23 Chase & Co., et al.
24
25 THOMAS J. MOLONEY (Evan A.
26 Davis, David E. Brodsky, Marla
27 A. Decker, Charles J. Keeley,
28 Jason B. Frasco on the brief)
29 Cleary Gottlieb Steen & Hamilton
30 LLP, New York, New York for
31 Defendant-Appellee HSBC Bank
32 plc, et al.
33
34 MARCO E. SCHNABL (Susan L.
35 Saltzstein, Jeremy A. Berman on
36 the brief) Skadden, Arps, Slate,
37 Meagher & Flom LLP, New York,
38 New York for Defendants-
39 Appellees UniCredit S.p.A. and
40 Pioneer Alternative Investment
41 Management Ltd.
42
43 MARSHALL R. KING, Gibson, Dunn &
44 Crutcher LLP, New York, New York
45 for Defendant-Appellee UBS AG,
46 et al.
5
1
2 FRANKLIN B. VELIE (Jonathan G.
3 Kortmansky, Mitchell C. Stein on
4 the brief) Sullivan & Worcester
5 LLP, New York, New York for
6 Defendant-Appellee UniCredit
7 Bank Austria AG.
8
9 Robert W. Gottlieb, Katten
10 Muchin Rosenman LLP, New York,
11 New York for Defendant-Appellee
12 Access International Advisers,
13 LLC, et al.
14
15 Brett S. Moore, Porzio Bromberg
16 & Newman P.C., New York, New
17 York for Defendant-Appellee
18 Luxalpha Sicav, et al.
19
20 Robert Knuts, Park & Jensen LLP,
21 New York, New York for
22 Defendant-Appellee Theodore
23 Dumbauld.
24
25
26 DENNIS JACOBS, Chief Judge:
27 Irving Picard (“Picard” or the “Trustee”) sues in his
28 capacity as Trustee under the Securities Investor Protection
29 Act (“SIPA”) on behalf of victims in the multi-billion-
30 dollar Ponzi scheme worked by Bernard Madoff. The four
31 actions presently before this Court allege that numerous
32 major financial institutions aided and abetted the fraud,
33 collecting steep fees while ignoring blatant warning signs.
34 In summary, the complaints allege that, when the Defendants
35 were confronted with evidence of Madoff’s illegitimate
6
1 scheme, their banking fees gave incentive to look away, or
2 at least caused a failure to perform due diligence that
3 would have revealed the fraud. The Trustee asserts claims
4 for unjust enrichment, breach of fiduciary duty, aiding and
5 abetting fraud, and negligence, among others. The Trustee’s
6 position is supported by the Securities Investor Protection
7 Corporation (“SIPC”), a statutorily created nonprofit
8 corporation consisting of registered broker-dealers and
9 members of national securities exchanges, which intervened
10 to recover some or all of the approximately $800 million it
11 advanced to victims.
12 As we will explain, the doctrine of in pari delicto
13 bars the Trustee (who stands in Madoff’s shoes) from
14 asserting claims directly against the Defendants on behalf
15 of the estate for wrongdoing in which Madoff (to say the
16 least) participated. The claim for contribution is likewise
17 unfounded, as SIPA provides no such right. The decisive
18 issue, then, is whether the Trustee has standing to pursue
19 the common law claims on behalf of Madoff’s customers. Two
20 thorough well-reasoned opinions by the district courts held
21 that he does not. See Picard v. HSBC Bank PLC, 454 B.R. 2522 (S.D.N.Y. 2011) (Rakoff, J.); Picard v. JPMorgan Chase &
23 Co., 460 B.R. 84 (S.D.N.Y. 2011) (McMahon, J.).
7
1 Our holding relies on a rooted principle of standing: A
2 party must “assert his own legal rights and interests, and
3 cannot rest his claim to relief on the legal rights or
4 interests of third parties.” Warth v. Seldin, 422 U.S. 490,
5 499 (1975). This prudential limitation has been
6 consistently applied in the bankruptcy context to bar suits
7 brought by trustees on behalf of creditors. See, e.g.,
8 Caplin v. Marine Midland Grace Trust Co., 406 U.S. 4169 (1972); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d
10 114, 118 (2d Cir. 1991).
11 Picard offers two theories for why a SIPA liquidation
12 is a different creature entirely, and why therefore a SIPA
13 trustee enjoys third-party standing: (1) He is acting as a
14 bailee of customer property and therefore can pursue actions
15 on customers’ behalf to recover such property; and (2) he is
16 enforcing SIPC’s rights of equitable and statutory
17 subrogation to recoup funds advanced to Madoff’s customers.
18 Neither is compelling. Although a SIPA liquidation is not a
19 traditional bankruptcy, a SIPA trustee is vested with the
20 “same powers and title with respect to the debtor and the
21 property of the debtor . . . as a trustee in a case under
22 Title 11.” 15 U.S.C. § 78fff-1(a). At best, SIPA is silent
8
1 as to the questions presented here. And analogies to the
2 law of bailment and the law of subrogation are inapt and
3 unconvincing.1
4
5 BACKGROUND
6 In December 2008, federal agents arrested Bernard L.
7 Madoff, who had conducted the largest Ponzi scheme yet
8 uncovered. Madoff purported to employ a “split-strike
9 conversion strategy” that involved buying S&P 100 stocks and
10 hedging through the use of options. In reality, he engaged
11 in no securities transactions at all.2
12
1
The Defendants also argue that the Trustee has not
met constitutional standing requirements, violates the
Securities Litigation Uniform Standards Act, and fails to
plead with particularity SIPC’s purported subrogation
claims. Given our holding, we decline to address these
arguments.
2
Although Madoff simply appropriated his clients’
money without ever purchasing securities on their behalf, we
have held that Madoff’s victims are nonetheless “customers”
under the Act. See In re Bernard L. Madoff Inv. Sec. LLC,
654 F.3d 229, 236 (2d Cir. 2011) (“SIPA . . . ensur[es] that
claimants who deposited cash with a broker for the purpose
of purchasing securities, are treated as customers with
claims for securities. This is so because the critical
aspect of the ‘customer’ definition is the entrustment of
cash or securities to the broker-dealer for the purposes of
trading securities.”) (internal citations and quotation
marks omitted), cert. denied, 133 S. Ct. 25 (2012).
9
1 In March 2009, Madoff pleaded guilty to securities
2 fraud and admitted that he had used his brokerage firm,
3 Bernard L. Madoff Investment Securities LLC (“BLMIS”), as a
4 vast Ponzi scheme. The details of Madoff’s fraud have been
5 recounted many times. See, e.g., In re Bernard L. Madoff
6 Inv. Sec. LLC, 654 F.3d 229, 231-32 (2d Cir. 2011), cert.
7 denied, 133 S. Ct. 25 (2012); In re Bernard L. Madoff Inv.
8 Sec. LLC, 424 B.R. 122, 126–32 (Bankr. S.D.N.Y. 2010).
9 Following Madoff’s arrest, SIPC filed an application
10 under SIPA, 15 U.S.C. § 78eee(a)(4)(B), asserting that BLMIS
11 required protection. The district court appointed Picard as
12 the firm’s Trustee and referred the case to the bankruptcy
13 court.
14 SIPA was enacted in 1970 to speed the distribution of
15 “customer property” back to investors following a firm’s
16 collapse.3 Customer property is cash and securities held
17 separately from the general estate of the failed brokerage
18 firm. “SIPA serves dual purposes: to protect investors, and
19 to protect the securities market as a whole.” In re Bernard
20 L. Madoff Inv. Sec. LLC, 654 F.3d at 235. A SIPA
3
For a succinct overview of the statute’s history, see
Securities Investor Protection Corp. v. BDO Seidman, LLP, 49
F. Supp. 2d 644, 649 (S.D.N.Y. 1999).
10
1 liquidation confers priority on customer claims by an
2 expeditious alternative to a traditional bankruptcy
3 proceeding. Under SIPA, each customer shares ratably in the
4 fund of customer property according to the customer’s “net
5 equity.”
6 If (as is often the case) the assets are not enough to
7 satisfy all net equity claims, SIPC advances money (up to
8 $500,000 per customer) to the SIPA trustee, who is charged
9 with assessing customer claims and making the ratable
10 distributions. At the time of this appeal, SIPC had
11 advanced approximately $800 million.
12 A trustee also has authority to investigate the
13 circumstances surrounding the insolvency and to recover and
14 distribute any remaining funds to creditors. Picard alleges
15 that his investigation has uncovered evidence of wrongdoing
16 by third parties who aided and abetted Madoff, and seeks to
17 replenish the fund of customer property by taking action
18 against various financial institutions that serviced BLMIS.
19 Picard presses claims against JPMorgan Chase & Co., UBS
20 AG, UniCredit Bank Austria AG, HSBC Bank plc, and affiliated
21 persons and entities. The allegations against each are
22 summarized one by one. We distill the detailed allegations
11
1 from the consolidated complaints, and recount only the
2 background needed to understand our analysis. At this stage
3 of the litigation, the allegations are assumed to be true.
4 See Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir.
5 2009).
6 JPMorgan. Madoff maintained a checking account at
7 JPMorgan Chase & Co. (“JPMorgan”)4 for more than twenty
8 years, beginning in 1986. In the years prior to BLMIS’s
9 bankruptcy, JPMorgan collected an estimated half billion
10 dollars in fees, interest payments, and revenue from BLMIS.
11 The Trustee alleges that JPMorgan was “at the very center”
12 of Madoff’s fraud and was “thoroughly complicit” in it. A
13 662 ¶ 1.5 Madoff’s primary account with JPMorgan, the “703
14 Account,” was where hundreds of billions of dollars of
15 customer money were “commingled and ultimately washed.” A
16 663 ¶ 2. The customer funds deposited into the 703 Account
17 for “split-strike” securities transactions were instead
18 funneled to other customers to sustain the illusion of large
19 and reliable returns on investment.
4
Throughout this brief, “JPMorgan” refers to the four
JPMorgan defendants: JPMorgan Chase & Co., JPMorgan Chase
Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan
Securities Ltd.
5
Record citations refer to the joint appendix filed in
the action under discussion.
12
1 The 703 Account was a retail checking account, not a
2 commercial account. Billions of dollars from thousands of
3 investors were deposited without being segregated or
4 transferred to separate sub-accounts. These accounts
5 exhibited, on their face, a “glaring absence of securities
6 activity.” A 714 ¶ 190. At the same time, numerous multi-
7 million-dollar checks and wire transfers having no apparent
8 business purpose were exchanged between Madoff and his close
9 friend, Norman Levy (now dead).
10 In 2006, due diligence conducted by JPMorgan revealed
11 strong and steady yields by Madoff’s feeder funds during a
12 time when the S&P 100 dropped thirty percent. As one money
13 manager later acknowledged, that was too good to be true.
14 In June 2007, JPMorgan’s Chief Risk Officer John Hogan
15 learned at a lunch with JPMorgan money manager Matt Zames
16 that “there is a well-known cloud over the head of Madoff
17 and that his returns are speculated to be part of a [P]onzi
18 scheme.” A 695 ¶ 119. Hogan asked a junior analyst to run
19 a Google search on Madoff, and made no further inquiries
20 when the search yielded no hard evidence.
21 Faced with “numerous indications of Madoff’s fraud,” in
22 the fall of 2008 JPMorgan redeemed $276 million of its
13
1 investments in Madoff’s feeder funds. A 705 ¶¶ 156-60; A
2 710 ¶ 178. But the company failed to tip off regulators or
3 other investors. Though JPMorgan was uniquely positioned to
4 put an end to Madoff’s fraud, it quietly continued
5 collecting its large fees.
6 UBS and Access. Defendants UBS AG6 (“UBS”) and Access
7 International Advisors LLC7 (“Access”) are sued for aiding
8 and abetting Madoff’s fraud by creating feeder funds and
9 collecting investments from abroad. UBS acted as sponsor,
10 manager, administrator, custodian, and primary banker of the
11 funds. UBS reaped at least $80 million in fees as it
12 facilitated investments in BLMIS, despite clear indicia of
13 fraud. The “prestigious name” of UBS was used “to
14 legitimize and attract money to Madoff’s fraud,” but UBS
6
“UBS” includes UBS AG, UBS (Luxembourg) S.A., UBS
Fund Services (Luxembourg) S.A., UBS Third Party Management
Company S.A., Roger Hartmann, Ralf Schroter, Rene Egger,
Bernd Stiehl, Alain Hondequin, and Hermann Kranz.
7
“Access” includes Access International Advisors LLC,
Access International Advisors Europe Limited, Access
International Advisors Ltd., Access Partners (Suisse) S.A.,
Access Management Luxembourg S.A., Access Partners S.A.,
Patrick Littaye, Claudine Magnon de la Villehuchet (in her
capacities as Executrix and sole beneficiary of the Will of
Thierry Magnon de la Villehuchet), Pierre Delandmeter, and
Theodore Dumbauld. The Trustee also sues feeder funds
created by UBS and Access such as Defendants Luxalpha SICA V
and Groupement.
14
1 agreed to “look the other way and to pretend that they were
2 truly ensuring the existence of assets and trades when in
3 fact they were not and never did.” A 916 ¶ 5.
4 UBS observed but ignored Madoff’s lack of transparency
5 and his uncanny ability to generate consistently high
6 returns, except insofar as UBS declined to invest its own
7 money in BLMIS or endorse Madoff’s funds to its clients.
8 In 2009, the Luxembourg regulator, the Commission de
9 Surveillance du Secteur Financier, indicated that the
10 failure of UBS to identify Madoff as a possible fraud was a
11 violation of Luxembourg law.
12 Access was also alerted to Madoff’s suspicious
13 investment activities. In 2006, internal managers at Access
14 became worried about the volume of options trades being
15 reported by Madoff, and hired an independent consultant to
16 investigate. The consultant concluded that Madoff could not
17 possibly have executed the volume of options or equities
18 trades he reported, and that his trading revealed “either
19 extremely sloppy errors or serious omissions” that suggest
20 he “doesn’t really understand the costs of the option
21 strategy.” A 977 ¶ 218 (emphasis removed). Access
22 concealed the consultant’s findings and continued active
15
1 recruitment of investors for Madoff’s feeder funds in order
2 to keep churning its fees.
3 Unicredit. Madoff’s fraud drew billions from abroad.
4 With the help of UniCredit Bank Austria AG (“Bank Austria”)
5 and 20:20 Medici AG (“Bank Medici”), one Sonja Kohn
6 established several Madoff feeder funds (the “Medici
7 Funds”). Together, they funneled nearly $3 billion into
8 BLMIS. UniCredit S.p.A. and its two subsidiaries, Pioneer
9 Alternative Investment Management Limited (“Pioneer”) and
10 Bank Austria (collectively, the “UniCredit entities”),
11 helped to promote the Medici Funds and thereby facilitated
12 the fraud.
13 The UniCredit entities and their affiliates made a lot
14 of money servicing the Medici funds: Bank Medici took more
15 than $15 million in fees; and BA Worldwide, more than $68
16 million. The UniCredit entities were well aware that
17 Madoff’s returns were highly suspicious, and that the extent
18 of BLMIS’s trading activities was facially impossible. Yet
19 they continued to aggressively market the Madoff feeder
20 funds to new customers while purporting to provide
21 oversight. Among the signs overlooked by the UniCredit
22 entities were Madoff’s failure to identify counterparties to
16
1 BLMIS’s options transactions, BLMIS’s atypical fee
2 structure, and Madoff’s impossibly high volume of
3 transactions. Shortly after Madoff’s arrest, a senior
4 research analyst at Pioneer wrote, “[w]e should be the
5 professionals protecting investors from this fraud . . .
6 [but] there is not one [due diligence] report in the files
7 except for one in May 2005.” A 136 ¶ 314 (brackets in
8 original).
9 HSBC. HSBC Bank plc (“HSBC”)8 established Madoff
10 feeder funds (at least eighteen in seven different
11 countries) that injected capital into the Ponzi scheme while
12 ignoring obvious warning signs. As custodian and
13 administrator of the funds, HSBC was required to hold the
14 fund assets and handle day-to-day operations. HSBC also
15 created derivative products, such as notes and swaps, to
16 increase the flow of investment. These funds fed at least
8
The HSBC Defendants include HSBC Bank plc, HSBC
Holdings plc, HSBC Securities Services (Luxembourg) S.A.,
HSBC Institutional Trust Services (Ireland) Limited, HSBC
Securities Services (Ireland) Limited, HSBC Institutional
Trust Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC
Securities Services (Bermuda) Limited, HSBC Bank (Cayman)
Limited, HSBC Private Banking Holdings (Suisse) S.A., HSBC
Private Bank (Suisse) S.A., HSBC Fund Services (Luxembourg)
S.A., and HSBC Bank Bermuda Limited.
17
1 $8.9 billion into Madoff’s scheme, a sum representing nearly
2 forty percent of BLMIS’s capital under management.
3 HSBC represented to customers that it exercised
4 supervision and control over fund assets, whereas BLMIS
5 itself took the role of custodian. Had HSBC performed
6 oversight diligently, it would have seen thousands of
7 instances in which Madoff’s purported trades exceeded the
8 total market volume of such trades on the given day.
9 Repeatedly, industry analysts and HSBC’s own due diligence
10 team openly questioned Madoff’s extraordinary success, lack
11 of transparency, and incredible trading volume.
12 In September 2005, HSBC commissioned KPMG LLP to detect
13 potential fraud in BLMIS’s operations. Resulting reports in
14 2006 and 2008 warned that BLMIS’s role as custodian of its
15 own funds posed a risk that the trades were “a sham in order
16 to divert client cash.” A 89 ¶ 168. Nonetheless, HSBC
17 continued to “enable[]” Madoff in order to reap a windfall.
18 A 35 ¶ 1. In sum, HSBC “engineered a labyrinth of hedge
19 funds, management companies, and service providers that, to
20 unsuspecting outsiders, seemed to compose a formidable
21 system of checks and balances,” yet, in reality, “it
22 provided different modes for directing money to Madoff while
23 avoiding scrutiny and maximizing fees.” A 36 ¶ 4.
18
1 Procedural History. On July 15, 2009, the Trustee
2 commenced an adversary proceeding in the United States
3 Bankruptcy Court for the Southern District of New York
4 against HSBC and thirty-six others, including UniCredit and
5 Pioneer.9 The Amended Complaint sought recovery of $2
6 billion in preferential or fraudulent transfers (Counts 1
7 through 19), and asserted four common law causes of action:
8 aiding and abetting fraud, aiding and abetting breach of
9 fiduciary duty, unjust enrichment, and money had and
10 received (collectively, the “common law claims”). These
11 common law claims sought $6.6 billion from HSBC and $2
12 billion from the remaining defendants. A contribution claim
13 was asserted under New York law.
14 On a motion by the UniCredit entities, the district
15 court withdrew the reference to the bankruptcy court, for
16 the limited purpose of deciding two threshold issues: (1)
17 the Trustee’s standing to assert the common law claims, and
18 (2) preemption of these claims by the Securities Litigation
19 Uniform Standards Act (“SLUSA”).
20 The common law claims and the contribution claim were
21 dismissed by Judge Rakoff in July 2011, on the grounds that
9
This proceeding consolidated two actions, one against
HSBC and one against UniCredit and Pioneer.
19
1 the Trustee was in pari delicto with the defendants, lacked
2 standing to assert the common law claims on customers’
3 behalf, and could not demonstrate a right to contribution.
4 See Picard v. HSBC Bank PLC, 454 B.R. 25, 37 (S.D.N.Y.
5 2011). The court did not reach the question whether SLUSA
6 bars the Trustee’s claims. Id.7 The Trustee’s adversary proceeding against JPMorgan was
8 commenced in December 2010. As in the proceedings against
9 HSBC and UniCredit, the Trustee asserted common law claims
10 seeking $19 billion for, inter alia, aiding and abetting
11 fraud, aiding and abetting breach of fiduciary duty, unjust
12 enrichment, and conversion.
13 The adversary proceeding against UBS followed. Also
14 named were Access, several of its affiliates, and two feeder
15 funds. Again, the Trustee asserted common law claims for
16 aiding and abetting fraud, aiding and abetting breach of
17 fiduciary duty, unjust enrichment, and conversion, among
18 others. Damages of approximately $2 billion were sought on
19 behalf of the customers of BLMIS (rather than BLMIS itself).
20 All Defendants (except Luxalpha and two individual
21 Defendants) moved to dismiss the common law claims and the
22 contribution claim. In November 2011, Judge McMahon granted
23 the motions. See Picard v. JPMorgan Chase & Co., 460 B.R.
201 84 (S.D.N.Y. 2011). Judge McMahon concluded (as did Judge
2 Rakoff) that the Trustee lacks standing to bring an action
3 on behalf of third parties and has no valid claim for
4 contribution. Id. at 106.
5 DISCUSSION
6 We review de novo a district court’s dismissal of
7 causes of action for failure to state a claim for relief or
8 lack of standing. See Fulton v. Goord, 591 F.3d 37, 41 (2d
9 Cir. 2009). Point I considers the Trustee’s claims as
10 asserted by him on behalf of BLMIS itself; Point II
11 considers claims asserted by the Trustee on behalf of
12 BLMIS’s customers.
13 I
14 We agree with the district courts that the Trustee’s
15 common law claims asserted on behalf of BLMIS are barred by
16 the doctrine of in pari delicto.
17 A
18 Under New York law,10 one wrongdoer may not recover
19 against another. See Kirschner v. KPMG LLP, 938 N.E.2d 941,
10
“In a bankruptcy proceeding, state law . . .
determines whether a right to sue belongs to the debtor or
to the individual creditors.” Wight v. BankAmerica Corp.,
219 F.3d 79, 86 (2d Cir. 2000) (citation and internal
quotation marks omitted). New York law governs here.
21
1 950 (N.Y. 2010). The principle that a wrongdoer should not
2 profit from his own misconduct “is . . . strong in New
3 York.” Id. at 964. The New York Appellate Division, First
4 Department, has long applied the doctrine of in pari delicto
5 to bar a debtor from suing third parties for a fraud in
6 which he participated. See Barnes v. Hirsch, 212 N.Y.S.
7 536, 539 (App. Div. 1st Dep’t 1925) (“The bankrupts could
8 not recover against these defendants for bucketing orders
9 because they were responsible for the illegal transaction
10 and parties to the fraud.”), aff’d, 152 N.E. 424 (N.Y.
11 1926).
12 A “claim against a third party for defrauding a
13 corporation with the cooperation of management accrues to
14 creditors, not to the guilty corporation.” Shearson Lehman
15 Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991)
16 (citing Barnes, 212 N.Y.S. at 537). The debtor’s misconduct
17 is imputed to the trustee because, innocent as he may be, he
18 acts as the debtor’s representative. See Wight v.
19 BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000)
20 (“[B]ecause a trustee stands in the shoes of the
21 corporation, the Wagoner rule bars a trustee from suing to
22 recover for a wrong that he himself essentially took part
22
1 in.”); accord Breeden v. Kirkpatrick & Lockhart LLP (In re
2 Bennett Funding Grp., Inc.), 336 F.3d 94, 99-100 (2d Cir.
3 2003) (applying Wagoner rule in the context of “the greatest
4 Ponzi scheme [then] on record” and holding that “the
5 defrauded investors and not the bankruptcy trustee” were
6 entitled to pursue malpractice claims against attorneys and
7 accountants arising from the fraud).11
8 Picard alleges that the Defendants were complicit in
9 Madoff’s fraud and facilitated his Ponzi scheme by providing
10 (well-paid) financial services while ignoring obvious
11 warning signs. These claims fall squarely within the rule
12 of Wagoner and the ensuing cases: Picard stands in the shoes
13 of BLMIS and may not assert claims against third parties for
14 participating in a fraud that BLMIS orchestrated.
15
11
See also Kirschner v. Grant Thornton LLP, No. 07
Civ. 11604 (GEL), 2009 WL 1286326, at *10 (S.D.N.Y. Apr. 14,
2009) (applying Wagoner rule to dismiss fraud and breach of
fiduciary claims where the debtor “participated in, and
benefitted from, the very wrong for which it seeks to
recover”), aff’d, 626 F.3d 673 (2d Cir. 2010); Hirsch v.
Arthur Andersen & Co., 72 F.3d 1085, 1094-95 (2d Cir. 1995)
(holding that even though “there [was] at least a
theoretical possibility that some independent financial
injury to the Debtors might be established,” the Wagoner
rule precluded standing “because of the Debtors’
collaboration with the defendants-appellees in promulgating
and promoting the Colonial Ponzi schemes”).
23
1 Picard’s scattershot responses are resourceful, but
2 they all miss the mark. He contends that a SIPA trustee is
3 exempt from the Wagoner rule, but adduces no authority. He
4 argues that the rationale of the in pari delicto doctrine is
5 not served here because he himself is not a wrongdoer; but
6 neither were the trustees in the cases cited above.12 He
7 contends that in pari delicto should not impede the
8 enforcement of securities laws, citing Bateman Eichler, Hill
9 Richards, Inc. v. Berner, 472 U.S. 299 (1985); but Bateman
10 Eichler is inapposite. See id. at 315-16 (holding that in
11 pari delicto would not prevent defrauded tippee from
12 bringing suit against defrauding tipper, at least absent
13 further inquiry into “relative culpabilities” of tippee and
14 tipper).13 He invokes the “adverse interest” exception,
12
Relatedly, he argues that in a typical bankruptcy in
pari delicto is designed to bar corporate malefactors,
including shareholders, from recovering, whereas in a SIPA
liquidation the trustee marshals assets for the benefit of
the customer property estate. Accordingly, there is no
similar concern here that funds collected by the trustee
would be distributed to wrongdoers. But, in Kirschner v.
KPMG LLP, the New York Court of Appeals declined to make an
exception to the in pari delicto doctrine despite the
trustee’s urging that proceeds would “benefit blameless
unsecured creditors . . . and shareholders.” Kirschner v.
KPMG LLP, 938 N.E.2d 941, 958 (N.Y. 2010).
13
Like the Supreme Court in Bateman Eichler, we
recently declined to apply in pari delicto to bar suit in a
private civil antitrust action, “where private actions play
24
1 which directs a court not to impute to a corporation the bad
2 acts of its agent when the fraud was committed for personal
3 benefit. See The Mediators, Inc. v. Manney (In re
4 Mediators, Inc.), 105 F.3d 822, 827 (2d Cir. 1997).
5 However, “this most narrow of exceptions” is reserved for
6 cases of “outright theft or looting or embezzlement . . .
7 where the fraud is committed against a corporation rather
8 than on its behalf.”14 Kirschner v. KPMG LLP, 938 N.E.2d
9 941, 952 (N.Y. 2010). It is not possible thus to separate
a significant role in the enforcement scheme.” Gatt
Commc’ns, Inc. v. PMC Assocs., L.L.C., 711 F.3d 68, 80 (2d
Cir. 2013) (dismissing action on threshold question of
antitrust standing). Here, in contrast, barring claims
brought by Madoff’s successor-in-interest would not preclude
his victims from bringing suit individually. See infra p.
58 n.29. In pari delicto does not apply to all wrongdoers;
the doctrine targets those who “actively participate in the
illegal scheme and who are substantially at fault.” Gatt
Commc’ns, 711 F.3d at 84 (Wesley, J., concurring). The
pleadings here leave us with no doubt that BLMIS--in whose
shoes the Trustee stands--bore at least “substantially equal
responsibility” for the injuries the Trustee now seeks to
redress. See Bateman Eichler, 472 U.S. at 310-11.
Accordingly, application of the rule in this context is well
established. See, e.g., Wagoner, 944 F.2d at 120; Wight,
219 F.3d at 87.
14
When, as here, principal and agent are “one and the
same . . . the adverse interest exception is itself subject
to an exception styled the ‘sole actor’ rule,” which
“imputes the agent’s knowledge to the principal
notwithstanding the agent’s self-dealing.” In re Mediators,
Inc., 105 F.3d at 827.
25
1 BLMIS from Madoff himself and his scheme. Finally, Picard
2 argues that the district courts should not have applied the
3 in pari delicto doctrine at the pleadings stage; but the New
4 York Court of Appeals has held otherwise. See id. at 947
5 n.3; see also Wagoner, 944 F.2d at 120. Early resolution is
6 appropriate where (as here) the outcome is plain on the face
7 of the pleadings.
8 B.
9 The Trustee’s claim for contribution is the only one
10 that may escape the bar of in pari delicto. See Barrett v.
11 United States, 853 F.2d 124, 127 n.3 (2d Cir. 1988)
12 (explaining that parties seeking contribution are
13 necessarily in pari delicto).15 The Trustee seeks
14 contribution for payments made to BLMIS customers under
15 SIPA, on the theory that the Defendants are joint
16 tortfeasors with BLMIS under New York law.
17
15
Some courts have suggested that Wagoner nevertheless
bars a contribution claim. See, e.g., Devon Mobile Commc’ns
Liquidating Trust v. Adelphia Commc’ns Corp. (In re Adelphia
Commc’ns Corp.), 322 B.R. 509, 529 (Bankr. S.D.N.Y. 2005);
Silverman v. Meister Seelig & Fein, LLP (In re Agape World,
Inc.), 467 B.R. 556, 580-81 (Bankr. E.D.N.Y. 2012). We need
not decide whether such a claim would survive a Wagoner
challenge because, as explained in text, there is no
contribution right under SIPA.
26
1 The New York statute provides that “two or more persons
2 who are subject to liability for damages for the same
3 personal injury, injury to property or wrongful death, may
4 claim contribution among them whether or not an action has
5 been brought or a judgment has been rendered against the
6 person from whom contribution is sought.” N.Y. C.P.L.R.
7 § 1401 (McKinney). Section 1401 “requires some form of
8 compulsion; that is, the party seeking contribution must
9 have been compelled in some way, such as through the entry
10 of a judgment, to make the payment against which
11 contribution is sought.” N.Y. State Elec. & Gas Corp. v.
12 FirstEnergy Corp., No. 3:03-CV-0438 (DEP), 2007 WL 1434901,
13 at *7 (N.D.N.Y. May 11, 2007) (emphasis added).
14 However, the SIPA payments for which Picard seeks
15 contribution were not compelled by BLMIS’s state law fraud
16 liability to its customers; his obligation to pay customers
17 their ratable share of customer property is an obligation of
18 federal law: SIPA. SIPA provides no right to contribution,
19 and it is settled in this Circuit that there is no claim for
20 contribution unless the operative federal statute provides
21 one. See Nw. Airlines, Inc. v. Transp. Workers Union of
22 Am., AFL-CIO, 451 U.S. 77, 97 n.38, 97-99 (1981); see also
27
1 Herman v. RSR Sec. Servs. Ltd., 172 F.3d 132, 144 (2d Cir.
2 1999) (affirming dismissal of New York state law
3 contribution claims for liability under the Fair Labor
4 Standards Act); KBL Corp. v. Arnouts, 646 F. Supp. 2d 335,
5 341 (S.D.N.Y. 2009) (“[A] plaintiff cannot use New York
6 State common law as an end-around to make a claim for
7 contribution that it could not make under the federal
8 statutory scheme.”); Lehman Bros., Inc. v. Wu, 294 F. Supp.
9 2d 504, 505 n.1 (S.D.N.Y. 2003) (“[W]hether contribution is
10 available in connection with a federal statutory scheme is a
11 question governed solely by federal law.”) (citation and
12 quotation marks omitted).
13 Picard emphasizes that he is not seeking contribution
14 for violations of SIPA or any other federal statute, but
15 that is beside the point. “The source of a right of
16 contribution under state law must be an obligation imposed
17 by state law.” LNC Invs., Inc. v. First Fid. Bank, 935 F.
18 Supp. 1333, 1349 (S.D.N.Y. 1996) (emphasis added). The
19 issue is therefore whether the payments made by the Trustee,
20 for which he is seeking contribution, are required by state
21 or federal law--an easy question.
22
28
1 The $800 million paid out to customers fulfilled an
2 obligation created by SIPA, a federal statute that does not
3 provide a right to contribution “either expressly or by
4 clear implication,” Texas Industries, Inc. v. Radcliff
5 Materials, Inc., 451 U.S. 630, 638 (1981). Unlike the
6 Bankruptcy Act, SIPA does not require customers to establish
7 a basis of liability as a prerequisite for the Trustee’s
8 disbursement obligation. The loss itself is enough. See 15
9 U.S.C. § 78fff-2(c) (the Trustee “shall allocate customer
10 property of the debtor . . . to customers of such debtor,
11 who shall share ratably in such customer property on the
12 basis and to the extent of their respective net equities”);
13 cf. Hill v. Day (In re Today’s Destiny, Inc.), 388 B.R. 737,
14 753-56 (Bankr. S.D. Tex. 2008) (holding that Texas law
15 governed contribution claim where debtor sought contribution
16 for obligations set forth in proofs of claim alleging fraud
17 under state law). Because the Trustee’s payment obligations
18 were imposed by a federal law that does not provide a right
19 to contribution, the district courts properly dismissed
20 these claims.
21
22
29
1 II
2 Having rejected the Trustee’s claims asserted on behalf
3 of BLMIS, we consider next whether the Trustee may assert
4 such claims on behalf of BLMIS’s customers. To proceed with
5 these claims, the Trustee must first establish his standing.
6 This he cannot do.
7 Standing is a “threshold question in every federal
8 case, determining the power of the court to entertain the
9 suit.” Warth v. Seldin, 422 U.S. 490, 498 (1975). Standing
10 depends, first, on whether the plaintiff has identified a
11 “case or controversy” between the plaintiff and the
12 defendants within the meaning of Article III of the
13 Constitution. Ass’n of Data Processing Serv. Orgs., Inc. v.
14 Camp, 397 U.S. 150, 152 (1970). “To have standing, ‘[a]
15 plaintiff must [1] allege personal injury [2] fairly
16 traceable to the defendant’s allegedly unlawful conduct and
17 [3] likely to be redressed by the requested relief.’”
18 Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1091 (2d Cir.
19 1995) (alterations in original) (quoting Allen v. Wright,
20 468 U.S. 737, 751 (1984)). In addition, the plaintiff must
21 comply with “prudential” limitations on standing, of which
22 the salient one here is that a party must “assert his own
30
1 legal rights and interests and cannot rest his claim to
2 relief on the legal rights or interests of third parties.”
3 Warth, 422 U.S. at 499.
4 We consider below Picard’s arguments that: (A) existing
5 Second Circuit precedent allows for third-party standing in
6 a SIPA liquidation; and (B) SIPA itself confers standing,
7 both by creating a bailment relationship between the Trustee
8 and the debtor’s customers, and by authorizing SIPC to
9 pursue subrogation claims on customers’ behalf.16
10 A
11 The implied prohibition in Article III against third-
12 party standing applies to actions brought by bankruptcy
13 trustees. In Caplin v. Marine Midland Grace Trust Co. of
14 N.Y., 406 U.S. 416 (1972), the Supreme Court ruled that
15 federal bankruptcy law does not empower a trustee to collect
16 money owed to creditors. That is because a bankruptcy
17 trustee is not empowered “to collect money not owed to the
18 estate”; the trustee’s proper task “is simply to collect and
16
In proceedings before one of the district courts,
the Trustee grounded his standing argument in large part on
Section 544(a) of the Bankruptcy Code, which gives a trustee
the rights of a hypothetical lien creditor. The court
considered this argument at length and ultimately rejected
it, see Picard v. JPMorgan Chase & Co., 460 B.R. 84, 92-97
(S.D.N.Y. 2011) (McMahon, J.), and the Trustee has abandoned
it on appeal.
31
1 reduce to money the property of the estates for which (he is
2 trustee).” Id. at 428-29 (citation and internal quotation
3 marks omitted). “[N]owhere in the statutory scheme is there
4 any suggestion that the trustee in reorganization is to
5 assume the responsibility of suing third parties” on behalf
6 of creditors. Id. at 428. This way, creditors can “make
7 their own assessment of the respective advantages and
8 disadvantages, not only of litigation, but of various
9 theories of litigation,” id. at 431; no consensus is needed
10 as to “the amount of damages to seek, or even on the theory
11 on which to sue,” id. at 432; and disputes over inconsistent
12 judgments and the scope of settlements can be avoided, id.
13 at 431-32.
14 Our Court has hewed to this principle. In Wagoner, the
15 misappropriation of funds by the owner and president of the
16 debtor company was facilitated by stock transactions
17 effected through a third-party brokerage firm. Shearson
18 Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir.
19 1991). The trustee’s claim that the brokerage aided and
20 abetted the fraud was dismissed on summary judgment, and we
21 affirmed, observing that “[i]t is well settled that a
22 bankruptcy trustee has no standing generally to sue third
32
1 parties on behalf of the estate’s creditors, but may only
2 assert claims held by the bankrupt corporation itself.” Id.3 at 118 (citing Caplin, 406 U.S. at 434); see also Hirsch v.
4 Arthur Andersen & Co., 72 F.3d 1085, 1094 (2d Cir. 1995)
5 (holding that Chapter 11 trustee had no standing to bring
6 creditor claims against accountants and law firms that had
7 provided services to the debtor, a real estate partnership
8 operated as a Ponzi scheme); The Mediators, Inc. v. Manney
9 (In re Mediators, Inc.), 105 F.3d 822, 826 (2d Cir. 1997)
10 (affirming dismissal of breach of fiduciary duty claim
11 brought by creditors’ committee functioning as bankruptcy
12 trustee, against bank and law firm for allegedly aiding and
13 abetting debtor’s fraud).
14 The Trustee makes little effort to explain why Caplin
15 and its progeny do not control. Instead, he relies on a
16 single Second Circuit case that was overruled by the Supreme
17 Court, and on dicta in another. Apart from lacking
18 precedential force, both cases are readily distinguishable.
19 1
20 In Redington v. Touche Ross & Co., 592 F.2d 617 (2d
21 Cir. 1978), rev’d, 442 U.S. 560 (1979), a SIPA trustee sued
22 the accountant of an insolvent brokerage for violations of
33
1 record-keeping provisions of Section 17(a) of the Securities
2 Exchange Act, as well as violations of state common law.
3 The district court dismissed the Section 17(a) claim for
4 lack of an implied private right of action, and concluded
5 that it lacked jurisdiction over the common law claims. See
6 Redington v. Touche Ross & Co., 428 F. Supp. 483, 492-93
7 (S.D.N.Y. 1977).
8 In reversing, we held that Section 17(a) did create an
9 implied private right of action. See Redington v. Touche
10 Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 56011 (1979). We then considered the trustee’s claim that “[h]e
12 is responsible for marshalling and returning [customer]
13 property; to the extent that he is unable to do so, he
14 argues, he may sue on behalf of the customer/bailors any
15 wrongdoer whom they could sue themselves.” Id. at 625.
16 Relying on the Federal Rules of Civil Procedure, Redington
17 concluded that “the Trustee, as bailee, is an appropriate
18 real party in interest,” id., and that “SIPC is subrogated
19 to the right of action implied in section 17 in favor of
20 brokers’ customers against third parties such as
21 accountants.” Id. at 624. Redington would favor Picard’s
22 case, except that Redington is no longer good law.
34
1 The Supreme Court granted certiorari in Redington to
2 decide whether Section 17(a) created an implied right of
3 action and whether a SIPA trustee and SIPC had standing to
4 assert that claim. See Touche Ross & Co. v. Redington, 442
5 U.S. 560 (1979). The Court held that no private right of
6 action existed under Section 17(a), id. at 579, and
7 therefore considered it “unnecessary to reach” the standing
8 issue, id. at 567 n.9. The case was remanded to consider
9 whether an alternative basis for jurisdiction existed, but
10 none was found. See Redington v. Touche Ross & Co., 612
11 F.2d 68, 70 (2d Cir. 1979).
12 Picard argues that the Supreme Court left the standing
13 question “untouched” because the opinion was “limited to a
14 merits-based reversal on the issue of whether a private
15 right of action existed under section 17(a).” Appellant Br.
16 31 (11-5044). However, the question of who may assert a
17 right of action is presented ordinarily only if a right of
18 action has been found to exist. See Nat. R.R. Passenger
19 Corp. v. Nat. Assoc. of R.R. Passengers, 414 U.S. 453, 456
20 (1974) (“[T]he threshold question clearly is whether the
21 Amtrak Act . . . creates a [private] cause of action . . .
22 for it is only if such a right of action exists that we need
35
1 consider whether the respondent had standing to bring the
2 action[.]”).17 The Supreme Court’s reversal on the
3 threshold question drained the Second Circuit Redington
4 opinion of force on other questions. See Newdow v. Rio
5 Linda Union Sch. Dist., 597 F.3d 1007, 1041 (9th Cir. 2010)
6 (“[W]hen the Supreme Court reverses a lower court’s decision
7 on a threshold question,” the Court “effectively holds the
8 lower court erred by reaching [other issues].”).
9 Following the Supreme Court’s reversal, this Court
10 vacated its original judgment on the ground that subject
11 matter jurisdiction was lacking. See Order, Redington v.
12 Touche Ross, Nos. 77-7183, 77-7186 (2d Cir. Aug. 8, 1979);
13 Appellee Br. Addendum A (11-5207). As the Trustee concedes,
14 vacatur dissipates precedential force. See Appellant Br. 30
17
The Trustee attempts to distinguish National
Railroad on the ground that that case involved a single
federal statute without additional claims, so a
determination that the Amtrak Act did not create a private
right of action ended the case. Because Redington also
involved state law claims over which the Court exercised
pendent jurisdiction, Picard reasons, “a determination on
the existence of a private right of action tied to a federal
statute does not end the court’s inquiry into a trustee’s
standing to assert state common law claims.” Appellant Br.
36 (11-5044). In Redington, however, we did not consider
specifically whether the trustee had standing to bring
claims under common law. As explained in text, Redington‘s
standing analysis was entirely dependent on the Court’s
antecedent ruling that the statute created an implied
private right of action--a ruling that was later overturned.
36
1 (11-5044). See also O’Connor v. Donaldson, 422 U.S. 563,
2 577 n.12 (1975) (observing that vacatur “deprives [the]
3 court’s opinion of precedential effect”); Brown v. Kelly,
4 609 F.3d 467, 476-77 (2d Cir. 2010).
5 Since Redington, at least six judges in this Circuit
6 have questioned or rejected third-party claims brought by
7 SIPA trustees, beginning with Judge Pollack in Mishkin v.
8 Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 556-58
9 (S.D.N.Y. 1990).18 See also Picard v. JPMorgan Chase & Co.,
10 460 B.R. 84, 100-101 (S.D.N.Y. 2011) (McMahon, J.); Picard
11 v. HSBC Bank PLC, 454 B.R. 25, 33-34 (S.D.N.Y. 2011)
12 (Rakoff, J.); Picard v. Taylor (In re Park South Sec., LLC),
13 326 B.R. 505, 516 (Bankr. S.D.N.Y. 2005) (Drain, J.);
14 Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co., Inc.),
15 280 B.R. 794, 804 (Bankr. S.D.N.Y. 2002) (Beatty, J.); SIPC
16 v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 653 (S.D.N.Y. 1999)
17 (Preska, J.), rev’d on other grounds, 222 F.3d 63 (2d Cir.
18 2000).
19
18
In a hearing in the Mishkin case, Judge Pollack
concluded, as we do, that Redington “was reversed in all
respects not on other grounds” and “does not stand as the
law of this circuit.” SPA 17 (11-5175).
37
1 Yet Redington has enjoyed something of a half-life,
2 with several courts (including this one) assuming without
3 deciding that Redington retains residual force.19 Redington
4 should be put to rest; it has no precedential effect.
5 Even if Redington retained some persuasive value, it
6 would not decide this case. First, Redington considered
7 chiefly whether the trustee and SIPC had standing to bring a
8 cause of action under Section 17 of the Exchange Act; the
9 opinion said nothing about a SIPA trustee’s ability to
10 orchestrate mass tort actions against third parties. See
11 Redington v. Touche Ross & Co., 592 F.2d 617, 618 (2d Cir.
12 1978), rev’d, 442 U.S. 560 (1979) (“[W]e are presented with
13 the question whether a private cause of action exists under
14 section 17 of the Securities Exchange Act of 1934 against
19
Assuming that Redington was still good law, Judges
Drain and Beatty instead rejected SIPA trustees’ standing
arguments on the ground that only SIPC, not a SIPA trustee,
could enforce its rights of subrogation. See In re Park
South Sec., LLC, 326 B.R. at 516; In re A.R. Baron & Co.,
Inc., 280 B.R. at 804. In BDO Seidman, LLP, Judge Preska
held that although Mishkin‘s interpretation of SIPC’s
subrogation power was “more faithful to the letter and
purpose of the Act,” she was nonetheless “bound by Redington
to find that SIPC has standing to bring suit.” 49 F. Supp.
2d at 653. On appeal, this Court “assume[d], without
deciding, that . . . SIPC has standing as the customers’
subrogee,” SIPC v. BDO Seidman, LLP, 222 F.3d 63, 69 (2d
Cir. 2000), and ultimately dismissed its claims on
substantive grounds, id. at 71-76.
38
1 accountants who prepare misleading statements of a broker’s
2 financial affairs, and if so, who may maintain such an
3 action.”). Second, our holding in Redington turned, in
4 part, on an analysis of Fed. R. Civ. P. 17(a), which sets
5 forth rules concerning real parties in interest, and which
6 has no application here. See id. at 625; see also infra p.
7 51 n.25. Third, Redington involved claims against a single
8 accounting firm for a few discrete instances of alleged
9 misconduct (the preparation of misleading financial
10 statements). As a result, the policy concerns we express
11 below (see infra pp. 59-69) would have been considerably
12 diminished--and, indeed, were not even addressed by the
13 Court. Fourth, and finally, in Redington the brokerage firm
14 was not complicit in the wrongdoing, but rather “an entity
15 distinct from its conniving officers [that] was directly
16 damaged by Touche Ross’ unsatisfactory audit.” 592 F.2d at17 620. The Redington Court therefore did not have occasion to
18 consider whether the doctrine of in pari delicto barred all
19 or part of the suit. In sum, Redington is both non-binding
20 and inapposite.
21
22
23
39
1 2
2 The Trustee relies on St. Paul Fire & Marine Insurance
3 Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989), for the
4 proposition that a trustee may assert creditors’ claims if
5 they are generalized in nature, and not particular to any
6 individual creditor. However, the holding of that case has
7 no application here.
8 PepsiCo had been guarantor of bonds issued by a
9 subsidiary that later was acquired by a subsidiary of Banner
10 Industries. When the (later) merged entity defaulted on the
11 bonds, PepsiCo sued Banner, alleging diversion of assets and
12 alter ego. The merged entity went bankrupt, and the trustee
13 sued Banner for misappropriation. We ruled that the
14 trustee--and not PepsiCo--could pursue Banner because Ohio
15 law allowed a subsidiary to assert an alter ego claim
16 against its parent, so that “[t]he cause of action therefore
17 becomes property of the estate of a bankrupt subsidiary, and
18 is properly asserted by the trustee in bankruptcy.” Id. at
19 703-04.
20 Picard directs us to a passage in St. Paul--stating
21 that a trustee may bring a claim if the “claim is a general
22 one, with no particularized injury arising from it, and if
40
1 that claim could be brought by any creditor of the debtor,”
2 id. at 701--and contends that the third-party claims here
3 are common to all customers because all customers were
4 similarly injured by Madoff’s fraud and the Defendants’
5 facilitation. This argument is flawed on many levels:
6 • St. Paul decided the “specific question” whether a
7 creditor may bring an alter ego claim against the debtor’s
8 parent when the debtor itself also possesses such a claim.
9 Id. at 699. But Picard seeks to assert claims that are
10 property only of the creditors, not of the debtor.
11 • The Trustee’s broad reading of St. Paul would
12 bring the Court’s holding into conflict with a line of cases
13 that came before and after it. As discussed supra pp. 32-
14 34, it is settled that a trustee may not assert creditors’
15 claims against third parties. See, e.g., Shearson Lehman
16 Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991). And,
17 of course, St. Paul could not alter the Supreme Court’s
18 ruling in Caplin. Picard’s argument thus conflicts with
19 Supreme Court and Second Circuit precedent. See generally
20 In re Stanwich Fin. Servs. Corp., 317 B.R. 224, 228 n.4
21 (Bankr. D. Conn. 2004) (highlighting this tension).
22
41
1 • The language cited by Picard from St. Paul is not
2 a pronouncement about third-party standing; it voices the
3 maxim that only a trustee, not creditors, may assert claims
4 that belong to the bankrupt estate. As St. Paul elsewhere
5 states: “‘[T]he Trustee in bankruptcy has standing to
6 represent only the interests of the debtor corporation.’
7 Our decision today goes no further than to say that causes
8 of action that could be asserted by the debtor are property
9 of the estate and should be asserted by the trustee.” St.
10 Paul, 884 F.2d at 702 n.3 (internal citation omitted)
11 (quoting Bloor v. Carro, Spanbock, Londin, Rodman & Fass,
12 754 F.2d 57, 62 n.4 (2d Cir. 1985)). As illustrated by St.
13 Paul, when a creditor seeks relief against third parties
14 that pushed the debtor into bankruptcy, the creditor is
15 asserting a derivative claim that arises from harm done to
16 the estate. Judge Posner described this distinction:
17 The point is simply that the trustee is confined
18 to enforcing entitlements of the corporation. He
19 has no right to enforce entitlements of a
20 creditor. He represents the unsecured creditors
21 of the corporation; and in that sense when he is
22 suing on behalf of the corporation he is really
23 suing on behalf of the creditors of the
24 corporation. But there is a difference between a
25 creditor’s interest in the claims of the
26 corporation against a third party, which are
27 enforced by the trustee, and the creditor’s own
28 direct--not derivative--claim against the third
42
1 party, which only the creditor himself can
2 enforce.
3
4 Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994).
5 See generally Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863
6 A.2d 772, 792 (Del. Ch. 2004).
7 • The customers’ claims against the Defendants are
8 not “common” or “general.” A debtor’s claim against a third
9 party is “general” if it seeks to augment the fund of
10 customer property and thus affects all creditors in the same
11 way. Picard, however, seeks to assert claims on behalf of
12 thousands of customers against third-party financial
13 institutions for their handling of individual investments
14 made on various dates in varying amounts. The Defendants’
15 alleged wrongful acts, then, could not have harmed all
16 customers in the same way.20
20
A recent case arising out of the BLMIS bankruptcy
provides a useful contrast. In Fox v. Picard (In re
Madoff), 848 F. Supp. 2d 469 (S.D.N.Y. 2012), the district
court relied on St. Paul in holding that certain Madoff
customers could not pursue fraudulent transfer claims “that
were the property of the BLMIS estate.” Id. at 478. The
customer claims were “duplicative and derivative of the
Trustee’s fraudulent transfer claim.” Id. at 479 n.2.
Accordingly, the court found the claims to be “general” in
the sense articulated in St. Paul, in that they arose from
“a single set of actions that harmed BLMIS and all BLMIS
customers in the same way.” Id. at 480. Here, however, the
customers’ claims are not derivative of claims held by the
BLMIS estate.
43
1 B
2 The Trustee attempts to blunt the force of Caplin and
3 its progeny by arguing that a SIPA liquidation is unique and
4 is therefore not controlled by precedent under the
5 bankruptcy code. He advances two theories for why a SIPA
6 trustee enjoys standing to assert third-party claims.
7 1
8 Picard contends that, for SIPA purposes, the customers
9 of a failed brokerage are bailors, and that he--acting as
10 bailee--“has a sufficient possessory interest to permit him
11 to ‘recover for the wrongful act of a third party resulting
12 in the loss of, or injury to, the subject of the bailment.’”
13 United States v. Perea, 986 F.2d 633, 640 (2d Cir. 1993)
14 (quoting Rogers v. Atl., Gulf & Pac. Co., 107 N.E. 661, 664
15 (N.Y. 1915)). We disagree.
16 First, the statute is not written or cast in terms of
17 bailment. “To the extent consistent with the provisions of
18 this chapter, a liquidation proceeding shall be conducted in
19 accordance with, and as though it were being conducted under
20 [the Bankruptcy Code].” 15 U.S.C. § 78fff(b). As a general
21 rule, SIPA vests trustees with “the same powers and title
22 with respect to the debtor and the property of the debtor
44
1 . . . as a trustee in a case under Title 11.” 15 U.S.C. §
2 78fff-1(a). True, a SIPA trustee has some powers not
3 conferred on a trustee under Title 11. Most notably, SIPA
4 creates a fund of customer property that is separate from
5 the debtor estate and that has priority over other
6 creditors’ claims, and authorizes the trustee to ratably
7 distribute those funds based on customers’ net equity. See
8 15 U.S.C. § 78fff–2(c)(1)(B); In re Bernard L. Madoff
9 Investment Secs., 654 F.3d 229, 231 (2d Cir. 2011), cert.
10 denied, 133 S. Ct. 25 (2012). But the statute does not
11 confer upon SIPA trustees a power, denied all other
12 bankruptcy trustees, to sue third parties on claims that
13 belong to persons other than the estate. Nowhere does the
14 statute reference bailment, or characterize customers as
15 “bailors” or trustees as “bailees,” or in any way indicate
16 that the trustee is acting as bailee of customer property.
17 Picard alternatively invokes the principle of bailment
18 under the common law. This is dubious: courts are careful
19 to avoid overlaying common law principles onto a statutory
20 framework, even when (unlike here) the statute makes clear
21 reference to common law. See Moore v. PaineWebber, Inc.,
22 189 F.3d 165, 179-80 (2d Cir. 1999) (“That the statute . . .
45
1 borrow[s] in part from the common law should not mislead us:
2 it remains the statute and its purpose that governs.”).
3 This caution is especially apt here because the statute
4 creates a ramified scheme that makes no mention of common
5 law.
6 In any event, the analogy to the common law of bailment
7 is flawed from start to finish. A bailment is “a delivery
8 of personalty for some particular purpose, or on mere
9 deposit, upon a contract express or implied, that after the
10 purpose has been fulfilled it will be redelivered to the
11 person who delivered it, or otherwise dealt with according
12 to that person’s directions, or kept until it is reclaimed.”
13 9 N.Y. Jur. 2d Bailments and Chattel Leases § 1 (West 2013).
14 Even assuming that the customers’ investments could be
15 deemed bailed property, the only delivery that took place
16 was when customers made their investments, either in BLMIS
17 directly, or through the feeder funds. See Pattison v.
18 Hammerstein, 39 N.Y.S. 1039, 1040 (App. Div. 1st Dep’t
19 1896); see also United States v. $79,000 in Account No.
20 2168050/6749900 at Bank of N.Y., 96 CIV. 3493 (MBM), 1996 WL
21 648934, at *6 (S.D.N.Y. Nov. 7, 1996) (“Delivery to the
22 bailee is required to create a bailment.”). So: any
46
1 supposed bailment pre-dated Picard’s appointment; he was not
2 entrusted with any customer property until after it had been
3 impaired; and he never had control over the missing funds
4 that he now seeks to recoup. He therefore is not the proper
5 party to bring such an action. See 9 N.Y. Jur. 2d Bailments
6 and Chattel Leases § 115 (West 2013) (explaining that bailee
7 may only “bring an action to recover for the loss of or
8 injury to the bailed property while in his or her
9 possession”).21
10 Moreover, Picard is not seeking to recover specific
11 bailments for return to individual bailors. See 9 N.Y. Jur.
12 2d Bailments and Chattel Leases § 82 (West 2013) (“One of
13 the most important rights of the bailor is that, on the
14 termination of the bailment, the bailor will return to him
15 or her the identical thing bailed . . . .”). Unlike
16 “customer name securities,” which are separately held and
17 returned to individual customers outside the normal
18 distribution scheme,22 Picard’s claims are intended to
21
Judge McMahon likened the Trustee’s position to that
of a parking garage attendant who is handed the keys to a
car that was recently in an accident and decides to sue the
culpable party on the owner’s behalf. See Picard v.
JPMorgan Chase & Co., 460 B.R. 84, 104-05 (S.D.N.Y. 2011).
22
See 15 U.S.C. § 78lll(4) (excluding “customer name
securities delivered to the customer” from definition of
47
1 augment the general fund of customer property so that it can
2 be distributed ratably based on customers’ net equity. This
3 arrangement is not an analog to a bailment, in which the
4 bailee is entrusted with an item that is to be recovered by
5 the bailor at some later time.
6 SIPC urges that we view the transaction as though
7 BLMIS, not the Trustee, acted as the bailee of customer
8 property, and that the Trustee is simply acting on BLMIS’s
9 behalf to recover the bailed property. The short answer is
10 that Madoff (and, by extension, BLMIS) took the investment
11 money from the customers in order to defraud them--and a
12 thief is not a bailee of stolen property. See Pivar v.
13 Graduate Sch. of Figurative Art of the N.Y. Acad. of Art,
14 735 N.Y.S. 2d 522, 522 (App. Div. 1st Dep’t 2002) (holding
15 that a bailment relationship arises if the bailee takes
customer property); see also In re New Times Sec. Servs.,
Inc., 371 F.3d 68, 72-73 (2d Cir. 2004). This contrast, and
its ramifications, are illuminated by SIPC’s own statements
to Congress regarding the passage of the 1978 amendments to
SIPA. SIPC’s then-Chairman, Hugh F. Owens, explained that
customer name securities “will be treated, in short, as
though they are not part of the debtor’s estate, but merely
held by the debtor as bailee”--implying that most other
commingled property, such as cash, would simply become part
of the debtor’s estate. SIPA Amendments: Hearings on H.R.
8331 Before the Subcomm. on Sec., Comm. on Banking, Hous.
and Urban Affairs, 95th Cong. 41-42 (1978) (Statement by
Hugh F. Owens, Chairman of SIPC).
48
1 “lawful possession” of property “without present intent to
2 appropriate”).
3 Madoff’s commingling of customer funds also defeats any
4 analogy to bailment. Notwithstanding Madoff’s pretense, he
5 failed to maintain customers’ investments in separate named
6 accounts. He deposited all customer funds into a general
7 account (the 703 Account) and distributed those new
8 investments to earlier customers in lieu of actual returns.
9 This arrangement, which enabled the fraud, made a bailment
10 impossible. See Peoples Westchester Sav. Bank v. F.D.I.C.,
11 961 F.2d 327, 330 (2d Cir. 1992) (distinguishing special
12 accounts from general accounts); see also United States v.
13 Khan, No. 97-6083, 1997 WL 701366, at *2 (2d Cir. 1997)
14 (holding that a deposit into a general bank account
15 “destroys a potential bailment” under New York law).23
16
23
“With a few exceptions, such as commingled fungible
goods in a warehouse, the general rule is that the bailee
can only discharge his or her liability to the bailor by
returning the identical thing received, in its original or
an altered form, according to the terms of the bailment.” 9
N.Y. Jur. 2d Bailments and Chattel Leases § 84 (West 2013).
Rahilly v. Wilson, a case relied on by SIPC, is not to the
contrary. See Rahilly v. Wilson, 20 F. Cas. 179, 182 (Cir.
Ct. D. Minn. 1873) (comparing commingled bales of wheat to
“an ordinary general deposit of money in a bank” and holding
that no bailment had taken place).
49
1 SIPC attempts to obviate these difficulties by relying
2 on SEC Rule 15c, which establishes bookkeeping segregation
3 requirements for brokers. 17 C.F.R. § 240.15c3-3. Judge
4 Rakoff was “mystified” by this argument, Picard v. HSBC Bank
5 PLC, 454 B.R. 25, 32 (S.D.N.Y. 2011), as are we.
6 Rule 15c requires brokers to maintain a minimum cash
7 balance in a reserve account and segregate all such cash for
8 customers’ benefit. See 17 C.F.R. § 240.15c3-3. It also
9 “specifically contemplates the commingling of customer
10 monies and the lending of customer securities.” Levitin v.
11 PaineWebber, Inc., 159 F.3d 698, 706 (2d Cir. 1998).
12 Whatever Rule 15c may do, it does not confer power on a SIPA
13 trustee to sue on behalf of customers. First, the Rule is
14 not a part of SIPA. Second, such a rule would exceed the
15 scope of agency rule-making. See generally Alexander v.
16 Sandoval, 532 U.S. 275, 291 (2001) (“Language in a
17 regulation may invoke a private right of action that
18 Congress through statutory text created, but it may not
19 create a right that Congress has not.”). In any event, the
20 Rule does not suggest that the broker (or the Trustee)
21 serves as a bailee of customer property, or that the Trustee
22 may assert claims on behalf of customers.
50
1 Finally, SIPC and the Trustee infer a bailment
2 relationship from federal common law and the Federal Rules
3 of Civil Procedure. The inferences are strained at best.
4 Federal common law, which does not speak to the powers of a
5 SIPA trustee, offers no useful insight.24 Nor do the
6 Federal Rules of Civil Procedure.25
7 2
8 The Trustee argues that, because SIPC advanced funds to
9 customers at the outset of the liquidation, SIPC is
24
SIPC suggests that it is appropriate to resort to
federal common law where a significant conflict exists
between state and federal law and where the need for
uniformity in the treatment of brokerage customers is
paramount. But no legal authority is offered to support the
application of federal common law here. And there is no
evident conflict between New York bailment law (on the one
hand) and (on the other) SIPA, Rule 15c, or some broader
federal policy.
25
The Trustee invokes Rule 17, which allows a bailee
to sue “in [his] own name[] without joining the person for
whose benefit the action is brought.” Fed. R. Civ. P.
17(a)(1). But, as discussed in text, the trustee is not a
bailee. Additionally, Rule 17(a), like all rules prescribed
by the Supreme Court, may not abridge, enlarge, or otherwise
modify substantive rights. See 28 U.S.C. § 2072(b);
Stichting Ter Behartiging Van de Belangen Van
Oudaandeelhouders In Het Kapitaal Van Saybolt Int’l B.V. v.
Schreiber, 407 F.3d 34, 49 (2d Cir. 2005) (“The procedural
mechanisms set forth in Rule 17(a) for ameliorating real
party in interest problems may not . . . be employed to
expand substantive rights.”). It therefore cannot provide
an independent basis for standing. See generally Natural
Res. Def. Council, Inc. v. EPA, 481 F.2d 116, 121 (10th Cir.
1973).
51
1 subrogated to those customers’ claims against the
2 Defendants; SIPC therefore may assert those claims as
3 subrogee; and Picard is authorized to enforce that right on
4 SIPC’s behalf. But SIPC is a creature of statute, and
5 neither the plain language of the statute, nor its
6 legislative history, supports the Trustee’s position.
7 True, a SIPA trustee (unlike a trustee in bankruptcy),
8 advances money to pay claims. The statute takes this fact
9 into account by subrogating SIPC to customers’ net equity
10 claims to the extent of the advances they received. But it
11 goes no further.
12 The Trustee’s subrogation theory is premised in
13 § 78fff-3(a):
14 To the extent moneys are advanced by SIPC to the
15 trustee to pay or otherwise satisfy the claims of
16 customers, in addition to all other rights it may
17 have at law or in equity, SIPC shall be subrogated
18 to the claims of such customers with the rights
19 and priorities provided in this chapter, except
20 that SIPC as subrogee may assert no claim against
21 customer property until after the allocation
22 thereof to customers as provided in section 78fff-
23 2(c) of this title.
24
25 15 U.S.C. § 78fff-3(a). It is undisputed that the phrase
26 “claims of customers” refers (as throughout the statute) to
27 customers’ net equity claims against the estate. See
28 generally In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d
521 229, 233 (2d Cir. 2011), cert. denied, 133 S. Ct. 25 (2012).
2 SIPA thus allows only a narrow right of subrogation--for
3 SIPC to assert claims against the fund of customer property
4 and thereby recoup any funds advanced to customers once the
5 SIPA trustee has satisfied those customers’ net equity
6 claims.
7 The Trustee urges us to conclude that § 78fff-3(a) does
8 more--much more--by creating a right of subrogation that
9 allows SIPC (and, by extension, the Trustee) to step into
10 customers’ shoes and to initiate and control litigation on
11 their behalf, against any number of defendants, until SIPC
12 has been repaid in full. As we emphasized earlier, SIPA
13 grants trustees the “same powers and title with respect to
14 the debtor and the property of the debtor” as a Title 11
15 trustee, 15 U.S.C. § 78fff-1(a), and the Supreme Court has
16 squarely rejected attempts by Title 11 trustees to capture
17 such litigation, see Caplin v. Marine Midland Grace Trust
18 Co., 406 U.S. 416, 428 (1972). As a final resort, the
19 Trustee relies on a catch-all provision included in the 1978
20 amendments to SIPA, which states that the subrogation rights
21 afforded by § 78fff-3(a) should not be read to diminish “all
22 other rights [SIPC] may have at law or in equity.” 15
53
1 U.S.C. § 78fff-3(a). From here, the Trustee claims an
2 implied right of equitable subrogation, “the principle by
3 which an insurer, having paid losses of its insured, is
4 placed in the position of its insured so that it may recover
5 from the third party legally responsible for the loss.”
6 Winkelmann v. Excelsior Ins. Co., 650 N.E.2d 841, 843 (N.Y.
7 1995). He thus claims a wide grant of authority to initiate
8 class-action lawsuits and assert any number of tort claims
9 against third parties on customers’ behalf.26 This is a
10 long, long reach.
11 There is no sign that Congress intended an expansive
12 increment of power to SIPA trustees. In 1973, the SIPC
13 chairman appointed a Special Task Force to consider possible
14 amendments to the 1970 Act. The resulting July 1974 report
15 separately listed its “major policy recommendations” and its
16 proposed “technical refinements.” See Report to the Board
17 of Directors of SIPC of the Special Task Force to Consider
18 Possible Amendments to SIPA, Letter of Transmittal (July 31,
19 1974). Recommendation II.A.9, deemed a “Major Policy
20 Recommendation,” states that “claims of SIPC as subrogee
21 (except as otherwise provided), should be allowable only as
26
We use the term “class-action lawsuits” loosely
here, without taking a position on the SLUSA question.
54
1 claims against the general estate.” Id. at 12 (emphasis
2 added); see also SIPA Amendments of 1975: Hearings on H.R.
3 8064 Before the Subcomm. on Consumer Protection and Fin. of
4 the H. Comm. on Interstate and Foreign Commerce, 94th Cong.
5 64 (1976) (hereinafter “Hearings on H.R. 8064”).
6 Notably, Caplin was decided in 1972, before the Task
7 Force report and six years before Congress amended § 78fff-
8 3(a) to include “all other rights [SIPC] may have at law or
9 in equity.” If Congress sought to exempt SIPA trustees from
10 Caplin’s rule and expand SIPC’s subrogation rights to tort
11 actions against third parties, we would expect such intent
12 to be manifested in the statutory wording and in the
13 record.27
14 The wording cited by Picard was proposed by SIPC itself
15 as a “Minor Substantive or Technical Amendment[]” in order
16 to “make clear that SIPC’s subrogation rights under the 1970
17 Act are cumulative with whatever rights it may have under
18 other State or Federal laws.” Hearings on H.R. 8064, 94th
27
Caplin was undoubtedly on the radar of legislators
at the time, as an earlier version of Section 544 of the
Bankruptcy Code introduced with the 1978 amendments
contained a provision intended to overrule Caplin. See In
re Ozark Rest. Equip. Co., Inc., 816 F.2d 1222, 1227 n.9
(8th Cir. 1987). Significantly, this provision was deleted
prior to enactment. Id.55
1 Cong. 197, 199 (1976) (Memorandum of the Securities Investor
2 Protection Corporation in Regard to Certain Comments
3 Concerning H.R. 8064). Congress “does not alter the
4 fundamental details of a regulatory scheme in vague terms or
5 ancillary provisions--it does not . . . hide elephants in
6 mouseholes.” Whitman v. Am. Trucking Assocs., Inc., 531
7 U.S. 457, 468 (2001).
8 The Trustee adduces rules of insurance law to justify
9 his claim, an analogy with some intuitive appeal: Principles
10 of equity generally permit subrogees wide scope to sue
11 third-party tortfeasors, a claim that arises most commonly
12 with insurance. See, e.g., Winkelmann, 650 N.E.2d at 843.
13 But this argument succumbs to the same critique as
14 Picard’s bailment theory: We avoid engrafting common law
15 principles onto a statutory scheme unless Congress’s intent
16 is manifest. See supra p. 46. The clearest Congressional
17 intent here is that we should treat SIPA as a bankruptcy
18 statute, not as an insurance scheme. “SIPA and FDIA are
19 independent statutory schemes, enacted to serve the unique
20 needs of the banking and securities industries,
21 respectively.”28 SIPC v. Morgan, Kennedy & Co., 533 F.2d
28Congress rejected some early versions of the SIPA
bill “which were patterned on FDIA and which extended
56
1 1314, 1318 (2d Cir. 1976). We have since warned against
2 oversimplified comparisons between insurance law and federal
3 statutory law: “While this Court has referred to SIPC as
4 providing a form of public insurance, it is clear that the
5 obligations imposed on an insurance provider under state law
6 do not apply to this congressionally-created nonprofit
7 membership corporation.” In re Bernard L. Madoff Inv. Sec.
8 LLC, 654 F.3d 229, 239 (2d Cir. 2011), cert. denied, 133 S.
9 Ct. 25 (2012) (internal citations and quotation marks
10 omitted).
11 Relatedly, Picard argues under principles of equity
12 that unless he can spearhead the litigation on behalf of
13 defrauded customers, the victims will not be made whole,
14 SIPC will be unable to recoup its advances, and third-party
15 tortfeasors will reap windfalls.29 No doubt, there are
insurance coverage to certain beneficial interests
represented by customer accounts.” Morgan, Kennedy & Co.,
533 F.2d at 1318.
29
Picard and SIPC contend that, absent his exclusive
authority to bring these customer claims, the Defendants
would in effect be immunized from suit. But it is not
obvious why customers cannot bring their own suits against
the Defendants. In fact, the Defendants make clear that
customers have already filed such actions. See, e.g., MLSMK
Inv. Co. v. JP Morgan Chase & Co., 431 F. App’x 17 (2d Cir.
2011) (summary order); Shapiro v. JP Morgan Chase & Co., No.
11-CV-8331 (S.D.N.Y.); Hill v. JPMorgan Chase & Co., No. 11-
CV-7961 (S.D.N.Y.). As in Redington, “the customers on
whose behalf the Trustee seeks to maintain suit are not only
57
1 advantages to the course Picard wants to follow. But equity
2 has its limits; it may fill certain gaps in a statute, but
3 it should not be used to enlarge substantive rights and
4 powers. Cf. In re Ozark, 816 F.2d at 1230 (observing that
5 while Bankruptcy Code allows a court to apply equitable
6 principles when necessary, “[t]hese powers . . . do not
7 include the ability to award equitable relief where the
8 party asserting the cause of action for such relief does not
9 have standing under any other section of the Code”).
10 As the Supreme Court observed, “SIPC’s theory of
11 subrogation is fraught with unanswered questions.” Holmes
12 v. SIPC, 503 U.S. 258, 270 (1992) (ultimately declining to
13 decide subrogation issue and instead holding that link
14 between stock manipulation and harm to customers was too
15 remote to support SIPC’s RICO claim). As in Holmes, SIPC
16 has left courts “to guess at the nature of the ‘common law
17 rights of subrogation’ that it claims.” Id. at 271.
18 The practical skepticism voiced in Caplin in a
19 traditional bankruptcy context is justified here as well.
20 Would such suits prevent customers from “mak[ing] their own
entitled to bring, but have already initiated their own
action.” Redington v. Touche Ross & Co., 592 F.2d 617, 635
(2d Cir. 1978) (Mulligan, J., dissenting).
58
1 assessment of the respective advantages and disadvantages,
2 not only of litigation, but of various theories of
3 litigation”? Caplin, 406 U.S. at 431. Can a SIPA trustee
4 control customers’ claims against third parties if SIPC has
5 not fully satisfied the customers’ claims against the
6 estate? How would inconsistent judgments be avoided, given
7 that “independent actions are still likely because it is
8 extremely doubtful that [the parties] would agree on the
9 amount of damages to seek, or even on the theory on which to
10 sue”? Id. at 432. Who would be bound by a settlement
11 entered into by either the Trustee or by each customer who
12 brings suit? Id. The size and scope of the litigation here
13 only amplify these concerns.
14 As Caplin advises, it is better to leave these
15 intractable policy judgments to Congress:
16 Congress might well decide that reorganizations
17 have not fared badly in the 34 years since Chapter
18 X was enacted and that the status quo is
19 preferable to inviting new problems by making
20 changes in the system. Or, Congress could
21 determine that the trustee . . . was so well
22 situated for bringing suits . . . that he should
23 be permitted to do so. In this event, Congress
24 might also determine that the trustee’s action was
25 exclusive, or that it should be brought as a class
26 action on behalf of all [creditors], or perhaps
27 even that the [creditors] should have the option
28 of suing on their own or having the trustee sue on
29 their behalf. Any number of alternatives are
59
1 available. Congress would also be able to answer
2 questions regarding subrogation or timing of law
3 suits before these questions arise in the context
4 of litigation. Whatever the decision, it is one
5 that only Congress can make.
6 Caplin, 406 U.S. at 434-35.
7 * * *
8 For the foregoing reasons, the judgments are affirmed.
60