480 B.R. 117
S.D.N.Y.2012Background
- Investors in sixteen feeder funds invested a significant portion of their assets with BLMIS, believing BLMIS would invest on their behalf.
- Madoff was arrested, and SIPA protections were applied to BLMIS customers in the liquidation proceeding.
- The Trustee determined the feeder funds were BLMIS customers, but the appellants themselves were not; they challenged this on appeal.
- Bankruptcy Court found the feeder funds met five characteristics and that appellants had no direct accounts with BLMIS; the appellants thus were not SIPA customers.
- Appellants argued that SIPA’s definition of customer could include them under alternative definitions or agency theory, and sought an evidentiary hearing, which the court declined.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are appellants SIPA customers despite no direct BLMIS accounts? | Appellants contend SIPA's definitions cover investors through third-party funds. | Feeder Funds hold accounts with BLMIS; appellants have no accounts with BLMIS. | Appellants are not SIPA customers; feeder funds are the customers. |
| Does SIPA § 78fff-3(a)(5) extend customer status to feeder-fund investors via banks/brokers? | Third-party customers should be protected under the exception. | Feeder funds do not qualify for the exception; they are not direct customers of the debtor. | Feeder funds do not fall within the § 78fff-3(a)(5) exception. |
| Must customer accounts be held at the debtor for SIPA to grant status? | SIPA permits broader interpretation of ‘securities accounts’. | Accounts must be held at the debtor; feeder funds’ accounts are not personal to appellants. | Accounts must be those of the debtor associated with the investor; appellants lack such accounts. |
| Do arguments based on Morgan, Kennedy and agency duties create SIPA customer status for appellants? | Direct control and fiduciary duties imply customer status. | Offering documents grant management to feeder funds’ managers; appellants had no direct control. | Morgan, Kennedy factors not met; no customer status for appellants. |
| Was an evidentiary hearing required on contested facts related to fiduciary duties? | Amended complaint suggests breaches and agency. | No request for a hearing was made; record shows no customer status. | No error; no mandatory hearing required. |
Key Cases Cited
- Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d 1314 (2d Cir. 1976) (factors indicating customer status and entrustment to broker-dealer)
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (SIPA customer status and net equity framework)
- In re New Times Sec. Servs., Inc., 463 F.3d 125 (2d Cir. 2006) (customer property and net equity principles in SIPA)
- In re Old Naples Sec., Inc., 223 F.3d 1296 (11th Cir. 2000) (deposit of funds and customer status through agent/promises)
- In re Primeline Sec. Corp., 295 F.3d 1100 (10th Cir. 2002) (deemed deposits under SIPA when broker deposits on claimant's behalf)