In the Matter of Bernard L. Madoff Inv. Sec., LLC, Sagor v. Picard
697 F. App'x 708
2d Cir.2017Background
- This appeal concerns the Trustee’s adoption of the “Inter-Account Method” to calculate customers’ "net equity" in the liquidation of Bernard L. Madoff Investment Securities, LLC (BLMIS).
- The Inter-Account Method applies the Net Investment Method to every account, including accounts that received one or more transfers from other BLMIS accounts, and credits transferee accounts only with actual principal available to be transferred.
- Appellants are multiple former BLMIS account holders (including pro se Sagor and the Zraick appellants) who challenge the Trustee’s treatment of inter-account transfers, seeking to give legal effect to fictitious gains shown on BLMIS statements or to treat inter-account transfers as equivalent to external withdrawals/deposits.
- Lower courts (Bankruptcy Court and Southern District of New York) upheld the Trustee’s method; this appeal seeks reversal of those rulings.
- The Second Circuit reviews the bankruptcy court’s legal conclusions de novo and frames the dispute against its prior "Net Equity" jurisprudence that measures net equity by external cash deposits minus external cash withdrawals.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Inter-Account Method violates SIPA/Net Equity Decision | Appellants: inter-account transfers should be treated as external withdrawals/deposits or merged accounts so fictitious profits count | Trustee: only external cash deposits/withdrawals matter; inter-account paperwork reflected no real cash or value | Affirmed: Inter-Account Method consistent with Net Equity Decision; fictitious profits excluded |
| Whether method implicates Bankruptcy Code avoidance powers | Appellants: inter-account transfers are real transfers that avoidance law protects | Trustee: transfers were bookkeeping entries; only actual principal (if any) could transfer; method doesn’t unwind transfers | Affirmed: Trustee need not invoke avoidance powers; method only measures net equity, not voids transfers |
| Whether method violates federal securities laws by ignoring BLMIS account statements | Appellants: statements should have legal effect | Trustee: statements were fictitious; legal reliance would give effect to fraud | Affirmed: no legal effect to false statements; Net Investment Method and Inter-Account Method lawful |
| Whether New York law or equitable arguments override Inter-Account Method | Ryan appellants: state statutes/common law & Sagor’s equity claim favor different treatment | Trustee: SIPA and federal insolvency law supersede inconsistent state law; non-customers not protected | Affirmed: SIPA governs; state law cannot trump SIPA; Sagor (non-customer) not entitled to relief |
Key Cases Cited
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (establishes Net Investment Method as measure of customer "net equity" in BLMIS liquidation)
- Picard v. Ida Fishman Revocable Tr. (In re Bernard L. Madoff Inv. Sec. LLC), 773 F.3d 411 (2d Cir. 2014) (distinguishes actual cash withdrawals context from purely inter-account transfers)
- Trs. of Upstate N.Y. Eng’rs Pension Fund v. Ivy Asset Mgmt., 843 F.3d 561 (2d Cir. 2016) (describes how BLMIS commingled customer funds and how withdrawals were funded)
- Butner v. United States, 440 U.S. 48 (1979) (federal bankruptcy law governs property rights in insolvency proceedings)
- Exch. Nat’l Bank of Chi. v. Wyatt, 517 F.2d 453 (2d Cir. 1975) (recognizes SIPA as enacted under Congress’s bankruptcy power)