Irving H. Picard v. Cardinal Management, Inc.
1:12-cv-02981
S.D.N.Y.Jul 2, 2014Background
- Trustee Irving Picard (SIPA trustee for Bernard L. Madoff Investment Securities LLC) filed adversary proceedings seeking avoidance/recovery of transfers to customers and moved to disallow those customers' SIPA net-equity claims under 11 U.S.C. § 502(d) until avoidable transfers are returned.
- Defendants are Madoff customers who filed SIPA net-equity claims (claims for net deposits minus withdrawals) and had received withdrawals that the Trustee alleges are avoidable fraudulent transfers.
- Trustee withheld SIPC advances and interim distributions from defendants pending resolution of avoidance/recovery claims and asserted § 502(d) disallowance counts in multiple consolidated adversary proceedings.
- Defendants moved to dismiss the § 502(d) disallowance counts and to withdraw the reference, arguing § 502(d) does not apply to SIPA net-equity claims (filed under 15 U.S.C. § 78fff-2) and that SIPA’s prompt-payment scheme conflicts with § 502(d).
- District Court revisited its earlier brief treatment in Picard v. Katz, concluded collateral estoppel/law-of-the-case did not bar reexamination, and held after full briefing that § 502(d) is applicable to SIPA net-equity claims absent an irreconcilable conflict with SIPA.
- Court directed return of specified adversary proceedings to Bankruptcy Court for further proceedings consistent with the ruling.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 502(d) applies to SIPA net-equity claims filed under 15 U.S.C. § 78fff-2 | § 502(d) applies because SIPA incorporates Bankruptcy Code chapter 5 where consistent; SIPA net-equity claims are functionally like prepetition proofs of claim | § 502(d) is limited to claims filed under § 501; SIPA claims are filed under § 78fff-2 and thus outside § 502(d)’s scope | § 502(d) applies to SIPA net-equity claims absent an irreconcilable conflict with SIPA |
| Whether application of § 502(d) conflicts with SIPA’s requirement that the trustee “promptly” pay/distribute net-equity claims | § 502(d)’s temporary disallowance is an ordering/coercive provision compatible with SIPA’s goals and does not meaningfully frustrate prompt payment | SIPA’s mandatory prompt-payment provisions and SIPC advance scheme preclude withholding payments under § 502(d) | No irreconcilable conflict; SIPA permits delay where a customer is indebted to the estate (e.g., § 78fff-2(c)(2)) |
| Whether expressio unius bars reading § 502(d) into SIPA (i.e., SIPA’s listed exceptions exhaust conditions for withholding payments) | SIPA incorporates Bankruptcy Code provisions unless inconsistent; listed SIPA exceptions do not signal exclusion of § 502(d) | SIPA’s enumerated conditions/limitations imply Congress did not intend other conditions (like § 502(d)) | Expressio unius inapplicable; SIPA provisions do not clearly preclude § 502(d) |
| Whether equity or double-counting arguments preclude § 502(d) application | § 502(h) and recalculation can prevent double-counting; statutory command cannot be overridden by judge-made equity | Disallowance would double-count withdrawals and be inequitable | Court rejects equitable override; recalculation and code provisions mitigate double-counting; limited exceptions (e.g., insolvent transferee) may be addressed case-by-case |
Key Cases Cited
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (describing SIPA net-equity calculation and Net Investment Method)
- In re Ames Dep't Stores, Inc., 582 F.3d 422 (2d Cir. 2009) (construing § 502(d)’s scope and incompatibility with § 503 administrative-expense allowance)
- Picard v. Katz, 462 B.R. 447 (S.D.N.Y. 2011) (earlier district treatment of § 502(d) in Madoff liquidation)
- SIPC v. Charisma Sec. Corp., 506 F.2d 1191 (2d Cir. 1974) (standard for when a statutory provision is inconsistent with SIPA)
- Ball v. A.O. Smith Corp., 451 F.3d 66 (2d Cir. 2006) (elements of collateral estoppel)
- Envtl. Def. v. EPA, 369 F.3d 193 (2d Cir. 2004) (hesitance to apply collateral estoppel to pure legal questions)
- Matter of Davis, 889 F.2d 658 (5th Cir. 1989) (policy and coercive purpose behind § 502(d))
- Sunbeam Prods., Inc. v. Chi. Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012) (court cannot refuse to apply Bankruptcy Code provisions based on generalized inequity)