Marshall v. Picard (In Re Bernard L. Madoff Investment Securities LLC)
740 F.3d 81
| 2d Cir. | 2014Background
- BLMIS (Bernard L. Madoff Investment Securities) was placed in SIPA liquidation; Irving Picard was appointed trustee to recover estate property for the benefit of customers.
- Picard sued the Picower defendants in bankruptcy court seeking avoidance/recovery of billions in alleged fraudulent withdrawals from BLMIS accounts; settlement returned $5 billion and included a request for a permanent injunction barring duplicative/derivative third-party suits.
- Two former BLMIS investors (Marshall and Fox) filed separate Florida actions alleging conspiracies and torts against the Picower defendants seeking damages not recoverable in an avoidance action; Picard sought and obtained a permanent injunction in bankruptcy court enjoining those suits as duplicative/derivative.
- The District Court affirmed the bankruptcy court’s approval of the settlement and injunction; Marshall and Fox appealed, arguing the injunction exceeded Bankruptcy Code authority and violated Article III after Stern v. Marshall.
- The Second Circuit examined whether the Florida suits were derivative (i.e., attacks on the estate property recoverable by the trustee) or particularized claims of the investors, and whether injunctive relief by a bankruptcy court violated Article III.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the bankruptcy court could enjoin third-party suits as derivative/duplicative of trustee’s avoidance action | Marshall/Fox: their suits allege independent, particularized conspiracy/tort injuries not subsumed by trustee’s fraudulent-transfer claims | Trustee/Picard: plaintiffs’ complaints merely repackage allegations of fraudulent withdrawals and thus are derivative of estate claims | Held: Suits are derivative; bankruptcy court properly enjoined them (plaintiffs may seek leave to amend) |
| Whether plaintiffs’ alleged injuries are particularized (non-derivative) | Plaintiffs: damages (lost returns, taxes, litigation exposure) are individualized and not recoverable in avoidance actions | Trustee: claimed damages are secondary harms flowing from depletion of estate funds and not direct actions against Picower for conduct aimed at customers | Held: Injuries not sufficiently particularized; claims track the trustee’s fraudulent withdrawal theory and are derivative |
| Whether the bankruptcy court exceeded 11 U.S.C. authority by approving the settlement and issuing injunction | Plaintiffs: bankruptcy court lacks power to release/enjoin independent non-debtor claims absent strict limits | Trustee: injunction limited to claims duplicative/derivative or which could have been brought by trustee; fit within §105(a) and settlement approval authority | Held: Bankruptcy court acted within its statutory authority to enjoin derivative/duplicative claims |
| Whether the injunction violated Article III post‑Stern v. Marshall | Plaintiffs: Stern forbids bankruptcy courts from entering final orders on state‑law common‑law claims; enjoining those suits is an Article III problem | Trustee: Plaintiffs’ suits are derivative of trustee’s avoidance claims; Picower filed a proof of claim so Granfinanciera/Stern permits bankruptcy resolution; injunction addresses estate‑related rights | Held: No Article III violation; Stern does not bar the bankruptcy court’s approval of the settlement and related injunction here |
Key Cases Cited
- Stern v. Marshall, 131 S. Ct. 2594 (2011) (limits on bankruptcy courts entering final judgment on state‑law claims not arising from public rights)
- Granfinanciera v. Nordberg, 492 U.S. 33 (1989) (fraudulent‑conveyance actions are private‑rights suits when brought against non‑claimants)
- Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC), 721 F.3d 54 (2d Cir. 2013) (trustee lacks standing to pursue certain customer‑based claims; distinction between derivative and particularized customer claims)
- Quigley Co. v. Law Offices of Peter G. Angelos (In re Quigley Co.), 676 F.3d 45 (2d Cir. 2012) (bankruptcy jurisdiction over non‑debtors depends on conceivable effect on the estate)
- Johns‑Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns‑Manville Corp.), 517 F.3d 52 (2d Cir. 2008) (distinguishing derivative claims that affect estate assets from independent third‑party claims)
- MacArthur Co. v. Johns‑Manville Corp. (In re Johns‑Manville Corp.), 837 F.2d 89 (2d Cir. 1988) (claims that seek recovery from debtor’s insurance proceeds can be derivative and subject to bankruptcy court jurisdiction)
- Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005) (nonconsensual releases of third‑party claims permissible only in truly unusual circumstances)
- Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995) (creditors’ claims that allege direct injuries are particularized and not derivative)
- Cumberland Oil Corp. v. Thropp, 791 F.2d 1037 (2d Cir. 1986) (conspiracy claims may be non‑derivative where misrepresentations were pled with particularity)
- Paramedics Electromedicina Comercial, Ltda. v. GE Med. Sys. Info. Techs., Inc., 369 F.3d 645 (2d Cir. 2004) (standard of review for permanent injunction is abuse of discretion)