Picard v. Fairfield Greenwich Ltd.
762 F.3d 199
2d Cir.2014Background
- Bernard Madoff operated a Ponzi scheme through BLMIS; independent “feeder funds” routed investor money into BLMIS and paid management fees to fund managers.
- After the fraud was revealed, feeder-fund investors sued the funds/managers (Anwar; NYAG/Schwartz v. Merkin), and those defendants negotiated large settlements (Anwar: ~$50M + $30M escrow; Merkin: $410M).
- Trustee Picard, as SIPA trustee for BLMIS, brought separate adversary proceedings seeking declarations that those suits/settlements violated the Bankruptcy Code’s automatic stay, SIPA, or district stay orders, and sought preliminary injunctions under 11 U.S.C. § 105(a) to block the settlements.
- The district courts withdrew the bankruptcy reference, denied the Trustee’s stay applications and injunction requests, and approved the settlements; the Trustee appealed.
- Trustee’s core contention: the feeder-fund suits were effectively fraudulent‑conveyance claims in disguise or were sufficiently ‘‘intertwined’’ with the estate’s avoidance actions so as to affect estate property and be subject to the stay or equitable injunction.
- The district courts held the feeder‑fund claims were independent (based on duties owed directly to plaintiffs), not property of the estate or derivative avoidance claims, and denied injunctions as discretionary and lacking the requisite showing of immediate or likely irreparable harm.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether feeder‑fund suits are barred by the automatic stay as fraudulent‑conveyance claims | Picard: suits are disguised avoidance actions that seek the same recovery as Trustee’s fraudulent‑transfer claims and thus are "against the debtor" or affect estate property | Defendants: suits allege independent duties/claims owed directly to investors/NYAG; liability does not depend on Madoff’s transfers | Held: Claims are independent tort/ statutory claims, not disguised avoidance actions; automatic stay does not apply |
| Whether suits are "intertwined" with estate property such that § 362(a)(3) applies | Picard: settlements will diminish estate assets and thus are intertwined with estate property | Defendants: any impact is speculative/factual, not the legal effect required to trigger the stay | Held: 48th St. Steakhouse limited to actions with legal effect on estate property; speculative or factual likelihood is insufficient to extend the stay |
| Whether § 105(a) authorizes preliminary injunctions to block the settlements | Picard: bankruptcy court should enjoin settlements to protect estate and avoid undermining avoidance claims | Defendants: § 105 is extraordinary relief; Trustee must show immediate/likely irreparable harm and likelihood of success | Held: Even assuming § 105 power, Trustee failed to show immediate adverse economic consequence or likelihood of irreparable harm; injunctions properly denied |
| Whether SIPA changes the Trustee’s interest in unadjudicated fraudulent transfers | Picard: SIPA gives the trustee special powers; settlements interfere with SIPA duties | Defendants: SIPA creates a legal fiction but does not give greater rights to unadjudicated transfers than bankruptcy law | Held: SIPA does not alter the rule that avoidable transfers are not estate property until recovered; Trustee’s interest remained contingent |
Key Cases Cited
- In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122 (Bankr. S.D.N.Y. 2010) (background on Madoff Ponzi scheme and SIPA proceedings)
- Colonial Realty Co. v. FDIC (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992) (avoidance recoveries are not estate property until recovered; actions to recover transfers can be stayable)
- 48th St. Steakhouse, Inc. v. Rockefeller Grp. Inc. (In re 48th St. Steakhouse, Inc.), 835 F.2d 427 (2d Cir. 1987) (stay applies where action would have legal effect of adversely impacting estate property)
- Marshall v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), 740 F.3d 81 (2d Cir. 2014) (fraud claims that are disguised fraudulent‑transfer actions belong exclusively to the Trustee)
- Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7 (2008) (standard for preliminary injunctions requires likelihood of success and likely irreparable harm)
- Pfizer Inc. v. Law Offices of Peter G. Angelos (In re Quigley Co., Inc.), 676 F.3d 45 (2d Cir. 2012) (bankruptcy court has jurisdiction over suits that might have any conceivable effect on the estate)
- Cumberland Oil Corp. v. Thropp, 791 F.2d 1037 (2d Cir. 1986) (a complaint is not automatically duplicative of an avoidance action simply because it alleges some of the same facts)