Picard v. JPMorgan Chase & Co. (In Re Bernard L. Madoff Investment Securities LLC)
721 F.3d 54
| 2d Cir. | 2013Background
- Bernard Madoff operated a massive Ponzi scheme through BLMIS; SIPC appointed Irving Picard as SIPA trustee after the firm’s collapse to recover customer property and distribute ratably.
- Picard sued major financial institutions (JPMorgan, HSBC, UBS, UniCredit, Access, others), alleging they aided and abetted Madoff by collecting fees while ignoring red flags; claims included aiding and abetting fraud, breach of fiduciary duty, unjust enrichment, negligence, and a state-law contribution claim.
- District courts (Rakoff, McMahon) dismissed the common-law claims and contribution claims on grounds that the trustee was in pari delicto for claims on behalf of BLMIS and lacked standing to pursue customers’ claims; SIPC intervened, having advanced roughly $800 million.
- On appeal the Second Circuit affirmed: (1) claims belonging to BLMIS were barred by in pari delicto because the trustee stands in the debtor’s shoes; (2) SIPA provides no federal contribution right for the SIPC advances; and (3) the trustee lacks prudential third-party standing to assert customers’ common-law tort claims.
- Picard argued SIPA makes the trustee a bailee of customer property or that SIPC (as subrogee) granted the trustee authority to sue on customers’ behalf; the court rejected both analogies and emphasized SIPA’s alignment with bankruptcy principles (e.g., Caplin) rather than creating new third-party standing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether trustee can sue on behalf of BLMIS for third-party wrongdoing (in pari delicto) | Picard: SIPA trustee is unique; in pari delicto should not bar SIPA trustee claims | Defendants: Wagoner/Kirschner principles impute debtor’s misconduct to trustee; trustee stands in debtor’s shoes | Court: In pari delicto bars claims brought on behalf of BLMIS; trustee cannot recover against third parties for fraud in which debtor participated |
| Whether trustee may seek contribution for SIPC advances under state law | Picard: Contribution available under NY law for joint tortfeasors | Defendants: SIPA payments were compelled by federal law; no contribution right exists under SIPA; federal law governs availability | Court: No contribution—payments obligated by SIPA (federal) and SIPA provides no contribution right |
| Whether trustee has standing to pursue customers’ common-law claims (third-party/prudential standing) | Picard: SIPA creates a bailment-like relationship; trustee is real party in interest; SIPC subrogation and Rule 17 permit trustee to sue for customers | Defendants: Trustee lacks Article III and prudential standing; Caplin/Wagoner bar trustee from suing on creditors’ direct claims; customers should sue themselves | Court: Trustee lacks standing to assert customers’ claims; Caplin and Wagoner principles apply; bailment and broad subrogation theories rejected |
| Whether SIPC’s statutory subrogation grants broad authority to sue tortfeasors on behalf of customers | Picard/SIPC: §78fff-3(a) and legislative history permit SIPC/subrogee to assert customers’ claims and trustee to enforce them | Defendants: §78fff-3(a) limits subrogation to claims against the fund/customer property; Congress did not intend to override Caplin/Wagoner | Held: Subrogation under SIPA is narrow—SIPC may recoup advances against customer-property claims but does not confer broad tort-litigation authority to trustee or SIPC |
Key Cases Cited
- Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (U.S.) (bankruptcy trustee cannot sue to collect claims belonging to creditors)
- Warth v. Seldin, 422 U.S. 490 (U.S.) (prudential limitation: cannot assert rights of third parties)
- Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir.) (trustee stands in debtor’s shoes; trustee generally may not assert creditors’ claims)
- Kirschner v. KPMG LLP, 938 N.E.2d 941 (N.Y.) (New York Court of Appeals recognizing strength of in pari delicto; narrow adverse-interest exception)
- Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (U.S.) (in pari delicto not automatically applied in all contexts; relative culpability considerations)
- Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (U.S.) (expressing skepticism about expansive SIPC subrogation theories)
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir.) (context on SIPA customer definition and prior appellate treatment of the Madoff liquidation)