598 B.R. 102
S.D. Ill.2019Background
- Bernard Madoff ran a Ponzi scheme through BLMIS; the SIPA liquidation used the Net Investment Method to calculate customer claims, disallowing fictitious profits as recoverable.
- Trustee Irving Picard sued the Picower Parties and settled for approximately $7.235 billion; the Bankruptcy Court approved the settlement and issued a permanent injunction barring BLMIS customers/creditors from bringing claims against the Picower defendants that are duplicative or derivative of the Trustee’s claims.
- The Fox plaintiffs (former BLMIS customers) repeatedly sued the Picower Parties asserting non-derivative claims (including § 20(a) control-person liability); prior iterations (Fox I, Fox II) were enjoined as derivative and barred by the permanent injunction.
- Fox III repleaded a § 20(a) claim and added allegations that Picower "propped up" BLMIS with loans and acted as an options counterparty to lend credibility, and attached a Madoff deposition and a Madoff declaration as supposed new, particularized evidence.
- The Bankruptcy Court held the Fox III Complaint to be duplicative/derivative of the Trustee’s claims and barred by the permanent injunction; the district court (this opinion) affirmed, finding the § 20(a) theory merely a disguised fraudulent-transfer claim and the new evidence conclusory or mischaracterized.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Fox III's § 20(a) claim is barred as duplicative/derivative of Trustee's claims | Fox: § 20(a) control-person claim is non-derivative and therefore not covered by the injunction | Picard/Picower: Claim is derivative (fraudulent-transfer in disguise) and thus enjoined | Held: Claim is derivative/disguised fraudulent-transfer and barred by the permanent injunction |
| Whether propping-up (loans) and counterparty allegations plausibly show Picower "control" under § 20(a) | Fox: these new allegations demonstrate Picower directed or influenced BLMIS management/policies | Picard/Picower: allegations are conclusory, echo prior complaints, and show only participation or withdrawals, not control | Held: Propping-up/counterparty allegations do not show the requisite control; courts (including Second Circuit in Goldman III) find them insufficient |
| Whether Madoff deposition and declaration supply particularized facts to convert the claim into a bona fide § 20(a) claim | Fox: Madoff’s statements identify Picower as complicit and as creator/primary beneficiary of the fraud, adding particularity | Picard/Picower: Madoff’s testimony/declaration are conclusory or relate to Picower’s conduct in his own accounts and do not establish direction/control of BLMIS | Held: The deposition/declaration are conclusory or mischaracterized and do not supply the particularized allegations necessary to avoid the injunction |
| Appropriate remedy / relief requested by Fox (declaratory judgment to permit repleading and suit) | Fox: seek declaration that Fox III is not barred so they can proceed | Picard/Picower: seek dismissal and enforcement of injunction | Held: Declaratory relief denied; action dismissed as barred; court did not impose an injunction preventing future complaints but dismissed the Fox III pleading |
Key Cases Cited
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir.) (Net Investment Method and rejection of fictitious profits recovery)
- Marshall v. Picard (Fox I), 740 F.3d 81 (2d Cir.) (approval of permanent injunction application to earlier Fox complaints)
- In re Tronox Inc., 855 F.3d 84 (2d Cir.) (derivative-vs-particularized-claim legal standard; de novo review guidance)
- A & G Goldman P’ship v. Picard, 739 F. App’x 679 (2d Cir.) (affirming that propping-up/counterparty allegations did not establish § 20(a) control and are barred by the injunction)
- Goldman v. Capital Growth Co., 565 B.R. 510 (S.D.N.Y.) (district-court decision finding Goldman complaints functionally similar and enjoined)