Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC
2011 U.S. Dist. LEXIS 57645
S.D.N.Y.2011Background
- JPMorgan moved to withdraw the reference of Picard’s 21-count action against JPMorgan from the Bankruptcy Court under 28 U.S.C. § 157(d), and the Trustee opposed.
- The action arises from Madoff's Ponzi scheme; JPMorgan allegedly served as BMIS's primary banker and allegedly ignored red flags in the 703 Account.
- The Trustee seeks to recover roughly $5.4 billion in damages plus about $425 million in clawback-related amounts from BMIS customers and JPMorgan.
- BMIS's SIPA liquidation is being administered in the SDNY Bankruptcy Court; the SIPA trustee asserts claims both within and outside the bankruptcy framework.
- The Trustee’s claims include extensive common-law theories (aiding and abetting fraud, breach of fiduciary duty, conversion, unjust enrichment, fraud on the regulator) arising from JPMorgan’s alleged participation in or facilitation of the fraud.
- The court concluded that mandatory withdrawal applies because the Trustee’s suit would require significant interpretation of non-bankruptcy federal law (SLUSA) and issues of standing under federal law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does SLUSA preemption require interpretation of non-bankruptcy federal law? | Picard argues withdrawal unnecessary because preemption is straightforward. | JPMorgan argues substantial interpretation of SLUSA is needed, triggering mandatory withdrawal. | Yes; SLUSA interpretation mandating withdrawal. |
| Does the Trustee have standing to assert the common-law claims for BMIS customers? | Picard contends standing under SIPA allows suit on behalf of customers. | JPMorgan contends standing requires significant non-bankruptcy-law interpretation. | Yes; standing requires non-bankruptcy-law interpretation, mandating withdrawal. |
| Is JPMorgan's withdrawal motion timely? | Trustee contends timing is appropriate given anticipated defenses. | JPMorgan argues timely because grounds are apparent and efficient resolution favors withdrawal. | Timely; motion granted. |
Key Cases Cited
- In re Ionosphere Clubs, Inc., 922 F.2d 984 (2d Cir.1990) (mandatory-withdrawal narrow standard for non-bankruptcy-law reliance)
- City of New York v. Exxon Corp., 932 F.2d 1020 (2d Cir.1991) (significant interpretation of non-bankruptcy statutes required for withdrawal)
- Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) (SLUSA preemption framework for covered class actions)
- Redington v. Touche Ross & Co., 442 U.S. 560 (1979) (standing framework in bankruptcy contexts affecting SIPA trustee)
- LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir.2008) (claims owned by beneficiaries may be treated as covered-class actions under SLUSA)
- Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531 (S.D.N.Y.1990) (SIPA assignments limited to net-equity-type claims; third-party claims uncertain)
- Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992) (SIPA standing and trustee powers under federal securities law)