987 F. Supp. 2d 311
S.D.N.Y.2013Background
- The Trustee (Picard), appointed under SIPA to liquidate Bernard L. Madoff Investment Securities LLC, sued feeder-fund principals and affiliates for aiding and abetting fraud and unjust enrichment, alleging they knew of and enabled Madoff’s Ponzi scheme.
- Defendants moved to dismiss, arguing the Trustee lacks standing to assert common-law claims and that SLUSA precludes aggregated suits; the district court consolidated and decided these threshold issues.
- The Second Circuit had already held the Trustee lacks standing to sue third-party aiders-and-abettors on behalf of the debtor (JP Morgan II), invoking in pari delicto and third-party-standing principles.
- The Trustee asserted alternative bases for standing under SIPA: bailment, equitable subrogation (via SIPC), and assignment by customers; the Second Circuit and this Court rejected bailment and subrogation but reserved the assignment question.
- The Court held that valid customer assignments give the Trustee standing as assignee under bankruptcy principles (11 U.S.C. § 541(a)(7)), because SIPA does not expressly bar such assignments and CBI permits trustees to sue on assigned creditor claims.
- The Court ruled, however, that where the Trustee asserts more than 50 assigned customer claims, SLUSA likely treats the suit as a "covered class action," and thus may preclude state-law fraud claims; the insider-exception to in pari delicto does not extend to spouses (Deborah and Stephanie), so claims against them were dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to sue on behalf of debtor (Madoff Securities) | Trustee may represent the estate and sue third parties | In pari delicto and debtor’s own misconduct bar Trustee from suing on debtor’s behalf | Denied — Trustee cannot sue on behalf of the debtor (in pari delicto; JP Morgan II) |
| Standing to sue on behalf of customers (three theories) | Trustee has standing as (a) bailee under SIPA; (b) subrogee of SIPC; (c) assignee of customer claims | Defendants: Caplin and SIPA/Bankruptcy law bar trustee from suing on creditors’ claims except as Congress permitted | Bailment and subrogation rejected; assignee theory accepted if customers validly assigned claims to Trustee |
| SLUSA preclusion when Trustee aggregates assigned claims | Trustee is a single entity entitled to SLUSA’s counting exception | Defendants: aggregation of >50 assignors makes it a covered class action under SLUSA | Held for defendants: Trustee’s pursuit of >50 assigned customer claims constitutes a covered class action for SLUSA counting purposes; SLUSA preclusion to be assessed complaint-by-complaint by Bankruptcy Court |
| Insider-exception to in pari delicto for spouses (Deborah, Stephanie) | Trustee urges extension of insider exception to spouses who received joint transfers with insider spouses | Defendants: spouses are non-insiders with no alleged role or control; in pari delicto bars claims against non-insiders | Denied — insider exception not extended to spouses; claims dismissed for lack of standing |
Key Cases Cited
- Picard v. JP Morgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC.), 721 F.3d 54 (2d Cir. 2013) (trustee lacks standing to assert common-law claims on behalf of debtor; rejects bailment and subrogation theories)
- Warth v. Seldin, 422 U.S. 490 (U.S. 1975) (prudential third-party-standing principle)
- Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416 (U.S. 1972) (bankruptcy law does not empower trustee to collect claims belonging to creditors)
- Kirschner v. KPMG LLP, 15 N.Y.3d 446 (N.Y. 2010) (in pari delicto bars wrongdoer from recovering; narrow view of exceptions)
- In re CBI Holding Co., 529 F.3d 432 (2d Cir. 2008) (trustee may assert claims assigned by creditors under § 541(a)(7))
- LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008) (treats source of assigned claims as relevant under SLUSA; looks to assignors for counting)
- Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) (claims against third-party defrauders accrue to creditors, not culpable corporation)