IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor,
Nos. 12-410-bk(L), 12-437-bk(Con), 12-483-bk(Con), 12-529-bk(Con)
United States Court of Appeals, Second Circuit
February 22, 2013
August Term, 2012 (Argued: January 25, 2013)
BRICKLAYERS AND ALLIED CRAFTSMAN LOCAL 2 ANNUITY FUND, BRICKLAYERS AND ALLIED CRAFTSWORKERS LOCAL 2, HEALTH BENEFIT FUND, BRICKLAYERS & ALLIED CRAFTWORKERS, LOCAL NO. 2, AFL-CIO, BUILDING TRADE EMPLOYERS INSURANCE FUND, CENTRAL NEW YORK LABORERS ANNUITY FUND, CENTRAL NEW YORK LABORERS HEALTH AND WELFARE FUND, CENTRAL NEW YORK LABORERS PENSION FUND, CENTRAL NEW YORK LABORERS TRAINING FUND, CONSTRUCTION EMPLOYERS ASSOCIATION OF CNY, INC., CONSTRUCTION AND GENERAL LABORERS’ LOCAL NO. 633, AFL-CIO, ENGINEERS JOINT WELFARE FUND, ENGINEERS JOINT TRAINING FUND, INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS LOCAL UNION NO. 43 AND ELECTRICAL CONTRACTORS PENSION FUND, INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS LOCAL NO. 43 AND ELECTRICAL CONTRACTORS WELFARE FUND, I.B.E.W. LOCAL 241 WELFARE BENEFITS FUND, I.B.E.W. LOCAL 910 WELFARE FUND, LABORERS’ LOCAL 103 ANNUITY FUND, LABORERS’ LOCAL 103 WELFARE FUND, NEW YORK STATE LINEMAN‘S SAFETY TRAINING FUND, OSWEGO LABORERS’ LOCAL NO. 214 PENSION FUND, PLUMBERS, PIPEFITTERS AND APPRENTICES LOCAL NO. 112 HEALTH FUND, ROOFERS’ LOCAL 195 ANNUITY FUND, ROOFERS’ LOCAL 195 HEALTH & ACCIDENT
—v.—
SECURITIES INVESTOR PROTECTION CORPORATION, IRVING H. PICARD, Appellees,
SECURITIES AND EXCHANGE COMMISSION, Intervenor.*
Before: LEVAL, RAGGI, and LIVINGSTON, Circuit Judges.
Appeal from a judgment of the United States District Court for the Southern District of New York (Denise L. Cote, Judge; Burton R. Lifland, Bankruptcy Judge), affirming the bankruptcy court‘s order affirming Trustee Irving H. Picard‘s denial of appellants’ claims against Bernard L. Madoff Investment Securities LLC (“BLMIS“) under the Securities Investor Protection Act (“SIPA“),
AFFIRMED.
CHRISTOPHER H. LAROSA (Josephine Wang, Kevin H. Bell, on the brief), for Appellee Securities Investor Protection Corporation, Washington, D.C.
DAVID J. SHEEHAN (Jorian L. Rose, Thomas D. Warren, Wendy J. Gibson, Seanna R. Brown, Bik Cheema, on the brief), Baker & Hostetler LLP, New York, New York, for Appellee Irving H. Picard.
MICHAEL L. POST (Mark D. Cahn, Michael A. Conley, Jacob H. Stillman, John W. Avery, on the brief), for Intervenor Securities and Exchange Commission, Washington, D.C.
Helen Davis Chaitman, Becker & Poliakoff, LLP, New York, New York, for Appellants Neva Rosamilia and Nicholas Rosamilia.
Mark I. Silberblatt, Bisceglie & De Marco, LLC, Woodland Park, New Jersey, for Appellant Upstate New York Bakery Drivers and Industry Pension Fund.
REENA RAGGI, Circuit Judge:
Appellants are investors who lost money in the multi-billion dollar Ponzi scheme perpetrated by Bernard L. Madoff Investment Securities LLC (“BLMIS“). They here appeal from a judgment of the United States District Court for the Southern District of New York (Denise L. Cote, Judge) entered on January 6, 2012, which affirmed a June 28, 2011 order of the bankruptcy court for the same district (Burton R. Lifland, Bankruptcy Judge), affirming Trustee Irving H. Picard‘s denial of appellants’ claims against BLMIS under the Securities Investor Protection Act (“SIPA“),
The parties agree that the challenged bankruptcy court order and ensuing district court judgment did not apply to (1) appellants Neva and Nicholas Rosamilia, who did not invest in the sixteen hedge funds at issue in those decisions; and (2) appellant Upstate New York Bakery Drivers and Industry Pension Fund, because its claims involve the Employment Retirement Income Security Act of 1974 (“ERISA“),
The record demonstrates that none of the appellants remaining on this appeal invested directly with BLMIS.2 Rather, they invested in two limited partnerships, Spectrum Select, L.P., and Spectrum Select II, L.P. (“Spectrum Funds“), which in turn invested in two hedge funds, Rye Select Broad Market Fund, L.P., and Rye Select Broad Market Prime Fund, L.P. (“Feeder Funds“), which were organized as limited partnerships under Delaware law. Through various explanatory material, including offering memoranda, the Feeder Funds advised investors who purchased interests in the funds that the investors yielded exclusive control over investment decisions to the funds. The Feeder Funds invested the pooled capital obtained from their investors with BLMIS through securities accounts maintained only in the funds’ names. The Feeder Funds made deposits to and withdrawals from their BLMIS accounts, and they received account documentation, including account statements and trade confirmations, from BLMIS. As investors in the Spectrum Funds that invested in the Feeder Funds, appellants had no direct financial dealings with BLMIS, and no account information in BLMIS records identified them as BLMIS investors.
In these circumstances, the Trustee, the bankruptcy court, and the district court each concluded that appellants could not pursue SIPA claims distinct from those of the Feeder Funds because appellants were not themselves BLMIS “customers.” See SIPC v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff), 454 B.R. 285, 295 (Bankr. S.D.N.Y. 2011) (stating that, because appellants “purchased ownership interests in the Feeder Funds
Appellants’ timely appeal followed.
II. Discussion
Appellants’ interest in being recognized as BLMIS “customers” distinct from the Feeder Funds is obvious. To the extent BLMIS‘s assets are insufficient to compensate “customers” for their investment losses, each recognized “customer” can seek to have its remaining losses compensated by the Securities Investor Protection Corporation (“SIPC“)—subject to a cap of $500,000 per “customer“—out of a special fund capitalized by the general brokerage community. See
In considering appellants’ argument that they qualify as BLMIS “customers” under SIPA, we review the bankruptcy court‘s contrary conclusion “independently, accepting its factual findings unless clearly erroneous but reviewing its conclusions of law de novo.” Midland Cogeneration Venture Ltd. P‘ship v. Enron Corp. (In re Enron Corp.), 419 F.3d 115, 124 (2d Cir. 2005). On such review, we perceive no error in the bankruptcy court‘s decision.
SIPA defines a “customer” of a debtor as follows:
[A]ny person (including any person with whom the debtor deals as principal or agent) who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral, security, or for purposes of effecting transfer.
This court has ruled that “[j]udicial interpretations of ‘customer’ status support a narrow interpretation of the SIPA‘s provisions.” In re New Times Sec. Servs., Inc., 463 F.3d at 127 (internal quotation marks omitted). We have identified “the critical aspect of the ‘customer’ definition” to be “the entrustment of cash or securities to the broker-dealer for the
Appellants fail to satisfy this critical requirement. The record shows that they: (1) had no direct financial relationship with BLMIS, (2) had no property interest in the assets that the Feeder Funds invested with BLMIS, (3) had no securities accounts with BLMIS, (4) lacked control over the Feeder Funds’ investments with BLMIS, and (5) were not identified or otherwise reflected in BLMIS‘s books and records. In SIPC v. Morgan, Kennedy & Co., 533 F.2d 1314 (2d Cir. 1976), we relied on similar factors to conclude that employee-beneficiaries of a profit-sharing plan were not “customers” of a debtor under SIPA. See id. at 1318. Such analysis continues to provide the appropriate framework for identifying a SIPA debtor‘s “customers.” Thus, as in Morgan Kennedy, we here reject appellants’ argument that they qualify as “customers” of the debtor. Appellants’ urged construction not only would depart from the “narrow interpretation” mandated by our precedent, see In re New Times Sec. Servs., Inc., 463 F.3d at 127, but also would stretch the word “customers” “wholly beyond [the] limits” of its understood meaning, see SIPC v. Morgan, Kennedy & Co., 533 F.2d at 1318. Accordingly, like the Trustee, the bankruptcy court, and the district court, we conclude that appellants do not qualify as BLMIS “customers” under SIPA.
Appellants seek to distinguish this case from Morgan Kennedy, claiming that they did exercise a degree of control over the Feeder Funds’ investments with BLMIS. The
Similarly unpersuasive is appellants’ argument that they are BLMIS “customers” because they always intended that the money they invested in the Spectrum Funds would, in the end, be invested in BLMIS. The argument fails because the limited partnership interests sold by the Feeder Funds to investors, such as the Spectrum Funds, did not confer
Out-of-circuit cases cited by appellants do not aid their argument. See Ahammed v. SIPC (In re Primeline Sec. Corp.), 295 F.3d 1100 (10th Cir. 2002); Focht v. Heebner (In re Old Naples Sec., Inc.), 223 F.3d 1296 (11th Cir. 2000). In each of those cases, the claimants provided money to an ostensible agent of a broker-debtor for the purpose of investing their money through the broker-debtor, but the agent instead misappropriated the funds. See In re Primeline Sec. Corp., 295 F.3d at 1107–08; In re Old Naples Sec., Inc., 223 F.3d at 1303–04. The courts concluded that the claimants were “customers” of the broker-debtor because, in each case, they intended to deposit their money with the broker-debtor; they
Nor did the bankruptcy court err in concluding that the Feeder Funds were not BLMIS agents. Appellants point to no record evidence that BLMIS authorized the Feeder Funds to act on its behalf or that BLMIS exercised control over the Feeder Funds. See Pan Am. World Airways, Inc. v. Shulman Transp. Enters., Inc. (In re Shulman Transp. Enters., Inc.), 744 F.2d 293, 295 (2d Cir. 1984) (“Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” (internal quotation marks omitted)).
Finally, we need not address appellants’ contention that, according to the statutory language, they were not required to have had accounts with BLMIS in order to be “customers.” Even if we were to decide this question in their favor, appellants would not meet SIPA‘s definition of a “customer.”
The judgment of the district court, affirming the bankruptcy court‘s order granting the Trustee‘s motion, is AFFIRMED.