MEMORANDUM DECISION AND ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS TRUSTEE’S COMPLAINT
Before this Court are the motions (the “Motions to Dismiss”) of Mark D. Madoff
1
and Andrew H. Madoff, Peter M. Madoff,
The instant Complaint differs from all others connected to the Madoff Ponzi scheme in one significant respect: its named Defendants are Madoffs brother, two sons, and niece. As set forth in the Complaint, the Defendants held senior management positions at BLMIS, which, the Trustee asserts, was “operated as if it was the family piggy bank,” with the Defendants living in multi-million dollar homes and relying on BLMIS funds to pay for vacations, travel, and other personal expenses — all while failing to fulfill their responsibilities as high ranking employees of the business. This failure was unsurprising given their close familial relationship with Madoff and proximity to BLMIS, both of which undergird the claim at the heart of the Trustee’s Complaint: that if anyone was in a position to prevent Ma-doffs scheme, it was the Defendants, who, instead, stood by profiting mightily while allowing it to persist. The Defendants nevertheless steadfastly contend their involvement with BLMIS was entirely legitimate, and they, above all others, were betrayed by their family’s patriarch. But even if they were victims of the cruelest betrayal, the Complaint alleges that the Defendants’ failures to fulfill their responsibilities at BLMIS facilitated egregious harms.
The Trustee accordingly seeks to avoid and recover transfers made to the Defendants in the collective amount of over $198 million under various sections of the Bankruptcy Code (the “Code”) and New York Debtor and Creditor Law
4
(the “NYDCL”); as well as to utilize sections of the Code to disallow and equitably subordinate those claims filed by the Defendants in the SIPA proceeding (collectively,
BACKGROUND
A comprehensive discussion of the facts underlying the SIPA Liquidation and Ma-doffs Ponzi scheme is set forth in this Court’s prior decisions.
See In re Bernard L. Madoff Inv. Sec. LLC,
I. THE DEFENDANTS
A. Peter B. Madoff
Peter B. Madoff (“Peter”) is Madoffs brother and was BLMIS’s Senior Managing Director and Chief Compliance Officer (“CCO”). He is a law school graduate and held a number of securities licenses with the Financial Industry Regulatory Authority (“FINRA”), including Series 1, 4, and 5. Peter was the Director of the Securities Industry Financial Markets Associations (“SIFMA”), a member of the Board of Governors and the Executive Committee of the National Stock Exchange, the Vice Chairman of the FINRA Board of Governors, as well as a Director of the National Securities Clearing Corporation. He also served on NASDAQ’s Executive Committee Board of Governors. Compl. ¶ 6.
As the CCO of BLMIS, Peter was allegedly responsible for^ adopting and administering compliance procedures to prevent and detect fraud and to identify and address significant compliance issues in accordance with SEC and FINRA regulations. Compl. ¶¶ 28-36. His duties included, inter alia, preparing the annual review of BLMIS’s investment advisory business’s (“IA Business”) compliance program, performing qualitative tests of BLMIS’s internal compliance procedures, and assessing whether such procedures were effectively implemented. Compl. ¶¶ 28-36.
Peter is alleged to have received at least $60,631,292 from BLMIS, including, but not limited to, withdrawals of fictitious profits from investment advisory accounts at BLMIS (“IA Accounts”); salaries and bonuses from 2001 to 2008 in the total
B. Mark D. Madoff and Andrew H. Madoff
Mark D. Madoff (“Mark”) and Andrew H. Madoff (“Andrew”), Madoff s sons, were Co-Directors of Trading at BLMIS and served as Controllers and Directors of Ma-doff Securities International Ltd. (“MSIL”), a U.K. affiliate of BLMIS. 8 Both held securities licenses with FINRA, including Series 4, 7, 24, and 55, and were members of various securities organizations. Mark was Chairman of the FINRA Inter-Market Committee, Governor of the Securities Traders Association (“STA”), Co-Chair of the STA Trading Committee, a member of the FINRA Membership Committee and Mutual Fund Task Force, President of the Securities Trader Association of New York (“STANY”), Chairman of the FINRA Regulation District Ten Business Conduct Committee, and Chairman of the Securities Industry and Financial Markets Association (“SIFMA”) NASDAQ committee. Similarly, Andrew was Chairman of the Trading, Trading Issues and Technology, and Decimalization and Market Data Committees and Subcommittees at SIFMA. He was also a member of the FINRA District Ten and NASDAQ Technology Advisory Committees. Compl. ¶¶ 7, 8.
Andrew and Mark were purportedly responsible for ensuring compliance with BLMIS’s policies and procedures, as well as applicable securities laws. Compl. ¶¶ 28-36, 47-49.
Mark allegedly received at least $66,859,311 from BLMIS, including, but not limited to, withdrawals of fictitious profits from IA Accounts; salaries and bonuses from 2001 to 2008 in the total amount of $29,320,830; real estate loans in the amount of $15,126,589; and payments funding real estate purchases, business investments, and personal credit card bills. Compl. ¶¶ 74-84. Likewise, Andrew allegedly received at least $60,644,821 from BLMIS, including, but not limited to, withdrawals of fictitious profits from IA Accounts; $31,105,505 in salary and bonuses between 2001 and 2008; loans totaling $11,285,000; and various other payments funding business investments, the purchase and maintenance of a boat, and personal credit card expenses. Compl. ¶¶ 85-94.
C. Shana Madoff
Shana Madoff (“Shana”), Madoff s niece, served as the in-house Counsel and Compliance Director for BLMIS. She is a law
Like Peter, Shana was purportedly responsible for monitoring BLMIS’s operations and ensuring compliance with federal securities laws and regulations and corresponding FINRA rules and regulations. Compl. ¶¶ 28-36, 43-46.
Shana allegedly received at least $10,607,876 from BLMIS, including, but not limited to, withdrawals of fictitious profits from IA Accounts; salaries from 2001 to 2008 in the amount of $3,832,878; as well as various payments funding the purchase of a home, business investments, interior decoration, rent, and personal credit card expenses. Compl. ¶¶ 95-98.
MOTION TO DISMISS UNDER RULE 12(b)(6) STANDARD OF REVIEW
Rule 12(b)(6) allows a party to move to dismiss a cause of action for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6); Fed. R. BaNkrP. 7012(b). When considering a motion to dismiss under Rule 12(b)(6), a court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiffs favor.
Ashcroft v. Iqbal,
To survive a motion to dismiss, a pleading must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.CivP. 8(a)(2); Fed. R. BanKR.P. 7008. A recitation of the elements of the cause of action supported by mere conclusory statements, however, is insufficient.
Iqbal,
DISCUSSION
I. THE BANKRUPTCY CLAIMS
In Counts Two through Ten of the Complaint, the Trustee seeks to avoid and recover payments totaling $198,743,299 made to or for the benefit of the Defendants pursuant to sections 544, 547, 548, 550, and 551 of the Code and various sections of the NYDCL. The Trustee alleges that more than 383 transfers totaling $141,034,907 to or for the benefit of the Defendants in the six year period (the “Six-Year Transfers”) prior to December 11, 2008 (the “Filing Date”),
9
and are avoidable and recoverable under sections 544, 550(a), and 551 of the Code and sections 273 through 276 of the NYDCL. Compl. ¶ 106. Of the Six-Year Transfers, at least 129 totaling $58,666,811 were allegedly made within two years pri- or to the Filing Date (the “Two-Year Transfers”) and are avoidable and recover
A. Actual Fraud Under the Code and the NYDCL
In Counts Three and Five of the Complaint, the Trustee seeks to avoid and recover, under a theory of actual fraud, Two Year Transfers pursuant to section 548(a)(1)(A), and Six Year Transfers under section 544 of the Code and section 276 of the NYDCL (collectively, the “Actual Fraudulent Transfers”). With regard to the Trustee’s Actual Fraudulent Transfers claims, although the Complaint adequately alleges the element of intent, it fails, in many instances, to state the factual circumstances constituting the fraud as required by Rule 9(b).
Pursuant to section 548(a)(1)(A) of the Code, a trustee must establish the debtor “made such transfer ... with actual intent to hinder, delay, or defraud.” 11 U.S.C. § 548(a)(1)(A). Under section 276 of the NYDCL, a trustee similarly may avoid any “conveyance made ... with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors.” NYDCL § 276. A claim brought under either statute must be supported by enough factual allegations to satisfy the pleading requirements set forth under Rule 9(b).
Am. Tissue, Inc. v. Donaldson, Lufkin & Jenrette Sec. Corp.,
i. The Trustee Has Adequately Alleged the Element of Intent in His Actual Fraudulent Transfer Claims in Accordance with Rule 9(b)
As a matter of law, the “Ponzi scheme presumption” establishes the debtors’ fraudulent intent as required under both the Code and the NYDCL.
Gowan v. The Patriot Group, LLC (In re Dreier LLP),
The Ponzi scheme presumption applies only to the
transferor’s
intent.
See Patriot,
ii. The Trustee Has Not Identified All of the Actual Fraudulent Transfers with Particularity Under Rule 9(b)
The fraudulent intent of the debtor/transferor is one essential element of a prima facie claim brought under either section 548(a)(1)(A) of the Code or section 276 of the NYDCL. A second requirement is that the transfers sought to be avoided must be identified with particularity in accordance with Rule 9(b). Fed. R.Crv.P. 9(b); Fed. R. BaNKr.P. 7009. Here, many of the Actual Fraudulent Transfers are not so identified.
To satisfy Rule 9(b)’s particularity requirement, a party must ordinarily allege: “(1) the property subject to the transfer, (2) the timing and, if applicable, frequency of the transfer and (3) the consideration paid with respect thereto.”
Pereira v. Grecogas Ltd., (In re Saba Enters., Inc.),
Of course, “relaxing the particularity requirement” of Rule 9(b) does not “eliminate” it.
Devaney v. Chester,
To begin with, the Trustee fails to specify which Count he seeks to employ to avoid each Actual Fraudulent Transfer. For example, under Count Three, the Complaint fails to identify which of the Two Year Transfers are additionally Preferences.
11
Similarly, with respect Count
Second, piecing together the facts contained in the Complaint reveals that the majority of the Actual Fraudulent Transfers are not identified completely. Peter’s 1954 Aston Martin provides an illustrative example: allegedly there were four payments totaling approximately $274,562 for its purchase and restoration, but it is not clear how, to whom, or when those payments were made. Compl. ¶ 73;
see Official Comm. of Unsecured, Creditors of M. Fabrikant & Sons Inc. v. JPMorgan Chase Bank, N.A (In re M. Fabrikant & Sons, Inc.),
Rectifying the majority of these pleading deficiencies upon amendment should not prove to be a Herculean task. For example, more detailed information appears to be readily accessible to the Trustee given that the Complaint already includes information related to the credit cards used by the Defendants as well as examples of personal charges paid by BLMIS. Compl. ¶¶ 73, 84, 94, 98. Similarly, since the Trustee has indicated that
four
payments were made for the purchase and restoration of the Aston Martin, he likely can specify the method, amount, and date of each of those payments without much difficulty. Compl. ¶ 73. The Complaint as it currently stands, however, has too many porous and disparate factual allegations to provide a legal basis to sustain many of the Trustee’s Actual Fraudulent Transfer claims.
12
See Fed. Nat’l. Mortgage Ass’n,
Notwithstanding these pleading deficiencies, the Complaint nevertheless identifies a few Actual Fraudulent Transfers with Rule 9(b) particularity (the “Particularly Pled Actual Fraudulent Transfers”).
See Fed. Nat’l. Mortgage Ass’n.,
Accordingly, except with regard to Particularly Pled Actual Fraudulent Transfers, Counts Three and Five
14
of the Complaint are dismissed, with leave to
B. The Trustee Has Sufficiently Pled the Application of the Discovery Rule to Avoid the Particularly Pled Actual Fraudulent Transfers Occurring Prior to Six Years Before the Filing Date
All but one of the Particularly Pled Actual Fraudulent Transfers occurred more than six years prior to the Filing Date. Consequently, these Transfers can be avoided only by invoking New York’s “discovery rule,” which permits a plaintiff to commence a cause of action predicated on actual fraud within two years of the date the fraud was or should have been discovered with reasonable diligence. NYCPLR §§ 213(8), 203(g);
see Silverman v. United Talmudical Acad. Torah Vyirah, Inc. (In re Allou Distribs., Inc.),
Pursuant to well-established case law, so long as a bankruptcy trustee provides sufficient notice to the defendants of at least one category of creditors that have standing to avoid an actual fraudulent transfer under non-bankruptcy law, the trustee has standing to assert that actual fraudulent transfer claim under section 544(b) of the Code.
Global Crossing Estate Rep. v. Winnick,
No. 04-CIV-2558,
The Complaint provides sufficient notice to the Defendants of at least one category of creditors on whose claims the Trustee bases his standing to avoid transfers under New York’s discovery rule: defrauded BLMIS customers. Specifically, it states that “[a]t all times relevant to transfers, the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS,” Compl. ¶ 161, and that “[a]t all times relevant to the transfers, there have been one or more creditors who have held and still hold matured or unmatured unse
C. Constructive Fraud Under the Code and the NYDCL
In Counts Four, Six, Seven, and Eight of the Complaint, the Trustee seeks to avoid and recover, under a theory of constructive fraud, Two Year Transfers pursuant to section 548(a)(1)(B) of the Code, and Six Year Transfers under section 544 of the Code and sections 273-275 of the NYDCL (collectively the “Constructive Fraudulent Transfers”). This Court finds most, but not all, of the allegations corresponding to the Constructive Fraudulent Transfers provide sufficient information to sustain the Trustee’s avoidance claims under the liberal pleading standards of Rule 8(a), as set forth below.
Section 548(a)(1)(B) of the Code requires the Trustee to show,
inter alia,
BLMIS did not receive “reasonably equivalent value” for any of the transfers alleged to be fraudulent. 11 U.S.C. § 548(a)(1)(B). Similarly, under sections 273 through 275 of NYDCL, the Trustee must demonstrate BLMIS did not receive “fair . consideration” for the same. NYDCL §§ 273-275. It has been found, “‘reasonably equivalent value’ in Section 548(a)(1)(B), [and] ‘fair consideration’ in the [NYDCL] ... have the same fundamental meaning.”
Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortgage Inv. Corp.),
Under both the Code and the NYDCL, courts consistently hold that “claims of constructive fraud do not need to meet the heightened pleading requirements of Fed.R.Civ.P. 9(b).”
Bank of Commc’ns v. Ocean Dev. Am., Inc.,
No. 07-CIV-4628,
The Defendants concede that Rule 9(b) is typically not applicable because the conduct of the transferee is normally irrelevant to constructive fraud, which merely looks at the value given and the solvency of the transferor. They contend nevertheless that Rule 9(b) does apply in the instant proceeding because the underlying allegations sound in fraud. But not every allegation of wrongful conduct sounds in fraud for purposes of Rule 9(b); the Trustee has not alleged, and need not allege for purposes of constructive fraud, that the Defendants were involved in the kind of misrepresentation or deceit that would require a heightened pleading standard. Instead, the only relevant allegation to this Constructive Fraudulent Transfer claim is that the Defendants breached fiduciary duties by failing to perform compliance responsibilities and therefore did not provide value for their wages. Such a breach of a fiduciary duty does not implicate Rule 9(b).
See Official Comm. of Unsecured Creditors v. Donaldson, Lufkin & Jenrette Secs. Corp.,
No. 00 Civ. 8688,
i. The Trustee Has Sufficiently Pled that BLMIS Did Not Receive Value for Purposes of Constructive Fraud Under the Code and the NYDCL
The Constructive Fraudulent Transfers that the Trustee seeks to avoid include Defendants’ withdrawals of ficti
With respect to the Defendants’ withdrawals of profits from their BLMIS IA Accounts, courts have consistently held that fictitious profits from a Ponzi scheme are deemed to have been received for less than reasonably equivalent value and can be avoided.
See Sender v. Buchanan (In re Hedged-Inv. Assoc., Inc.),
The Defendants unsuccessfully argue that their services constituted reasonably equivalent value and fair consideration given to BLMIS in exchange for their salaries. In support of this contention, the Defendants rely upon
Churchill I
where the court found the brokers provided value for the commissions they received by performing their duties.
Notwithstanding the Defendants’ arguments to the contrary, this conclusion is consistent with the decision in
Churchill I.
There, the trustee sought to recover commissions paid to brokers by debtors for bringing investors into a Ponzi scheme, on the theory that services enlarging the scope of the debtors fraudulent scheme do not give value. In rejecting the trustee’s theory, the
Churchill I
court reasoned that the debtors’ involvement in a fraudulent enterprise did not determine whether value was given under section 548 of the Code.
In contrast to
Churchill I,
where the brokers faithfully carried out their duties, the Trustee here takes direct aim at the “astronomical” compensation — including payments to Mark and Andrew of $4.8 million in 2006 and over $9 million in 2007 — that was paid despite the Defendants’
failure to fulfill their employment duties.
Compl. ¶¶ 74, 85. Therefore, even if the Defendants’ wages were proportionate to the wages of senior management in legitimate enterprises, a fact the Trustee does not concede, the Defendants returned less than reasonable equivalent value to BLMIS as a result of their alleged lack of faithful service.
See Churchill I,
In any event, the Court need not make a finding as to whether the Defendants’ services constituted adequate value, as these issues often involve factual inquiries inappropriate for a motion to dismiss.
In re Actrade Fin. Techs. Ltd.,
ii. The Trustee Has Pled Nearly Every Constructive Fraudulent Transfer in Satisfaction of Rule 8(a)
In accordance with the liberal pleading requirements of Rule 8(a), “[t]he plaintiff need not provide specific facts to support its allegations.”
Fabrikant,
Accordingly, many of the allegations underlying the Constructive Fraudulent Transfers in the Complaint satisfy the notice pleading standard of Rule 8(a), including a number of the allegations that aggregate these Transfers over several years. For instance, the Trustee’s allegation that $6,645,000 was
Other allegations are not as satisfactory. Certain aggregations in the Complaint (the “Longer Aggregations”)
17
include transfers that extend beyond any applicable look-back period
18
and it is unclear which ones, if any, the Trustee seeks to avoid as constructively fraudulent. Other transfers are listed in the Complaint without providing any date associated with the transfer (the “Undated Transfers”),
19
While discovery is sometimes necessary to assist a trustee in clarifying the circumstances surrounding particular Constructive Fraudulent Transfers — for instance when the trustee has no access to the debtor’s books and records or the books and records are in shambles — the Trustee here has not provided any such explanation. Accordingly, the Motions to Dismiss the Trustee’s Constructive Fraudulent Transfer claims are granted with respect to the Longer Aggregations and the Undated Transfers, with leave to amend the Complaint within forty five days. As to the remainder of the Trustee’s Constructive Fraudulent Transfer claims, the Motions to Dismiss are denied,
iii. Section 546(e) Does Not Provide a Basis for Dismissing The Trustee’s Constructive Fraudulent Transfer Claims
Mark and Andrew unsuccessfully argue their withdrawals of fictitious profits are insulated from liability by the “safe harbor” of section 546(e) of the Code, which provides, in relevant part, that “the trustee may not avoid ... [a] settlement payment ... made by or to (or for the benefit of) a ... stockbroker ... in connection with a securities contract.” 11 U.S.C. § 546(e). “Settlement payment” is defined as a “preliminary settlement payment, a partial settlement payment, an interim settlement payment ... or any other similar payment commonly used in the securities trade.” 11 U.S.C. § 741(8). A “stockbroker” is a person who has a customer and “that is engaged in the business of effecting transactions in securities.” 11 U.S.C. § 101(53A)(A), (B). A “securities contract” is defined as, inter alia, “a contract for the purchase, sale, or loan of a security.” 11 U.S.C. § 741 (7) (A) (i)-(xi). Mark and Andrew contend that the Constructive Fraudulent Transfers made from their IA Accounts are settlement payments by a stockbroker pursuant to a securities contract, and thus cannot be avoided. See Memorandum of Law in Support of Defendants Mark and Andrew Madoff s Motion to Dismiss at p. 38, 39 (No. 09-01503) (dated March, 15, 2010) (Dkt. No. 13) [Hereinafter “Mark and Andrew Mot.”].
In
Merkin I,
this Court addressed virtually identical arguments, and found that they were at best premature, as section 546(e) provides an affirmative defense that, unless clearly established on the face of the Complaint, does not tend to controvert the Trustee’s
prima facie
case.
For the same reason, it is doubtful whether the payments from BLMIS to the Defendants are settlement payments as contemplated by the statute. Settlement payments subject to the safe harbor of section 546(e) must be made in the context of a “securities transaction.”
See In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V.,
09-5122, 09-5142,
Additionally, even if BLMIS were a stockbroker, the Court is unable to conclude that a “securities contract” ever existed. The Defendants do not explain what qualifies as an investment contract in this case and merely conclude that “the Bankruptcy Code’s definition of a ‘securities contract’ certainly covers the transactions here.” Mark and Andrew Mot. at p. 39. Surely the IA Account agreements are not investment contracts as a matter of law; this Court has previously questioned whether they effect “the purchase, sale, or loan of a security” between the parties or contemplate any particular security transaction. 11 U.S.C. § 741(7)(A). At most, they merely authorize Madoff to act as “agent and attorney in fact to buy, sell and trade in stocks, bonds, options and any other securities” in the future on the Fund Defendants’ behalf.
See Merkin I,
Moreover, as this Court has previously held, the application of section 546(e) must be rejected as contrary to the purpose of the safe harbor provision and incompatible with SIPA. Section 546(e) was intended to promote stability and instill investor confidence in the commodities and securities markets.
Merkin I,
In light of the foregoing, I hold that the Defendants’ arguments under section 546(e) fail to establish a basis for dismissing the Trustee’s Constructive Fraudulent Transfer claims.
The Trustee has insufficiently pled Count Two of the Complaint to avoid and recover Preferences.
i. The Trustee Has Adequately Pled the Statutory Elements of a Preference Claim
Section 547(b) of the Code provides that a trustee may avoid a transfer from BLMIS, if the transfer is made to or for the benefit of a creditor, for or on account of an antecedent debt, while the debtor was insolvent, and within one year before the date of the filing of the petition if the creditor was an insider, as well as allows such creditor to receive more than it would in a chapter 7 liquidation. 11 U.S.C. § 547(b). Claims to avoid and recover preferential payments are not held to the heightened pleading requirements of Rule 9(b).
See Family Golf Ctrs., Inc. v. Acushnet Co. (In re Randall’s Island Family Golf Ctrs.),
The Trustee has adequately pled the requisite elements with regard to the Preferences. The Trustee has sufficiently alleged the Defendants are insiders of BLMIS subject to a one-year preference look back period, as all of the Defendants are close relatives of Madoff and were officers or senior managers at BLMIS.
See
11 U.S.C. § 101(31)(B) (defining insiders of a corporate debtor to include officers of the debtor and “relative[s] of a general partner, director, officer, or person in control of the debtor”). Additionally, as discussed above, Ponzi schemes are presumptively insolvent, and the Trustee need not allege specific facts supporting the insolvency of BLMIS at the times of the preferential transfers. Finally, the Trustee alleges the Preferences were compensation for services performed by the Defendants prior to payment, and suffice to show the payments were to a creditor on account of an antecedent debt.
See Pryor v. Cohen (In re Blue Point Carpet, Inc.),
ii. The Trustee Has Not Identified the Preferences with Sufficient Information
The Trustee’s Preference claims fail to provide the minimum information required by Rule 8(a). The Trustee’s allegations aggregate the transfers into a lump sum without specifying the number of Preferences, the amount of any specific Preference, or which defendant received any specific Preference.
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While Rule 8(a) does not require specific factual detail,
E. The Trustee Fails to Adequately Plead his Claims To Recover Subsequent Transfers From the Defendants
The Trustee has insufficiently pled Count Ten of the Complaint to recover funds subsequently transferred to the Defendants (the “Subsequent Transfers”) under section 550(a)(2) of the Code and section 278 of the NYDCL.
See
11 U.S.C. § 550(a)(2) (allowing recovery from “any immediate or mediate transferee of such initial transferee”); NYDCL § 278 (allowing recovery from “any person”);
Farm Stores, Inc. v. Sch. Feeding Corp.,
In determining whether a claim to recover fraudulent transfers from a subsequent transferee is adequately pled, Rule 8(a) governs.
Stratton Oakmont, Inc.,
Here, the Complaint merely alleges that “[o]n information and belief, some or all of the transfers were subsequently transferred by one or more [of the Defendants]
The
Amaranth
court held similarly vague allegations to be insufficient to sustain a subsequent transfer claim.
Accordingly, Count Ten of the Complaint to recover Subsequent Transfers is dismissed with leave to amend within forty five days.
F. The Trustee has Sufficiently Pled a Basis For Disallowing the Defendants’ SIPA Claims
The Trustee has sufficiently pled Count Eleven of the Complaint to disallow the Defendants’ SIPA claims under section 502(d) of the Code, which states, “the court shall disallow any claim of any entity ... that is a transferee of a [voidable] transfer.” 11 U.S.C. § 502(d). The purpose of this section is to “preclude entities that have received voidable transfers from sharing in the distribution of assets unless and until the voidable transfer has been returned to the estate.”
In re Mid. Atl. Fund, Inc.,
G. The Trustee Has Adequately Alleged a Claim for Equitable Subordination of the Defendants’ SIPA Claims
The Trustee has sufficiently pled Count Twelve of the Complaint to equitably subordinate the Defendants’ SIPA claims, pursuant to section 510(c) of the Code, which empowers this Court to “subordinate for the purposes of an allowed interest to all or part of another allowed interest.” 11 U.S.C. § 510(c).
“To plead equitable subordina-' tion successfully, a complaint must contain enough facts to satisfy each part of the following three-part test: (1) that the [Defendants] engaged in inequitable conduct, (2) that the misconduct caused injury to the creditors or conferred an unfair advantage on the defendant-claimant, and (3) that bestowing the remedy of equitable subordination is not inconsistent with bankruptcy law.”
In re Hydrogen, L.L.C.,
The Complaint is replete with allegations that the Defendants have left much to undo.
See
Comp ¶¶ 28-29, 32, 37-39, 43, 45, 47-49, 51-58, 73, 94, 98, 182. As explained in-depth below, the Complaint sufficiently alleges that the Defendants breached their fiduciary duties to BLMIS and those breaches directly harmed the same.
See
Section II.C.
infra; Official Comm. of Unsecured Creditors of the Debtors v. Austin Fin. Servs., Inc., (In re KDI Holdings, Inc.),
II. THE COMMON LAW CLAIMS
Through the Common Law Claims the Trustee seeks to recover damages suffered' by BLMIS as a result of the Defendants’ failure to perform duties arising from their management roles at BLMIS. To support these Claims, the Complaint alleges that the Defendants were directors, officers, managers, and fiduciaries with broad oversight of BLMIS as a whole, and that their responsibilities included developing and implementing a supervisory system to prevent and report any fraudulent activity occurring within BLMIS. Specifically, according to BLMIS’s purported compliance policies, the Defendants were required to “respond to red flags,” closely scrutinize “any aberrational activity,” and “monitor ... the activities of BLMIS personnel to ensure that the policies and procedures ... [were] being followed.” Compl. ¶ 33. The Trustee alleges the Defendants failed to implement and comply with these policies, thereby directly enabling Madoffs Ponzi scheme to continue undetected to the detriment of BLMIS.
Before reaching the merits of the Common Law Claims, the Court must first determine whether the Trustee has standing to assert them, and second, if he does, whether New York General Business Law §§ 352 et seq., commonly referred to as the Martin Act, otherwise preempts him from bringing them. N.Y. Gen. Bus. Law §§ 352 et seq. (McKinney 2010). As set forth below in greater detail, this Court finds the Trustee has standing to assert Common Law Claims on behalf of the BLMIS estate, and the Martin Act does not preempt him from pursuing them against the Defendants.
A. The Trustee Possesses Standing to Pursue the Common Law Claims on behalf of the BLMIS Estate
Given the “hybrid” nature of a SIPA liquidation,
In re BLMIS II,
In
HSBC,
the Trustee, as successor in interest to Madoff and BLMIS, lacked standing under the
Wagoner
rule
25
to bring common law fraud claims against the defendants (the “HSBC Defendants”).
General partners, sole shareholders, and sole decision makers are “insiders” or fiduciaries in the context of the
in pari delicto
doctrine under New York common law.
In re Adelphia Communs. Corp.,
The Complaint alleges that the Defendants were senior officers, directors, and compliance managers of BLMIS. Comp. ¶¶ 28-36. Peter, an experienced and licensed investment and legal professional, held the title of Senior Managing Director and Chief Compliance Officer of BLMIS and was designated principal responsible for supervising BLMIS personnel in the absence of Madoff himself. Comp. ¶¶ 37-42. Mark and Andrew, also investment professionals, held titles of Co-Directors of Trading at BLMIS, and were designated as personally responsible for carrying out the Firm’s policy in Madoffs absence. Comp. ¶¶ 47-51. Shana was in-house Counsel and Compliance Director of
Accordingly, the Wagoner rule and the in pari delicto doctrine do not bar the Trustee from asserting Common Law Claims on behalf of BLMIS against the Defendants.
B. The Trustee’s Common Law Claims are Not Preempted by New York’s Martin Act
For the better part of a century, the Martin Act has empowered the New York State Attorney General to take action against fraudulent practices involving securities.
See
Anwar,
(a) Any fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale;
(b) Any promise or representation as to the future which is beyond reasonable expectation or unwarranted by existing circumstances;
(c) Any representation or statement which is false, where the person who made such representation or statement: (i) knew the truth; or (ii) with reasonable effort could have known the truth; or (iii) made no reasonable effort to ascertain the truth; or (iv) did not have knowledge concerning the representations or statements made.
N.Y. Gen. Bus. Law § 352-c (McKinney 2010).
The Common Law Claims arise from the Defendants’ alleged derelictions of internal management duties and misuses of company funds unrelated to any specific investment accounts under management or any particular investment advice or decision.
See
Compl. ¶¶ 28-36, 42, 46, 49, 52-58. Thus, absent allegations of one of the types of conduct prohibited by the Martin Act—fraud, deception, unreasonable future promise, or false representation related to the sale of security—these Claims do not implicate its plain language.
See Assured Guar. (UK) Ltd.,
The Defendants nevertheless contend that if the Common Law Claims were permitted to go forward, the policy underlying the Martin Act would be undermined or otherwise compromised. They explain that the Martin Act grants the New York Attorney General exclusive power over all claims arising out of securities fraud, and thus “[t]o allow private plaintiffs to bring common law claims related to the Martin
Here, because “the Attorney General has, by operation of statute, no enforcement power,” it is “difficult to see how permitting a common law claim to go forward would interfere with the state’s legislature’s enforcement mechanism.”
Nanopierce Techs., Inc. v. Southridge Capital Mgmt. LLC,
No. 02 Civ. 0767,
The Motions to Dismiss on Martin Act preemption grounds are therefore denied.
Having determined that the Martin Act and the Wagoner Rule do not affect the Trustee’s ability to assert the Common Law Claims, this Court now turns to whether these Claims survive Rule 12(b)(6) scrutiny. The Trustee’s Common Law Claims for breach of fiduciary duty, negligence, unjust enrichment, constructive trust, and accounting in Counts Thirteen, Sixteen, Fifteen, Seventeen, and Eighteen of the Complaint, respectively, survive Rule 12(b) scrutiny. The Trustee’s claim for conversion in Count Fourteen of the Complaint, however, is dismissed with leave to amend within forty five days.
C. The Trustee’s Claims for Breach of Fiduciary Duty and Negligence are Adequately Pled
Under New York law, “[t]he elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct.”
Rut v. Young Adult Inst., Inc.,
The Complaint alleges that each Defendant’s relationship with BLMIS was fiduciary in nature since it was “characterized by trust and reliance” as well as an “assumption of control and responsibility for the affairs of [the firm].”
TP Grp., Inc. v. Wilson,
No. 89 Civ. 2227,
Just as the Trustee has sufficiently alleged the existence of a fiduciary relationship between the Defendants and BLMIS, so has the Trustee plausibly al
The Second Circuit’s opinion in
Gully v. National Credit Union Administration Board
illustrates how the Defendants’ derelictions of their compliance and supervisory duties constitute breaches notwithstanding Madoffs confessed masterminding of the fraud.
With that in mind, the Defendants may not escape liability by pointing to Madoffs fraudulent undertakings. Put another way, Madoffs fraudulent activities do not constitute a supervening cause that severs the causal link between the Defendants’ above-mentioned breaches and the foreseeable resulting harm to BLMIS. More to the point, “when the intervening, intentional act of another is itself the foreseeable harm that shapes the duty imposed, the defendant who fails to guard against such conduct will not be relieved of liability when that act occurs.”
Kush v. City of Buffalo,
i. Punitive Damages for Negligence and Breach of Fiduciary Duty Claims
For his negligence and breach of fiduciary duty claims, the Trustee asserts that the Defendants’ “conscious, willful, wanton, and malicious conduct entitles [him], on behalf of BLMIS and its creditors, to an award of punitive damages in an amount to be determined at trial.” Comp ¶¶ 187, 205. For the following reasons, the Trustee’s pursuit of punitive damages against the Defendants cannot be dismissed at this early stage of the case.
Under New York law, punitive damages serve the dual purposes of punishing the offending party while deterring similar conduct by others.
See Ross v. Louise Wise Servs., Inc.,
The Trustee has sufficiently alleged that the acts and omissions of the Defendants were performed under circumstances showing “heedlessness and an utter disregard” for the rights or interests of BLMIS and, ultimately, all those who foreseeably relied upon its professed integrity. As discussed extensively above, the Trustee has been unable to identify any meaningful supervision of BLMIS by the Defendants.
See, e.g.,
Compl. ¶ 47. These alleged failures to adequately fulfill their jobs were not, as Mark and Andrew contend, mere “passive shortcomings” regarding their compliance duties. Mark and Andrew Mot. at 45. Rather, the Defendants spent every day for over twenty years in the
D. The Trustee Has Adequately Pied Claims for an Accounting of Funds Allegedly Diverted from BLMIS
The Trustee has sufficiently alleged Count Eighteen of the Complaint, which states that in order “to compensate BLMIS for the amount of monies the [Defendants] diverted from BLMIS for their own benefit, it is necessary for the [Defendants] to provide an accounting of any transfer of funds, assets or property received from BLMIS.” Compl. ¶ 214.
Under New York law, an accounting is a cause of action that seeks “an adjustment of the accounts of the parties and a rendering of a judgment for the balance ascertained to be due.”
DiTolla v. Doral Dental IPA of New York, LLC,
The Complaint states a claim for an accounting because it sufficiently alleges the Defendants had a fiduciary relationship with BLMIS and they breached their duties imposed by that relationship regarding the property in which the Trustee has an interest.
See Stratton Oakmont, Inc.,
E. The Trustee’s Unjust Enrichment and Constructive Fraud Claims Are Adequately Pled
Count Fifteen of the Complaint states that the Defendants benefited from the receipt of money from BLMIS at its expense, without adequately compensating or providing value to it, and that “[e]quity and good conscience require full restitution of the monies received by [Defendants] from BLMIS.” Compl. ¶¶ 195-96. Count Seventeen further states that “because of past unjust enrichment of the [Defendants], the Trustee is entitled to the imposition of a constructive trust with respect to any transfer of funds, assets, or property from BLMIS as well as any profits received by the [Defendants] in the past or on a going forward basis in connection with BLMIS.” Compl. ¶209. Both Counts Fifteen and Seventeen of the Complaint pass muster under Rule 12(b) because the Trustee has alleged enough facts in the Complaint to sustain his claims for unjust enrichment and the imposition of a constructive trust against the Defendants.
New York courts have long recognized that “a court of equity in decreeing a constructive trust is bound by no yielding formula. The equity of the transaction must shape the measure of relief.”
Beatty v. Guggenheim Exploration Co.,
Here, the Defendants allegedly misappropriated BLMIS’s funds for improper personal uses such as funding personal business ventures and homes. Compl. ¶¶ 66-99. The Defendants also allegedly failed to perform legal compliance and supervisory responsibilities they were legally obligated to perform at BLMIS, but nevertheless received astronomical compensation from the same. Compl. ¶¶ 28, 37, 43, 57, 58, 64. These and other similar facts alleged in the Complaint, when viewed in conjunction with the relevant precedent, sufficiently establish that the Defendants ended up with BLMIS’s funds that they should not possess, and more to point, in possessing them, the Defendants unjustly enriched themselves at the expense of BLMIS.
As the Trustee has sufficiently alleged that the Defendants are unjustly enriched by property rightfully belonging to BLMIS, the Trustee has adequately pled the requisite equitable basis for the imposition of a constructive trust.
Simonds v. Simonds,
The effect of a constructive trust in bankruptcy is profound. While the bankrupt estate is defined very broadly under § 541(a)(1) of the Bankruptcy Code to include all legal or equitable interests of the debtor, any property that the debtor holds in constructive trust for another is excluded from the estate pursuant to § 541(d) ... A constructive trust thus places its beneficiary ahead of other creditors with respect to the trust res.
In re Flanagan,
F. The Trustee’s Claim for Conversion is Dismissed
Under New York law, “[c]on-version is an unauthorized assumption and exercise of the right of ownership over [property] belonging to another to the exclusion of the owner’s rights.”
Traffix v. Herold,
Because the Complaint does not seek a specific amount of money converted from a particular account, but rather “an award of compensatory damages in an amount to be determined at trial” it fails to state a claim for conversion under New York law. Compl. ¶ 192. The Complaint asserts vague, unsubstantiated allegations that “BLMIS had a possessory right and interest to its assets, including its customers’ investment funds,” Compl. ¶ 189, and “[t]he Family Defendants converted the investment funds of BLMIS customers when they received money originating from other BLMIS customer accounts in the form of loans, payments, and other transfers. These actions deprived BLMIS and its creditors of the use of this money,” Compl. ¶ 190. Such allegations “merely refer[] to unspecified monies and assets” and give “no indication of an identifiable fund or otherwise segregated amount, nor ... any description of the alleged transfer or transfers from which the Court could infer a specifically identified fund of money.”
Global View Ltd. Venture Capital v. Great Central Basin Exploration, L.L.C.,
CONCLUSION
For the aforementioned reasons, the Motions to Dismiss are denied except with regard to the Trustee’s: (1) Preference claims in Count Two, (2) Actual and Constructive Fraudulent Transfer claims in Count Three through Nine to the extent stated herein, (3) Subsequent Transfer claims in Count Ten, and (4) his conversion claim in Count Fourteen, with leave to amend the Complaint within forty five days consistent with the foregoing determinations.
Thus, to the extent described above, the Motions to Dismiss the Complaint are DENIED in part and GRANTED in part.
IT IS SO ORDERED.
Notes
. Mark D. Madoff passed away on December 11, 2010. The parties have stipulated that Mark D. Madoff in the above-captioned adversary proceeding is substituted by the Estate of Mark D. Madoff and Andrew H. Madoff, as Executor. See Stipulation and Order Substituting Party at p. 2 (dated Apr. 19, 2011) (Dkt. No. 47). For ease of reference, the Estate of Mark D. Madoff and Andrew H. Madoff, Executor, are referred to herein as Mark Madoff or Mark.
.SIPA sections 78fff(b) and 781ff-2(c)(3) allow a SIPA Trustee to utilize the avoidance powers enjoyed by a bankruptcy trustee.
See In re Bernard L. Madoff Inv. Sec. LLC,
. There is no paucity of decisional law regarding Bernard Madoff and the Trustee’s restitutional litigation relating to this Ponzi saga. Instructive and pertinent to the factors to consider when parsing a Rule 12(b) motion to dismiss arising from the Madoff case is the recent decision of U.S. District Judge Kimba Wood (the "District Court”) reviewing the Trustee's pleading sufficiency in another Ma-doff matter set at the same pleading stage as this one.
Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC),
11 MC 0012,
. N.Y. Debt. & Cred. Law § 270 et seq. (McKinney 2001).
. In accordance with this Court's decision in
Picard v. Merkin
the Trustee withdrew the claim for immediate turnover of alleged customer property pursuant to section 542 of the Code.
. The Complaint, like in a game of horseshoes, is a leaner rather than a ringer in that it misses the target, but comes close enough to score. For further discussion on leaners and ringers, see http://www.horseshoe pitching.com/rules/Content.html (last visited on Sept. 21, 2011).
. Peter transferred his ownership interest in the Aston Martin to the Trustee on May 4, 2011. Shortly thereafter, the Trustee won approval from this Court to retain an auctioneer to transport, store, repair and sell the Aston Martin at auction. See Order Authorizing the Sale of the Property of the Estate at p. 2 (No. 08-01789) (dated June 15, 2011) (Dkt. No. 4165). In August 2011, the Aston Martin was sold at auction for $225,000. See Notice of Sale of Aston Martin (No. 08-01789)(date Sept. 21, 2011)(Dkt. 4377).
. MSIL was placed into liquidation in the U.K. shortly after the commencement of this SIPA liquidation. On April 14, 2009, the joint provisional liquidators for MSIL filed a chapter 15 petition in the United States Bankruptcy Court for the Southern District of Florida seeking recognition of the U.K. liquidation. Following a transfer of that case to the Southern District of New York, this Court granted recognition of the U.K. liquidation as a foreign main proceeding. See Order Recognizing Foreign Proceeding at p. 2 (No. 09-12998) (dated June 6, 2009) (Dkt. No. 25).
. On December 11, 2008, Bernard Madoff was arrested by federal agents for violation of criminal securities laws, including,
inter alia,
securities fraud investment adviser fraud, and mail and wire fraud. Contemporaneously, the Securities Exchange Commission filed a complaint in United States District Court for the Southern District of New York. Compl. ¶ 13;
see also In re BLMIS I,
. Accordingly, the Defendants' arguments that they "took for value” and “in good faith” are affirmative defenses under sections 548(c) of the Code and 278 of the NYDCL and thus "should be considered on a full evidentiary record, either at the summary judgment phase or at trial.”
Merkin II,
. Pursuant to section. 547(b)(4)(B) of the Code, the one year statutory look back period
. It bears noting that of the complaints filed by the Trustee in connection with Madoff Ponzi scheme, those that withstood Rule 9(b) scrutiny included multiple exhibits detailing the payments that the Trustee sought to avoid as actual fraudulent transfers.
See, e.g., Cohmad,
. The Court assumes that the Trustee seeks to recover these two transfers under a benefit theory pursuant to section 550(a)(1) of the Code. Compl. ¶ 73 ("[T]he Trustee has identified the following transfers to Peter or
on his behalf
for which BLMIS received no corresponding benefit or value.”) (emphasis added);
see also Stratton Oakmont, Inc.,
. Count Five's request for attorneys’ fees under section 276-a of the NYDCL is not ripe for determination at this early stage.
See Patriot,
. Contrary to the Defendants’ position, BLMIS was insolvent at the time of the Constructive Fraudulent Transfers given that Pon-zi schemes are, by definition, at all times insolvent.
See Armstrong v. Romano,
Nos. 01 Civ. 2437,
et. al.,
. These are just illustrative examples of some of the many Constructive Fraudulent Transfers that have been adequately pled. Only those identified in the following paragraphs have not been so pled.
. The Longer Aggregations include: (1) the Defendants’ salaries and bonuses between 2001 and 2008, Compl. ¶¶ 65, 74, 85, 96 (this does not include the $4.8 million dollar bonus to both Mark and Andrew in 2006 which has been properly pled under the NYDCL, and the bonus of over $9 million dollars to both Mark and Andrew in 2007 which has been properly pled under the Code and the NYDCL, Compl. ¶¶ 74, 85); (2) transfers from BLMIS between 1996 and 2008 funding a life insurance policy for Peter, Compl. ¶ 73; (3) payments on Peter's behalf between January 18, 2000 and April 11, 2006 to limited partnerships where Peter was an investor, Compl. ¶ 73; (4) payments in 2002 to the Beacon Point Marine in Connecticut where Andrew kept a boat, Compl. ¶ 94; (5) payments in 2001 and 2002 to "Lock and Hackle,” a fly fishing and hunting membership club in Miami, Florida on Andrew’s behalf, Compl. ¶ 94; and (6) Shana's withdrawals of fictitious profits from her IA Account prior to December 2008, Compl. ¶ 97.
. In the context of constructive fraud, the New York discovery rule is not available to allow a plaintiff to avoid transfers occurring more than six years before the Filing Date.
See Tenamee v. Schmukler,
. The Undated Transfers are: (1) payments from BLMIS to finance Peter’s, Mark’s, and Andrew's ownership stakes in Madoff Broker
. Specifically, Andrew invested only $912,062 into IA Accounts, yet he redeemed $17,117,566; Mark invested only $745,482 into IA Accounts, yet he redeemed $18,105,456; Peter invested only $32,146 into IA Accounts, yet he redeemed $16,252,004; and Shana invested only $1,364,975 into IA Accounts, yet she redeemed $1,666,436. Compl. ¶¶ 66, 76, 86, 97. Additionally, some IA Accounts showed purported gains despite lacking any principal to support such gains. Compl. ¶¶ 67, 77-80, 87-90.
. Significantly, in the context of a SIPA proceeding, the Code provisions, including section 546(e), are incorporated only "to the extent consistent with the provisions of [SIPA]." SIPA § 78fff(b) (emphasis added).
. Salary payments are often subject to the affirmative defenses enumerated in section 547(c) of the Code, such as transfers made in the ordinary course of business.
See
11 U.S.C. § 547(g) ("[T]he creditor or party in interest against whom recovery or avoidance is sought has the burden of proving the non-avoidability of a transfer under subsection (c) of this section.”);
Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.),
. The only allegation in the Complaint specific to the Preferences is that “the compensation payments received by the four ... Defendants during the period from December 11, 2007[to] the Filing Date in the collective amount of $7,364,048 were made during the
. The district court in
Picard v. HSBC Bank PLC
held that the Trustee lacks standing— both directly and under theories of bailment, subrogation, assignment or contribution—to assert common law claims against third parties
on behalf of BLMIS customers.
Nos. 11 Civ.763, 11 Civ. 836,
. The
Wagoner
rule ”deprive[s] a trustee from even having standing to bring in federal court a common law claim that is clearly defeated by the doctrine of
in pari delicto."
. The rationale for the insider exception to the
in pari delicto
doctrine stems from the agency principles upon which the doctrine is premised; a corporate insider, whose wrongdoing is typically imputed to the corporation, should not be permitted to use that wrongdoing as a shield to prevent the corporation from recovering against him.
Official Comm. of Unsecured Creditors v. Shapiro (In re Walnut Leasing Co.),
No. 99-526,
. In at least two separate amicus curiae briefs filed in New York courts, the Attorney General has taken the position that the Martin Act does not preempt any private right of action in the investment securities context. Brief for the Attorney General of the State of New York as Amicus Curiae,
CMMF, LLC v. J.P. Morgan Inv. Mgt. Inc.,
. The precise nature and scope of the fiduciary relationship that each individual Defendant had with BLMIS need not be ascertained at this stage. Indeed, courts applying New York law have consistently held that such a determination is a mixed question of law and fact and cannot always be determined on a motion to dismiss.
See Am. Int’l Group, Inc. v. Greenberg,
. Bernard Madoff and Frank DiPascali, a former BLMIS employee, have pled guilty to money laundering charges arising from these transactions.
. The Defendants contend the Trustee should be limited solely to discovery in order to determine the amount of money at issue. A bankruptcy trustee is permitted, however, to pursue an accounting action to determine the extent of self-dealing by a corporation's senior executives and the value of the assets of the debtor corporation. See In re Colonial Mortgage Bankers Corp., 1989 Bankr.LEXIS 2783, *18 (Bankr.D.P.R. Apr. 12, 1989) (noting that "one of the purposes of an accounting is to separate the commingled funds and assets of the defendants from the ones of the estate,” the court enjoined the defendants “from transferring any personal assets until the [trustee’s] accounting is performed”).
. In determining whether to impose a constructive trust under New York law, courts consider four factors: (1) a confidential or fiduciary relationship; (2) a promise, express or implied; (3) a transfer made in reliance on that promise; and (4) unjust enrichment.
Sharp
v.
Kosmalski,