Picard v. JPMorgan Chase & Co.Picard v. JPMorgan Chase & Co.
DECISION AND ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS CERTAIN COMMON LAW CLAIMS
I. BACKGROUND
Bernard Madoff conducted a massive Ponzi scheme through his investment firm, Bernard L. Madoff Investment Securities, LLC (“BMIS”). After it was uncovered in December 2008, Madoff was arrested, BMIS went into bankruptcy, and the Securities Investor Protection Corporation (“SIPC”) applied to this Court (Stanton, J.) to commence a liquidation proceeding under the Securities Investor Protection Act (“SIPA”). 1 The application was granted, the Court appointed a trustee, and the case was removed to Bankruptcy Court pursuant to SIPA. (Am. Compl. ¶¶ 53-57.). See 15 U.S.C. § 78eee(a), (b)(3), (b)(4).
SIPA was enacted in 1970 to restore confidence to the securities market by providing additional protections for the customers of failed securities brokers.
See Sec. Investor Protection Corp. v. Barbour,
The SIPA trustee appointed to administer the customer fund for the BMIS customers is Irving Picard (the “Trustee”). He has worked relentlessly over nearly three years to bring assets that passed through BMIS back into the customer fund, in order to restore nearly $20 billion in customer losses. See generally Trustee’s Fifth Interim Report (May 16, 2011). The efforts with which we are concerned are directed at several banks and investment funds that the Trustee alleges facilitated or willfully failed to uncover Madoff s scheme.
In
Picard v. JPMorgan Chase & Co.,
No. 11 civ. 913 — commenced as an adversary proceeding in the BMIS liquidation— the Trustee seeks billions of dollars in avoidance and common law damages claims against JPMorgan Chase & Co.,
The Amended Complaint asserts common law damages claims for aiding and abetting fraud and breach of fiduciary duty, “fraud on the regulator,” unjust enrichment, conversion, aiding and abetting conversion, knowing participation in a breach of trust, and contribution. (JPM Am. Compl. ¶¶ 490-589 (Counts 21-28).) These common law claims are premised on the Trustee’s allegation that the JPMor-gan Defendants, as Madoff and BMIS’s primary banker, knew, should have known, or consciously avoided discovering, that BMIS was not engaged in lawful securities trading, but was illegally misappropriating customer funds. (Id.). The Trustee alleges that by this failure the JPMorgan Defendants substantially assisted, or knowingly participated in the scheme, breaching duties they owed to BMIS’s customers, and aiding and abetting BMIS’s breach of such duties. The Trustee seeks damages on those customers’ behalf, in the amount of approximately $19 billion. (Id. (Prayer for Relief).) Importantly, the Trustee’s claim for contribution (Count 28) is the only one that seeks redress for an injury to BMIS itself, rather than BMIS’s thousands of customers. (Id. ¶¶ 584-89.)
In Picard v. UBS AG, No. 11 civ. 4212— likewise commenced as an adversary proceeding in the BMIS liquidation — the Trustee seeks, in addition to avoidance claims, billions of dollars in damages against UBS AG and several of its affiliates (together, the “UBS Defendants”), 2 two so-ualled “feeder funds” for BMIS that were allegedly sponsored and serviced by the UBS Defendants, 3 and Access International Advisers LLC and several of its affiliates (the “Access Defendants”). 4 I refer to these Defendants together as the “UBS and Feeder Fund Defendants,” and refer to the JP Morgan and UBS and Feeder Fund Defendants collectively as “Defendants.”
The Trustee alleges that the UBS and Feeder Fund Defendants were aware that BMIS was likely engaged in fraud, but despite that knowledge sponsored two “feeder funds” that invested heavily BMIS. UBS thereby lent the prestige of its name to the funds, and created the appearance of overseeing them. In reality, however, UBS delegated custodial and supervision functions to Madoff himself, ultimately helping Madoff attract additional European investors in BMIS, and willfully turning a blind eye in order to collect lucrative fees for servicing the funds. The Access Defendants are alleged to have joined in this scheme by marketing the feeder funds to investors, despite knowing, or consciously
The Amended Complaint asserts common law causes of action for aiding and abetting BMIS’s fraud, breach of fiduciary duty, and conversion; knowing participation in a breach of trust; conversion; unjust enrichment; money had and received; and contribution. (UBS Am. Compl. ¶¶ 349-466 (Counts 12-28).) The Trustee seeks approximately $2 billion. (Id (Prayer for Relief).) As in the JPMorgan action, with respect to all causes of action except contribution, the Trustee seeks damages on behalf of BMIS’s customers, rather than BMIS itself.
The JPMorgan Defendants moved to withdraw the bankruptcy reference; I granted that motion this May. Sec.
Investor Protection Corp. v. Bernard, L. Madoff Inv. Sec. LLC,
On June 1, 2011, the JPMorgan Defendants moved to dismiss the Trustee’s original complaint. In lieu of responding, the Trustee filed the Amended Complaint, the allegations of which are set out above. The JPMorgan Defendants moved to dismiss again on August 1, 2011. The UBS and Feeder Fund Defendants moved as well, joining the JPMorgan Defendants’ arguments. The Trustee filed an Amended Complaint in the UBS ease on August 17, 2011, and the UBS Defendants’ arguments are deemed directed to that, rather than the original complaint. (See Case No. 11 civ. 4212, Docket No. 28.) Defendants argue that the Trustee lacks standing to bring common law claims on behalf of BMIS’s customers because he is limited under Chapter 11 of the Bankruptcy Code and SIPA to vindicating the interests of BMIS only. They therefore seek dismissal of all common law claims. 5
While these motions were being briefed, substantially identical arguments persuaded Judge Rakoff to dismiss the Trustee’s common law claims against HSBC and several of its affiliates for lack of standing.
Picard v. HSBC Bank PLC,
II. DISCUSSION
The standing requirement assures that an Article III “case or controversy” exists by allowing only those with actual legal injury to bring suit in federal court; moreover, judge-made “prudential” limitations on standing foster appropriate judicial restraint. “Foremost among the prudential requirements is the rule that a party must ‘assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.’ ”
Wight v. BankAmerica Corp.,
Three propositions, convincingly established in Judge RakofPs recent opinion and equally applicable here, demonstrate that the Trustee lacks standing to pursue his common law claims against Defendants.
First,
the Trustee lacks standing under the Bankruptcy Code, as incorporated into SIPA, to pursue claims that properly belong to creditors—here, BMIS’s customers. Instead, he is empowered to pursue only those claims that properly belonged to the debtor before it entered bankruptcy. “It is well settled that a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate’s creditors, but may only assert claims held by the bankrupt corporation itself.”
Wagoner,
There is good reason for this rule: formally, the Trustee steps into the shoes of the debtor for the purpose of bringing property into the bankruptcy estate, and as such possesses only the rights of the debtor.
See
11 U.S.C. § 541(a)(1). There is no indication in either the Bankruptcy Code or SIPA that Congress intended to give the Trustee power to pursue claims that are not the property of the debtor. “A party must ‘assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.’ ”
Wagoner,
Practically, giving the Trustee the power to pursue claims on behalf of creditors would usurp the creditors’ right to determine whether and in what forum to vindicate their legal injuries, and would raise difficult issues of preclusion.
Caplin,
Here, there is no doubt that the common law causes of action in the Amended Complaints, premised on a Ponzi scheme of unprecedented scope and duration orchestrated by BMIS, belong to the creditors, not to BMIS.
See Hirsch,
Second,
the Trustee cannot purse these common law claims on behalf of the debtor, BMIS. This is a consequence of the equitable doctrine of
in pari delicto,
which “mandates that the courts will not intercede to resolve a dispute between two wrongdoers.”
Kirschner v. KPMG LLP,
Here,
in pari delicto
would preclude Madoff from recovering against De
Third, the Trustee fails to establish any other basis for standing. The Trustee does not have a right to contribution under New York law, when the source of his obligation to the creditors is SIPA, rather than any tort claims that the creditors may eventually pursue against the debtor. Moreover, SIPA does not give the Trustee the power to pursue claims on behalf of creditors, any more than the Bankruptcy Code does. See 15 U.S.C. § 78fff-l(a) (SIPA trustee has “same” powers as a Chapter 11 trustee). Nor is SIPA consistent with the subrogation and bailment theories asserted by the Trustee. Thus, the Trustee lacks standing to pursue his common law claims against Defendants.
The Trustee strains to avoid these dis-positive conclusions by raising a novel theory of standing. The Trustee points out that he is empowered, by 11 U.S.C. § 544(a), to stand in the shoes of a hypothetical judgment creditor that extended credit to BMIS at the commencement of its bankruptcy in order to seek certain recoveries from third parties. He argues that that power allows him to effectively step into the shoes of all BMIS’s actual creditors for the purpose of pursuing common law claims against Defendants. As discussed below, this theory is not supported by the statute’s text and history or by any persuasive case law, and its adoption would undermine the limitations on trustee standing established in Caplin and enforced by courts in this and other circuits for nearly forty years.
The Trustee’s remaining arguments for standing under New York’s contribution statute and SIPA are mere reformulations of those already rejected by Judge Rakoff. They are no more persuasive to me than they were to him.
See HSBC,
A Section 511(a)
The Trustee concedes, as he must, that Caplin and its progeny in this Circuit, including Wagoner, Hirsch, Mediators and other cases, stand squarely for the proposition that a Chapter 11 bankruptcy trustee lacks standing to pursue creditor claims. However, the Trustee would limit this rule to section 541 of the Bankruptcy Code, and find a distinct source of standing to pursue pre-petition creditor claims under section 544(a).
Section 544(a) of the Bankruptcy Code provides, in pertinent part, as follows:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by-
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists ...
Under this section, “the trustee hypothetically extends credit to the debtor at the time of filing and, at that moment, obtains a judicial lien on all property in which the debtor has any interest that could be reached by a creditor.”
Musso v. Ostashko,
The purpose of this section is to allow the trustee in bankruptcy to cut off any secret or unperfected liens on debtor property that would bind the debtor itself, but not the debtor’s judgment creditor, who typically enjoys top priority under state creditor/debtor laws. “Pursuant to this section, the trustee in bankruptcy can avoid unperfected liens on property belonging to the bankruptcy estate.”
Kors,
The upshot of sections 544 and 541 is that, in addition to all property and rights belonging to the debtor at the commencement of its bankruptcy, “Any property of the debtor upon which a judgment creditor might obtain a lien under state law flows to the bankruptcy estate” for the benefit of all creditors. Id.
1. Standing to pursue customer claims
The Trustee first argues that he can use section 544(a), not only to avoid interests in BMIS’s property inferior to those of a judgment creditor, but also to step into the shoes of any actual creditor in order to pursue its pre-petition common law claims against third parties — here, the Defendants.
The problems with this theory are legion. Foremost is that its conclusion — the Trustee is empowered to pursue the pre-petition common law claims of actual creditors — does not follow from its premise— that the Trustee has the powers of a judgment creditor “that extends credit to the debtor at the commencement of the case.” 11 U.S.C. § 544(a)(1), (2). The Trustee does not argue that New York law allows a judgment creditor to seek its recovery against a debtor by appropriating causes of action against third parties that belong, not to the debtor, but to the debtor’s other creditors. Nor could he; the result would be preposterous.
Moreover, a hypothetical judgment creditor who extends credit at the commencement of the liquidation would
Finally, the Trustee’s reading would obviate the remainder of section 544 itself, which provides for the avoidance of preferences in favor of creditors. If the Trustee were empowered to pursue any creditor’s claims under section 544(a), there would be no need to specify its power to assert some creditors’ fraudulent conveyance or avoidance claims in section 544(b).
Thus, the Trustee’s reading of section 544(a) is inconsistent its language, the other subsections of section 544, and common sense. It is also inconsistent with precedent. If the Trustee were right, his theory would render the Supreme Court’s decision in Caplin a dead letter, along with Wagoner and its progeny in this Circuit. In Caplin, the Supreme Court held that a Chapter 10 trustee, overseeing the reorganization of a financial firm, could not sue an indenture trustee — a third party — on behalf of debenture holders — i.e., creditors of the failed firm. The bases of that conclusion were noted above: allowing the reorganization trustee standing to pursue claims not belonging to the debtor, but to its creditors, is not within the power granted by Congress, and raises difficult preclusion problems. Likewise, basing its holding on Caplin, the Second Circuit in Wagoner held that the same factors preclude standing for a Chapter 11 bankruptcy trustee. Thus, it is settled law that the standing analysis for a bankruptcy trustee asks whether the claim “belongs” to the debtor — in which case the trustee can pursue it — or to creditors — in which case the Trustee cannot.
The Trustee’s only response is to claim that the section 544(a) predecessor, section 70c of the Bankruptcy Act, was not in effect when the liquidation at issue in
Cap-lin
commenced. But as the JPMorgan Defendants thoroughly demonstrate, that claim is just plain wrong.
See
JPMorgan’s Reply, at 20-22 (collecting sources);
see also
UBS Reply, at 10 (same);
Lewis,
In fact, the history of section 544 subsequent to
Caplin
further belies the Trustee’s interpretation. During the 1978 revision of the bankruptcy laws, an addition was proposed as section 544(c) that would have specifically overruled Caplin’s limita
For these reasons, the Trustee’s theory has been rejected in numerous persuasive cases, including cases from at least three Circuit Courts of Appeals.
See, e.g., Ozark,
Meanwhile, the cases on which the Trustee relies do not support his position.
See St. Paul Fire and Marine Ins. Co. v. PepsiCo, Inc.,
Here, by contrast, there is no dispute to whom the common law claims belong — the Trustee acknowledges they are the customers’, and not the debtor’s.
St. Paul Fire
does not stand for the proposition that the Trustee can pursue claims that belong individually to the creditors — just the opposite. If that were the rule, the Second Circuit’s lengthy discussion establishing ownership of the claims in the Trustee would have been unnecessary.
See
The Trustee nevertheless seizes on language in
St. Paul Fire
and
Koch
that suggests that when a claim is “general” to all creditors, and any one of them could bring the claim and all would benefit in the same way by establishing it, the trustee may assert the claim “on behalf of’ the creditors. However, the analysis in
St. Paul Fire
and
Koch
is employed consistently with
Caplin
to determine which claims should be considered debtor property. Courts that follow this approach reason that allowing individual creditors to pursue certain claims common to all of them would result in the kind of rush to judgment and inconsistent adjudications that the bankruptcy laws exists to avoid. Thus, to further the goals of the bankruptcy laws generally, such claims should be deemed vested in the trustee, with exclusive standing to pursue them for the benefit of all creditors.
See, e.g., Koch,
But here, the Trustee’s claims are not on being brought on behalf of all BMIS’s creditors, and could not be brought by any given one of them. In contrast to the alter ego claims asserted in
Koch
and
St. Paul Fire,
they are not derivative but direct claims. “To determine whether an action accrues individually to a claimant or generally to the corporation, a court must look to the injury for which relief is sought and consider whether it is peculiar and personal to the claimant or general and common to the corporation and creditors.”
Koch,
It is true that allowing the Trustee to pursue claims that belong properly to individual creditors would accrue to the benefit of all creditors by augmenting the bankruptcy estate. But under settled law, this is not enough to make them “general” within the meaning of
Koch
and
St. Paul Fire. See Pereira,
“A trustee may maintain only a general claim. His right to bring a claim ‘depends on whether the action vests in the trustee as an assignee for the benefit of creditors or, on the other hand, accrues to specific creditors.’ ”
Koch,
Admittedly, some courts have read
Koch
to support a reading of section 544(a) that gives a trustee standing to pursue claims that belong to the creditors and not the debtor.
See, e.g., Lumbard v. Maglia, Inc.,
We do not question the right of a trustee in bankruptcy to maintain a “veil piercing” suit on behalf of the bankrupt corporation (citing, among other things, Koch and St. Paul Fire), but the qualification “on behalf’ must be stressed. If the corporation is injured by the shareholders’ disregard of corporate formalities, or stated differently but equivalently if a claim against the shareholders arising from their disregard of corporate formalities is the property of the corporation, then the trustee can .sue; otherwise he cannot....
When a third party has injured not the bankrupt corporation itself but a creditor of that corporation, the trustee in bankruptcy cannot bring suit against the third party. He has no interest in the suit.
Steinberg v. Bucsynski,
Thus, I conclude that section 544(a) of the Bankruptcy Code does not give the Trustee standing to pursue claims that are concededly the property of the creditors directly, and not the property of the debt- or.
2. Standing to pursue BMIS claims
The Trustee also argues, albeit briefly, that section 544(a) allows him to pursue common law causes of action that belong to BMIS. He points out that a judgment creditor can satisfy his judgment by appropriating choses in action that belong to the debtor under New York law. Thus, he continues, he can appropriate BMIS’s claims against Defendants.
The Trustee is right, but wrong, because BMIS’s causes of action against Defendants are worthless under the doctrine of
in pari delicto. See Picard v. HSBC,
The Trustee argues that a judgment creditor somehow takes the debtor’s legal rights free of the debtor’s equitable disability to recover on them, because of its favored status. There is some appeal to this argument, but its consequence runs afoul of controlling law, the Wagoner rule in particular. It has already been determined in this Circuit that a bankruptcy trustee, standing in the shoes of the debt- or, cannot pursue claims the debtor could not. If Wagoner could be avoided by allowing the trustee to step out of the debt- or’s shoes and into a hypothetical judgment creditor’s shoes under section 544(a), and then back into the debtor’s shoes by executing on the debtor’s common law claims without debtor’s legal disability, then Wagoner would be avoided in every case, effectively overruling it. Convenient legal fictions should not be employed to overrule binding precedent sub silentio.
Finally, such a fiction is not even necessary, because the Trustee already succeeds to all the debtor’s choses in action by virtue of section 541(a)(1), which provides that the estate is comprised of, among other things, “all legal or equitable interests of the debtor in property as of the commencement of the case.”
Thus, section 544(a) does not provide the Trustee standing to pursue the common law claims at issue in these cases.
B. Contribution
1. Introduction
The Trustee next argues that because his claim for contribution is brought on behalf of BMIS, and is not subject to the defense of
in pari delicto,
he has standing
2. The Trustee fails to state a claim, for contribution
11 U.S.C. § 541, incorporated in SIPA, provides that BMIS’s liquidation estate is comprised of “all legal and equitable interests of the debtor in property as of the commencement” of the bankruptcy case. This includes any causes of action BMIS had before it entered bankruptcy. “A debtor’s interests in property, including causes of action, are defined by state law, and become assets of the estate once the bankruptcy petition is filed,”
In re Ionosphere Clubs, Inc.,
The Trustee relies on C.P.L.R. 1401, New York’s contribution statute, to assert a claim on BMIS’s behalf. It says in pertinent part that,
two or more persons who are subject to liability for damages for the same personal injury, injury to property or wrongful death, may claim contribution among them whether or not an action has been brought or a judgment has been rendered against the person from whom contribution is sought.
C.P.L.R. 1401. “[T]he lynchpin of New York’s contribution provision is common liability for the same injury.”
N.Y. State Elec. & Gas Corp. v. FirstEnergy Corp.,
The Trustee argues that the BMIS estate possesses a pre-petition cause of action under New York law for contribution that he has standing to pursue: BMIS and Defendants, he argues, are “subject to liability for damages for the same ... injury to property,” namely the customers losses caused by the parties’ joint fraud. Thus, the Trustee can “claim contribution” against Defendants “whether or not an action has been brought” by the customers against them, “or a judgment has been entered” in the customers’ favor against them. Moreover, this claim, unlike any other BMIS might have, is not barred by the doctrine of in pari delicto, because even thought parties seeking contribution are necessarily in pari delicto, the statute provides a cause of action.
However, C.P.L.R. 1401 is triggered only when one joint tortfeasor is compelled under state law to pay damages arising out of a tort or tort-like injury. “New York’s statutory contribution scheme requires some form of compulsion; that is, the party seeking contribution must have been compelled in some way, such as through the entry of a judgment, to make the payment against which contribution is sought.”
NYSEG,
The Trustee acknowledges that, “The compulsion to pay in this case is the Trustee’s obligation to pay customer claims
under SIPA.”
Trustee’s JPMorgan Br. at 26 (emphasis added). But this “compulsion”
The fact that “federal courts, including Th[e Supreme] Court, have recognized a right to contribution under state law in cases in which state law supplied the appropriate rule of decision,” does not aid the Trustee here.
Northwest Airlines, Inc. v. Transport Workers Union of America. AFL-CIO,
Thus, where, as here, contribution is sought for a liability created by federal statute, cases recognizing a state law right to contribution are simply “inapposite,”
id.
at 96-97 n. 38,
Judge Rakoff made this point in his
HSBC
decision: “The Trustee asserts a claim for contribution based on the fact that he has to pay customer claims pursuant to SIPA. Given that these payments are being made pursuant to a comprehensive statutory scheme, however, the Court concludes that the Trustee cannot rely on state law to seek contribution where a right to contribution is not expressly provided by a federal statute.”
Thus, the Trustee identifies no legal basis for contribution, and therefore lacks standing on that ground as well.
C. Standing as common law bailee or equitable subrogee
Having failed to ground standing in either the Bankruptcy Code or New York’s law of contribution, the Trustee’s final argument is that SIPA empowers him to do more than a typical Chapter 11 trustee
Judge Rakoff rejected these contentions,
HSBC,
1. SIPA does not give to bailees or subrogees standing to pursue customers’ common law claims against third parties
Chief Judge Preska succinctly set forth the history and purpose of SIPA as follows:
Congress enacted [SIPA] after a business contraction in the securities industry led to a rash of failures among brokerage firms. After that contraction, “customers of failed firms found their cash and securities on deposit either dissipated or tied up in lengthy bankruptcy proceedings.” SIPA was intended to “arrest this process, restore investor confidence in the capital markets, and upgrade the financial responsibility requirements for registered brokers and dealers.” SIPA created a new form of liquidation proceeding that was “applicable only to member firms, designed to accomplish the completion of open transactions and the speedy return of most customer property.” Those investors who had left identifiable securities in their names with the broker-dealer or cash balances to be used for investment purposes (which collectively constitute “net equity claims”) are entitled to receive such securities and cash from the liquidator before other creditors may share in the estate. The Act contemplates that customers’ claims will be satisfied to the greatest extent possible from the bankrupt brokerage firm.
Sec. Investor Protection Corp. v. BDO Seidman, LLP,
SIPA accomplishes its purpose by empowering SIPC, once it has identified a failing or failed securities broker, to seek a protective order from a court. The court, in turn, appoints a liquidating trustee and refers the case to Bankruptcy Court, where it proceeds more or less like a Chapter 11 proceeding. See 15 U.S.C. § 78eee(a), (b), § 78fff(b). The difference between a SIPA and a non-SIPA liquidation is that customer “net equity” claims are given priority over the claims of the broker’s other creditors (e.g., its landlord or any unsecured Tenders). See id. § 78fff-2. The SIPA trustee is “vested ■with the same powers and title with respect to the debtor and the property of the debtor, including the same rights to avoid preferences, as a trustee in a case under Title 11.” Id. § 78fff-l(a).
One of the purposes of a SIPA liquidation is to “to enforce rights of subrogation as provided in this chapter.”
Id.
§ 78fff(a)(3). The only such rights arise, not in favor of the trustee, but in favor of SIPC.
Id.
§ 78ccc. In addition to overseeing securities brokers and, when necessary, seeking protective orders for failing ones, SIPC also helps assure prompt payments to customers by advancing funds to the SIPA trastee to satisfy net equity claims.
Id.
§ 78fff-3. SIPC obtains these
The right to subrogation referred above is found in section 78fff — 3(a)(5):
To the extent moneys are advanced by SIPC to the trustee to pay or otherwise satisfy the claims of customers, in addition to all other rights it may have at law or in equity, SIPC shall be subrogat-ed to the claims of such customers with the rights and priorities provided in this chapter, except that SIPC as subrogee may assert no claim against customer property until after the allocation thereof to customers as provided in section 78fff-2(c) of this title.
This section has been interpreted to grant SIPC statutory subrogation rights only to the extent that it satisfies customer net equity claims against the customer fund.
See Picard v. HSBC,
Nor is there any hint in SIPA that a trustee has the powers of a common law bailee to pursue third party claims on the customers’ behalf. As Judge Rakoff pointed out, that statute is silent on bailment, granting the trustee the “same” powers as a chapter 11 trustee. HSBC,
The Trustee quite candidly admits that his bailment and subrogation theories are not founded on the SIPA statute at all, but rather on common law and equitable principles. Given that both SIPC and the Trustee are creations of SIPA, designed with a very specific purpose in mind, this is a remarkable admission. To support reading these sources of law into the SIPA structure, the Trustee relies on almost exclusively on the Second Circuit’s decision in
Redington,
to which I turn.
See
2. Redington
In
Redington,
a securities broker, Weis, went into SIPA liquidation after its outside accountant, Touche & Ross, failed to identify accounting fraud. The trustee argued that Touche Ross thereby violated the requirements of section 17(a), and sought recovery on that basis on behalf of Weis’ customers.
Redington v. Touche Ross & Co.,
The District Court dismissed the complaint for want of subject matter jurisdiction. It declined to imply a private right of action under section 17(a) in favor of Weis’ customers. Because the complaint failed to state any federal claim, the District Court declined to exercise pendent jurisdiction over SIPC’s and the trustee’s common law claims (for breach of contract, negligence, and malpractice) and dismissed the complaint. The District Court never
The Court of Appeals reversed the District Court’s conclusion that no private right of action should be implied in a favor of the broker’s customers.
Redington v. Touche Ross & Co.,
The Supreme Court later overturned the Second Circuit’s determination that Weis’ customers had a private right of action under section 17(a) of the Exchange Act.
Touche Ross & Co. v. Redington,
The Trustee argues that the
Redington
court’s decision granting SIPC and a SIPA trustee standing to pursue customer claims as a common law subrogee and bailee remains good law, because the Supreme Court did not expressly overrule the Second Circuit on this point. Some judges of this circuit agree with the Trustee.
See, e.g., SIPC v. BDO,
Judge Rakoff relied on the rule that, when a court is reversed on the basis that it lacks subject matter jurisdiction, none of its other holdings has precedential value. Because no basis for federal jurisdiction existed after the section 17(a) claim was dismissed, see
Redington,
The Supreme Court long ago held that when a case presents two questions— whether a cause of action exists, and if so whether a given party has standing to assert it — the “merits” question is the “threshold” inquiry, and standing is not to be reached unless a cause of action exists.
National R.R. Passenger Corp. v. National Ass’n of R.R. Passengers,
On further appeal, the Supreme Court noted that three separate questions were presented by the motion to dismiss— whether the private of action right exists, whether the District Court has subject matter jurisdiction, and whether the plaintiffs have standing. Nevertheless, the Court recognized that:
however phrased, the threshold question clearly is whether the Amtrak Act or any other provision of law creates a cause of action whereby a private party such as the respondent can enforce duties and obligations imposed by the Act; for it is only if such a right of action exists that we need consider whether the respondent had standing to bring the action and whether the District Court had jurisdiction to entertain it.
Id.
at 456,
So while the Trustee is correct that standing is
often
a “threshold” inquiry,
see Nnebe v. Daus,
The District Court in Redington acted in conformity with National Railroad; it did not bother to address standing to bring any claim, state or federal, once it determined that no private right of action exists under section 17(a). Similarly, and equally correctly, the Second Circuit addressed standing only after it became necessary to do so — that is, only after it decided to imply the asserted federal private right of action.
But once the Supreme Court told the Second Circuit that no private right of action existed under federal law, whatever the Second Circuit said about standing was rendered superfluous. Its finding on standing should never have been made; it was not necessary to the determination of the case.
The Trustee of course argues that
Red-ington
should be read as holding broadly that the SIPA trustee has standing as a bailee and a subrogee to bring any sort of claim on behalf of the broker’s customers — not just a section 17(a) claim. Assuming without deciding that
Redington
can be read so broadly, if it was intended to so hold, then the Court of Appeals went beyond what was necessary to its decision — which was to find a basis for federal jurisdiction and then assign standing to pursue that federal claim. If one argues that the reasoning underlying that narrow holding applies equally to all other causes of action held by the customers, the obvious retort is that the holding that reasoning undergirded was rendered meaningless by the Supreme Court’s reversal. In the absence of a section 17(a) cause of action, any suggestion that the trustee and SIPC can pursue other claims did not actually decide anything in the case, and so becomes mere dictum. It is holdings, not reasoning, that bind later courts; as Judge Calabresi effectively put the point, “Holdings — what is necessary to a decision — are binding. Dicta — no matter how strong or how characterized- — are not.”
U.S. v. Gar-
In short, the Supreme Court’s reversal on the threshold issue means that the Second Circuit should never have reached standing. Whatever its reasoning in the course of (erroneously) reaching the standing question surely cannot bind a lower court.
Judge Rakoff also observed that Red-ingtori s subrogation analysis was undermined by a subsequent amendment to SIPA, establishing the current priority scheme. Id. at 36. As discussed above, this scheme subordinates any subrogation right belonging to SIPC to the full payment of all customer net equity claims. As further discussed below, Redingtoris theory of subrogation is inconsistent with the current SIPA scheme. Under no theory of which I am aware does a decision remain good law after the passage of a superseding statute that renders its analysis patently faulty.
Thus, I conclude that Redingtoris statements regarding bailee and subrogee standing are no longer good law, and have not been since Redington was reversed, long ago, and therefore do not bind me.
3. The Trustee’s theories fail
Without Redington to prop them up, the Trustee’s arguments collapse under their own weight.
a. Bailment
First, the Trustee is not a bail-ee of customer funds by virtue of stepping into the shoes of BMIS. This is due to the common law rule that a thief can never take the status of a bailee.
See, e.g., Pivar v. Graduate School of Figurative Art of N.Y. Academy of Art,
Nor does SIPA independently create a bailment relationship. The only “entrusting” of property it accomplishes is empowering of the Trustee to collect and distribute the customer fund. But that entrusting necessarily takes place only after the customers’ property has been damaged. In a different situation, for example, if a SIPA customer fund was deposited in a bank account at JPMorgan, and an employee stole those funds, I may be willing to recognize the Trustee’s right to sue as bailee for the destruction of the funds in his possession. But that is not like what happened here. The Trustee was not in possession of customer funds when the alleged torts took place. He was not even appointed. In other words, even entertaining the possibility that SIPA creates a bailment relationship with respect to the customer funds, it necessarily does not arise until the wrongs of third parties and the debtors have already taken place. Thus, there is no damage to the property that the Trustee as bailee of those funds could pursue.
Perhaps an additional example is in order: If I park my car in a city garage and another customer scratches it while it’s parked there, the garage may have standing as my bailee to go after the other customer. But if, instead, a stranger scratches my car while I’m sitting in traffic, and I afterward park it in the garage, what interest could the garage possibly have in going after the stranger? Since it was not my bailee when the injury to
In any event, treating SIPA as creating a bailment through force of law is fanciful to begin with.
See HSBC,
In conclusion, SIPA does not create or contemplate a bailment relationship, and the Trustee’s theory of common law bailment ignores that he was not in possession of property when it was damaged by Defendants. He stands in no better position than the hypothetical parking garage operator, suing strangers for injuries that occurred before I ever parked my car with it. He thus lacks standing to vindicate the customers’ claims against Defendants.
b. Subrogation
The Trustee’s arguments for equitable subrogation fare no better.
The relevant statutory provisions are set forth above. The upshot, again, is that SIPC’s statutory subrogation right is a limited one: it permits claims only to the extent of customers’ net equity claims against the customer, and not against any other party; moreover, it is subordinated to the payment of customer net equity claims.
When Congress creates one remedy, and limits its scope, a court should be extremely hesitant before implying a broader remedy. The Trustee therefore eschews any argument that Congress actually intended to create a subrogation right for customer common law claims against third parties. Instead, he argues that equity provides that right, SIPA notwithstanding.
However, the creation of SIPC contemporaneously with its limited right to recovery makes it more than just unlikely that Congress intended a different remedy. It also means that Congress’s purposes and objectives may be frustrated by implying a further remedy under state law. In other words, Congress must be assumed to have provided a limited remedy for a reason. Recognizing an additional remedy anyway therefore risks undermining the Congressional scheme.
In this case, more than inference supports the conclusion that no further subro-gation remedy should be implied. As Judge Rakoff observed, allowing SIPC, or the Trustee as its assignee, to pursue sub-rogated net equity claims against third parties upsets the distribution priority of SIPA itself. SIPC is to recover the extent of its “fronted” net equity payments, but only after the customers have recovered their net equity claims.
See
15 U.S.C. §§ 78fff-3(a), 78fff-2(c)(l)(B), (C). The Trustee’s theory would effectively permit SIPC to jump the line.
HSBC,
I therefore conclude that the Trustee lacks standing to pursue equitable subro-gation rights of SIPC, to the extent they exist, when to do so would undermine the SIPA distribution scheme. 8
III. CONCLUSION
The Trustee lacks standing to pursue the common law claims against Defendants. Counts 21 to 28 of the Amended Complaint in the JPMorgan case (No. 11 civ. 913, Docket # 50), and Counts 12 through 28 of the Amended Complaint in the UBS case (No. 11 civ. 4212, Docket #23), are therefore DISMISSED. The Court further directs that what remains of adversary proceedings Nos. 10^1932 (BRL) and 10-4285 (BRL) be returned to the Bankruptcy Court for further proceedings consistent with this Opinion and Order.
The Clerk of Court is instructed to close the motions at 11 Civ. 913, Dockets Nos. 32 and 56, and those at 11 Civ. 4212, Dockets Nos. 1,16 and 17.
Notes
. The interested reader is directed to the following cases for further factual context:
In
re
Bernard L. Madoff Inv. Sec. LLC,
. The affiliates are UBS (Luxembourg) SA, UBS Fund Services (Luxembourg) SA, and UBS Third Party Management Company SA.
. These Defendants are Luxalpha, one of the funds, now in liquidation, and its Directors, Roger Hatmann, Ralf Schroeter, Rene Egger, Alain Hondequin, Hermann Kranz, Bernard Stiehl, Patrick Littaye, and Pierre Delandme-ter; and Groupement Financier, the other fund, and its Directors, Defendant Littaye and Claudine Magon de la Villehuchet.
.The affiliated persons and entities are Access International Advisors Europe Limited, Access International Adviser Ltd., Access Partners (Suisse) S.A., Access Management Luxembourg S.A., Access Partners S.A. (Luxembourg), and several individuals who ran or worked for the Access group of companies, Defendants Littaye, Villehuchet, Delandmeter and Theodore Dumbauld.
. Although the Court is only interested in the standing and SLUSA issues that necessitated withdrawal of the bankruptcy reference, the JPMorgan Defendants have briefed several additional ones. Their arguments, and the Trustee's responses thereto, are not considered in deciding this motion.
. These claims duplicated claims that had been asserted in an earlier filed action by SIPC and the SIPA trustee in the New York State Supreme Court. The first-filed State court suit remained pending all the while.
. SIPC struggles heroically in its brief to establish the Trustee's standing as successor bailee to BMIS — invoking federal common law, SEC Rule 15c3-3, and several cases of ancient vintage — but ultimately fails to persuade. See SIPC Brief, at 13-23.
. The Trustee makes no allegation that he has been assigned any customer claims against the Banks, and therefore does not rely on any assignment for standing. The issue is thus not ripe for adjudication.
See Picard v. HSBC,