OPINION AND ORDER
Irving H. Picard, the trustee appointed to administer the bankruptcy estate of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”), moves to preliminarily enjoin Eric T. Schneiderman, the New York State Attorney General, from consummating Schneiderman’s $410 million settlement with alleged Madoff associate J. Ezra Merkin and his companies. The Trustee, however, having for more than three years issued empty threats to seek a halt to the Attorney General’s suit, has lost his right to complain. Even on the merits, moreover, his bluster proves to be without substance. Accordingly, not only this motion but also this entire action seeking to derail the Attorney General’s settlement must be dismissed.
By way of background, Ezra Merkin and Gabriel Caрital Corp. (together, the “Mer-kin defendants”) managed several private investment partnerships that invested in Madoff Securities, including Ascot Partners, L.P. and Ascot Fund, Ltd. (together, “Ascot”),
In December 2008, Madoff Securities was revealed to be a Ponzi scheme, and Irving H. Picard (the “Trustee”), was shortly therefore appointed trustee under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. § 78aaа et seq., to
On April 6, 2009, the New York Attorney General (“NYAG”) brought suit in New York State Supreme Court alleging that the Merkin defendants had violated New York’s Martin Act, its Executive Law, and its Not-for-Profít Corporation Law, by making material misrepresentations and omissions to investors regarding, inter alia, the investment strategies Mer-kin intended to pursue, Merkin’s role in managing the Merkin Funds’ investments, and Merkin’s intention to ton over substantially all of the funds to Madoff and other investment managers. The NYAG also named the Merkin Funds as relief defendants. See People v. Merkin, No. 450879/2009 (N.Y. Sup. Ct. filed Apr. 6, 2009). On September 16, 2010, Bart Schwartz (the “Ariel and Gabriel Receiver”), who had been appointed receiver for the Ariel and Gabriel Funds, also filed suit in New York State Supreme Court, alleging on behalf of the Ariel and Gabriel Funds and their investors that, inter alia, the Merkin defendants violated their fiduciary duties of candor and disclosure, fraudulently concealed and misrepresented the involvement of various investment managers, and collected exorbitant fees. See Schwartz v. Merkin, No. 651516/2010 (N.Y. Sup.Ct. filed Sept. 16, 2010).
Meanwhile, on May 6, 2009 (i.e., after the commencement of the NYAG’s suit but well before the commencement of the Ariel and Gabriel Receiver’s suit), the Trustee commenced an adversary proceeding against the Merkin defendants and the Merkin funds, seeking return of transfers of alleged Madoff Securities customer funds as actual and constructive fraudulent conveyances pursuant to the Bankruptcy Code and New York Debtor-Creditor Law, the imposition of a constructive trust, and disallowance of claims. See Picard v. Merkin, Adv. Pro. No. 09-1182, ECF No. 1 (Bankr.S.D.N.Y. filed May 6, 2009). The Trustee alleged, in sum and substance, that Merkin, a sophisticated investment manager with close ties to Madoff, steered hundreds of millions of dollars frоm the Merkin Funds into Madoff Securities. In total, the Trustee sought $33 million from the Ariel and Gabriel funds and $460 million from Ascot and the Mer-kin defendants. Although the Merkin Funds were “net losers” under the Trustee’s net equity calculation — that is, they invested more principal in Madoff Securities than they withdrew over the life of their investment — the Trustee alleged that the Merkin defendants had knowledge of Madoff s scheme and therefore sought to recover the entire value of transfers re
Several years later, after considerable litigation, the NYAG and the Ariel and Gabriel Receiver, on June 13, 2012, executed a joint settlement of their claims with the Merkin defendants for $410 million, most of which was to be distributed to the Merkin Funds’ investors. David Pitofsky (the “Ascot Receiver”), who had been appointed receiver for Ascot, participated in the settlement and agreed to release any claims that Ascot might have against the Merkin defendants.
On August 1, 2012, several weeks after the public announcement of the settlement, the Trustee filed the instant action against the NYAG, the Ariel and Gabriel Receiver, the Ascot Receiver, and the Merkin defendants, claiming that the June 2012 settlement violated the Bankruptcy Code’s automatic stay, as well as the various stay orders entered in the Madoff Securities SIPA proceeding. By way of relief, the Trustee sought to have the NYAG’s and Receiver’s actions (and the resulting settlement) not only stayed but also declared void ab initio. The Trustee also moved to have consummation of the settlement agreement preliminarily enjoined under Section 105(a) of the Bankruptcy Code pending resolution of the stay action. On December 27, 2012, on defendants’ motion, this Court withdrew the reference to the Bankruptcy Court on all issues in this action. See Order, No. 12 Civ. 6733, ECF No. 14 (S.D.N.Y. filed Dec. 28, 2012).
In essence, the Trustee claims that the settlement funds are in fact “stolen” customer property paid by Madoff Securities to the Merkin Funds and then transferred to the Merkin defendants as fees for Mer-kin’s management of the Funds’ investments with Madoff Securities. Thus, the Trustee claims that the funds used to pay the settlement are the same funds that the Trustee seeks to recover through his fraudulent transfer action and therefore are properly subject to the automatic stay and the Bankruptcy Court’s jurisdiction.
Very similar arguments were recently rejected by Judge Marrero in his persuasive opinion in Picard v. Fairfield Greenwich Ltd., No. 12 Civ. 9408,
As an initial matter, the Court finds that, contrary to defendants’ suggestion, this case properly falls under the Court’s bankruptcy jurisdiction under 28 U.S.C. § 1334(b), which grants to district courts jurisdiction over “all civil proceedings arising under [the Bankruptcy Code], or arising in or related to cases under [the Bankruptcy Code].” As the Second Circuit has stated, “the touchstone” for whether a case falls under a district court’s bankruptcy jurisdiction is “whether its outcome might have any conceivable effect on the bankruptcy estate.” In re Quigley Co., Inc.,
The Court turns next to the defendants’ claim that the equitable doctrine of laches bars the Trustee’s motion becausе the Trustee waited more than three years before attempting to enjoin the NYAG’s and Receiver’s actions against the Merkin defendants. “A party asserting a laches defense must show that the plaintiff has inexcusably slept on its rights so as to make a decree against the defendant unfair,” and that the defendant “has been prejudiced by the plaintiffs unreasonable delay in bringing the action.” Merrill Lynch Inv. Managers v. Optibase, Ltd.,
The following facts are essentially undisputed. Although aware from the outset of the NYAG’s action, which was publicly filed in April 2009, the Trustee sought no judicial action to stay the NYAG’s action until the filing of the instant action in August 2012, more than three years later. In November 2009, more than six months after the filing of the NYAG action, the Trustee informed the NYAG that he would seek to enjoin the NYAG action unless the NYAG agreed to turn over any recovery it obtained from the Merkin defendants. El-lenhorn Decl. ¶ 14; Supplemental Decl. of David J. Sheehan in Further Supp. of Injunction (“Supp. Sheehan Decl.”) ¶ 9. In response, the NYAG wrote a letter to the Trustee explaining that the Attorney General believed (correctly, as it turned out, see infra) that the Trustee could not enjoin the NYAG’s action. Id. Nonetheless, the NYAG then invited the Trustee to negotiate a resolution of this disagreement, but the Trustee fаiled to respond after preliminary discussions. Id. After this point, there was no contact between the NYAG and the Trustee for about a year, see Affirmation of Maria T. Vullo ¶¶ 2-3; Supp. Sheehan Decl. ¶ 16, and it was not until mid-2011 that the Trustee again threatened to sue to enjoin any settlement reached in the NYAG’s action against the Merkin defendants — a threat that once again remained idle until the instant action. Ellenhorn Decl. ¶ 15. During this same time period, moreover, various private investors commenced several independent lawsuits and arbitrations against the Merkin Funds and the Merkin
Under these circumstances, the Trustee’s argument that the NYAG and the Ariel and Gabriel Receivers proceeded “at their own peril” rings hollow, for it was far more reasonable for these parties to have concluded that the Trustee, for all his rhetoric, was not prepared to follow through on his threat to attempt to stay the NYAG’s action. Indeed, from the outset, the NYAG had informed the Trustee of strong arguments against such a stay, such as the argument that the Merkin defendants’ assets at issue in the NYAG’s suit are not property of the Madoff Securities estate and the argument that the Bankruptcy Code explicitly exempts state regulatory actions from the coverage of the automatic stay. See 11 U.S.C. 362(b)(4). If the Trustee had believed that these arguments were invalid, the burden was on him to take action to enforce the stay, rather than permit the NYAG to litigate its case for years while the Trustee did nothing but mouth occasional threats.
The Trustee notes that it had engaged in settlement negotiations of its own fraudulent transfer claims with the Merkin defendants and the Funds over the same three-year time period and that the original draft of the settlement between the NYAG, the Receivers, and the Merkin defendants conditioned agreement on the Merkin defendants’ and the Funds’ receiving releases from the Trustee’s claims — a condition that was not removed until the final settlement. See Supp. Sheehan Decl. ¶¶ 14-15, 17-18, 20; Decl. of Bart M. Schwartz (“Schwartz Decl.”) ¶ 17, No. 12 Civ. 6733, ECF No. 16 (S.D.N.Y. filed Jan. 25, 2013). The Trustee argues that this proposed condition supports his claim that he perceived no threat to the bankruptcy estate until learned he had been “cut out” of the final settlement agreement. See Supp. Sheehan Decl. ¶¶ 20-22; Ellenhorn Decl. ¶¶ 8-9. However, the mere fact that the defendants hoped to obtain “global peace” as part of their settlement with the NYAG and the Receivers in no way justifies the Trustee in allowing lawsuits he claims he had a right to stay at the outset to proceed apace for years, at great expense to all involved. Nor was the Trustee even involved more than sporadically and tаngentially in the discussions that led to the defendants’ settlement. See Levander Decl. ¶ 8-10; see also Harley-Davidson, Inc. v. O’Connell,
At bottom, the Trustee could have acted at any of a number of points in the history of these cases to enforce the automatic stay: when the Trustee filed his action against the Merkin defendants and the Merkin funds in May 2009; when he first threatened to enjoin the settlement in No
Even then, however, such a delay might be forgiven if it had not caused prejudice to the defendants. But in fact, the prejudice to the defendants here, to the investors in the Merkin Funds, and even to the New York Supreme Court that managed the NYAG’s case for three years, cannot be overstated. The NYAG expended substantial public resources and engaged in extensive investigation and litigation in bringing its enforcement action against the Merkin defendants: even before filing its case, attorneys from the NYAG’s office conducted interviews of investors, оbtained sworn testimony from Merkin and his employees, and reviewed thousands of documents. Ellenhorn Deck ¶ 3. The parties then engaged in years of litigation, including briefing and arguing motions to dismiss and motions for summary judgment and engaging in a year of discovery, at great expense to all involved. Id. ¶¶ 6-7. Throughout this time period, the NYAG and the Receivers responded to investor inquiries, confirming that a significant portion of any moneys obtained from Merkin would be returned to his investors. Schwartz Decl. ¶ 12. Thus, as many as hundreds of Merkin’s investors — who have no ability to file claims in the Trustee’s claims administration process as “indirect” customers of Madoff Securities — refrained from bringing their own actions against Merkin in reliance on the NYAG and Receiver actions. Id. ¶ 14. Declaring the NYAG’s suit void ab initio at this point would effectively cause these investors to lose their claims, and all because the Trustee chose to wait so long before seeking to enforce the automatic stay.
Judge Marrero recently found in his closely analogous case that “[i]f the Trustee believed the assets of the Fairfield Defendants to be property of the [Madoff Securities] estate, he should have sought relief long ago rather than delaying more than four years only to file the Stay Application on the eve of settlement, resulting in enormous prejudice to the Injunction Defendants.”. Fairfield Greenwich,
Accordingly, laches alone is sufficient to deny the instant motion — and, indeed, to dismiss the entire action (see infra). Independently, however, the Court finds that the Trustee is unable to satisfy the requirements for the imposition of the automatic stay against these actions or to otherwise meet the requirements for an injunction under Section 105(a) of the Bankruptcy Code.
Turning first to the automatic stay, the Trustee argues that even though the NYAG’s and Receiver’s actions against the Merkin defendants are third-pаrty actions and therefore not brought directly against the debtor, they nonetheless violate the Bankruptcy Code’s automatic stay of (i) all actions that seek “to recover a claim against the debtor,” 11 U.S.C. § 362(a)(1); (ii) any attempt “to exercise control over property of the estate,” 11
The Trustee argues that the claims brought by the NYAG and the Receivers are based on the same facts, seek the same funds from the same defendants, and are inextricably intertwined with the Trustee’s claims. Therefore, according to the Trustee, the claims are derivative of the Trustee’s claims and effectively belong to the Madoff Securities estate. However, the NYAG’s and Receiver’s actions relate to Merkin’s fraud on his own investors — not Madoff s fraud at the expense of his customers — and therefore are independent claims based on separate facts, theories, and duties than the Trustee’s fraudulent transfer claims against Merkin. Because thе Trustee has no standing to bring claims on behalf of Merkin’s investors, these claims do not properly belong to the Madoff Securities estate. Cf. Picard v. HSBC Bank PLC,
The fact that the claims at issue here are based on an independent duty owed between Merkin and his investors distinguishes the NYAG’s and the Receiver’s actions from those actions enjoined by the Bankruptcy Court as violating the automatic stay in which the plaintiffs brought claims against third parties that were general to all creditors of the Madoff Securities estate. See, e.g., Fox v. Picard (In re Madoff),
Because the NYAG’s and Receiver’s actions are independent claims against a non-debtor, the Trustee cannot seek application of the automatic stay under Section 362(a)(1). See Variable-Parameter Fixture Dev. Corp. v. Morpheus Lights, Inc.,
As to Section 362(a)(3), the Trustee argues that the settlement “necessarily implicates” Madoff Securities’ rights in property, see In re Adelphia Communications Corp.,
Assuming arguendo that the Trustee could establish that the assets to be used for the settlement are property of the Ma-doff Securities estate before that proposition is adjudicated in the Trustee’s fraudulent transfer action, the Trustee has failed to sufficiently support that premise as a factual matter.
This stands in contrast to the factual background of the Second Circuit’s recent decision to uphold a Section 105(a) injunction barring a suit by creditors of the Madoff Securities estate against Bernard Madoffs relatives and employees, where the defendants’ “every asset (or the vast majority thereof) is claimed by the Trustee as a fraudulent transfer from [Madoff Se-
Moreover, the Trustee has failed to show by more than conclusory and speculative assertions that, if the settlement goes forward, the Merkin defendants would be unable to pay any fraudulent transfer judgment obtained by the Trustee. The Ariel and Gabriel funds each have approximately $500 million in remaining non-Madoff assets, so it is unlikely that they would be unable to pay any fraudulent transfer judgment against them, as only approximately $33 million is being sought by the Trustee. As to Ascot, the NYAG settlement provides for a hold-back for potential recovery by the Trustee, so the defendants claim that there is little, if any, risk that there will be insufficient funds to pay the Trustee should he prevail on his avoidance actions.
Looking forward to how the Trustee’s avoidance and recovery proceedings may unfold, the Merkin defendants further argue that the Gabriel and Ariel Funds will be recipients of tens of millions of dollars in distributions from the Trustee in excess of the recovery the Trustee seeks once the Funds pay any fraudulent conveyance judgment against them and are eligible to receive their net equity claims through the Trustee’s claims administration process. Similarly, the Merkin defendants argue that the claims against Ascot, though far more substantial, will be offset by net equity distributions either in full or with the Trustee recovering in the end only slightly more than Ascot will receive back in distributions. Although the Trustee contests the legal basis for this calculation as well as the contingent nature of the defendants’ claimed recovery, the fact remains that the Trustee has set forth no stronger factual basis for his claim that the defendants will be unable to pay the Trustee’s claims. Since it is the Trustee’s burden to show that the settlement will “necessarily implicate” property of the estate, the failure to present a factual basis for this claim is fatal to the Trustee’s argument. Accordingly, even if the Court were not to find that the Trustee’s action is barred by lach-es, the Court would also conclude that the Trustee has not sufficiently shown that property of the debtor is at risk in this action to justify applying the automatic stay and declaring the NYAG’s and Receiver’s void ab initio. This, again, supplies an independent basis not only for denying the junction but also for dismissing the action.
Even if all the above were not so, moreover, the Trustee has still failed to satisfy the requirements for a preliminary injunction. Section 105(a) of the Bankruptcy Code authorizes the bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Code].” 11 U.S.C. § 105(a); see also 15 U.S.C. 78fff(b) (applying Section 105(a) in SIPA liquidations). Although “section 105 grants broader authority than section 362,” In re Calpine Corp.,
The parties dispute what standard applies to a Section 105(a) injunction: wheth
The Court need not decide which standard applies, however, as the Trustee has failed to satisfy the requirements of either standard.
Moreover, the Court notes that the Trustee’s invocation of a “race to the courthоuse” in contravention of SIPA’s statutory scheme of equitable distribution is misplaced in this case. Because the Trustee has failed to show a likelihood of
Finally, the Trustee argues thаt allowing the settlement to go forward — and therefore, according to the Trustee, depleting the pool of assets available for the Trustee’s recovery of fraudulent transfers— would impermissibly elevate the NYAG’s and Receiver’s state law claims over the Trustee’s federal statutory claims. Therefore, the Trustee claims that the NYAG’s and Receiver’s claims are preempted as an impediment to Congress’s mandate in SIPA that customers of failed brokerage houses would receive first priority in the distribution of customer property and recoup their losses on a pro rata basis. See SIPA § 78ffl(ll).
“Where a federal law treads on a traditional state power, [the] presumption [against preemption] is especially strong, and is overcome only where the statute evidences that preemption is the clear and manifest purpose of Congress.” Disney Enterprises, Inc. v. Tax Appeals Tribunal of State,
The Trustee’s claim that [Madoff Securities] customers should get the first bite at the [] Defendants’ assets because “Congress gave ‘customers’ higher priority than other potential claimants” distorts the underlying issue: the [ ] Plaintiffs are not claimants, creditors, or customers of the [Madoff Securities] estate, but rather independent plaintiffs bringing direct federal and state causes of action against a non-debtor third party alleging claims that the Trustee cannot bring.
Accordingly, because the Court finds that the Trustee’s claim to any relief under the automatic stay is barred by the doctrine of laches, and, independеntly, because the Court also finds that the Trustee’s claims have no basis in law, the Court not only denies this motion for a preliminary injunction, but also, sua sponte dismisses the entire stay action. Cf. Matthews,
SO ORDERED.
Notes
. Ascot Fund was subsumed by Ascot Partners in 2003.
. The December 18, 2008 Order similarly enjoined interference with “the assets subject to the receivership,” see Order on Consent Imposing Preliminary Injunction Freezing Assets and Granting Other Relief Against Defendants at 9, No. 08 Civ. 10791, ECF No. 8 (S.D.N.Y. Dec. 18, 2008), and the February 9, 2009 оrder incorporated and made permanent the December 18, 2008 order, see Partial Judgment on Consent Imposing Permanent Injunction and Continuing Other Relief at 4, No. 08 Civ. 10791, ECF No. 18 (S.D.N.Y. Feb. 9, 2009).
. A Memorandum stating the reasons for the withdrawal will issue in due course.
. The Receivers argue that, under the "Barton doctrine,” this Court is deprived of subject matter jurisdiction as against them because the Trustee has not obtained leave to sue from the state court that appointed them as receivers. See Barton v. Barbour,
. As discussed infra, the fаcts here needed to support a preliminary injunction are essentially the same facts needed to support the Trustee's ultimate claims for relief, so that a failure to adduce such facts is fatal not only to the motion for a preliminary injunction but also to the Trustee’s action as a whole.
. Because the Court finds that a preliminary injunction is not warranted, the Court does not consider whether such an injunction would contravene the Supreme Court's decision in Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc.,
. The Trustee makes no attempt to show that this injunction "plays an important part in the debtor's reorganization plan,” as the Madoff Securities proceeding is a liquidation, not a reorganization.