MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS MOTION FOR WITHDRAWAL OF THE REFERENCE

Transcription

1 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 1 of 34 Parvin K. Aminolroaya SEEGER WEISS LLP 77 Water Street 26th Floor New York, NY Tel: (212) Fax: (212) Attorneys for the M & B Weiss Family Limited Partnership of 1996 c/o Melvyn I. Weiss, Melvyn I. Weiss, Barbara J. Weiss, Stephen A. Weiss, Leslie Weiss and Gary M. Weiss UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES INVESTOR PROTECTION CORPORATION, v. Plaintiff-Applicant, Adv. Pro. No (BRL) SIPA LIQUIDATION (Substantively Consolidated) BERNARD L. MADOFF INVESTMENT SECURITIES LLC, In re: Defendant. BERNARD L. MADOFF, Debtor. IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Adv. Pro. No (BRL) v. Plaintiff, THE M & B WEISS FAMILY LIMITED PARTNERSHIP OF 1996 C/O MELVYN I. WEISS, et al., Defendants. MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS MOTION FOR WITHDRAWAL OF THE REFERENCE

2 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 2 of 34 TABLE OF CONTENTS I. INTRODUCTION...1 II. PRELIMINARY STATEMENT...1 A. Madoff s Fraud and The Weiss Defendants Loss...1 B. A SIPA Liquidation Proceeding is Commenced...2 C. The Nature of the Trustee s Avoidance Actions and Possible Defenses Leslie Weiss Gary M. Weiss Stephen A. Weiss The Weiss Family Partnership Melvyn I. Weiss and Barbara J. Weiss JTWROS...6 III. ARGUMENT A. THIS ACTION IS SUBJECT TO MANDATORY WITHDRAWAL OF THE REFERENCE The Trustee s Complaint Against The Weiss Defendants Raises Significant Issues of Non-Bankruptcy Law The Trustee s Claims Violate the Purpose and Provisions of the Securities Investor Protection Act The Trustee s Claims Run Afoul of Federal Securities Laws Providing that BLMIS s Payments to the Weiss Defendants Were in Satisfaction of an Antecedent Debt...15 a. Brokerage Statements Create Enforceable Obligations...16 b. The Trustee Cannot Avoid Payments in Satisfaction of an Antecedent Debt SIPA Requires the Trustee to Apply the SEC s Constant Dollar Approach to Determine Whether a Customer Must Return Funds to the Fund of Customer Property The Trustee s Claims Put Bankruptcy Code Section 546(e) in Conflict with SIPA...22 B. THIS ACTION IS SUBJECT TO WITHDRAWAL OF THE REFERENCE FOR CAUSE...25 a. Defendants Stephen Weiss and the Weiss Family Partnership Have a Right to a Jury Trial on all of the Trustee s Claims Against Them...25 b. The Bankruptcy Court Cannot Issue a Final Judgment Against the Remaining Weiss Defendants...26 IV. CONCLUSION...27

3 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 3 of 34 TABLE OF AUTHORITIES CASES Page(s) Atlanta Shipping Corp. v. Chemical Bank, 818 F.2d 240 (2d Cir. 1987) Bear, Stearns Securities Corp. v. Gredd, No , 2001 WL (S.D.N.Y. July 25, 2001) City of New York v. Exxon Corp., 932 F.2d 1020 (2d Cir. 1991)... 11, 19 Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., No , 2011 WL (2d Cir. June 28, 2011)... 12, 24 Geron v. Palladin Overseas Fund, Ltd. (In re AppliedTheory Corp.), 323 B.R. 838 (Bankr. S.D.N.Y. 2005) Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) In re Adelphia Communications Corp. Securities. and Derivative Litigation, No , 2006 WL (S.D.N.Y. Feb. 10, 2006) In re Baker & Getty Financial Services., Inc., 106 F.3d 1255 (6th Cir. 1997) In re Bernard L. Madoff Investment Securities, LLC, No , F.3d, 2011 WL (2d Cir. Aug. 16, 2011) In re Cablevision S.A., 315 B.R. 818 (S.D.N.Y. 2004) In re Dana Corp., 379 B.R. 449 (S.D.N.Y. 2007) In re Drexel Burnham Lambert Grp., 960 F.2d 285 (2d Cir. 1992) In re Ionosphere Clubs, Inc., 922 F.2d 984 (2d Cir. 1990) In re J.P. Jeanneret Associates., 769 F. Supp. 2d 340 (S.D.N.Y. Jan. 31, 2011) In re Refco, Inc. Securities Litigation, No , 2009 WL (S.D.N.Y. Nov. 13, 2009)... 23, 24 In re The Singer Co., No , 2002 WL (S.D.N.Y. Feb. 20, 2002) In re Wedtech Corp., 94 B.R. 293 (S.D.N.Y 1988) Keller v. Blinder (In re Blinder, Robinson & Co.), 135 B.R. 892 (D. Colo. 1991) ii

4 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 4 of 34 Lustig v. Weisz & Assocs., Inc. (In re Unified Commercial Capital, Inc.), 260 B.R. 343 (Bankr. W.D.N.Y. 2001) M. Fabrikant & Sons, Inc. v. Long's Jeweler's Ltd., 2008 WL (S.D.N.Y. June 26, 2008) Stern v. Marshall, U.S., No , 2011 WL (June 23, 2011) Messinger v. Chubb Group of Insurance Companies, No , 2007 WL (N.D. Ohio May 16, 2007) Mishkin v. Ageloff, 220 B.R. 784 (S.D.N.Y. 1998) Nathel v. Siegal, 592 F. Supp. 2d 452 (S.D.N.Y. 2008) New Times I, 371 F.3d 68 (2d Cir. 2004) New Times II, 463 F.3d 125 (2d Cir. 2006) Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095 (2d Cir. 1993) Orlick v. Kozyak (In re Fin. Federated Title & Trust, Inc.), 309 F.3d 1325 (11th Cir. 2002) Pereira v. Equitable Life Ins. Soc'y of the United States (In re Trace Int'l Holdings, Inc.), 289 B.R. 548 (Bankr. S.D.N.Y. 2003) Picard v. HSBC Bank PLC, No , 2011 WL (S.D.N.Y. Apr. 25, 2011)... 10, 13, 14 Picard v. JPMorgan Chase Bank, N.A., No , 2011 WL (S.D.N.Y. May 23, 2011)... 1, 10, 11, 13, 15 Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC), 440 B.R. 243 (Bankr. S.D.N.Y. 2010) Pryor v. Fisher (In re Dimino), 429 B.R. 408 (Bankr. E.D.N.Y. 2010) SEC v. Zandford, 535 U.S. 813 (2002) SEC v. F.O. Baroff Co., 497 F.2d 280 (2d Cir. 1974) Sharp Int l Corp. v. State St. Bank & Trust Co. (In re Sharp Int'l Corp.), 403 F.3d 43 (2d Cir. 2005)... 16, 19 iii

5 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 5 of 34 Trefny v. Bear Stearns Securities Corp., 243 B.R. 300 (S.D. Tex. 1999)...9 FEDERAL STATUTES AND REGULATIONS 11 U.S.C. 101(12)... 15, 16, U.S.C. 101(5)(A) U.S.C. 101(53A) U.S.C. 544(b)... passim 11 U.S.C. 548(a)(1)... 14, U.S.C. 548(a)(1)(B) U.S.C. 546(e)... 23, U.S.C. 741(8) U.S.C , et seq., U.S.C. 78ccc(a)(2)(A) U.S.C. 78eee U.S.C. 78fff(b) U.S.C. 78fff-1(a) U.S.C. 78fff-2(c)(3)... 9, 13, 15, U.S.C. 78lll(11)... 3, 23, U.S.C. 78lll(12)... 24, U.S.C. 78fff U.S.C. 157(b) U.S.C. 157(b)(1) U.S.C. 157(d)... passim 17 C.F.R b C.F.R a-4(b)(4) iv

6 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 6 of 34 STATE STATUTES N.Y. Debt. & Cred. Law , 20 N.Y. Debt. & Cred. Law 270, et seq.... 5, 16 N.Y.C.P.L.R. 203(g)... passim N.Y.C.P.L.R. 213(1) N.Y.C.P.L.R. 213(8)... passim NYUCC 8-102(a)(14) NYUCC 8-102(a)(17) NYUCC 8-102(a)(7) NYUCC 8-501(b) NYUCC 8-501(c)...18 v

7 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 7 of 34 I. INTRODUCTION Defendants, the M & B Weiss Family Limited Partnership of 1996 c/o Melvyn I. Weiss, Melvyn I. Weiss, Barbara J. Weiss, Stephen A. Weiss, Leslie Weiss, and Gary M. Weiss (collectively, the Weiss Defendants ) respectfully submit this memorandum of law in support of their motion for an order pursuant to 28 U.S.C. Section 157(d) withdrawing the reference of this action to the bankruptcy court. As set forth below, this case meets the requirements for both mandatory and permissive withdrawal of the reference and must be adjudicated in the district court. II. PRELIMINARY STATEMENT A. Madoff s Fraud and The Weiss Defendants Loss Among the over 1,000 adversary proceedings filed by the Trustee seeking to avoid transfers from Madoff customers, this action is sui generis. Putting aside the Trustee s improper joinder of the Weiss Defendants with Defendants David J. Bershad and the Bershad Investment Group LP, the Weiss Defendants are not aware of a single other avoidance action in which the Trustee has sought the avoidance from a BLMIS account customer of withdrawals beyond the six-year statute of limitations in the absence of any allegations of some special relationship with Madoff or his family, knowledge of the Madoff fraudulent scheme or some preferential or atypical rate of return. The Trustee s adversary proceeding against the Weiss Defendants is brought as part of the Securities Investor Protection Corporation ( SIPC ) liquidation proceeding of Bernard L. Madoff Securities ( BLMIS ) pending in the Bankruptcy Court. The Trustee s complaint against the Weiss Defendants seeks to avoid transfers made from their brokerage accounts with

8 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 8 of 34 Bernard L. Madoff Investment Securities, LLC ( BLMIS ), without regard to applicable statutes of limitations. See Exhibits to Complaint [Adv. Pro. Dkt. No. 1]. 1 The Weiss Defendants are former customers of BLMIS, a registered securities broker. Certain of the Weiss Defendants were customers of BLMIS for as long as fifteen years. Like other BLMIS customers, they signed brokerage agreements that gave Bernard L. Madoff ( Madoff ) discretionary trading authority over their brokerage accounts and received monthly BLMIS account statements reflecting BLMIS obligations to them for securities. On December 11, 2008, when Madoff s fraud was exposed, they learned that the brokerage account statements BLMIS sent to them each month were fraudulent. 2 The Weiss Defendants are innocent victims of the massive fraud perpetrated by Madoff. None are alleged to have had actual or constructive knowledge of the fraud. Yet, the Trustee seeks to recover from them all withdrawals made in excessive of deposits over a fifteen-year period starting in Such claims are well beyond the reach of any applicable statute of limitations. B. A SIPA Liquidation Proceeding is Commenced On December 11, 2008, the above-captioned liquidation proceeding was commenced against BLMIS, pursuant to SIPA. See Order, Securities and Exchange Commission v. Madoff, No (S.D.N.Y. Dec. 15, 2008) (ordering relief under SIPA and transferring proceeding to the Bankruptcy Court) [Dkt. No. 4]. Irving Picard ( Trustee ) was appointed Trustee, charged 1 All citations to Adv. Pro. Dkt. No. shall refer to the adversary proceeding against the Weiss Defendants, Bankruptcy Docket No Certain of the Weiss Defendants Stephen A. Weiss and The M&B Weiss Family Limited Partnership of 1996 liquidated their BLMIS accounts long before December 11, Indeed, Stephen Weiss closed his account with BLMIS over 16 years ago. 2

9 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 9 of 34 with overseeing the liquidation of BLMIS and processing customer claims pursuant to SIPA. Id. On December 23, 2008, the Bankruptcy Court issued an Order authorizing the Trustee to disseminate notice, a claim form, and other related documents to customers and creditors of BLMIS. See Order at 2 [Main Dkt. No. 12]. 3 The Order provided that customers could submit customer claim forms to the Trustee, and the Trustee would satisfy[] a customer s net equity claim, as defined in 15 U.S.C. 78lll(11).... Id. at 5. Section 78lll(11) defines net equity as the amount that would have been owed by the debtor to such customer if the debtor had liquidated... on the filing date, all securities positions of such customer... minus any indebtedness of such customer to the debtor on the filing date U.S.C. 78lll(11). 4 All Weiss Defendants except the M & B Weiss Family Limited Partnership of 1996 (the Weiss Family Partnership ) and Stephen A. Weiss ( Stephen Weiss ) submitted a customer claim form setting forth their final BLMIS account balance as their loss. See Exhibits to Complaint [Adv. Pro. Dkt. No. 1]. However, rather than calculating their loss based on what BLMIS owed them, as reflected on their BLMIS account statements and as required by SIPA, the Trustee used a novel net investment claims calculation method that disregarded earnings reported on customer account statements and instead subtracted customer withdrawals from deposits to ascertain any principal remaining in the account. 3 All citations to Main Dkt. No. shall refer to the BLMIS liquidation proceeding, Bankruptcy Court Docket. No On April 13, 2009, an involuntary petition was filed against Madoff individually. That Chapter 7 case was substantively consolidated with the liquidation of BLMIS. See Consent Order Substantively Consolidating The Estate of Bernard L. Madoff Into The SIPA Proceeding of Bernard L. Madoff Investment Securities LLC and Expressly Preserving All Rights, Claims and Powers of Both Estates (Bankr. S.D.N.Y. issued June 9, 2009) [Main Dkt. No. 252]. 3

10 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 10 of 34 Applying this net investment method, the Trustee disallowed the claims of the Weiss Defendants who submitted SIPC claims in their entirety because their total account withdrawals exceeded their deposits. See Exhibits to Complaint [Adv. Pro. Dkt. No. 1]. The Weiss Defendants would soon learn that not only were the claims of those Weiss Defendants who submitted SIPC claims disallowed under the Trustee s novel approach, but the Trustee would also recalculate their account balances by disallowing all fictitious profits. C. The Nature of the Trustee s Avoidance Actions and Possible Defenses In December 2010, the Trustee initiated approximately 1,000 avoidance actions against former BLMIS customers seeking return of the monies they innocently withdrew from their BLMIS accounts. Approximately two weeks earlier, the Trustee filed the above-captioned avoidance action against the Weiss Defendants. 5 See Complaint [Adv. Pro. Dkt. No. 1]. Curiously, the action against the Weiss Defendants was the first avoidance action filed by the Trustee following the filing of approximately 19 avoidance actions against defendants whom the Trustee claims knew or should have known of the Madoff fraud. Unlike those actions, the Complaint against the Weiss Defendants contained no allegations that the Weiss Defendants knew or should have known of the fraud. Devoid of any such assertions, the Complaint was evidently selected as the first to be filed in this round of avoidance actions in order to capitalize on the media attention that would be generated by a filing against Messrs. Weiss and Bershad. See, e.g., Nate Raymond, Trustee Seeks to Recoup Fictitious Madoff Profits From Weiss and Family Members, Former Partner, N.Y.L.J. Nov. 19, (discussing Mr. Weiss s and Mr. Bershad s previous legal troubles and stating that [t]he suit against Messrs. Weiss and Bershad 5 The Trustee has also joined Defendants David J. Bershad and Bershad Investment Group LP in the Complaint against the Weiss Defendants. However, this motion is brought only on behalf of the Weiss Defendants. 4

11 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 11 of 34 is among about 19 filed by Mr. Picard seeking to set aside on fraud and other grounds a total of $15 billion in payments that Mr. Madoff made to his investors before his scheme unraveled. ). Attached hereto as Exhibit A to the declaration of Parvin K. Aminolroaya, dated September 6, 2011 ( Aminolroaya Decl. ). The Trustee s adversary proceeding against the Weiss Defendants is brought pursuant to sections 78fff(b), 78fff-1(a) and 78fff-2(c)(3) of SIPA, Complaint at 3, as well as certain provisions of the Bankruptcy Code, the New York Fraudulent Conveyance Act, N.Y. Debt. & Cred. Law 270, et seq., and New York Civil Practice Law and Rules 203(g) and 213(8). Id. The Weiss Defendants intend to move to dismiss the complaint on numerous grounds including grounds based upon federal and state securities laws. The Weiss Defendants deadline to answer or move to dismiss is currently October 3, Leslie Weiss The Complaint seeks recovery of funds that Ms. Weiss withdrew from her BLMIS account (a) as an alleged six-year fraudulent conveyance pursuant to New York s Fraudulent Conveyance Law as applicable pursuant to Section 544(b) of the Bankruptcy Code and, (b) as an alleged undiscovered fraudulent conveyance pursuant to New York s Fraudulent Conveyance Law as applicable pursuant to Section 544(b) of the Bankruptcy Code and New York Civil Practice Law and Rules 203(g) and 213(8). In seeking to maintain an action for recovery against Ms. Weiss, the Trustee is forced to avoid all earnings and withdrawals in the account since the account opening including withdrawals made years prior to December 11, 2002 the beginning of the six year look back period. Had the Trustee avoided only withdrawals in the 6 Since January 2011, the Trustee has been conferring with counsel for various defendants in the avoidance actions on omnibus procedures for briefing the anticipated motions to dismiss in the hundreds of avoidance actions filed by the Trustee. 5

12 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 12 of 34 account accrued during the six year look back period, Ms. Weiss s BLMIS account would reflect a positive balance under the Trustee s net equity methodology. See Exhibits to Complaint. The Complaint also seeks to avoid all earnings on the account since the accounting opening, including reported earnings accrued prior to December 11, 2002 the beginning of the six year look back period. 2. Gary M. Weiss The Complaint seeks recovery of funds that Mr. Weiss withdrew from his BLMIS account (a) as an alleged two-year fraudulent conveyance pursuant to Section 548(a)(1) of the Bankruptcy Code, (b) as an alleged six-year fraudulent conveyance pursuant to New York s Fraudulent Conveyance Law as applicable pursuant to Section 544(b) of the Bankruptcy Code, and (c) as an alleged undiscovered fraudulent conveyance pursuant to New York s Fraudulent Conveyance Law as applicable pursuant to Section 544(b) of the Bankruptcy Code and New York Civil Practice Law and Rules 203(g) and 213(8). In seeking to recover from Mr. Weiss, the Trustee avoids all withdrawals made by Mr. Weiss since May 2002, which is prior to the beginning of the six year look back period. Had the Trustee avoided only withdrawals in the account accrued during the six year look back period, the Complaint could only seek to recover a lesser amount than is currently sought by the Trustee. See Exhibits to Complaint. The Complaint also seeks to avoid all earnings on the account since the accounting opening, including reported earnings accrued prior to December 11, 2002 the beginning of the six-year look back period. 3. Stephen A. Weiss The Complaint seeks recovery of funds that Mr. Weiss withdrew from BLMIS as an alleged undiscovered fraudulent conveyance pursuant to New York s Fraudulent Conveyance 6

13 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 13 of 34 Law as applicable pursuant to Section 544(b) of the Bankruptcy Code and New York Civil Practice Law and Rules 203(g) and 213(8). Mr. Weiss withdrew these funds in 1995 when he closed his BLMIS account, some 13 years before the discovery of the Madoff fraud. In seeking to avoid this amount, the Trustee attempts to avoid a transfer made over seven years prior to December 11, 2002 the beginning of the six-year look back period. Had the Trustee avoided only withdrawals in the account accrued during the six year look back period, no recovery could be sought from Mr. Weiss. See Exhibits to Complaint. 4. The Weiss Family Partnership The Complaint seeks recovery of funds that the Weiss Family Partnership withdrew as (a) an alleged two-year fraudulent conveyance pursuant to Section 548(a)(1) of the Bankruptcy Code, (b) an alleged six-year fraudulent conveyance (which includes the two-year amounts) pursuant to New York s Fraudulent Conveyance Law as applicable pursuant to Section 544(b) of the Bankruptcy Code, and (c) funds that the Weiss Family Partnership withdrew as an alleged undiscovered fraudulent conveyance including transfers going back to November 2002 (which includes the two-year and six-year amounts) pursuant to New York s Fraudulent Conveyance Law as applicable pursuant to Section 544(b) of the Bankruptcy Code and New York Civil Practice Law and Rules 203(g) and 213(8). Had the Trustee avoided only withdrawals in the account accrued during the six-year look back period, the Complaint could seek to recover a lesser amount than is currently sought by the Trustee. See Exhibits to Complaint. The Complaint also seeks to avoid all earnings on the account since the account opening in 1996, including reported earnings accrued prior to December 11, 2002 the beginning of the six-year look back period. 7

14 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 14 of Melvyn I. Weiss and Barbara J. Weiss JTWROS The Complaint seeks recovery of funds that Mr. and Mrs. Weiss withdrew as an alleged two-year fraudulent conveyance pursuant to Section 548(a)(1) of the Bankruptcy Code, (b) as an alleged six-year fraudulent conveyance (which includes the two-year amounts), and (c) as an alleged undiscovered fraudulent conveyance (which includes the two-year and six-year amounts) pursuant to New York s Fraudulent Conveyance Law as applicable pursuant to Section 544(b) of the Bankruptcy Code and New York Civil Practice Law and Rules 203(g) and 213(8). The Complaint also seeks to partially avoid an account to account transfer that was used to open Mr. and Mrs. Weiss s account in 1993 more than fifteen years before the bankruptcy filing and well beyond the maximum six-year statutory look back period for avoidance. Mr. and Mrs. Weiss s BLMIS account statement reflects that a transfer was made to their account on June 7, The Trustee has partially avoided this transfer and credited their account with a significantly lesser amount. Had the Trustee avoided only withdrawals in the account accrued during the six year look back period, the Complaint could seek to recover a lesser amount instead of the amount sought by the Trustee. See Exhibits to Complaint. The Complaint also seeks to avoid all earnings on the account since that initial transfer, including reported earnings accrued prior to December 11, 2002 the beginning of the six-year look back period. 7 7 The Trustee s claims against the Weiss Defendants are also questionable because the Trustee has apparently already marshaled assets more than sufficient to pay all customer claims. As of September 6, 2011, the Trustee had determined 99.99% of all customer claims. See He has allowed customer claims totaling $6,961,691, Id. By comparison, the Trustee has recovered or entered into settlement agreements to recover over $7.6 billion.... See Trustee s Fifth Interim Report for the Period Ending March 31, [Main Dkt. No. 4072]. This $7.6 billion figure does not include a $5 billion settlement, which is currently on appeal, in the Picower avoidance action. Id. at 62, As the Trustee has marshaled almost double the assets necessary to satisfy all customer claims, he has no basis to pursue avoidance actions against customers such as the Weiss Defendants. See 15 U.S.C. 78fff-2(c)(3) ( Whenever customer property is not sufficient to pay in full 8

15 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 15 of 34 On the two-year, six-year, and undiscovered claims, the Trustee alleges that the transfers were made with actual intent to hinder, delay, or defraud creditors. See Complaint 63, 78, 102. In addition, the Trustee makes two-year and six-year claims for constructive fraudulent conveyance -- i.e., that the Weiss Defendants received payments in exchange for less than a reasonably equivalent value or fair consideration while BLMIS was insolvent or in distressed financial condition. Id. at 69, 83, 89, 95. These claims fail because, as discussed herein, the Weiss Defendants receipt of payments of amounts shown on their BLMIS account statements satisfied an antecedent debt. Moreover, the allegations regarding undiscovered claims also fail because these transactions occurred well beyond any applicable statute of limitations. However, the Trustee takes the position that, notwithstanding SIPA provisions designed to protect customers of broker-dealers, a Ponzi scheme is sui generis and the usual rules governing fraudulent conveyances do not apply. This dispute raises a fundamental question of SIPA interpretation that is sharply at variance with Title 11 in this context. The Trustee has not alleged, and cannot allege, that the Weiss Defendants were anything other than innocent victims of Madoff s fraud. Unlike other Complaints filed by the Trustee against former BLMIS investors seeking to avoid all withdrawals made in their BLMIS accounts, including those made well beyond the maximum six-year statutory look back period for avoidance, the Complaint against the Weiss Defendants is void of any allegations that the Weiss Defendants had knowledge, actual or constructive, of the Madoff Ponzi scheme. See Complaint. Whether the Trustee should be using SIPA, a customer protection statute, to assert claims against [customer] claims..., the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the [Bankruptcy Code]. ); see also Trefny v. Bear Stearns Sec. Corp., 243 B.R. 300, 321 (S.D. Tex. 1999) ( Section 78fff-2(c)(3) comes into effect when the customer s property held by the debtor is not sufficient to pay customers claims in full. ). 9

16 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 16 of 34 innocent customers for withdrawals made by them over 15 years ago is a novel issue requiring mandatory withdrawal of the reference. Even if the withdrawal of the reference were not mandatory based on the myriad of federal law questions raised by the Trustee s claims, the reference should be withdrawn as a matter of discretion. Under section 157(d), withdrawal of the reference for cause is appropriate where the bankruptcy court lacks authority to enter final orders on those claims and where the interests of efficiency and uniformity would be served by withdrawal. Notably, the District Court recently ordered mandatory withdrawal of the reference in one Madoff-related adversary proceedings involving customers, see Picard v. Katz, No (S.D.N.Y. July 5, 2011), Dkt. No. 19, and two Madoff-related adversary proceedings involving non-customers, Picard v. JPMorgan Chase Bank, N.A., No , 2011 WL , at *9 (S.D.N.Y. May 23, 2011); Picard v. HSBC Bank PLC, No , 2011 WL , at *5 (S.D.N.Y. Apr. 25, 2011). Motions to withdraw the reference have since been filed in at least five other Madoff-related adversary proceedings asserting fraudulent conveyance claims against BLMIS customers. See Picard v. Goldman, No (S.D.N.Y. filed July 19, 2011); Picard v. Elins Family Trust, No (S.D.N.Y. filed July 11, 2011); Picard v. Franitza Family Ltd. P ship, No (S.D.N.Y. filed June 30, 2011); Picard v. Blumenthal, No (S.D.N.Y. filed June 24, 2011); Picard v. Greiff, No (S.D.N.Y. filed June 3, 2010). III. ARGUMENT A. THIS ACTION IS SUBJECT TO MANDATORY WITHDRAWAL OF THE REFERENCE Mandatory withdrawal of the reference is governed by 28 U.S.C. Section 157(d), which provides as follows: 10

17 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 17 of 34 The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce. 28 U.S.C. 157(d). The decision whether to withdraw reference to the bankruptcy court rests squarely with the district court. Messinger v. Chubb Group of Ins. Cos., No , 2007 WL , at *1 (N.D. Ohio May 16, 2007). The basic principles governing withdrawal of the reference are well established. The mandatory withdrawal provision of Section 157(d) has been construed narrowly to apply only in cases where substantial and material consideration of non-bankruptcy Code federal statutes is necessary for the resolution of the proceeding. Picard v. JPMorgan Chase Bank, N.A., 2011 WL , at *3 (quoting In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 (2d Cir. 1990)). Consideration is substantial and material when the case requires the bankruptcy judge to make a significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes. Id. (quoting City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991)); see also In re Dana Corp., 379 B.R. 449, 461 (S.D.N.Y. 2007) ( Withdrawal of the reference is mandatory because substantial and material consideration of CERCLA is required for the resolution of th[e] proceedings. ); In re Adelphia Commc ns Corp. Secs. and Derivative Litig., No , 2006 WL , at *5 (S.D.N.Y. Feb. 10, 2006) (withdrawing reference where claims required significant interpretation of RICO and Bank Holding Company Act); In re The Singer Co., No , 2002 WL , at *3 (S.D.N.Y. Feb. 20, 2002) ( [M]andatory withdrawal is proper here because resolving the complaint will require the substantial and material consideration of patent law. ). [I]t is not necessary that the federal law or statute implicated involve unsettled law or issues of first impression because what is relevant is the degree to which the bankruptcy judge would have to consider the federal non-bankruptcy laws, 11

18 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 18 of 34 not just their application. In re Enron Corp., No , 2005 WL , at *2 (S.D.N.Y. May 18, 2005). However, [w]here matters of first impression are concerned, the burden of establishing a right to mandatory withdrawal is more easily met. Picard v. JP Morgan Chase Bank, N.A., 2011 WL , at *3. 1. The Trustee s Complaint Against The Weiss Defendants Raises Significant Issues of Non-Bankruptcy Law Although the Weiss Defendants have not yet filed their motion to dismiss, withdrawal of the reference is mandatory for two reasons. First, the Trustee s claims against them raise issues requiring significant and novel interpretation of SIPA. Second, the Trustee s claims rely heavily on state law fraudulent conveyance statutes and tolling provisions. This District Court has already held that issues arising under SIPA are other laws of the United States regulating organizations or activities affecting interstate commerce, as required by Section 157(d): [W]hile it is certainly true that SIPA liquidation proceedings may be brought in the bankruptcy court and that SIPA incorporates provisions of title 11 to the extent that they are consistent with SIPA, SIPA expressly provides that it shall be considered an amendment to, and section of, the Securities Exchange Act of 1934, and for this reason is codified in Title 15 (where securities laws are placed), rather than in Title 11 (where bankruptcy laws are placed).... The reason for this language and placement is that SIPA is, first and foremost, concerned with the protection of securities investors (as its very title states), whether in or outside the bankruptcy context. A substantial issue under SIPA is therefore, almost by definition, an issue the resolution of [which] requires consideration of both title 11 and other laws of the United States. Picard v. HSBC Bank PLC, 2011 WL , at *2 (quoting 28 U.S.C. 157(d)); see also Picard v. JPMorgan Chase Bank, N.A., 2011 WL , at *7 (same). Below is a discussion of the federal non-bankruptcy law issues implicated by the Trustee s claims. 12

19 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 19 of The Trustee s Claims Violate the Purpose and Provisions of the Securities Investor Protection Act The Trustee s claims against the Weiss Defendants raise complex issues of first impression under SIPA, which the District Court has ruled is part of the federal securities laws. Congress passed SIPA in 1970 in the wake of several brokerage failures and rampant fraud 8 to, among other things, establish immediately a substantial reserve fund which will provide protection to customers of broker-dealers [to] reinforce the confidence that investors have in the U.S. securities markets.... H.R. Rep. No , at 3-4 (1970). SIPA is a remedial statute enacted to promot[e] investor confidence and provid[e] protection to investors. New Times I, 371 F.3d 68, 84 (2d Cir. 2004). To promote its remedial purpose, SIPA gives customers of broker-dealers priority status in the liquidation claims process as well as up to $500,000 as an advance on each customer s claim, funded by the Securities Investor Protection Corporation. See 15 U.S.C. 78fff-3; 78fff-2. Consistent with promoting investor confidence and protection, courts have noted that [i]t is a customer s legitimate expectations on the filing date... that determines the availability, nature, and extent of customer relief under SIPA. New Times II, 463 F.3d 125, 128 (2d Cir. 2006) (emphasis added). By asserting fraudulent conveyance claims against the Weiss Defendants, for withdrawals made over fifteen years ago, the Trustee is acting contrary to SIPA. The Weiss Defendants are innocent victims of Madoff s fraud. They reasonably believed their monthly brokerage account statements to be accurate and the Trustee has not alleged otherwise. See Complaint. While SIPA incorporates the Bankruptcy Code, including its avoidance provisions, 8 SIPA was enacted in the wake of several brokerage failures and rampant fraud in the brokerage industry. The late 1960 s saw the collapse of several brokerage establishments, causing serious financial losses to their clients.... There was considerable concern that investors, particularly smaller ones, would lose confidence in the stability of broker-dealers, and withdraw from the securities market. SEC v. F.O. Baroff Co., 497 F.2d 280, 283 (2d Cir. 1974). 13

20 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 20 of 34 such incorporation is only [t]o the extent consistent with SIPA. 15 U.S.C. 78fff(b) (emphasis added). Here, the Trustee s claims against the Weiss Defendants are inconsistent with SIPA in that they disregard the Weiss Defendants legitimate expectations on the filing date. Moreover, in seeking to avoid all withdrawals made by the Weiss Defendants, the Trustee s claims violate the statutory look back periods limiting avoidance to six years prior to the filing date for state law claims and to two years prior to the filing date for claims under the Code. See 11 U.S.C. 548(a)(1); 11 U.S.C. 544(b); N.Y.C.P.L.R. 213(1). There is no provision in SIPA or the Bankruptcy Code which purports to authorize asserting such claims. These are significant and novel issues under SIPA requiring mandatory withdrawal of the reference. See Aminolroaya Decl. Ex. B Transcript of Oral Argument at 33:15-20, Picard v. Katz, No (withdrawing reference where highly material issues of interpretation not just of bankruptcy law but also nonbankruptcy law, securities law of SIPA were raised); Picard v. HSBC Bank PLC, 2011 WL , at *2 (quoting 28 U.S.C. 157(d)) ( A substantial issue under SIPA is therefore, almost by definition, an issue the resolution of [which] requires consideration of both title 11 and other laws of the United States. ); Picard v. JPMorgan Chase Bank, N.A., 2011 WL , at *7 ( [A]n issue that requires significant interpretation of SIPA undoubtedly requires consideration of laws other than Title 11. ); see also In re Drexel Burnham Lambert Grp., 960 F.2d 285, 288 (2d Cir. 1992) ( Because the Securities Claims necessitated an examination of federal securities laws, Judge Pollack properly withdrew those claims from the bankruptcy court. ); In re Cablevision S.A., 315 B.R. 818, 821 (S.D.N.Y. 2004) (withdrawing reference where dispute required consideration of the Trust Indenture Act and the Williams Act); Bear, Stearns Sec. Corp. v. Gredd, No , 2001 WL , at *3 14

21 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 21 of 34 (S.D.N.Y. July 25, 2001) (withdrawing reference where ownership interests at issue require[d] substantial and material consideration of the federal securities laws and the regulations issued thereunder ); Mishkin v. Ageloff, 220 B.R. 784, 798 (S.D.N.Y. 1998) (withdrawing reference where adversary proceeding raised issues under PSLRA). Accordingly, withdrawal of the reference is mandatory. 3. The Trustee s Claims Run Afoul of Federal Securities Laws Providing that BLMIS s Payments to the Weiss Defendants Were in Satisfaction of an Antecedent Debt SIPA provides that [w]henever customer property is not sufficient to pay in full [customer] claims... [t]he trustee may recover any property transferred by the debtor... to the extent that such transfer is voidable or void under the provisions of Title U.S.C. 78fff- 2(c)(3) (emphasis added). The Trustee alleges that withdrawals made by the Weiss Defendants over the last fifteen years from their BLMIS accounts are avoidable as fraudulent transfers. See Complaint. However, this conflicts with federal securities laws providing that brokerage account statements create obligations owed by the broker to the customer, such that any payments thereon were in satisfaction of an antecedent debt, 9 and not with a fraudulent intent or to defraud other creditors. See 11 U.S. C. 548(a)(1)(A); 11 U.S.C. 548(c); N.Y. Debt. & Cred. Law 276. As discussed in greater detail below, courts have held that payment of an antecedent debt cannot constitute an intentional fraudulent conveyance. See Sharp Int l Corp. v. State St. Bank & 9 The Bankruptcy Code defines debt as liability on a claim. 11 U.S.C. 101(12). Claim is defined as a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. 11 U.S.C. 101(5)(A). The definition of debt set forth in New York s Debtor and Creditor Law is similarly broad. See N.Y. Debt. & Cred. Law 270 ( Debt includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent. ). 15

22 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 22 of 34 Trust Co. (In re Sharp Int l Corp.), 403 F.3d 43, 54 (2d Cir. 2005). Likewise, authorities provide that payment of an antecedent debt constitutes a reasonably equivalent value or fair consideration as to alleged constructively fraudulent transfers under section 548(a)(1)(B) and New York s Debtor and Creditor Law, as well as good faith within the definition of New York s Debtor and Creditor Law. See 11 U.S.C. 101(12); N.Y. Debt & Cred. Law 272. Moreover, the satisfaction of a debt is also a defense to a fraudulent conveyance under Section 548(c) of the Bankruptcy Code. 11 U.S.C. 548(c). a. Brokerage Statements Create Enforceable Obligations Since the 1970s, the securities market has operated through an indirect holding system whereby brokers hold securities for customers in street name, such that customers no longer receive securities certificates to evidence their purchase. 10 Instead, brokerage customers receive brokerage account statements, which provide them rights of ownership regardless of whether the broker-dealer actually purchases the securities. Federal securities regulations require broker-dealers to send customers account statements and trade confirmations. See 17 C.F.R b-10 (requiring broker-dealers to 10 As described by the Securities and Exchange Commission, when securities are held in street name : The security is registered in the name of your brokerage firm on the issuer s books, and your brokerage firm holds the security for you in book-entry form. Book-entry simply means that you do not receive a certificate. Instead, your broker keeps a record in its books that you own that particular security.... While you will not receive a certificate, your firm will send to you, at least four times a year, an account statement that lists all your securities at the broker-dealer. Holding Your Securities -- Get the Facts, SEC website, (last visited on Mar. 2, 2011). 16

23 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 23 of 34 send customers trade confirmations). 11 Brokerage account statements are enforceable under the federal securities laws, even when the broker does not purchase the securities set forth thereon. See SEC v. Zandford, 535 U.S. 813, 819 (2002) ( [A] broker who accepts payment for securities that he never intends to deliver, or who sells customer securities with intent to misappropriate the proceeds, violates 10(b) and Rule 10b-5. ); see also In re J.P. Jeanneret Assocs., 769 F. Supp. 2d 340, 363 (S.D.N.Y. Jan. 31, 2011) (holding that a securities fraud claim arises where the plaintiffs part with money intending that it be invested in securities, only to have the person to whom that money is entrusted steal it ); Nathel v. Siegal, 592 F. Supp. 2d 452, 463 (S.D.N.Y. 2008) (same). The National Association of Securities Dealers and the New York Stock Exchange likewise require brokers to send their customers account statements. See NASD Rule 2340 (requiring broker-dealers to send customers account statement at least every quarter); NYSE Rule 409 (same). These federal laws and regulations are consistent with state law ownership rights under UCC Article 8. Article 8 was enacted to provide clarity and certainty regarding the rules that govern how interests in securities are evidenced and how they are transferred in the current securities market. NYUCC Art. 8 Historical and Statutory Notes. Section 8-501(b) 12 of the 11 See also 17 C.F.R a-4(b)(4) (requiring broker-dealers to maintain all records of communications sent and received); 17 C.F.R a-4(c) (requiring broker-dealers to maintain records relating to customer accounts) 12 Article 8 was enacted to provide clarity and certainty regarding the rules that govern how interests in securities are evidenced and how they are transferred in the current securities market. The existing law fails to clearly define such rules when an interest is held through an intermediary, rather than by holding a certificate or by registration with the issuer of securities. NYUCC Art. 8 Historical and Statutory Notes. 17

24 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 24 of 34 NYUCC provides that a person acquires a security entitlement 13 if a securities intermediary indicates by book entry that a financial asset has been credited to the person s security account, [or] becomes obligated under other law, regulation, or rule to credit a financial asset to the person s securities account. NYUCC 8-501(b). Section 8-501(c) provides that upon such book entry, a person has a security entitlement even though the securities intermediary does not itself hold the financial asset. NYUCC 8-501(c) (emphasis added). Recognizing that statements create obligations, SIPA advises customers of broker-dealers to look to their statements to ascertain what is owed to them: In the unlikely event your brokerage firm fails, you will need to prove that cash and/or securities are owed to you. This is easily done with a copy of your most recent statement and transaction records of the items bought or sold after the statement. Understanding Your Brokerage Account Statements at 5, available at (last accessed on June 21, 2011). The Trustee s claims against the Weiss Defendants are at total odds with the foregoing. b. The Trustee Cannot Avoid Payments in Satisfaction of an Antecedent Debt Under the foregoing laws, brokerage account statements create enforceable ownership rights against the broker, such that the amounts reported thereon are an antecedent debt that the broker owes to the customer. These rights are an antecedent debt under the Bankruptcy Code because they create liability on a claim. 11 U.S.C. 101(12). 13 A security entitlement is the rights and property interest of an entitlement holder with respect to a financial asset. NYUCC 8-102(a)(17). An entitlement holder is a person identified in the records of a securities intermediary as the person having a security entitlement against the securities intermediary. NYUCC 8-102(a)(7). 14 A securities intermediary includes a broker-dealer. See NYUCC 8-102(a)(14). 18

25 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 25 of 34 It necessarily follows that a customer s account withdrawal is a satisfaction or partial satisfaction of this antecedent debt, and thus not a fraudulent conveyance. See Sharp Int l Corp. v. State St. Bank & Trust Co. (In re Sharp Int l Corp.), 403 F.3d 43, 54 (2d Cir. 2005) ( [A] conveyance which satisfies an antecedent debt made while the debtor is insolvent is neither fraudulent nor otherwise improper, even if its effect is to prefer one creditor over another. ); Atlanta Shipping Corp. v. Chemical Bank, 818 F.2d 240, 249 (2d Cir. 1987) ( In general, repayment of an antecedent debt constitutes fair consideration unless the transferee is an officer, director, or major shareholder of the transferor. ); Pryor v. Fisher (In re Dimino), 429 B.R. 408, 417 (Bankr. E.D.N.Y. 2010) ( In general, where a transfer is made to pay an antecedent debt, the transfer does not constitute a constructive fraudulent conveyance. ); Pereira v. Equitable Life Ins. Soc y of the United States (In re Trace Int l Holdings, Inc.), 289 B.R. 548, 557 (Bankr. S.D.N.Y. 2003) ( The payment of antecedent debts satisfies the definition of value under the fraudulent conveyance laws,... and if reasonably or fairly equivalent to the transfer, will defeat the trustee s claim. ). This is consistent with cases noting that [u]nder SIPA and the case law construing it, a party who files a customer claim is considered a preferred creditor of the estate. Keller v. Blinder (In re Blinder, Robinson & Co.), 135 B.R. 892, 896 (D. Colo. 1991) (emphasis added) Consistent with this, SIPA provides that [a] trustee shall be 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 of the United States Code. 15 U.S.C. 78fff- 1(a). SIPA s emphasis on preferences, rather than fraudulent conveyances, is significant because the Trustee may avoid payments on an antecedent debt only when they are preferences -- not fraudulent conveyances. See Geron v. Palladin Overseas Fund, Ltd. (In re AppliedTheory Corp.), 323 B.R. 838, 842 (Bankr. S.D.N.Y. 2005) (discussing cases noting that a preferential transfer that satisfied an antecedent debt could not be deemed to be a fraudulent conveyance because the existence of the antecedent debt satisfied the requirement of reasonably equivalent value or fair consideration. ). As such, Section 78fff-1(a) is an implicit acknowledgment that 19

26 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 26 of 34 New York s Debtor and Creditor Law likewise recognizes that a payment on an antecedent debt constitutes fair consideration. See N.Y. Debt. & Cred. Law 272 ( Fair consideration is given for property... [w]hen in exchange for such property... as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied.... ) (emphasis added). Based on the foregoing, the Weiss Defendants BLMIS account withdrawals were in partial satisfaction of the antecedent debt BLMIS owed them. As such, the withdrawals were not made to defraud and are not voidable or void under SIPA. See 15 U.S.C. 78fff-2(c)(3). As this argument requires significant analysis of how the Bankruptcy Code s avoidance provisions interact with SIPA and other federal securities laws, withdrawal of the reference is mandatory. 4. SIPA Requires the Trustee to Apply the SEC s Constant Dollar Approach to Determine Whether a Customer Must Return Funds to the Fund of Customer Property Even if the Weiss Defendants account withdrawals were avoidable fraudulent conveyances, the Trustee s methodology for determining the purportedly avoidable amounts presents yet another issue of non-bankruptcy law that must be addressed -- whether the Trustee should use the constant dollar approach urged by the SEC. As discussed above, the Trustee used a novel net investment method to calculate customer claims, whereby the Trustee ignored customer account statements and the earnings reported thereon, and instead looked only to customers account contributions less any withdrawals. The net investment method is central not only to claims calculation, but also to determining if the customer owes money to the fund of customer property and will thus be subject to an avoidance action. See Exhibits to Complaint [Adv. Pro. Dkt. No. 1]. This is customers under SIPA are creditors owed an antecedent debt against whom the Trustee may avoid preferences, but not fraudulent conveyances. 20

27 Case 1:11-cv UA Document 2 Filed 09/07/11 Page 27 of 34 because if the customer s withdrawals exceed the customer s contributions under the net investment calculation, the customer is a net winner whose claim is not only disallowed, but who purportedly must return to the fund of customer property any withdrawals in excess of principal contributions. Id. This is the basis for the Trustee s claims against the Weiss Defendants. See Complaint. The SEC has argued that the Trustee should be using a constant dollar approach, whereby the net investment method is modified to apply an interest factor to older transactions so that customer deposits made years ago are valued consistently with more recent withdrawals. See Memo. of Law of SEC, In re Bernard L. Madoff Inv. Secs. LLC, No (Bankr. S.D.N.Y. filed Dec. 11, 2009) [Main Dkt. No. 1052] ( The Commission believes... that in determining customer claims under the cash-in/cash-out method, the amount of the payment should be calculated in constant dollars by adjusting for the effects of inflation (or deflation). ). The constant dollar approach properly recognizes that BLMIS s use of customer money had a time value. As an alternative to the antecedent debt defense described above, the constant dollar approach urged by the SEC will be raised as a defense to the Trustee s avoidance claims in the context of whether customer withdrawals were for value. 16 See 11 U.S.C. 548(c) (providing that a transferee who takes for value and in good faith... may retain any interest transferred or 16 Although the Trustee s use of the net investment method, as it pertains to the determination of customer claims, was recently affirmed by the Second Circuit, see In re Bernard L. Madoff Investment Securities, LLC, No , F.3d, 2011 WL (2d Cir. Aug. 16, 2011), the SEC s constant dollar approach is not yet before the Second Circuit. Despite the request to brief this issue, the Bankruptcy Court specifically limited consideration to whether net equity should be calculated using the net investment method or the last statement method, reserving the constant dollar approach for a later date. See Order Scheduling Adjudication of Net Equity Issue (Sept. 16, 2009); Letter Endorsement (Sept. 16, 2009) [Main Dkt. No. 438]. 21