Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 1 of 30. SECURITIES INVESTOR PROTECTION Adv. Pro. No (BRL)

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1 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 1 of 30 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES INVESTOR PROTECTION CORPORATION, Adv. Pro. No (BRL) Plaintiff, v. Civ. No. 12-mc-0115 (JSR) BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: MADOFF SECURITIES TRUSTEE S MEMORANDUM OF LAW IN OPPOSITION TO THE ANTECEDENT DEBT DEFENDANTS MOTION TO AMEND OCTOBER 15, 2013 OPINION AND ORDER REGARDING ANTECEDENT DEBT ISSUES TO ADD 28 U.S.C. 1292(b) CERTIFICATION FOR INTERLOCUTORY APPEAL Baker & Hostetler LLP 45 Rockefeller Plaza New York, NY Telephone: (212) Facsimile: (212) David J. Sheehan Oren J. Warshavsky Michelle R. Usitalo Elizabeth M. Schutte Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff

2 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 2 of 30 TABLE OF CONTENTS Page(s) PRELIMINARY STATEMENT...1 LEGAL STANDARD...3 ARGUMENT...5 I. Certification Would Not Materially Advance the Termination of this Litigation...5 II. Defendants Have Not Presented a Controlling Question of Law...8 III. There Is No Substantial Ground for Difference of Opinion Regarding the Order...9 A. The Court s interpretation of value is supported by the Second Circuit s Net Equity Decision...10 B. The Court s decision that non-bankruptcy law claims cannot be made against the customer property estate and thus cannot constitute antecedent debt under section 548(c) is supported in this Circuit...12 C. Defendants attempts to contort this Court s findings on the interpretation of the definition of a claim in a SIPA liquidation involving a Ponzi scheme must fail as they have presented no authority showing a significant disagreement on that issue...17 D. Defendants argument that obligations of BLMIS that can be disregarded as value for purposes of section 548(c) are only those obligations the Trustee actually avoids is a new issue raised in their motion, but one that is addressed by statute and the Second Circuit and not one of first impression E. Defendants offer no authority to support that there is substantial doubt regarding the Court s decision that the Net Investment Method applies to fraudulent transfers and that inter-account transfers do not constitute principal CONCLUSION i-

3 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 3 of 30 TABLE OF AUTHORITIES CASES Page(s) Am. Geophysical Union v. Texaco Inc., 802 F. Supp. 1 (S.D.N.Y. 1992)...9 In re Arcade Publ g, Inc., 455 B.R. 373 (Bankr. S.D.N.Y. 2011)...18 Aristocrat Leisure Ltd. v. Deutsche Bank Trust Co. Americas, 426 F. Supp. 2d 125 (S.D.N.Y. 2005)...9 Armstrong v. Collins, No. 01 Civ (PAC), 2010 WL (S.D.N.Y. Mar. 24, 2010)...16, 20 In re Bank of Am. Corp. Sec., Derivative & ERISA Litig., No. 09 MD 2058 (PKC), 2010 WL (S.D.N.Y. Oct. 8, 2010)...22 In re Bayou Grp., LLC, 362 B.R. 624 (Bankr. S.D.N.Y. 2007)...22 In re Bayou Grp., LLC, 439 B.R. 284 (S.D.N.Y. 2010)...17, 20, 23 Bilello v. JPMorgan Chase Ret. Plan, 603 F. Supp. 2d 590 (S.D.N.Y. 2009)...4, 8, 9, 10 Bishop v. Best Buy, Co., No. 08 Civ (LBS), 2011 WL (S.D.N.Y. Sept. 8, 2011)...10 In re BLMIS LLC, 454 B.R. 285 (Bankr. S.D.N.Y. 2003)...15 In re BLMIS LLC, 654 F.3d 229 (2d Cir. 2011), cert. denied, 133 S. Ct. 24, 133 S. Ct. 25 (2012)... passim Bos. Trading Grp., Inc. v. Burnazos, 835 F.2d 1504 (1st Cir. 1987)...19 In re Buspirone Patent Litig., 210 F.R.D. 43 (S.D.N.Y. 2002)...3 Butner v. United States, 440 U.S. 48 (1979) ii-

4 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 4 of 30 Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943)...21 In re Contemporary Indus. Corp., 312 B.R. 898 (D. Neb. 2003)...8, 9 Coopers & Lybrand v. Livesay, 437 U.S. 463 (1978)...3 Domenikos v. Roth, 288 F. App x 718 (2d Cir. 2008)...13 Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008), cert. denied, 129 S. Ct. 640 (2008)...13, 20, 23 FDIC v. Hirsh (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992)...21, 22 In re Fitness Holdings Int l, Inc., 714 F.3d 1141 (9th Cir. 2013)...13, 14 Flaherty v. Filardi, No. 03 Civ (LTS) (HBP), 2007 WL (S.D.N.Y. June 26, 2006)...5 In re Hannover, 310 F.3d 796 (5th Cir. 2002)...16 Koehler v. Bank of Bermuda Ltd., 101 F.3d 863 (2d Cir. 1996)...3 In re Madoff (SIPC v. BLMIS), 496 B.R. 744 (Bankr. S.D.N.Y. 2013)...2, 15 In re Madoff Sec. (SIPC v. BLMIS), 476 B.R. 715 (S.D.N.Y. 2012)... passim In re Madoff Sec. (SIPC v. BLMIS), 499 B.R. 416 (2013)... passim In re MTBE Prods. Liab. Litig., 399 F. Supp. 2d 320 (S.D.N.Y. 2005)...11 In re MTBE Prods. Liab. Litig., No. MDL 1358 (SAS), 2005 WL (S.D.N.Y. Jan. 6, 2005)...5, 14 Perkins v. Haines, 661 F.3d 623 (11th Cir. 2011) iii-

5 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 5 of 30 Picard v. Katz, 462 B.R. 447 (S.D.N.Y. 2011)...19 Quinn v. Altria Grp., Inc., No. 07 Civ (LTS) (RLE), 2008 WL (S.D.N.Y. Aug. 1, 2008)...4 Pa. Pub. Sch. Emps. Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 341 (S.D.N.Y. 2012)...9, 23 Rosenman Family, LLC v. Picard, 395 F. App x 766 (2d Cir. 2010)...13 Rosenman Family, LLC v. Picard (SIPC v. BLMIS LLC), 401 B.R. 629 (Bankr. S.D.N.Y. 2009) In re S. African Apartheid Litig., 624 F. Supp. 2d 336 (S.D.N.Y. 2009)...7, 22 In re S. African Apartheid Litig., No. 02 MDL 1499 (SAS), 2009 WL (S.D.N.Y. Dec. 31, 2009)...4, 9 Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995)...20 SEC v. Credit Bancorp, Ltd., 103 F. Supp. 2d 223 (S.D.N.Y. 2000)...6, 8, 10 SEC v. Hasho, 784 F. Supp (S.D.N.Y. 1992)...21 SEC v. JNT Investors, Inc., No. 72 Civ. 681, 1978 WL 1137 (S.D.N.Y. Feb. 9, 1978)...15 SEC v. S. J. Salmon & Co., 375 F. Supp. 867 (S.D.N.Y. 1974)...15 SEC v. Straub, No. 11 Civ (RJS), 2013 WL (S.D.N.Y. Aug. 05, 2013)...5 Sedona Corp. v. Ladenburg Thalman & Co., No. 03 Civ (LTS), 2005 WL (S.D.N.Y. Aug. 9, 2005)...13 Sender v. Buchanan (In re Hedged Inv. Assocs. Inc.), 84 F.3d 1286 (10th Cir. 1996)...20, 23 In re Sharp Int l Corp., 403 F.3d 43 (2d Cir. 2005) iv-

6 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 6 of 30 South v. Saab Cars USA, Inc., 28 F.3d 9 (2d Cir. 1994)...9 Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007)...19 United Paperworkers Int l Union and its Local 340 v. Specialty Paperboard, Inc., 999 F.2d 51 (2d Cir. 1993)...9 United States v. Huron Consulting Grp., Inc., No. 09 Civ (JSR), 2011 WL (S.D.N.Y. May 16, 2011)...3, 4 Visconsi v. Lehman Bros., Inc., 244 F. App x 708 (6th Cir. 2007)...20, 21 In re Weis Sec., Inc., No. 73 Civ. 2332, 1976 WL 820 (S.D.N.Y. Aug. 2, 1976)...13, 15 Williston v. Eggleston, 410 F. Supp. 2d 274 (S.D.N.Y. 2006)...4 STATUTES 15 U.S.C. 78fff-2(c)(1)(B) U.S.C. 78fff(b) U.S.C. 1292(b)... passim -v-

7 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 7 of 30 Irving H. Picard, trustee ( Trustee ) for the substantively consolidated liquidation of the business of Bernard L. Madoff Investment Securities LLC ( BLMIS ) under the Securities Investor Protection Act, 15 U.S.C. 78aaa-lll ( SIPA ) and the estate of Bernard L. Madoff ( Madoff ), respectfully submits this memorandum of law in opposition to the Antecedent Debt Defendants Motion to Amend October 15, 2013 Opinion and Order Regarding Antecedent Debt Issues to Add 28 U.S.C. 1292(b) Certification for Interlocutory Appeal ( Defs. Mem. ). 1 PRELIMINARY STATEMENT The Trustee commenced these actions against Defendants as net winners in Madoff s fraud. The Trustee s theory of recovery is not novel after reconciling each account at BLMIS, the Trustee brought garden variety avoidance actions seeking the return of fictitious profits realized by Defendants. This Court s October 15, 2013 Opinion and Order correctly denied Defendants motion to dismiss. In re Madoff Sec. (SIPC v. BLMIS), 499 B.R. 416 (2013) ( Order ). The Order applied the same reasoning as prior decisions in this liquidation including decisions at the Second Circuit and in the Bankruptcy Court to which Defendants were parties. The Order resulted from this Court s straightforward application of the law to the instant action, and Defendants offer no basis to undertake the extraordinary measure of interlocutory review. 28 U.S.C. 1292(b) requires that Defendants demonstrate (1) the Order presents a controlling question of law, (2) as to which there is a substantial ground for difference of opinion, and (3) an immediate appeal may materially advance the ultimate termination of the litigation. Even if Defendants seven issues were deemed controlling questions of law, there is no room for substantial doubt concerning the Order. All seven issues relate to hypothetical 1 All defendants participating in this briefing will hereinafter be referred to as Defendants. 1

8 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 8 of 30 claims Defendants seek to assert against the customer property estate, and which, Defendants further contend, may provide an offset to the Trustee s avoidance actions. However, the only claim a customer has against the customer property estate is a net equity claim. See 15 U.S.C. 78fff-2(c)(1)(B); Order, 499 B.R. at 424. The Second Circuit has already determined that net equity claims here are limited to a customer s principal investment. In re BLMIS LLC, 654 F.3d 229 (2d Cir. 2011), cert. denied, 133 S. Ct. 24, 133 S. Ct. 25 (2012) ( Net Equity Decision ). The Order applies the Second Circuit s reasoning in the Net Equity Decision, finding that net equity claims cannot include claims for damages. Order, 499 B.R. at 424 (citing 15 U.S.C. 78fff-2(b)). The Bankruptcy Court separately held that damage claims may only be asserted against the general estate. In re Madoff (SIPC v. BLMIS), 496 B.R. 744 (Bankr. S.D.N.Y. 2013) ( Time-Based Damages Decision ). This authority is uncontroverted here, and this Court already explained the reason: allowing net winners, such as Defendants, to retain profits paid out of customer property... would conflict with the priority system established under SIPA by equating net equity and general creditor claims. In re Madoff Sec. (SIPC v. BLMIS), 476 B.R. 715, 727 (S.D.N.Y. 2012) ( Greiff ). Defendants present no authority to contradict either the Order or the prior authority in this case. The arguments advanced by Defendants do not remotely warrant the substantial delay that an interlocutory appeal would impose. An interlocutory appeal will neither expedite nor materially advance the litigations here: even if Defendants prevail on the issues raised in their motion, their central premise is that each defendant has a unique, unrealized (and unspecified) damages claim against the BLMIS estate. Thus, in the unlikely scenario that the Second Circuit were to review and reverse the Order, each case will continue and require an examination of Defendants accounts and their relationships with BLMIS to determine whether these antecedent debt claims apply and if so, the amount by 2

9 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 9 of 30 which they impact the Trustee s claims. Meanwhile, net losers wait to receive their principal investments and the fictitious profits dissipate in Defendants hands. LEGAL STANDARD It is a basic tenet of federal law to delay appellate review until a final judgment has been entered. Koehler v. Bank of Bermuda Ltd., 101 F.3d 863, 865 (2d Cir. 1996) (citation omitted). [F]ederal practice is strongly biased against interlocutory appeals. Appeals from interlocutory orders prolong judicial proceedings, add delay and expense to litigants, burden appellate courts, and present issues for decisions on uncertain and incomplete records, tending to weaken the precedential value of judicial opinions. United States v. Huron Consulting Grp., Inc., No. 09 Civ (JSR), 2011 WL , at *1 (S.D.N.Y. May 16, 2011) (quoting In re Sept. 11 Litig., Misc. No (AKH), 2003 WL , at *1 (S.D.N.Y. Oct. 1, 2003)). However, under section 1292(b), a district court may, in its discretion, certify an interlocutory order for appeal to the Second Circuit where the order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation. 28 U.S.C. 1292(b). Interlocutory appeals are an exception to the general policy against piecemeal appellate review embodied in the final judgment rule. In re Buspirone Patent Litig., 210 F.R.D. 43, 49 (S.D.N.Y. 2002) (Koeltl, J.). The Second Circuit has therefore held that only exceptional circumstances [will] justify a departure from the basic policy of postponing appellate review until after the entry of a final judgment. Huron, 2011 WL , at *1 (quoting Klinghoffer v. 5.N.C. Achille Lauro In Amministrazione Straordinaria, 921 F.2d 21, 25 (2d Cir.1990); Coopers & Lybrand v. Livesay, 437 U.S. 463, 475 (1978)). As courts in this District repeatedly recognize, interlocutory appeals are not appropriate in circumstances such as these, where a party simply disagrees with the court s interpretation of 3

10 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 10 of 30 the law. See Quinn v. Altria Grp., Inc., No. 07 Civ (LTS) (RLE), 2008 WL , at *3 (S.D.N.Y. Aug. 1, 2008). Section 1292(b) is not intended as a vehicle to provide early review of difficult rulings in hard cases. In re S. African Apartheid Litig., No. 02 MDL 1499 (SAS), 2009 WL , at *1 (S.D.N.Y. Dec. 31, 2009) (citations and internal quotation marks omitted). The criteria for certification under section 1292(b) are conjunctive. Even where a party has moved to certify an issue for interlocutory appeal that would be case dispositive, courts repeatedly have denied such motions. See Bilello v. JPMorgan Chase Ret. Plan, 603 F. Supp. 2d 590, (S.D.N.Y. 2009); In re S. African Apartheid Litig., 2009 WL , at *2; Williston v. Eggleston, 410 F. Supp. 2d 274, (S.D.N.Y. 2006) (Sweet, J.) (denying 1292(b) certification where non-movants conceded that the issue presented a controlling question of law and that the interlocutory appeal could terminate the litigation because there was no substantial ground for a difference of opinion, despite the fact that the Second Circuit had not established a unified approach to the issue). Moreover, a district judge has unfettered discretion to deny certification of an order for interlocutory appeal even when a party has demonstrated that the criteria of 28 U.S.C. 1292(b) are met. Huron, 2011 WL , at *1 (citations and internal quotation marks omitted). 4

11 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 11 of 30 ARGUMENT I. Certification Would Not Materially Advance the Termination of this Litigation The most important criterion for certification under section 1292(b) is whether an interlocutory appeal will materially advance the ultimate resolution of the litigation. See SEC v. Straub, No. 11 Civ (RJS), 2013 WL , at *2 (S.D.N.Y. Aug. 05, 2013); In re MTBE Prods. Liab. Litig., No. MDL 1358 (SAS), 2005 WL 39918, at *3 (S.D.N.Y. Jan. 6, 2005). An interlocutory appeal must advance the time for trial or... shorten the time required for trial. Straub, 2013 WL , at *2; see also Flaherty v. Filardi, No. 03 Civ (LTS) (HBP), 2007 WL , at *1 (S.D.N.Y. June 26, 2006). Certainly, an absolute defense could hasten the termination of the litigation. But antecedent debt is not an absolute defense, as Defendants merely posit that they have unique, unrealized claims for non-specific amounts of damages that would offset the Trustee s claims. The Second Circuit already has held that Defendants cannot rely on their customer statements as a basis for their claims against the BLMIS estate. Net Equity Decision, 654 F.3d at 235. Thus Defendants cobble together different theories, all of which will require further exploration. For instance, one argument they proffer is that they have a claim for interest though it is unclear in what amount or on what basis (or how to calculate the principal for which they claim interest). Allowing a piecemeal appeal will only delay the litigation. The antecedent debt defense is one of only many affirmative defenses raised by Defendants. Just a brief review of the motions to withdraw the reference still pending shows that Defendants have raised various defenses which, they assert, all present threshold issues, such as whether transfers can be property of the BLMIS estate, 2 a safe harbor/value credit for annuity 2 See, e.g., Picard v. Coughlin, No. 12-cv JSR; Picard v. Cohen, No. 12-cv JSR. 5

12 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 12 of 30 payments, 3 a safe harbor/value credit for estate and income taxes, 4 and a safe harbor/value credit for mandatory withdrawals from charitable trusts. 5 There are also some more far-fetched defenses, such as whether the Trustee can avoid transfers if the transferee was involved in charity 6 and even whether the Trustee s claims violate a defendant s First Amendment rights. 7 There are scores of other defenses pleaded, and one sub-set of Defendants the roughly 417 defendants in 128 actions represented by Becker & Poliakoff have filed motions to dismiss in the Bankruptcy Court raising antecedent debt again as one of the bases for dismissal. (See Warshavsky Decl., Ex. A.) These motions also raise related issues, such as: the methodology for calculating the Trustee s avoidance claim; defendants state law property rights as a set-off for the Trustee s claims; whether the Trustee can avoid obligations; and whether non-bankruptcy law defenses protect transfers. Id. Most Defendants have not yet filed answers because of the pending motions, so undoubtedly more defenses will be raised. Defendants also argue that, due to the consolidated nature of these proceedings, an appellate ruling would have precedential value for many cases thereby materially advancing this litigation. (Defs. Mem. 14.) Defendants argument is flawed. This is only one of many defenses, and precedential value, standing alone, does not warrant certification. See SEC v. 3 Picard v. Irving J. Pinto 1996 Grantor Retained Annuity Trust, No. 12-cv JSR. 4 Picard v. Arnold Shapiro 11/9/96 Trust, No. 12-cv JSR; Picard v. Estate of Maurice U. Rosenfeld A/K/A Maurice Rosenfeld, Nos. 12-cv JSR, 12-cv JSR; Picard v. Estate of Sarah E. Pearce, No. 12-cv JSR; Picard v. Saul A. Geronemus Revocable Trust dtd 6/26/92, No. 12-cv JSR. 5 Picard v. Katz Grp. Ltd. P ship, No. 12-cv JSR. 6 Picard v. Am. Israel Cultural Found., Inc., No. 12-cv JSR. 7 Picard v. Lawrence R. Velvel, No. 12-cv JSR. 6

13 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 13 of 30 Credit Bancorp, Ltd., 103 F. Supp. 2d 223, 227 (S.D.N.Y. 2000) (citing In re Oxford Health Plans, Inc., 182 F.R.D. 51, 54 (S.D.N.Y. 1998)). Defendants have already ignored the precedential value of the Net Equity Decision, and 417 of the defendants have disregarded the Order by filing another motion to dismiss based on this very issue. Certifying the Order for immediate appeal will only further delay these proceedings. The complaints were filed against Defendants in Since then, litigation has been delayed by a multitude of motions to withdraw the reference and ensuing motions to dismiss. Much of this has proceeded in a piecemeal fashion to expedite matters. As evidenced by the 417 Becker & Poliakoff defendants however, further motions and certainly further affirmative defenses await resolution. Indeed, many of the defendants in the Greiff action filed motions to dismiss upon returning to the Bankruptcy Court and many raised, again, the issue of antecedent debt, incorporating the motion papers filed by Defendants, allowing them to effectively delay their cases pending the Order. (See, e.g., Warshavsky Decl., Ex. B.) As more time passes without a trial on the Trustee s claims, customers are deprived of their ratable share of their principal investments while Defendants continue to retain those customers funds. Indeed, to the extent Defendants seek to assert offset claims based on their relationship with BLMIS, evidence will become more difficult to elicit. As one Court in this District explained, [a]s memories fade and relevant actors pass away, discovery becomes more difficult and plaintiffs lose their chance for relief and that is reason enough to decline certification. In re S. African Apartheid Litig., 624 F. Supp. 2d 336, 342 (S.D.N.Y. 2009). Here, not only do memories continue to fade, but also Defendants continue to dispose of assets. In an odd coincidence, the lead defendant in the Court s Greiff decision, James Greiff, filed an action against Becker & Poliakoff in which he admitted to transferring approximately $6 million of his 7

14 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 14 of 30 assets to his then-current wife in a 2012 post-nuptial agreement intending to shield his assets from the Trustee s avoidance action. Three months later, his wife divorced him, leaving him penniless and living with his mother. (See Warshavsky Decl., Ex. C.) Thus, in the case of Mr. Greiff, the Trustee will now be forced to avoid the transfers in an action against him, deal with his various affirmative defenses and then assuming the facts in his complaint against Becker & Poliakoff are true bring an avoidance action against his former wife. To some degree, this may be unavoidable but the longer these cases continue, the harder it will be for the Trustee to recover for the net loser victims of Madoff s scheme. II. Defendants Have Not Presented a Controlling Question of Law A question of law is controlling where reversal of the district court s opinion would either result in dismissal of the action or significantly affect the conduct of the action. Credit Bancorp, Ltd., 103 F. Supp. 2d at 227. This determination is closely connected with whether certification would materially advance the ultimate termination of the litigation. Id. The issues addressed in the Order are not controlling questions of law. Defendants incorrectly assert that matters of statutory interpretation are automatically controlling questions. (Defs. Mem. 2.) The cases cited by Defendants fail to support this proposition. Rather, those decisions concern threshold questions: statutory standing and the statute of limitations. See Bilello, 603 F. Supp. 2d at 593; In re Contemporary Indus. Corp., 312 B.R. 898, 900 (D. Neb. 2003). In those cases, reversal of the order at issue would result in automatic dismissal. Yet as previously stated, here a reversal would not result in dismissal. And the reason is easy to grasp: Defendants claims of reliance, interest and damages if they are valid all are inherently factual. Defendants argue that the Order addresses controlling legal questions because it analyzes the availability of affirmative defenses.... (Defs. Mem. 2.) Defendants 8

15 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 15 of 30 misunderstand the law. A controlling question is, as stated, a legal one that would cause dismissal or limit the action. If the test were merely whether an order analyzes a party s right to raise a claim or defense, every interim substantive ruling would be ripe for interlocutory appeal. That is not the case. As previously indicated, the reversal of the Order would only require additional factual determinations a reversal would not result in dismissal of the Trustee s claims. This is different from the cases cited by Defendants, which similar to Bilello and Contemporary Industries, involved absolute defenses that would automatically terminate the action if the orders there were reversed. See South v. Saab Cars USA, Inc., 28 F.3d 9, (2d Cir. 1994) (statute of limitations defense); United Paperworkers Int l Union and its Local 340 v. Specialty Paperboard, Inc., 999 F.2d 51, 52 (2d Cir. 1993) (same); Am. Geophysical Union v. Texaco Inc., 802 F. Supp. 1, 29 (S.D.N.Y. 1992) (parties stipulated that reversal would terminate the action). III. There Is No Substantial Ground for Difference of Opinion Regarding the Order For there to be substantial ground for difference of opinion under section 1292(b), there must be substantial doubt that the district court s order was correct. Aristocrat Leisure Ltd. v. Deutsche Bank Trust Co. Americas, 426 F. Supp. 2d 125, (S.D.N.Y. 2005) (internal quotations omitted). A party cannot meet this standard by merely claiming that the district court decided an issue of first impression, Pa. Pub. Sch. Emps. Ret. Sys. v. Bank of Am. Corp., 874 F. Supp. 2d 341, 372 (S.D.N.Y. 2012), or that the district court s decision is incorrect. Aristocrat Leisure Ltd., 426 F. Supp. 2d at 129. The district court must analyze the strength of the arguments in opposition to the challenged ruling. In re S. African Apartheid Litig., 2009 WL , at *2. There must be more than some level of disagreement among the courts for section 1292(b) to be satisfied. Credit Bancorp, Ltd., 103 F. Supp. 2d at

16 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 16 of 30 Defendants recast the issues addressed by the Court seven ways and claim that each of their characterizations is an issue of first impression in the Second Circuit or the subject of significant conflicting authority. (Defs. Mem. 3.) Neither statement is accurate, nor are these recast issues different from before. 8 The Court decided issues that are intertwined with those addressed by the Second Circuit in the Net Equity Decision. The Order relies on and follows the Net Equity Decision, and other decisions issued in connection with this SIPA liquidation. Defendants set forth no conflicting authority to create substantial doubt that the Order is correct. Rather, they rehash the same arguments and cases previously rejected by this Court, which is insufficient under section 1292(b). See Bilello, 603 F. Supp. 2d at 594 (movant failed to meet this factor where the cases cited were already distinguished by the court in its opinion); Bishop v. Best Buy, Co., No. 08 Civ (LBS), 2011 WL , at *14 (S.D.N.Y. Sept. 8, 2011) (party failed to meet the second requirement of section 1292(b) where it only offered arguments rejected on the initial motion). To avoid repetition, the Trustee has categorized his responses to Defendants seven issues as indicated below. A. The Court s interpretation of value is supported by the Second Circuit s Net Equity Decision. Defendants claim that each of their seven issues is one of first impression in this Circuit. Yet each issue amounts to the same thing whether Madoff s customer statements and/or the customer s relationship with Madoff create value under section 548(c). In the Order, this Court addressed whether and how section 548(c) s value limitation applies in the context of the avoidance and recovery actions brought by [the Trustee]. Order, 499 B.R. at 418. While the Second Circuit has not addressed this specific issue, the Net Equity Decision supports this 8 This excepts the issue raised in Part III.D, which Defendants did not previously raise before the Court. 10

17 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 17 of 30 Court s determinations made in the Order. And there is no applicable authority to the contrary. Defendants have not shown any substantial doubt that the Order is correct. See In re MTBE Prods. Liab. Litig., 399 F. Supp. 2d 320, (S.D.N.Y. 2005) ( [A] question of first impression, standing alone, is insufficient to satisfy this prerequisite. ). In the Net Equity Decision, the Second Circuit found that the Net Investment Method is the proper method for determining a customer s net equity in this case. 654 F.3d at 235. The Court found that this method allows the Trustee to make payments based on withdrawals and deposits, which can be confirmed by the debtor s books and records in compliance with SIPA 78fff-2(b)(2). Id. at Also, the Second Circuit recognized that there is a limited amount available for distribution from the customer property fund. Id. at 238 (quoting In re BLMIS, 424 B.R. 122, 133 (Bankr. S.D.N.Y. 2010)). The Court found that restricting net equity claims to principal investment would avoid the inequitable consequence of allowing customers who received imaginary profits in excess of their initial investment to benefit at the expense of those customers who had not withdrawn funds before the fraud was exposed. Id. The Order is consistent with the Net Equity Decision. Relying on the Second Circuit s definition of net equity, the Order explains that net equity is inherently intertwined with the definition of claims that can provide value to the customer property estate. Order, 499 B.R. at 424 (citing Net Equity Decision, 654 F.3d at 233). As this Court explained, [T]he customer property estate is created as a priority estate intended to compensate customers only for their net-equity claims.... To the extent that defendants state and federal law claims allow them to withhold funds beyond their net-equity share of customer property, those defendants are, in effect, making those damages claims against the customer property estate. Because their damages claims are not net-equity claims (or any other payments that are permitted to be made in SIPA s priority scheme), allowing such claims to be drawn out of the customer property estate would violate SIPA. It is for this reason that only a defendant s investment of principal may count as value with respect to the customer property estate for purposes of section 548(c). 11

18 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 18 of 30 Id. The Order comports with the Net Equity Decision, which recognizes that allowing net winners to take more than their net investment would be inequitable because those customers would receive more favorable treatment by profiting from the principal investments of [net losers]. Net Equity Decision, 654 F.3d at 235. This Court s decision that the Net Investment Method, rather than the Replenishment Credit Method, should apply to the Trustee s recovery of fraudulent transfers further harmonizes the Order with the Net Equity Decision. Order, 499 B.R. at (citing Net Equity Decision, 654 F.3d at 242 n.10). Defendants cannot satisfy section 1292(b) s substantial ground for difference of opinion requirement based on alleged issues of first impression, where the Order is consistent with the Net Equity Decision and Defendants offer no conflicting authority on point. B. The Court s decision that non-bankruptcy law claims cannot be made against the customer property estate and thus cannot constitute antecedent debt under section 548(c) is supported in this Circuit. There is no substantial ground for difference of opinion on this Court s holding that nonbankruptcy law claims cannot equate to value in a SIPA liquidation. Defendants muddle this issue by raising hollow arguments and citing irrelevant cases. Classifying their arguments as Issue One and Issue Two, Defendants contend that whether state and federal law claims can constitute antecedent debt and whether that antecedent debt is determined against the debtor at the time of the transfer are issues ripe for certification for appeal. The Order squarely considered these arguments and, based on SIPA and Second Circuit precedent, found that the dual estate structure of a SIPA liquidation does not permit non-bankruptcy law claims to be antecedent debt here. Relying on the language of the SIPA statute itself, the Order explained the essence of the two separate estates created in a SIPA liquidation and is consistent with the Second Circuit s decision in Rosenman Family. Order, 499 B.R. at 420 (citing 15 U.S.C. 78fff-2(b), 78fff- 12

19 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 19 of 30 2(c)(1), 78fff-2(c)(3)); see also Rosenman Family, LLC v. Picard, 395 F. App x 766, 768 (2d Cir. 2010). The Court described a SIPA liquidation s purpose as prioritizing the customer property estate over the general bankruptcy estate. Order, 499 B.R. at 420; see also In re Weis Sec., Inc., No. 73 Civ. 2332, 1976 WL 820, at *6-7 (S.D.N.Y. Aug. 2, 1976). Defendants do not dispute the Order s explanation of the structure and purpose of the customer property estate and its relationship to the general estate. Instead, Defendants appear to urge that they can assert a non-bankruptcy law claim (and non-sipa claim) against the customer property estate. Significant case law in this Circuit holds to the contrary and Defendants cite no authority that could lead this Court to conclude there is disagreement. First, despite their claim of entitlement to a hypothetical claim, none of Defendants commenced a non-bankruptcy law claim against BLMIS prior to Madoff s confession. Likewise, no Defendant asserted any of these hypothetical claims against the BLMIS estate prior to the claims bar date. 9 It is for this reason that Defendants reliance on In re Fitness Holdings International, Inc., 714 F.3d 1141 (9th Cir. 2013) to undermine Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008), cert. denied, 129 S. Ct. 640 (2008), is without merit. 10 In Fitness Holdings, a non-sipa case involving constructive fraudulent transfers, the Ninth Circuit held that a court must determine whether a purported debt constituted a right to 9 As the Trustee noted below, because Defendants have not actually made any non-bankruptcy law claims against BLMIS, the statute of limitations has run for claims brought under section 10(b) of the Securities Exchange Act of 1934 ( Exchange Act ) and 17 C.F.R b-5 ( Rule 10b-5 ). See Domenikos v. Roth, 288 F. App x 718, 720 (2d Cir. 2008); Sedona Corp. v. Ladenburg Thalman & Co., No. 03 Civ (LTS), 2005 WL , at *7 (S.D.N.Y. Aug. 9, 2005). 10 Even if this Ninth Circuit case law did conflict with the Court s ruling, authority from other circuits [does] not control in this Circuit and do not themselves create substantial grounds for a difference of opinion. In re MTBE Prods. Liab. Litig., No. MDL 1358(SAS), 2005 WL 39918, at *2 n.15 (S.D.N.Y. Jan. 6, 2005) (citations omitted). 13

20 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 20 of 30 payment under state law [and if] it did not, the court may recharacterize the debtor s obligation to the transferee under state law principles. 714 F.3d at But this holding is inapplicable here where there is nothing to recharacterize. Despite Defendants conjectures, no purported debt is detailed here. More important, with respect to certifying this issue for appeal, Fitness Holdings illustrates that these determinations are fact intensive. The Ninth Circuit remanded the case because the trustee s claim that the transfer was not for reasonably equivalent value combined with plausible allegations of the other elements of a claim... under 548(a)(1)(B), could potentially nudge the trustee s claims across the line from conceivable to plausible. Fitness Holdings, 714 F.3d at 1149 (internal citations and quotations omitted). It would then be for the Fitness Holdings defendant to demonstrate that its purported debt amounted to a right to payment under state law based on the facts surrounding the transaction. Second, even if such a claim existed, it would be considered an unliquidated general unsecured claim. As the Order explained, following the Net Equity Decision, BLMIS customer claims against the customer property estate are limited to the amount of their net equity claims. Order, 499 B.R. at 424. Any claims beyond the net equity claim, such as non-bankruptcy law claims, can only be brought against the general estate. 11 The Order finds clear support for this understanding in SIPA 78fff-2(c)(1)(d) which indicates that [net equity claims] are the only claims allowed against the estate. Id. The Court also relies on the Second Circuit s holding in Rosenman Family which is directly on point in its ruling that SIPA liquidations have both customers and general unsecured creditors and that customer s claims are satisfied from a customer property estate, which is separate from the general estate used to satisfy the claims of general unsecured creditors. Id. at 425 (quoting Rosenman Family, 395 F. App x at 768). This 11 The Court s opinion, however, allows that nothing in its ruling deprives a defendant of the ability to make a claim against Madoff Securities general estate. Order, 499 B.R. at

21 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 21 of 30 position is well established in this District where the court has found that all non-bankruptcy law claims, including fraud, breach of contract, rescission, and violations of the Exchange Act are not customer claims, but claims against the general estate. See Greiff, 476 B.R. at 728; Time-Based Damages Decision, 496 B.R. at 760 (customer claims for damages stemming from Madoff s wrongdoing are not covered by SIPA and at best, they may constitute general claims to be satisfied by payment from the general estate fund ); In re BLMIS, 454 B.R. 285, 297 n.17 (Bankr. S.D.N.Y. 2003) (citing In re Klein, Maus & Shire, Inc., 301 B.R. 408, 421 (Bankr. S.D.N.Y. 2003)); see also In re Weis Sec., Inc., 1976 WL 817, at *2-3 (while SIPA does not contain anti-fraud provisions, claims for section 10(b) violations, which are both statutory and implied tort liabilities, are to be satisfied out of the general estate as are claims for improper margining under section 7(c) of the Exchange Act); see also SEC v. JNT Investors, Inc., No. 72 Civ. 681, 1978 WL 1137, at *1-2 (S.D.N.Y. Feb. 9, 1978) (customer claims for fraud, breach of contract, conversion or rescission are not customer claims within the meaning of SIPA); SEC v. S. J. Salmon & Co., 375 F. Supp. 867, (S.D.N.Y. 1974) (finding that a claim for fraudulent inducement and rescission is not a customer claim under SIPA but may be brought as a fraud claim by a general creditor to be satisfied out of the general estate, not the single and separate fund). As this Court found in Grieff, allowing Defendants to retain amounts beyond their principal would conflict with the priority system established under SIPA by equating net equity and general creditor claims. 476 B.R. at 727. Defendants cite no cases to the contrary, let alone cases that indicate there are any issues of substantial disagreement in this area of the law. Nonetheless, Defendants contrive a disagreement by asserting that the Order fails to properly consider cases showing that value under section 548(c) should be determined as of 15

22 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 22 of 30 the time of the transfers from BLMIS to Defendants, rather than in a later SIPA liquidation. As in prior briefs, Defendants rely on Armstrong v. Collins, No. 01 Civ (PAC), 2010 WL (S.D.N.Y. Mar. 24, 2010) and In re Hannover, 310 F.3d 796 (5th Cir. 2002). In Armstrong, a non-sipa Ponzi scheme case, the court stated that value should be determined at the time of the transfer, but that value can only be given in the form of a dollar-for-dollar reduction in the investor s restitution claim against the Ponzi scheme WL , at *22. This is no different than the Court s opinion here, stating that value cannot be given above a transferee s principal investment. The Fifth Circuit s decision in In re Hannover is even less helpful to Defendants. There, the debtor in a non-sipa bankruptcy proceeding made payments to a transferee under a call option agreement for the purchase of real estate. In re Hannover, 310 F.3d at 798. The debtor engaged in fraudulent acts in connection with obtaining financing for the transaction and never exercised the option. The Fifth Circuit found that the agreement nonetheless had value for purposes of section 548(c), which should be determined at the time of the agreement. Id. at The transferee in Hannover was simply seeking the amounts owed pursuant to the agreement, whereas here Defendants seek speculative damages based on unidentified claims. Further, Defendants are prevented from relying on BLMIS s customer statements for determining the amount owed on their purported claims because the Second Circuit already determined that those statements are invalid and unenforceable, and have no value for calculating customer claims. Net Equity Decision, 654 F.3d at 235. These decisions create no dispute let 16

23 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 23 of 30 alone a significant one as to whether non-bankruptcy law claims can be considered an antecedent debt here. 12 C. Defendants attempts to contort this Court s findings on the interpretation of the definition of a claim in a SIPA liquidation involving a Ponzi scheme must fail as they have presented no authority showing a significant disagreement on that issue. All of the questions Defendants raise in Issues Four, Five and Seven concerning the definition and impact of their claim under the Bankruptcy Code were thoroughly examined by this Court. Because this is a SIPA liquidation any claim made by a BLMIS customer that is not a net equity claim, is a general unsecured claim. This does not mean, as Defendants assert, that Defendants must obtain a judgment prior to bringing a claim against the general estate, but it does mean, as this Court found, that Defendants cannot deem retained fictitious profits an antecedent debt for interest on a contingent, speculative judgment on non-bankruptcy law claims. Order, 499 B.R. at 422. The Court s reliance on Bayou IV to support this finding and explain that the Defendants cannot seek prejudgment interest because they have already fully collected the debt owed to them their initial investment is well founded. Id. (quoting In re Bayou Grp., LLC ( Bayou IV ), 439 B.R. 284, 337 (S.D.N.Y. 2010)). These decisions are not novel as they are grounded in N.Y. C.P.L.R. 5001(a), which instructs that a verdict, judgment or decision must exist to collect interest. In re Arcade Publ g, Inc., 455 B.R. 373, 380 & n.10 (Bankr. S.D.N.Y. 2011). 12 Defendants argument that this Court failed to consider the value of the transfers when they were made is far from a model of clarity. The Order cites Greiff, which explained that in this context, the transfers must be assessed on the basis of what they really were; and they really were artificial transfers designed to further fraud, rather than any true return on investments. Order, 499 B.R. at 421 (quoting Greiff, 476 B.R. at 725). Accordingly, any transfers made above a customers principal investment are valued at the time they were made, and the Second Circuit and this Court have made clear that no value can be attributed to such transfers. Net Equity Decision, 654 F.3d at 235; Greiff, 476 B.R. at

24 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 24 of 30 This makes perfect sense when Defendants purported non-bankruptcy claims are viewed in the regular course of a bankruptcy proceeding or SIPA liquidation. Defendants suggested in their motion to dismiss that they could have claims for breach of contract, fraudulent inducement, and/or claims for violations of Rule 10b-5 and 15 U.S.C. 771(a)(2). Each one of these claims requires factual assertions particular to each defendant, such as the circumstances under which they invested with BLMIS, their state of mind, and the amount of principal invested. This is why these claims are contingent, unliquidated claims. They are contingent because they require something more than the passage of time to become payable. 1-1 Collier on Bankruptcy 1.03 (16th ed.). Until these non-bankruptcy claims are adjudicated, they remain unliquidated claims, i.e. without a fixed value. Although this reasoning applies in both a SIPA and non-sipa case, the priority that Defendants seek for their non-bankruptcy claims must be analyzed under the provisions of SIPA s priority scheme. SIPA provides that the Bankruptcy Code applies only [t]o the extent consistent with the provisions of this chapter. 15 U.S.C. 78fff(b). This Court has explained comprehensively why SIPA warrants a different application of the concept of value under section 548(c). Unlike in a traditional bankruptcy, SIPA creates a separate, priority customer property estate and provides for the recovery of customer property to be distributed according to each customer s net equity claim. Order, 499 B.R. at 423. Although SIPA does not redefine claim for a section 548(c) affirmative defense, the definition of net equity and the definition of claims that can provide value to the customer property estate are inherently intertwined.... Id. at 424; see also Greiff, 476 B.R. at Defendants repeat their reliance on In re Sharp International Corp., 403 F.3d 43 (2d Cir. 2005) and Boston Trading Group, Inc. v. Burnazos, 835 F.2d 1504 (1st Cir. 1987), but neither 18

25 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 25 of 30 case involves a SIPA liquidation or controls whether defendants can avail themselves of the affirmative defense of taking for value and in good faith under section 548(c). See Picard v. Katz, 462 B.R. 447, 454 (S.D.N.Y. 2011) (finding In re Sharp is not controlling because the attempts to avoid actually fraudulent transfers in that case failed due to the plaintiff s failure to allege fraud); see also Greiff, 476 B.R. at 723 n.8 (stating that Sharp and Boston Trading do not govern this case because the Trustee has adequately alleged that transfers not only preferred one creditor over another, but also defrauded Madoff Securities creditors and depleted the funds available to pay any of them ). Defendants also insert Butner v. United States, 440 U.S. 48 (1979) and Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007) into this discussion. Those cases stand for the general proposition that a party s right to estate property should be determined by state law or common law when there is no federal statute or interest requiring otherwise. See Butner, 440 U.S. at 48 (declining to apply a federal rule of equity that would grant a mortgagee a right to rent proceeds when it did not have that right under state law); Travelers Cas. & Surety Co. of Am., 549 U.S. at 443 (finding an unsecured creditor could claim attorney s fees authorized by a prepetition contract and incurred in post-petition litigation when the Bankruptcy Code provided no support for denying the claim). That is not the case here. SIPA preempts state and common law for determinations relating to customer property. See Rosenman Family, LLC v. Picard (SIPC v. BLMIS LLC), 401 B.R. 629, 636 n.12 (Bankr. S.D.N.Y. 2009). Accordingly, In re Sharp, Boston Trading, Butner, and Travelers Casualty provide no basis for certification under section 1292(b). Defendants also argue that there remains an open question as to whether the existence of a Ponzi scheme should affect their non-bankruptcy law claims in a SIPA case. As the Court noted in Greiff, every circuit court to address this issue has concluded that an investor s profits 19

26 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 26 of 30 from a Ponzi scheme... are not for value. 476 B.R. at 725. This Court thoroughly examined the law on this issue and stated that it is true that, in non-sipa cases involving Ponzi schemes, payments in satisfaction of claims have been recognized as providing value to the estate. Order, 499 B.R. at 422. However, the law is clear that defrauded investors in a Ponzi scheme can only give value up to the amount of their principal investments. See Net Equity Decision, 654 F.3d at ; Greiff, 476 B.R. at 725; Bayou IV, 439 B.R. at 309; Armstrong, 2010 WL , at *22, 29; Perkins v. Haines, 661 F.3d 623, 627 (11th Cir. 2011); Donell, 533 F.3d at 772; Sender v. Buchanan (In re Hedged Inv. Assocs. Inc.), 84 F.3d 1286, 1290 (10th Cir. 1996); Scholes v. Lehmann, 56 F.3d 750, (7th Cir. 1995) (while there may be a valid claim against the fraudster, there is no entitlement to have those claims paid by the proceeds of fraud, as would be obvious if [the fraudster] had picked someone s pocket and given the money found there to [the defendant] ). Defendants offer no support for a contrary finding. Defendants continue to rely on Visconsi v. Lehman Brothers, Inc., 244 F. App x 708, (6th Cir. 2007), to argue that the Ponzi scheme presumption does not apply to limit value to their principal investment. This Court already distinguished Visconsi in three important respects and rejected this argument. See Greiff, 476 B.R. at 725. First, the account statements in Visconsi tracked the defendants funds as if they had been properly invested. Id. Here, there is no reliable basis on which to determine how defendants would have benefited from their bargains with Madoff Securities. Id. Second, unlike in Visconsi where the defendant was a more culpable party, the Court here considers the defendants relative to other investors, many of whom were equally innocent. Id. at Last, Visconsi focused on the harm suffered by the investors, rather than their status as creditors. Id. at 726 (citing Visconsi, 244 F. App x at 713). As the Court noted, Defendants here have not shown that their harm in any way 20

27 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 27 of 30 corresponds to the amounts reflected on the customer statements. Id. Visconsi does not create substantial doubt that the Order is correct. Finally, as this Court noted, the distinction between equity investors and creditors in the immediate context... is a distinction without a difference because Defendants here faced the same risks as equity investors. Id. at 726. Defendants continue to urge this distinction, relying on a case involving repayment of a loan made in the ordinary course of business and unrelated to the fraud. (See Defs. Mem. 9 (citing B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474 (7th Cir. 2005)).) Defendants other cases simply discuss violations of securities laws in a nonbankruptcy context, and neither suggest that the Court s decision was improper nor support that BLMIS s status as a broker-dealer changes the value defense under section 548(c). See Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943) (petition to review an order of the SEC revoking a broker-dealer s registration for willfully violating section 17(a) of the Securities Act of 1933); SEC v. Hasho, 784 F. Supp (S.D.N.Y. 1992) (SEC action against registered representatives for securities violations). There is no substantial ground for difference of opinion on this issue. D. Defendants argument that obligations of BLMIS that can be disregarded as value for purposes of section 548(c) are only those obligations the Trustee actually avoids is a new issue raised in their motion, but one that is addressed by statute and the Second Circuit and not one of first impression. Due to the failure of prior arguments regarding obligations, Defendants have made an entirely new argument in their motion, designated Issue Three, claiming that the principles in FDIC v. Hirsh (In re Colonial Realty Co.), 980 F.2d 125, 131 (2d Cir. 1992), should extend to the avoidance of debtor obligations. Neither Hirsch nor its progeny were raised below. It is improper to raise wholly new issues on a motion seeking an order under section 1292(b). In re 21

28 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 28 of 30 Bank of Am. Corp. Sec., Derivative & ERISA Litig., No. 09 MD 2058 (PKC), 2010 WL , at *3 (S.D.N.Y. Oct. 8, 2010); In re S. African Apartheid Litig., 624 F. Supp. 2d at 342 n.27. Nonetheless, Defendants fail to identify an issue not squarely addressed by statute and the Second Circuit. In Hirsch, the Second Circuit established that the Trustee must recover fraudulently transferred property before it can be considered part of the bankruptcy estate. 980 F.2d at 131. Defendants contend that this principle affects debtor obligations because, if applied, it would mean that a transferee is entitled to treat a payment received on account of the debtor s obligation as satisfaction of an antecedent debt. (Defs. Mem. 7.) This argument is meritless. The statute is clear, section 548(a)(1)(A) avoids the entire amount of any transfer which was made by the transferor with actual intent to hinder, delay or defraud creditors. Moreover, the entirety of the transfer is avoidable whether or not the debtor received the value in exchange.... In re Bayou Grp., LLC ( Bayou II ), 362 B.R. 624, 629 (Bankr. S.D.N.Y. 2007). Thus, the Order explains, section 548(c) is an affirmative defense. 499 B.R. at 424. As such, once the transferor s fraudulent intent is proven, the transfer is presumed avoidable unless the transferee proves he provided value to the debtor. It is not for the transferee to unilaterally determine whether she can treat payment received on account of the debtor s obligation as satisfaction of an antecedent debt. (Defs. Mem. 7.) SIPA 78fff-2(b)(2) speaks directly to determining obligations and the Second Circuit has confirmed the understanding that obligations must be [1] ascertainable from the books and records of the debtor or [2] otherwise established to the satisfaction of the trustee. Net Equity Decision, 654 F.3d at 234 (citing In re BLMIS, 424 B.R. at 135). Accordingly, the findings of Hirsch that property must be avoided before it can become property of the estate has no bearing on the affirmative defenses under 548(c) and no plausible argument has been raised by Defendants here, never mind one of first impression. 22

29 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 29 of 30 E. Defendants offer no authority to support that there is substantial doubt regarding the Court s decision that the Net Investment Method applies to fraudulent transfers and that inter-account transfers do not constitute principal. Defendants cite no authority in Issue Six to support a substantial ground for difference of opinion concerning whether the Trustee should use the Net Investment Method to recover fraudulent transfers or treat inter-account transfers as fictitious profits. Instead, Defendants simply argue that this is an issue of first impression. However, this is insufficient for certification under section 1292(b). See Pa. Pub. Sch. Emps. Ret. Sys., 874 F. Supp. 2d at 372. As this Court found in Greiff and the Order, the Net Investment Method is the proper way to calculate whether a defendant received fraudulent transfers. Greiff, 476 B.R. at 729; Order, 499 B.R. at The Net Investment Method allows Defendants to receive credit to the extent that they provided value to Madoff Securities over the life of their investment relationship, rather than granting them a windfall based on the happenstance of the timing of those investments of principal. Order, 499 B.R. at 428. This follows the purposes underlying SIPA and the Net Equity Decision s goal of treating all customers equitably. See Net Equity Decision, 654 F.3d at ; see also Donell, 533 F.3d at ; In re Hedged-Inv. Assocs., 84 F.3d at Similarly, the Court s decision to treat inter-account transfers as fictitious profits is soundly based on the reality of the transfers and notions of equity. Order, 499 B.R. at As the Court noted, no new value was created by moving these funds between different accounts, Id. at 429, which is supported by an analogous Ponzi scheme case, Bayou IV. Defendants have failed to show any genuine doubt that the Court applied the proper legal standard in reaching its findings. 23

30 Case 1:12-mc JSR Document 504 Filed 11/19/13 Page 30 of 30 CONCLUSION For the reasons discussed above, the Trustee respectfully requests that Defendants motion be denied in its entirety. Dated: November 19, 2013 New York, New York s/ Oren J. Warshavsky Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York Telephone: (212) Facsimile: (212) David J. Sheehan Oren J. Warshavsky Michelle R. Usitalo Elizabeth M. Schutte Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff 24

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