Case: Document: 99 Page: 1 08/31/ bk(L) United States Court of Appeals FOR THE SECOND CIRCUIT

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1 Case: Document: 99 Page: 1 08/31/ bk(L) bk(CON), bk(CON), bk(CON), bk(CON) din THE United States Court of Appeals FOR THE SECOND CIRCUIT IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. SUSANNE STONE MARSHALL, individually and to the extent she purports to represent a class of those similarly situated, ADELE FOX, individually and to the extent she purports to represent a class of those similarly situated, Claimants-Appellants, against IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, and Appellee, SECURITIES INVESTOR PROTECTION CORPORATION, ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK Intervenor. BRIEF FOR APPELLEE IRVING H. PICARD, AS TRUSTEE FOR THE SUBSTANTIVELY CONSOLIDATED SIPA LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES LLC AND BERNARD L. MADOFF DAVID J. SHEEHAN DEBORAH H. RENNER TRACY L. COLE KEITH R. MURPHY THOMAS D. WARREN BAKER & HOSTETLER LLP 45 Rockefeller Plaza New York, New York (212) Attorneys for Appellee Irving H. Picard, as Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff

2 Case: Document: 99 Page: 2 08/31/ TABLE OF CONTENTS Page STATEMENT OF ISSUES PRESENTED... 1 STATEMENT OF THE CASE... 1 STANDARD OF REVIEW... 6 STATEMENT OF FACTS... 6 I. THE NET EQUITY DECISION... 6 II. APPELLANTS PARTICIPATION IN THE BANKRUPTCY PROCEEDING... 8 III. THE PICOWER COMPLAINT... 9 IV. THE FLORIDA ACTIONS V. THE BANKRUPTCY COURT S ENFORCEMENT OF THE AUTOMATIC STAY AND ISSUANCE OF A PRELIMINARY INJUNCTION VI. THE PICOWER SETTLEMENT VII. THE BANKRUPTCY COURT S APPROVAL OF THE SETTLEMENT AND ISSUANCE OF A PERMANENT INJUNCTION VIII. THE DISTRICT COURT S DECISION AND ORDER IX. THE CIVIL FORFEITURE ACTION AND THE TRUSTEE S DISTRIBUTION SUMMARY OF ARGUMENT ARGUMENT THE FLORIDA ACTIONS ARE BARRED I. THE FLORIDA ACTIONS ARE DUPLICATIVE AND DERIVATIVE OF THE TRUSTEE S ACTION AND APPELLANTS CLAIMS ARE PROPERTY OF THE ESTATE A. The Florida Actions Parrot the Trustee s Action B. The Claims in the Florida Action Are Property of the Estate i-

3 Case: Document: 99 Page: 3 08/31/ II. III. TABLE OF CONTENTS (continued) Page THE FLORIDA ACTIONS ARE VOID AB INITIO AND THE PRELIMINARY INJUNCTION WAS PROPER A. The Florida Actions Are Void Ab Initio B. The Preliminary Injunction Was Appropriate THE BANKRUPTCY COURT DID NOT ABUSE ITS DISCRETION IN ENTERING THE PERMANENT INJUNCTION A. Appellants Arguments that the Bankruptcy Court Lacked Jurisdiction Are Without Merit B. The Wagoner Rule Has No Application Here C. The Bankruptcy Court Did Not Abuse its Discretion in Approving the Injunction as Part of a Multi-Billion Dollar Settlement Metromedia Does Not Apply, but Even if it Did Apply, the Injunction Satisfies its Requirements The Injunction Is Material and Necessary to the Settlement The Civil Forfeiture Did Not Obviate the Need for the Injunction D. The Bankruptcy Court Had Subject Matter Jurisdiction to Enter the Permanent Injunction E. Stern Is Inapplicable CONCLUSION ii-

4 Case: Document: 99 Page: 4 08/31/ TABLE OF AUTHORITIES CASES Page(s) 48th St. Steakhouse, Inc. v. Rockefeller Grp., Inc. (In re 48th St. Steakhouse, Inc.), 835 F.2d 427 (2d Cir. 1987) In re Adelphia Commc ns Corp., 298 B.R. 49 (S.D.N.Y. 2003) Adelphia Commc ns Corp. v. Am. Channel, LLC (In re Adelphia Commc ns Corp.), No , 2006 WL (Bankr. S.D.N.Y. June 5, 2006) In re Ambac Fin. Grp., Inc., 457 B.R. 299 (Bankr. S.D.N.Y. 2011) AP Indus., Inc. v. SN Phelps & Co. (In re AP Indus., Inc.), 117 B.R. 789 (S.D.N.Y. 1990)... 29, 41 In re Baldwin-United Corp., 770 F.2d 328 (2d Cir. 1985) Baldwin-United Corp. v. Paine Webber Grp., Inc. (In re Baldwin-United Corp.), 57 B.R. 759 (S.D. Ohio 1985) Bankr. Servs., Inc. v. Ernst & Young (In re CBI Holding Co.), 529 F.3d 432 (2d Cir. 2008) In re Bernard L. Madoff Inv. Sec. LLC, No. 11 Civ (AKH), 2011 WL (S.D.N.Y. Nov. 17, 2011) In re Bostic Constr., Inc., 435 B.R. 45 (Bankr. M.D.N.C. 2010) In re Cabrini Med. Ctr., No , 2012 WL (Bankr. S.D.N.Y. Jun. 15, 2012)... 31, 32 Calpine Corp. v. Nev. Power Co. (In re Calpine Corp.), 354 B.R. 45 (Bankr. S.D.N.Y. 2006), aff d, 365 B.R. 401 (S.D.N.Y. 2007) iii-

5 Case: Document: 99 Page: 5 08/31/ TABLE OF AUTHORITIES (continued) Page(s) Cent. Vt. Pub. Serv. Corp. v. Herbert, 341 F.3d 186 (2d Cir. 2003) Chartschlaa v. Nationwide Mut. Ins. Co., 538 F.3d 116 (2d Cir. 2008) Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002) In re Combustion Eng g, 391 F.3d 190 (3d Cir. 2004) Cumberland Oil Corp. v. Thropp, 791 F.2d 1037 (2d Cir. 1986)... 43, 44 In re Delta Air Lines, Inc., 374 B.R. 516 (S.D.N.Y. 2007) Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005)... 24, 46, 47, 52 In re Dreier LLP, 429 B.R. 112 (Bankr. S.D.N.Y. 2010)...passim FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992)... 36, 37 Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746 (5th Cir. 1995) Fisher v. Apostolou, 155 F.3d 876 (7th Cir. 1998)...passim Fox v. Picard (In re Bernard L. Madoff), 848 F. Supp. 2d 469 (S.D.N.Y. 2012)...passim Gardi v. Gowan (In re Dreier LLP), No , 2010 WL (S.D.N.Y. Sept. 10, 2010) iv-

6 Case: Document: 99 Page: 6 08/31/ TABLE OF AUTHORITIES (continued) Page(s) Goldin v. Primavera Familienstiftung (In re Granite Partners, L.P.), 194 B.R. 318 (S.D.N.Y. 1996) Gourmet Ctr., Inc. v. Fox (In re Sage Enters., Inc.), No. 04-B-05548, 2006 WL (Bankr. N.D. Ill. Apr. 28, 2006) Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989)... 54, 55 Greene v. United States, 13 F.3d 577 (2d Cir. 1994) Highland Capital Mgmt. v. Chesapeake Energy Corp (In re Seven Seas Petrol., Inc.), 522 F.3d 575 (5th Cir. 2008)... 42, 43 Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995) Ingalls v. Gressett (In re Bradley), 326 F. App x 838 (5th Cir. 2009) Jackson v. Novak (In re Jackson), 593 F.3d 171 (2d Cir. 2010) Johns-Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns-Manville Corp.), 517 F.3d 52 (2d Cir. 2008) vacated & remanded on other grounds, 557 U.S. 137 (2009), aff g in part & rev g in part, 600 F.3d 135 (2d Cir. 2010)... 41, 42, 53 Johns-Manville Corp. v. Colo. Ins. Guar. Ass n (In re Johns-Manville Corp.), 91 B.R. 225 (Bankr. S.D.N.Y. 1988) Kagan v. Saint Vincents Catholic Med. Ctrs. of N.Y. (In re Saint Vincents), 449 B.R. 209 (S.D.N.Y. 2011) v-

7 Case: Document: 99 Page: 7 08/31/ TABLE OF AUTHORITIES (continued) Page(s) Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 500 F.3d 111 (2d Cir. 2007)... 6 Keene Corp. v. Coleman (In re Keene Corp.), 164 B.R. 844 (Bankr. S.D.N.Y. 1994)...35, 36, 37, 39, 41 McHale v. Alvarez (In re 1031 Tax Grp.), 397 B.R. 670 (Bankr. S.D.N.Y. 2008)...passim Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822 (2d Cir. 1997) In re Motors Liquidation, 447 B.R. 198 (Bankr. S.D.N.Y. 2008) In re Mrs. Weinberg s Kosher Foods, Inc., 278 B.R. 358 (Bankr. S.D.N.Y. 2002)... 46, 48 Nisselson v. Empyrean Inv. Fund, L.P. (In re MarketXT Holdings Corp.), 376 B.R. 390 (Bankr. S.D.N.Y. 2007) Official Comm. of Unsecured Creditors of Artra Grp., Inc. v. Artra Grp., Inc. (In re Artra Grp., Inc.), 300 B.R. 699 (Bankr. N.D. Ill. 2003) Official Comm. of Unsecured Creditors of LTV Aerospace & Def. Co. v. Official Comm. of Unsecured Creditors of LTV Steel Co. (In re Chateaugay Corp.), 988 F.2d 322 (2d Cir. 1993) In re Okwanna-Felix, No H4-13, 2011 WL (Bankr. S.D. Tex. Aug. 3, 2011) Picard v. Cohmad Sec. Corp., 443 B.R. 291 (Bankr. S.D.N.Y. 2011) Picard v. Fox, 429 B.R. 423 (Bankr. S.D.N.Y. 2010)...passim -vi-

8 Case: Document: 99 Page: 8 08/31/ TABLE OF AUTHORITIES (continued) Page(s) Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011) Picard v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011) Queenie, Ltd. v. Nygard Int l, 321 F.3d 282 (2d Cir. 2003) Quigley Co. v. Law Offices of Peter G. Angelos (In re Quigley Co.), 676 F.3d 45 (2d Cir. 2012)... 34, 53, 54 Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122 (Bankr. S.D.N.Y. 2010)...passim In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011)... 1, 2, 7 Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, No , B.R., 2012 WL (Bankr. S.D.N.Y. June 20, 2012)... 11, 12, 35 SEC v. Drexel Burnham Lambert Grp., Inc. (In re Drexel Burnham Lambert Grp., Inc.), 960 F.2d 285 (2d Cir. 1992) Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991)... 19, 23, 44, 45 Singer Co. B.V. v. Groz Beckert KG (In re Singer Co. N.V.), No , 41 Sosne v. Reinert & Duree, P.C. (In re Just Brakes Corporate Sys., Inc.), 108 F.3d 881 (8th Cir. 1997) St. Paul, Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989)...passim -vii-

9 Case: Document: 99 Page: 9 08/31/ TABLE OF AUTHORITIES (continued) Page(s) Stern v. Marshall, 131 S. Ct (2011)...passim Superintendent of Ins. v. Ochs (In re First Cent. Fin. Corp.), 377 F. 3d 209 (2d Cir. 2004)... 6 In re Swallen s, Inc., 205 B.R. 879 (Bankr. S.D. Ohio 1997) Travelers Indem. Co. v. Statutory & Hawaii Direct Action Settlement Counsel (In re Johns-Manville Corp.), 845 F. Supp. 2d 584 (S.D.N.Y. 2012)... 49, 50 United States v. $7,206,157,717 on Deposit at JP Morgan Chase Bank, N.A., 274 F.R.D. 125 (S.D.N.Y. 2011)... 21, 22 In re XO Commc ns, Inc., 330 B.R. 394 (Bankr. S.D.N.Y. 2005) STATUTES 11 U.S.C U.S.C. 105(a)...passim 11 U.S.C U.S.C. 362(a)(1) U.S.C. 362(a)(3)... 34, U.S.C. 362(a)(6) U.S.C. 524(e) U.S.C U.S.C. 541(a) U.S.C. 541(a)(1) viii-

10 Case: Document: 99 Page: 10 08/31/ TABLE OF AUTHORITIES (continued) Page(s) 15 U.S.C. 78fff-2(c)(1) U.S.C. 78lll(11) U.S.C. 157(a) U.S.C. 1334(b) RULES Fed. R. Bankr. P Fed. R. Bankr. P Fed. R. Bankr. P Fed. R. Bankr. P , 53, 54 OTHER AUTHORITIES 3 COLLIER ON BANKRUPTCY (8)(c) (16th ed. 2009)... 37, 38 -ix-

11 Case: Document: 99 Page: 11 08/31/ STATEMENT OF ISSUES PRESENTED 1) Whether the bankruptcy court clearly erred in making the finding, affirmed by the district court, that Appellants putative class actions were duplicative and derivative of the Trustee s action against Jeffry Picower and related individuals and entities ( Picower Defendants ) and thus were void ab initio; and 2) Whether the bankruptcy court manifestly abused its discretion in approving an injunction that bars duplicative and derivative claims that could result in double liability for the same acts, and whether the court had jurisdiction to make these determinations. STATEMENT OF THE CASE At their core, these appeals reflect Appellants continuing efforts to circumvent the bankruptcy court s decision affirmed by this Court that the Trustee s method of calculating net equity in the Securities Investor Protection Act ( SIPA ) liquidation of Bernard L. Madoff Investment Securities LLC ( BLMIS ) by using the net investment method was proper. See Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122 (Bankr. S.D.N.Y. 2010) ( Net Equity Decision ), aff d, 654 F.3d 229 (2d Cir. 2011), cert. denied, 2012 WL , 2012 WL (June 25, 2012).

12 Case: Document: 99 Page: 12 08/31/ The Net Equity Decision held that BLMIS customers, such as Appellants, are not entitled to distributions of customer property based upon the false profits shown on their customer statements. 424 B.R. at 141. Rather, net equity is to be based on the actual net cash that customers invested and withdrew. Id. As this Court held, to allow distributions based on fictitious profits would perpetuate Madoff s fraud, as it would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff s machinations. 654 F.3d at 235. Unhappy with the Net Equity Decision because it precludes them from recovering their false profits from the BLMIS estate, Adele Fox and Susanne Stone Marshall each brought a putative class action in federal district court in Florida ( Florida Actions ) against the Picower Defendants. Their complaints allege the same harm, based on the same alleged facts, as the Trustee s avoidance action against the Picower Defendants ( Trustee s Action ), but seek to recover through those lawsuits the very false profits that Appellants cannot receive through the SIPA liquidation. The bankruptcy court rejected this attempt to circumvent the Net Equity Decision. It held the Florida Actions to be void ab initio because they are duplicative and derivative of the Trustee s Action, and preliminarily enjoined the actions because they interfered with the administration of the estate and the 2

13 Case: Document: 99 Page: 13 08/31/ distribution scheme approved by the bankruptcy court, especially as further prosecution would ultimately result in another court s determining how potential estate assets are distributed among certain BLMIS customers. SA21. 1 Some months after the Florida Actions were held to be void ab initio and Appellants were preliminarily enjoined, the Trustee, along with the Department of Justice, settled with the Picower Defendants for $7.2 billion an amount equal to the net withdrawals that the Picower Defendants had made from BLMIS. In approving this extraordinary settlement, the bankruptcy court issued a permanent injunction, barring suits against the Picower Defendants that were duplicative or derivative of the Trustee s action. A These appeals rise or fall on Appellants contention that their claims are independent and personal. The bankruptcy court and district court each rejected this contention as a factual matter, finding them instead to be duplicative and derivative of the Trustee s Action. The lower courts did not clearly err in so finding. As the bankruptcy court concluded, the factual allegations... are virtually identical to those made by Picard... and cite to the Trustee s complaint throughout[.] SA Citations to the Joint Appendix and Special Appendix follow the same citation conventions as in Appellants briefs. 3

14 Case: Document: 99 Page: 14 08/31/ In their opening briefs, Appellants contend for the first time that the Florida Actions have nothing to do with the Picower Defendants withdrawals from BLMIS. But those withdrawals are essentially the only facts alleged in their complaints and the only alleged basis for their claims. As the district court found, [t]he Florida Actions, like Picard s New York Action, are based upon the same conduct by the Picower Defendants: involvement in the Madoff Ponzi scheme, and the transfer of billions of dollars in BLMIS-held customer funds to the Picower defendants. SA114. Moreover, the court found, [t]he Florida complaints contain no additional allegations of acts by the Picower Defendants that were directed toward the Appellants specifically, or any duty owed specifically to the Appellants by the Picower Defendants. Put bluntly, the wrongs pleaded in... the Florida Actions and in the Trustee s Action are the same. Id. Appellants argue that they seek to bring tort claims, not the fraudulent transfer claims brought by the Trustee. But Appellants, like other Madoff victims, had no direct dealings with the Picower Defendants. The harm Appellants allege derives from the same fraudulent transfers that formed the basis of the Trustee s action the fact that the Picower Defendants withdrew more from the scheme than they put in, thus diminishing the value of BLMIS. Every other BLMIS customer or creditor could bring the same claims against the Picower Defendants. As this Court held in St. Paul, Fire & Marine Insurance Co. v. PepsiCo, Inc., 884 F.2d 4

15 Case: Document: 99 Page: 15 08/31/ , 701 (2d Cir. 1989), when claims are generalized as to all creditors, they belong solely to the Trustee. As both lower courts found, Appellants argument that they seek separate damages in tort is a transparent effort to pursue claims against the Picower Defendants that were duplicative of claims brought by the Trustee and that belonged to the Trustee on behalf of all creditors of BLMIS. SA 97. A creditor cannot simply re-label causes of action to avoid the bankruptcy court s injunctive powers and the automatic stay provisions of the Bankruptcy Code. To hold otherwise would undermine the bankruptcy court s jurisdiction over the administration of the estate and interfere with a trustee s ability to litigate and settle cases for the benefit of all creditors. 2 SA The permanent injunction is necessary to prohibit BLMIS customers who are displeased with the Net Equity Decision [from] undermin[ing] that decision by directly pursuing claims that are wholly derivative of claims already brought by the Trustee. SA142. The Picower settlement, which included the permanent injunction as an integral component, brings billions of dollars into the BLMIS estate for distribution in accordance with the Net Equity Decision. The lower courts 2 The bankruptcy court recently denied an attempt by certain of the same counsel representing Fox to bring another putative class action against the Picower Defendants relying on pleadings that mimic the allegations in the Florida Actions, but which alleged violations of the federal securities laws. A645. 5

16 Case: Document: 99 Page: 16 08/31/ properly enforced the permanent injunction as against these duplicative and derivative claims, and their decisions should be affirmed. STANDARD OF REVIEW The bankruptcy court s factual determinations are reviewed for clear error, and its legal conclusions are reviewed de novo. See Fed. R. Bankr. P. 8013; Superintendent of Ins. v. Ochs (In re First Cent. Fin. Corp.), 377 F. 3d 209, 212 (2d Cir. 2004). The bankruptcy court s grant of an injunction under 11 U.S.C. 105(a) is reviewed for abuse of discretion. Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 500 F.3d 111, (2d Cir. 2007). STATEMENT OF FACTS The details of Madoff s Ponzi scheme and the background of the bankruptcy proceedings have been set forth numerous times and need not be repeated here. 3 I. THE NET EQUITY DECISION In liquidation proceedings, SIPA provides that customers share pro rata in customer property to the extent of their net equity, as defined in section 78lll(11) of SIPA. Consistent with SIPA, the Trustee determined that each customer s net equity should be calculated by crediting the amount of cash deposited by the 3 See, e.g., Net Equity Decision, 424 B.R. at

17 Case: Document: 99 Page: 17 08/31/ customer into their BLMIS account, less any amounts withdrawn from their BLMIS customer account. This is referred to as the net investment method. Net Equity Decision, 424 B.R. at 125. Certain customers, however, asserted that they should be entitled to recover whatever was on their last customer account statement, even though those statements were fictitious and reflected fake profits and nonexistent trades. Id. The bankruptcy court approved the Trustee s use of the net investment method and issued an order affirming the Trustee s calculation of net equity. Order dated March 8, 2010, Adv. Pro No (Bankr. S.D.N.Y. Mar. 8, 2010), ECF No This Court affirmed the Net Equity Decision, holding that the Trustee s methodology is more consistent with the statutory definition of net equity than any other method advocated by the parties or perceived by this Court. In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 235 (2d Cir. 2011). This Court stated that other methods would aggravate the injuries caused by Madoff s fraud, and that reliance on the fictitious profits shown on customer statements would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff s machinations. Id. On June 25, 2012, the United States Supreme Court denied certiorari. Velvel v. Picard, No , S. Ct., 2012 WL (U.S. Jun 25, 2012); Ryan v. Picard, No , S. Ct., 2012 WL (U.S. June 25, 2012). 7

18 Case: Document: 99 Page: 18 08/31/ II. APPELLANTS PARTICIPATION IN THE BANKRUPTCY PROCEEDING On December 23, 2008, the bankruptcy court entered a Claims Procedure Order, which implemented a customer claims process in accordance with SIPA. A By July 2, 2009, the bar date for filing claims under SIPA, the Trustee had received more than 16,000 customer claims. A174. Appellants participated in the claims procedure process. Marshall filed a customer claim regarding her BLMIS account. A It was allowed by the Trustee in the amount of $30,000, which represented the net cash position of her account. A After she executed an assignment and release, Marshall received a payment from the Trustee with funds advanced by SIPC. A ; A1306. Marshall did not file an objection to the Trustee s determination of her claim within the 30-day period prescribed by the Claims Procedure Order. A1288. Fox filed claims for two of the seven BLMIS accounts with which she is associated, both of which were denied because she was a net winner (meaning she withdrew more than she invested). A ; A251-54; A Fox filed objections to these determinations. A238-49; A Thus, Fox and Marshall submitted themselves to the jurisdiction of the bankruptcy court. As creditors and customers, Fox and Marshall are represented by the Trustee. Marshall s claim was allowed, albeit for less than she wanted. 8

19 Case: Document: 99 Page: 19 08/31/ And although Fox s net equity claim was denied because she was a net winner, like all other net winners, she may still participate in the estate as a general creditor (as could Marshall, for amounts above her net equity claim) if the Trustee were to recover more customer property than is required to satisfy net equity claims. See SIPA 78fff-2(c)(1) ( Any customer property remaining after allocation in accordance with this paragraph shall become part of the general estate of the debtor ). III. THE PICOWER COMPLAINT The Trustee filed a complaint against the Picower Defendants on May 12, A The complaint identified more than $6.7 billion in withdrawals that the Trustee alleged the Picower Defendants had received from BLMIS. 4 Id. 63(b), 67. The complaint alleged that the Picower Defendants knew or should have known that BLMIS was engaged in fraud and sought recovery of the entire amount known at the time of filing to have been transferred from BLMIS to the Picower Defendants throughout the history of the Picower Defendants BLMIS accounts. Id. 3, 4, 28, 57, Marshall falsely asserts that the Trustee s complaint sought only $2.4 billion. (Marshall Br. at 4.) 9

20 Case: Document: 99 Page: 20 08/31/ After filing the complaint, the Trustee identified additional transfers from BLMIS to the Picower Defendants, bringing the total amount of net withdrawals sought by the Trustee to $7.2 billion. A848; A1195. IV. THE FLORIDA ACTIONS On February 16 and 17, 2010, just two weeks after oral argument in bankruptcy court on the net equity issue, and anticipating (correctly) that their arguments would be rejected, Appellants each filed a putative class action against the Picower Defendants in federal court in Florida seeking to circumvent the anticipated net equity decision. A ; A Between them, Appellants sought to represent a class of all BLMIS customers whose claims would not be fully satisfied by the Trustee using his net equity calculation. Fox sought to certify a class on her own behalf and on behalf of all persons or entities who have maintained customer accounts with BLMIS who are not SIPA Payees and who have not received the net account value scheduled in their BLMIS accounts in other words, net winners. 5 A2379. Marshall sought to certify a class on her own behalf and on behalf of all SIPA Payees, but only with respect to claims, or portions thereof, not assigned to the Trustee. A2817. Marshall s action 5 Appellants amended their complaints on March 15, 2010, making only clerical changes. See A ; A

21 Case: Document: 99 Page: 21 08/31/ purportedly is on behalf of those customers whose claims were or will be allowed by the Trustee, but not to the full amount of their final fictitious BLMIS account statements. See A ; A2817. Neither putative class was ever certified. Appellants conceded below that the factual allegations in [Appellants ] respective Florida complaints are virtually identical to those made by the Trustee in his complaint. SA114. Both complaints copied the factual allegations contained in the Trustee s complaint (which Appellants cite as sole support for the allegations), added the caption, and rejiggered the causes of action. The complaints allege: that the Picower Defendants withdrew billions of dollars from Madoff s Ponzi scheme under the circumstances alleged in the Trustee s complaint; that those circumstances suggest that the Picower Defendants were not only aware of but were complicit in the Ponzi scheme; and that the Picower Defendants conduct in making these withdrawals under the circumstances alleged constituted conversion through the theft of funds from the accounts of Fox, Marshall and other BLMIS customers. The allegations parrot the Trustee s fraudulent transfer allegations against the Picower Defendants. They allege that Fox, Marshall, and other BLMIS customers were damaged as a result of the fraudulent transfers that the Picower Defendants received from BLMIS. A ; A ; see Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, No , B.R., 11

22 Case: Document: 99 Page: 22 08/31/ WL (Bankr. S.D.N.Y. June 20, 2012) (chart comparing allegations in Trustee s complaint with those in the Florida complaints, appended as Exhibit A thereto). The complaints allege that BLMIS and the Picower Defendants engaged in a conspiracy to steal the funds of other customers; specifically, that Picower and Defendants converted the cash in other innocent BLMIS customers accounts for their own personal benefit with the acquiescence and assistance of Madoff and BLMIS. A ; A The complaints seek, among other things, disgorgement of the profits that the Picower Defendants received from BLMIS and a constructive trust over the Picower Defendants assets (although the latter relief is now disclaimed in this appeal). V. THE BANKRUPTCY COURT S ENFORCEMENT OF THE AUTOMATIC STAY AND ISSUANCE OF A PRELIMINARY INJUNCTION Because the Florida Actions would interfere with the Trustee s prosecution of his fraudulent transfer claims, upend the SIPA priority distribution scheme, and hinder the settlement with the Picower Defendants, on March 31, 2010, the Trustee filed an application in the bankruptcy court seeking, among other things: (i) enforcement of the automatic stay and a declaration that the Florida Actions were void ab initio; and (ii) an order preliminarily enjoining Fox and Marshall and their counsel from litigating against the Picower Defendants, pending the completion of, 12

23 Case: Document: 99 Page: 23 08/31/ and a final order of approval on, the Trustee s settlement with the Picower Defendants. A On May 3, 2010, the bankruptcy court held that the Florida Actions violated the automatic stay and at least one stay order of the district court. SA The bankruptcy court declared the Florida Actions void ab initio and issued a preliminary injunction under section 105(a) of the Bankruptcy Code. Id. The bankruptcy court further found an imminent threat to the estate from the Florida Actions and held that an extension of the stay was appropriate and necessary to, among other reasons, preserve the integrity of the SIPA proceedings and the Trustee s settlement negotiations. SA21. As the bankruptcy court found: [c]ontinuation of the Florida Actions against these same defendants... has the potential to further reduce[] the Picower Defendants motivations for entering into a settlement with the Trustee, unravel months of investigation, litigation activity and settlement negotiations, and substantially undermine the Trustee s efforts to maximize recovery for the estate. SA Fox and Marshall appealed the bankruptcy court s order. A VI. THE PICOWER SETTLEMENT While the Trustee was pursuing his fraudulent transfer action against the Picower Defendants, the government was in discussions with the Picower Defendants counsel. A Ultimately, the Trustee and the United States 13

24 Case: Document: 99 Page: 24 08/31/ Attorney for the Southern District of New York coordinated their efforts to reach an agreement with Barbara Picower and the Picower estate and achieved a global settlement that resulted in the return of every penny of net withdrawals that the Picower Defendants had made from BLMIS. A After months of extensive negotiations, the Trustee and the Picower Defendants reached an agreement under which the Picower estate agreed to return $5 billion to the BLMIS estate. A927. The Picower estate agreed to forfeit the $5 billion and an additional amount of approximately $2.2 billion to the government. Id. When these amounts were combined, 100 percent of the net withdrawals received by the Picower Defendants over the lifetime of their investments with BLMIS became available for eventual distribution to BLMIS victims, without the need for litigation. A919. In exchange for the benefits to the estate, the settlement agreement contains a release of all claims that the Trustee brought or could have brought against the Picower Defendants in connection with BLMIS. A953. Because of the extreme importance to the Picower Defendants of precluding suits on claims that they were to settle, the Trustee agreed to use his reasonable best efforts to seek a narrowly tailored permanent injunction from the bankruptcy court. A The permanent injunction excludes from its scope actions where there is an 14

25 Case: Document: 99 Page: 25 08/31/ independent basis on which to bring suit. A939. The injunction was identified by the Picower Defendants as an essential part of the settlement. A943. VII. THE BANKRUPTCY COURT S APPROVAL OF THE SETTLEMENT AND ISSUANCE OF A PERMANENT INJUNCTION On December 17, 2010, the Trustee moved for an order approving the settlement agreement and entering the permanent injunction under section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure. A Out of the approximately 16,000 creditors of the BLMIS estate, only one other objection was filed to this landmark settlement. Appellants challenged the amount of the settlement, claiming that it was both too little and too much. On the one hand, they argued that the $7.2 billion settlement amount was too low because it did not include interest or profits on the fictitious profits withdrawn by the Picower Defendants. A On the other hand, they argued that the amount was too high, because, they asserted, the Trustee could not have successfully obtained this entire amount through his avoidance action. They claimed that by entering into the settlement, the Trustee was obtaining an unfair priority over the $7.2 billion, which should have remained available to Appellants and others who disagreed with the Net Equity Decision for satisfaction of their own claims. Id.; A

26 Case: Document: 99 Page: 26 08/31/ The bankruptcy court overruled Appellants objections and approved the settlement on January 13, The bankruptcy court found that the settlement fell well above the lowest point in the range of reasonableness; was fair, reasonable, equitable and in the best interests of the BLMIS estate; and would confer a significant benefit on BLMIS customers. A That finding is not challenged on this appeal. The bankruptcy court further found that the permanent injunction was necessary and appropriate to carry out the provisions of the Bankruptcy Code, to prevent any entity from exercising control or possession over property of the estate, to preclude actions that would have a conceivable effect or adverse impact upon the BLMIS estate or on the administration of the liquidation proceeding, and/or to avoid relitigation or litigation of claims that were or could have been asserted by the Trustee on behalf of all customers and creditors. A The bankruptcy court stated at the hearing that the purpose and need for the injunction is quite clear. The injunction is narrow. It deals with duplicative and parallel claims of the trustee.... And you cannot expect any settlor to make a settlement with a potential possibility of being sued twice over the same causes of action and claims. A Accordingly, the bankruptcy court approved the settlement agreement and issued the following permanent injunction: [A]ny BLMIS customer or creditor of the BLMIS estate... is hereby permanently enjoined from asserting any claim against the Picower 16

27 Case: Document: 99 Page: 27 08/31/ A1111. BLMIS Accounts or the Picower Releasees that is duplicative or derivative of the claims brought by the Trustee, or which could have been brought by the Trustee against the Picower BLMIS Accounts or the Picower Releasees.... VIII. THE DISTRICT COURT S DECISION AND ORDER Appellants appeals of the orders declaring the Florida Actions void ab initio, of the Picower settlement, and of the preliminary and permanent injunctions, were consolidated and heard by the Honorable John G. Koeltl. Judge Koeltl rejected each of the Appellants arguments made here, holding that the bankruptcy court was plainly correct in finding that the Florida Actions violated the automatic stay, because they were a transparent effort to pursue claims that were duplicative of claims brought by the Trustee and that belonged to the Trustee on behalf of all creditors of BLMIS. SA97. The district court examined the complaints in the Florida Actions and determined that, [p]ut bluntly, the wrongs pleaded in the Florida Actions and in the Trustee s action are the same. SA114. Appellants did not dispute that the factual allegations in their complaints were virtually identical to those in the Trustee s complaint, and the district court found that they alleged no act directed specifically toward Appellants or duty owed specifically to them. SA113. Instead, the district court held that the wrongful acts alleged in their complaints harmed every BLMIS investor (and BLMIS itself) in the same way: by withdrawing 17

28 Case: Document: 99 Page: 28 08/31/ billions of dollars in customer funds from BLMIS and thus substantially diminishing the assets available to BLMIS. SA115. Accordingly, the district court concluded that the claims asserted by Appellants could have been asserted by any creditor of BLMIS, and rejected Appellants attempt to circumvent this obvious proposition by arguing that they are seeking different damages such as the time-value of their money and taxes paid, because these are all the same types of damages that could be claimed by other BLMIS customers in general. SA117. Under this Court s St. Paul decision, as the district court held, such generalized claims belong to the Trustee. SA116. The district court concluded that the bankruptcy court had correctly determined that the claims asserted by the Appellants are duplicative and derivative of the Trustee s and are property of the BLMIS estate and, therefore, void ab initio. SA The district court further held that preliminarily enjoining the Florida Actions under 105 was warranted because the Florida Actions interfered with the bankruptcy court s jurisdiction over the distribution of estate funds. SA Even if the claims were not property of the estate, the district court concluded, the injunction was proper because the claims asserted in the Florida Actions are so closely related that allowing the [appellants] to convert the bankruptcy proceeding into a race to the courthouse would derail the bankruptcy proceedings. SA139 18

29 Case: Document: 99 Page: 29 08/31/ (quoting Fisher v. Apostolou, 155 F.3d 876, 883 (7th Cir. 1998)). The district court also held that the bankruptcy court did not clearly err in finding that the Florida Actions threatened the Picower settlement negotiations by rais[ing] the specter of double liability for the same conduct, making the Picower defendants less likely to settle. SA130. The district court then turned to the settlement, holding that the bankruptcy court was correct in approving the extraordinarily beneficial settlement with the Picower Defendants. SA97. Ultimately, the court refused to allow two litigants who are unhappy with the order of priority for the disbursement of funds to BLMIS customers to stand between BLMIS customers who lost their principal investments in the Madoff Ponzi scheme and billions of dollars in recovery. SA Finally, after rejecting Appellants challenge to the settlement amount as border[ing] on the frivolous, SA136, the district court considered the propriety of the permanent injunction as part of the Picower settlement. As a threshold matter, the district court held that, in connection with a settlement, a bankruptcy court has 6 Both lower courts flatly rejected Appellants attempt to invoke this Circuit s Wagoner Rule to avoid the reach of the automatic stay. SA The district court held that Wagoner rule has no application to Appellants disguised fraudulent transfer claims. SA Moreover, the district court rejected the significant expansion of the Wagoner rule to hypothetical claims that the Trustee never sought to assert. SA

30 Case: Document: 99 Page: 30 08/31/ jurisdiction to permanently enjoin actions that are derivative or duplicative of claims brought by the trustee, or that could have been brought by the trustee in the first instance. SA (citing In re Dreier LLP, 429 B.R. 112, 133 (Bankr. S.D.N.Y. 2010)). The district court rejected Appellants argument that the permanent injunction constitutes an improper nondebtor release because the only claims enjoined are claims that are owned by the estate in the first instance. Simply put, the only claims being released here are claims that are the Trustee s to bring, or that are duplicative or derivative of such claims. SA Because the injunction does not constitute a nonconsensual nondebtor release, the general bar on such releases does not apply. Id. But even to the extent that the injunction could, arguendo, be considered to constitute a nonconsensual release of a third party, the district court held, this case presents the kind of truly unusual circumstances that would justify it. SA140. Not only did the district court find that the extraordinary sum of $7.2 billion was recovered for the estate after arm s-length bargaining, and the injunction of derivative claims like the Florida Actions was part of that bargain, but the 20

31 Case: Document: 99 Page: 31 08/31/ integrity of the SIPA liquidation itself is protected by preventing customers from circumventing the Net Equity Decision and undermining the liquidation plan. 7 Id. IX. THE CIVIL FORFEITURE ACTION AND THE TRUSTEE S DISTRIBUTION Fox separately sought to intervene in the civil forfeiture action commenced by the government. On May 23, 2011, the Honorable Thomas P. Griesa denied Fox s attempt to intervene and amend, modify, or rescind the order of settlement. See United States v. $7,206,157,717 on Deposit at JP Morgan Chase Bank, N.A., 274 F.R.D. 125 (S.D.N.Y. 2011); A The district court found that Fox s status as a victim of Madoff s fraud is too remote to create the interest necessary to intervene in the action, id. at 126, and recognized that the proper avenue for Fox to challenge Picard s method of compensating Madoff s victims is not with this case, but with the appeal by other net winners of the Bankruptcy Court s decision approving of Picard s method. Id. On May 24, 2011, Judge Griesa issued a final judgment of forfeiture. See United States v. $7,206,157,717 on Deposit at JP Morgan Chase Bank, N.A., Final 7 The district court also rejected Appellants argument that Stern v. Marshall, 131 S. Ct (2011), deprived the bankruptcy court of jurisdiction to approve the settlement. It found no language in Stern that can reasonably be interpreted as holding that the power explicitly accorded by Congress to the bankruptcy courts to enter judgment in fraudulent transfer actions... violates Article III of the United States Constitution. SA125. Nor did Stern alter the bankruptcy court s power to approve a settlement. SA

32 Case: Document: 99 Page: 32 08/31/ Judgment of Forfeiture, 10-CV-9398 (TPG), ECF No. 17 (S.D.N.Y., Dec. 17, 2010); A Fox appealed the forfeiture order, and the government moved to dismiss the appeal as frivolous. See U.S. v. Fox, Case No CV (2d Cir. 2011), ECF Nos. 1, 44; A Thereafter, this Court dismissed the appeal as lacking a legal or factual basis. Fox did not seek a writ of certiorari, making the forfeiture order final and releasing funds to the Trustee, who has obtained approval to make a distribution to customers. A3319; Adv. Pro , ECF No. 4997, Order Approving an [sic] Second Allocation (Bankr. S.D.N.Y. Aug. 22, 2012). SUMMARY OF ARGUMENT Appellants urge this Court to find their claims to be independent and personal in the face of contrary decisions from the two courts below, which found as a factual matter that the Florida Actions were duplicative and derivative of the Trustee s Action. Notwithstanding Appellants efforts to run from the black and white of their pleadings, which clearly allege wrongs stemming solely from the Picower Defendants withdrawals from their own BLMIS accounts, there is nothing independent or personal about Fox s and Marshall s claims, or even their damages: Appellant Marshall, at oral argument, asserted that every single [BLMIS] customer could have brought the claims alleged in the Florida Actions.... Even without that concession, though, it is plain that every BLMIS customer suffered the same types of damages asserted by the Appellants in the Florida Actions. The damages are all based on the alleged actions of the Picower [D]efendants 22

33 Case: Document: 99 Page: 33 08/31/ withdrawing funds from BLMIS to which they were not entitled and thereby diminishing the funds that could otherwise be paid to the customers of BLMIS in an appropriate distribution mechanism which has been found to be the Net Equity method. Fox v. Picard (In re Bernard L. Madoff), 848 F. Supp. 2d 469, 480 (S.D.N.Y. 2012). Moreover, both courts correctly held that because the harm alleged is generalized as to all BLMIS customers and creditors as evidenced by the class nature of the Florida Actions they belong to the Trustee alone to bring and resolve. St. Paul, 884 F.2d at 701. Equally unavailing are Appellants arguments that the Trustee lacked standing or would be barred by the Wagoner Rule in bringing Appellants Florida Actions. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991). The Wagoner Rule is inapplicable to avoidance actions. In addition, the Rule is also inapplicable as to insiders, which Appellants allege the Picower Defendants to be. More to the point, as the district court held: The Appellants seek to invalidate the bankruptcy court s orders based on a hypothetical claim that the Trustee did not bring and based on a hypothetical defense that the Picower [D]efendants did not assert in the hypothetical lawsuit. The Appellants cannot defeat the straightforward fact that their lawsuits were duplicative of the [Trustee s] Action that the Trustee had the right to bring. Fox, 848 F. Supp. 2d at 485. To hold otherwise would be to allow any creditor not satisfied with his 23

34 Case: Document: 99 Page: 34 08/31/ distribution under the Net Equity Decision to circumvent the automatic stay and bring his or her own suit. Id. Nor is the permanent injunction contrary to this Court s decision in Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005), or Stern v. Marshall, 131 S. Ct (2011). Appellants contend that the permanent injunction is tantamount to an improper release under Metromedia. Even if an analysis under Metromedia were, arguendo, appropriate, given the duplicative and derivative nature of Appellants claims, the permanent injunction is wholly proper under such an analysis. As the district court held: Because the estate owns the claims in the first instance, the estate is entitled to settle them.... Metromedia s bar on nonconsensual releases of non-debtor claims does not apply here, because the claims being released belong to the BLMIS estate. Fox, 848 F. Supp. 2d at Similarly without merit is Appellants contention that the permanent injunction operates like a final judgment on her purely non-bankruptcy dispute with the Picower Defendants in violation of Stern. The question is not the effect of the settlement on Appellants duplicative and derivative claims. Those claims are in essence fraudulent transfer claims, upon which bankruptcy courts may enter final judgment. Moreover, Stern does not prohibit a bankruptcy court from enforcing the automatic stay, issuing injunctions or approving settlements, as here. 24

35 Case: Document: 99 Page: 35 08/31/ Finally, Appellants argue that the bankruptcy court lost jurisdiction to issue the permanent injunction once the Picower Defendants forfeited $7.2 billion because there could no longer be a conceivable effect on the res of the estate. To the contrary, as both courts below found, [a]llowing the Florida Actions to go forward would carry real risks to the estate, implicating the viability of the current settlement and the possibility of future settlements and providing an avenue for BLMIS customers who are displeased with the Net Equity decision to undermine that decision by directly pursuing claims that are wholly derivative of claims already brought by the trustee. Id. at The bankruptcy court s orders should again be upheld. ARGUMENT THE FLORIDA ACTIONS ARE BARRED I. THE FLORIDA ACTIONS ARE DUPLICATIVE AND DERIVATIVE OF THE TRUSTEE S ACTION AND APPELLANTS CLAIMS ARE PROPERTY OF THE ESTATE A. The Florida Actions Parrot the Trustee s Action As the district court correctly found, Appellants claims are not independent of the Trustee s fraudulent transfer claims. The Florida complaints contain no additional allegations of acts by the Picower defendants that were directed toward the Appellants specifically, or any duty owed specifically to the Appellants by the Picower defendants. Put bluntly, the wrongs pleaded in in the Florida Actions and in the Trustee s action are the same. Fox, 848 F. Supp. 2d at

36 Case: Document: 99 Page: 36 08/31/ Appellants claim is that the Picower Defendants knowingly withdrew fictitious profits from their BLMIS accounts. A ; A ; A ; A The conspiracy alleged is one between BLMIS and the Picower Defendants to allow the Picower Defendants to steal the funds of other investors through these withdrawals. A ; A There are no allegations that the Picower Defendants had any contact with or owed any duty to the Florida Plaintiffs. The only conduct alleged on the part of the Picower Defendants is in connection with their withdrawals from their own accounts. A ; A ; A ; A Appellants assert for the first time that the injuries alleged in their complaints are not founded upon the billions of dollars of fraudulent transfers from BLMIS to the Picower Defendants alleged in the Trustee s complaint. (Fox Br. at 37; see Marshall Br. at 25.) These transfers, they argue, were merely observe[d] in the factually identical Fox and Marshall Complaints. (Id.) 8 Notwithstanding Appellants convoluted and unsupported argument that asserting conspiracy and accomplice liability claims somehow is tantamount to being in privity with the Picower Defendants, there is nothing in the Florida complaints that could form the basis for a personalized claim, as both lower courts found. (See Fox Br. at 38-39; Marshall Br. at ) 26

37 Case: Document: 99 Page: 37 08/31/ But this after-the-fact attempt to rewrite the complaints fails, even had it been preserved. 9 The only conduct by the Picower Defendants alleged in the Fox and Marshall complaints is their demand for and receipt of transfers from BLMIS, under circumstances alleged to show participation in the Ponzi scheme. See A ; A As Appellants acknowledge, the theme of the Fox and Marshall Complaints is that the Picower Defendants conspired with Madoff to steal the funds of [customers]. (Fox Br. at 9; Marshall Br. at 7.) Specifically, the Fox and Marshall complaints allege that the Picower Defendants knew or should have known that the funds used to pay the [Picower] Defendants fictional profits could have only come from the accounts of other BLMIS customers. [The Picower] Defendants converted the cash in other innocent BLMIS customer accounts for their own personal benefit with the acquiescence and assistance of Madoff and BLMIS. A , A Were it not for the automatic stay, any BLMIS customer could bring the same claims against the Picower Defendants or against any other BLMIS customer who withdrew fictitious profits in circumstances the Trustee alleged showed a lack of good faith. 9 Appellants waived this argument by failing to raise it below. See Greene v. United States, 13 F.3d 577, 586 (2d Cir. 1994) ( an appellate court will not consider an issue raised for the first time on appeal ). 27