Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 1 of 11

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1 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 1 of 11 Baker & Hostetler LLP 45 Rockefeller Plaza New York, NY Telephone: (212) Facsimile: (212) Attorneys for Irving H. Picard, Esq., Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES INVESTOR PROTECTION CORPORATION, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Adv. Pro. No (BRL) SIPA LIQUIDATION (Substantively Consolidated) In re: Defendant. MADOFF SECURITIES, Case No. 12 Misc. 115 (JSR) Debtor. IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, PERTAINS TO Case No. 12 Civ (JSR) v. Plaintiff, TRUSTEE S SUPPLEMENTAL BRIEF IN FURTHER SUPPORT OF INJUNCTION ERIC T. SCHNEIDERMAN, as successor to ANDREW M. CUOMO, Attorney General of the State of New York; BART M. SCHWARTZ, as Receiver for ARIEL FUND LTD. and GABRIEL CAPITAL, L.P.; DAVID PITOFSKY, as Receiver for ASCOT PARTNERS, L.P. and ASCOT FUND, LTD.; J. EZRA MERKIN; and GABRIEL CAPITAL CORPORATION, Defendants.

2 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 2 of 11 TABLE OF CONTENTS Page INTRODUCTION... 1 ARGUMENT... 1 I. Laches Fails Because Defendants Were on Notice of the Trustee s Position from the Very Beginning and Cannot Plausibly Claim Any Unfair Surprise... 1 II. III. Laches Fails Because the Trustee Did Not Sleep on His Rights But Was in Active Negotiation with the Defendants... 4 Laches Fails Because It Was the Defendants Obligation To Seek To Lift the Automatic Stay... 5 CONCLUSION... 6 i

3 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 3 of 11 TABLE OF AUTHORITIES CASES Page(s) A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020 (Fed. Cir. 1992) (en banc)...1, 4 A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994 (4th Cir. 1986)...6 ACandS, Inc. v. Travelers Cas. & Sur. Co., 435 F.3d 252 (3d Cir. 2006)...5, 6 DeSilvio v. Prudential Lines, Inc., 701 F.2d 13 (2d Cir. 1983)...3 EEOC v. Local 638, 753 F.2d 1172 (2d Cir. 1985), aff d, Local 28 v. EEOC, 478 U.S. 421 (1986)...2, 3 Hutton Constr. Co., Inc., v. Cnty. of Rockland, 52 F.3d 1191 (2d Cir. 1995)...3 In re Fugazy Express, Inc. (Shimer v. Fugazy), 982 F.2d 769 (2d Cir. 1992)...6 In re Gucci (Gucci v. Sinatra), 197 Fed. App x 58 (2d Cir. 2006)...2 King v. Innovation Books, 976 F.2d 824 (2d Cir. 1992)...3 Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194 (3d Cir. 1992)...6 Mogavero v. McLucas, 543 F.2d 1081 (4th Cir. 1976)...5 NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d Cir. 2012)...2 ProFitness v. Pro-Fit Orthopedic, 314 F.3d 62 (2d Cir. 2002)...5 Saratoga Vichy Spring Co., Inc. v. Lehman, 625 F.2d 1037 (2d Cir. 1980)...3 ii

4 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 4 of 11 SIPC v. Barbour, 421 U.S. 412 (1975)...6 Stone v. Williams, 873 F.2d 620 (2d Cir. 1989), vacated on rehearing, 891 F.2d 401 (2d Cir. 1989)...4 United Merchs. & Mfrs., Inc. v. K. Gimbel Accessories, Inc., 294 F. Supp. 151 (S.D.N.Y. 1968)...4 Vaupel Textilmaschinen KG v. Meccanica Euro Italia SPA, 944 F.2d 870 (Fed. Cir. 1991)...3 Veltri v. Bldg. Serv. 32B-J Pension Fund, 393 F.3d 318 (2d Cir. 2004)...2 iii

5 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 5 of 11 The Trustee submits this memorandum of law in further support of his Application. INTRODUCTION [A]t all times, the defendant bears the ultimate burden of persuasion of the affirmative defense of laches. A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020, 1038 (Fed. Cir. 1992) (en banc). Defendants here fail to carry their burden for three related reasons: (1) it is uncontested that they knew from the beginning that the Trustee intended to block any dissipation of the Merkin Defendants assets that would impinge upon the Trustee s ability to collect on the BLMIS estate s claims; (2) it is uncontested that the Trustee and Defendants were engaged in bona fide settlement negotiations during the asserted period of delay; and (3) it was the NYAG s and Receivers obligation to seek relief from the automatic stay prior to bringing suit. Because the NYAG and Receivers never sought relief from the automatic stay despite the Trustee s warnings, and because the Merkin Defendants insisted that any settlement with the NYAG and Receivers would have to resolve the Trustee s claims as well, the Trustee had every assurance that the NYAG and Receivers could not take the Merkin Defendants assets out of turn. Only when Defendants announced a settlement struck behind his back did the Trustee have cause to file suit. For these reasons, the Defendants asserted laches defense to the Trustee s application for a preliminary injunction necessarily fails. ARGUMENT I. Laches Fails Because Defendants Were on Notice of the Trustee s Position from the Very Beginning and Cannot Plausibly Claim Any Unfair Surprise Laches does not lie here because the NYAG and the Receivers for the Ariel, Gabriel, and Ascot Funds have been on notice since 2009 that the Trustee would seek to enjoin any action by them to dissipate the Merkin Defendants assets. (See Supp. Sheehan Decl ) As the Trustee explained then, their actions against the Merkin Defendants violated the automatic stay 1

6 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 6 of 11 and threatened to impact negatively the BLMIS estate. (Id. 9.) On that basis, the Trustee stated that if they sought to collect money damages, the Trustee would sue. (Id. 10.) The NYAG acknowledges the Trustee s repeated notices to that effect. (Jan. 25, 2013 Ellenhorn Decl. 14 (In 2009, the Trustee informed the AG he would seek to enjoin the AG s action unless the AG agreed to turn over any funds he might obtain from Merkin to the Trustee. ); id. 15 (In 2011, the Trustee threatened to sue the AG to enjoin implementation of any [non-global] settlement with Merkin. ).) Given the Trustee s objections and the widely known circumstances of the Madoff recovery effort, any claim by the NYAG or Receivers that they expected to collect assets held by the Merkin Defendants, completely unimpeded by the Trustee, would beggar belief. Understandably, they claim no such thing. But their undisputed notice of the Trustee s intentions defeats any claim of laches here. Laches is not available where a defendant cannot claim to have been unfairly surprised by, nor can it claim to have been unable to plan to account for, a dispute of which it was promptly informed. Veltri v. Bldg. Serv. 32B-J Pension Fund, 393 F.3d 318, (2d Cir. 2004). On that basis, the Second Circuit rejected a pension fund s argument that a retiree s lawsuit, filed some eleven years after he first objected to his monthly payment, was barred by laches. Id. It was enough, the court explained, that the retiree in fact informed the Fund of his concern within months of the initial determination. Id. at 326. See also EEOC v. Local 638, 753 F.2d 1172, 1179 (2d Cir. 1985), aff d, Local 28 v. EEOC, 478 U.S. 421 (1986) (rejecting laches defense where Defendants had ample notice that plaintiffs were dissatisfied ); In re Gucci (Gucci v. Sinatra), 197 Fed. App x 58, (2d Cir. 2006) ( [I]n this Circuit, a defendant must establish... that he lacked knowledge that the claim might be asserted against him[.] ); NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246, 261 (2d Cir. 2012) (rejecting laches defense 2

7 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 7 of 11 where nation was on notice, five years before suit, that bondholders might sue); Hutton Constr. Co., Inc., v. Cnty. of Rockland, 52 F.3d 1191, 1193 (2d Cir. 1995) (rejecting laches argument where adverse party had notice the Sureties might assert their rights ); King v. Innovation Books, 976 F.2d 824, (2d Cir. 1992) (rejecting laches defense where author voice[d] his objections to defendants as soon as he learned of their course of conduct); DeSilvio v. Prudential Lines, Inc., 701 F.2d 13, 17 (2d Cir. 1983) (rejecting laches defense because the defendant was on notice of the accident and a probable lawsuit ). Likewise, Defendants here cannot claim any unfair surprise, in light of the Trustee s specific and repeated threats to sue. The Trustee s letters and other communications specifically stating his intention to sue also provided far clearer, more specific notice than has been held sufficient to defeat laches. See Local 638, 753 F.2d at 1179 (no laches where plaintiffs complained, albeit informally, to defendants... on many occasions ); Vaupel Textilmaschinen KG v. Meccanica Euro Italia SPA, 944 F.2d 870, 878 (Fed. Cir. 1991) (rejecting laches defense based on a sampling of the communications indicating that [the defendant] believed during the years in question that it was threatened with litigation); Saratoga Vichy Spring Co., Inc. v. Lehman, 625 F.2d 1037, 1041 (2d Cir. 1980) ( A simple warning letter would have sufficed. ). Moreover, the law favors less drastic methods of providing notice, such as voicing objections, over rashly filing suit. Local 638, 753 F.2d at 1179; Vaupel, 944 F.2d at 878 ( Patentees should be encouraged to avoid litigation.... ). And once notice has been provided, additional warnings would be superfluous, telling the [potential defendant] what he already knew. Id. Here, given the Trustee s early, repeated, specific, and consistent warnings that he would sue to enjoin dissipation of the Merkin Defendants assets, Defendants have no basis to complain that the Trustee s action to follow through on those warnings came as any surprise. 3

8 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 8 of 11 II. Laches Fails Because the Trustee Did Not Sleep on His Rights But Was in Active Negotiation with the Defendants [W]here plaintiff has not slept on her rights, but has been prevented from asserting them... because of ongoing settlement negotiations, the delay is reasonable and the equitable defense of laches will not bar an action. Stone v. Williams, 873 F.2d 620 (2d Cir. 1989), vacated on rehearing, 891 F.2d 401 (2d Cir. 1989) (no laches due to defendants unclean hands). See also Aukerman, 960 F.2d at 1034 (plaintiff s negotiations with the accused excuse any delay); United Merchs. & Mfrs., Inc. v. K. Gimbel Accessories, Inc., 294 F. Supp. 151 (S.D.N.Y. 1968) (no laches where the plaintiff engaged in protracted but unsuccessful settlement negotiations prior to filing injunction action). The timeline of the Trustee s engagement with the NYAG and Receivers belies any claim that he slept on his rights through inaction. In June 2009, the Trustee began negotiations with the NYAG and Merkin Defendants to prevent the imminent dissipation of proceeds from the sale of the Merkin Defendants artwork. (Supp. Sheehan Decl. 8). The Trustee then began settlement negotiations with the Receivers in August 2009, exchanging proposed terms. (Id , Exs. G I.) And the NYAG intermittently sought to engage the Trustee in broader settlement negotiations, ultimately meeting with the Trustee and Merkin Defendants in November 2010 in an attempt to strike a global settlement of all parties claims. (See id. 16.) With and without the Trustee s direct participation, global settlement discussions continued through May 2012, with the Merkin Defendants conditioning their participation on the Trustee s participation, thereby protecting the Trustee s interests. (Id ) But two months later, the NYAG announced a settlement excluding the Trustee, prompting the Trustee to follow through on his earlier threat to sue the AG to enjoin implementation of any settlement with Merkin. (Id. 19, ) 4

9 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 9 of 11 While a plaintiff cannot simply sleep on his rights, he has no obligation to sue until the likelihood of a threat to his interest looms large and his right to protection [has] clearly ripened. ProFitness v. Pro-Fit Orthopedic, 314 F.3d 62, 68 (2d Cir. 2002) (quotation marks omitted). The Trustee expected to participate in a negotiated global settlement, and then brought suit as soon as he learned that the NYAG crossed the line he had drawn collecting money from the Merkin Defendants, Supp. Sheehan Decl. 10 and his need for protection was ripe. A finding of laches would only reward the Defendants for striking a settlement behind the Trustee s back after years of negotiations, undermining the interest of encouraging disputants to settle claims prior to the institution of litigation. Mogavero v. McLucas, 543 F.2d 1081, 1083 (4th Cir. 1976). III. Laches Fails Because It Was the Defendants Obligation To Seek To Lift the Automatic Stay Where a party s claims implicate the automatic stay, the onus is on the party seeking to proceed to petition the Bankruptcy Court for relief from the stay. ACandS, Inc. v. Travelers Cas. & Sur. Co., 435 F.3d 252, 259 (3d Cir. 2006) (Alito, J.). This is because a Section 362 stay is automatic in that the debtor does not have to make any formal request that it be issued or that it apply to a particular proceeding. Id. On that basis, the Third Circuit vacated a district court s decision affirming an arbitration award in favor of an insurance company that threatened to dissipate potential property of a bankruptcy estate. Id. It explained that the panel should have halted the arbitration once it became apparent that proceeding further could negatively impact the bankruptcy estate. Id. It made no difference that the property at issue has not matured, has no cash surrender value and is otherwise contingent and therefore was not yet definitively property of the estate. Id. at 260. Finally, the court specifically rejected the insurance company s argument that equity precludes application of the stay in that case, reasoning that 5

10 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 10 of 11 equitable power to grant relief from an automatic stay rests only with the bankruptcy court and only in the context of a petition for relief from the stay. Id. at 261 (quoting Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1992)). See also In re Fugazy Express, Inc. (Shimer v. Fugazy), 982 F.2d 769, 776 (2d Cir. 1992) (holding that Section 362 requires that a party seeking relief from the automatic stay move the bankruptcy court); A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 1001 (4th Cir. 1986) ( [Section 362](a)(3) directs stays of any action, whether against the debtor or third-parties, to obtain possession or to exercise control over property of the debtor. ); cf. SIPC v. Barbour, 421 U.S. 412, 416 (1975) (in SIPA context). Here, the NYAG s and Receivers actions plainly seek to recover at least some of the same property that the Trustee seeks to recover as property of the BLMIS estate that had been fraudulently conveyed to the Merkin Defendants. In particular, the Receivers actions seek, inter alia, disgorgement or restitution of fees or profits from BLMIS and imposition of a constructive trust over all assets of the Merkin Defendants, while the NYAG s action seeks a substantial portion of the Merkin Defendants assets. Whatever disputes there may be over the extent of the Trustee s likely recovery of BLMIS estate property from the Merkin Defendants, there can be no question that the relief sought by the NYAG and Receivers which, again, extends to all of the Merkin Defendants assets necessarily impinges upon it and therefore must negatively impact the bankruptcy estate. ACandS, 435 F.3d at 259. Because the Defendants ignored their resulting obligation to petition the bankruptcy court for relief from the stay, they may not now claim equitable ratification of their unwise decision to engage in self-help in derogation of the automatic stay. In re Fugazy, 982 F.2d at 776. CONCLUSION For the foregoing reasons, and the reasons set forth in the Trustee s opening papers and reply memorandum, the Trustee respectfully requests that the Court grant his Application. 6

11 Case 1:12-cv JSR Document 43 Filed 04/03/13 Page 11 of 11 Respectfully submitted, Date: New York, New York April 3, 2013 Of Counsel: David B. Rivkin, Jr. Lee A. Casey Andrew M. Grossman Baker & Hostetler LLP Washington Square, Suite Connecticut Avenue, NW Washington, DC Telephone: (202) Facsimile: (202) /s/ David J. Sheehan Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York Telephone: (212) Facsimile: (212) David J. Sheehan Deborah H. Renner Tracy L. Cole Keith R. Murphy 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 - 7 -