Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 1 of 31 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK In re: FAIRFIELD SENTRY LIMITED, et al., 11 CIV. 5905 (AT) MEMORANDUM OF LAW IN SUPPORT OF TRUSTEE S MOTION TO INTERVENE Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York 10111 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
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 2 of 31 TABLE OF CONTENTS Page PRELIMINARY STATEMENT...1 BACKGROUND...3 I. THE TRUSTEE S SETTLEMENT WITH FAIRFIELD SENTRY...5 II. III. THE FGG MANAGEMENT DEFENDANTS ATTACK ON THE LIQUIDATORS ASSIGNMENT OF CLAIMS AGAINST THEM TO THE TRUSTEE...6 MORNING MIST S MOTION TO THIS COURT...7 ARGUMENT...11 THE TRUSTEE S MOTION TO INTERVENE TO BE HEARD ON THE MERITS SHOULD BE GRANTED...11 I. The Trustee is Entitled to Intervene...12 A. The Trustee s Motion is Timely 12 1. The Trustee moved as soon as his interests were implicated.... 13 2. The Trustee s intervention does not prejudice any party.... 15 3. The Trustee would suffer significant prejudice if intervention were denied.... 17 4. The unusual circumstances of this case demonstrate timeliness.... 19 B. The Trustee Has a Direct, Substantial, and Legally Protectable Interest in the Matter of the Action that Cannot Be Adequately Protected by the Existing Parties 20 C. The Trustee s Interest Is Not Adequately Represented by the Parties to This Action 21 D. Without Intervention, The Trustee s Interests Will Be Compromised 22 II. The Trustee Meets the Standard for Permissive Intervention...23 A. The Trustee s Motion Is Timely 23 B. The Trustee s Motion Raises Identical Questions of Law and Fact and the Trustee s Participation Will Assist the Court 24 C. The Trustee s Intervention Will Not Unduly Delay or Prejudice the Adjudication of the Original Parties Rights 25 - i -
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 3 of 31 TABLE OF AUTHORITIES CASES Page(s) Aristocrat Leisure Ltd. v. Deutsche Bank Trust Co. Americas, 2005 WL 751914 (S.D.N.Y. March 31, 2005)...21 Brennan v. N.Y.C. Bd. of Educ., 260 F.3d 123 (2d Cir. 2001)...12, 20, 24 CARS (Citizens Against Retail Sprawl) v. U.S. Army Corps of Engineers, 2007 WL 2778605 (W.D.N.Y. Sept. 18, 2007)...14, 18 Cook v. Bates, 92 F.R.D. 119 (S.D.N.Y. 1981)...17 Diduck v. Kaszycki & Sons Contractors, Inc., 149 F.R.D. 55 (S.D.N.Y. 1993)...20, 24 Dow Jones & Co., Inc. v. U.S. Dep't of Justice, 161 F.R.D. 247 (S.D.N.Y. 1995)...12, 15, 21 Enron Power Mktg., Inc. v. City of Santa Clara (In re Enron Power Mktg., Inc.), 2003 WL 68036 (S.D.N.Y. Jan. 8, 2003)...15 In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010)...9 Hoblock v. Albany County Bd. Of Elections, 233 F.R.D. 94 (N.D.N.Y. 2005)...22, 24 Home Ins. Co. v. Liberty Mut. Ins. Co., 1990 WL 188925 (S.D.N.Y. Nov. 20, 1990)...15 Kaliski v. Bacot (In re Bank of New York Derivative Litig.), 320 F.3d 291 (2d Cir. 2003)...23 Kashani v. Fulton (In re Kashani), 190 B.R. 875 (9th Cir. BAP 1995)...15 Katzman v. Victoria s Secret Catalogue, 923 F.Supp. 580 (S.D.N.Y. 1996)...22 Louis Berger Grp., Inc. v. State Bank of India, 802 F. Supp. 2d 482 (S.D.N.Y. 2011)...12, 21 - ii -
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 4 of 31 TABLE OF AUTHORITIES (continued) Page(s) Miller v. Silbermann, 832 F. Supp. 663 (S.D.N.Y. 1993)... passim Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d. 127 (2d Cir. April 16, 2013)...9 New Jersey Carpenters Health Fund v. Residential Capital, LLC, 2010 WL 5222127 (S.D.N.Y. Dec. 22, 2010)...18 Pereira v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 2006 WL 1982789 (S.D.N.Y. July 12, 2006)...12, 13, 18 Picard v. Fairfield Sentry Limited, et al., No. 09-01239 (Bankr. S.D.N.Y.)...8 Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. Jul. 28, 2011)...3, 6, 7, 8 R Best Produce, Inc. v. Shulman-Rabin Mktg. Corp., 467 F.3d 238 (2d Cir. 2006)...23 Russell v. Board of Plumbing Examiners of the County of Westchester, 74 F.Supp.2d 349 (S.D.N.Y. 1999)...22 Stewart v. Atwood, 834 F. Supp.2d 171 (W.D.N.Y. 2012)...23 In re Tribune Co. Fraudulent Conveyance Litig., 291 F.R.D. 38 (S.D.N.Y. 2013)...19 U.S. Postal Serv. v. Brennan, 579 F.2d 188 (2d Cir. 1978)...12 Underwood v. State of N.Y. Office of Court Admin., 1983 WL 504 (S.D.N.Y. Apr. 29, 1983)...16 United States v. Pitney Bowes, Inc., 25 F.3d 66 (2d Cir. 1994)...13, 15 Werbungs Und Commerz Union Austalt v. Collectors' Guild, Ltd., 782 F. Supp. 870 (S.D.N.Y. 1991)...13, 15, 21 STATUTES 11 U.S.C. 362...9 11 U.S.C. 1520(a)(1)...9 - iii -
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 5 of 31 TABLE OF AUTHORITIES (continued) Page(s) 15 U.S.C. 78aaa et seq....1 15 U.S.C. 78eee(a)(4)(A)...3 15 U.S.C. 78eee(b)(4)...3 28 U.S.C. 157(d)...15 RULES Fed. R. Bankr. P. 5011(c)...14 Fed. R. Civ. P. 24...1, 2, 12, 20 Fed. R. Civ. P. 24(a)... passim Fed. R. Civ. P. 24(b)...12, 23, 24, 25 OTHER AUTHORITIES 7C Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure 1908 (2d ed. 1986 & Supp. 2004)...22 - iv -
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 6 of 31 Irving H. Picard (the Trustee ), as trustee for the liquidation of Bernard L. Madoff Investment Securities LLC ( BLMIS ), and the substantively consolidated estate of Bernard L. Madoff ( Madoff ), individually, under the Securities Investor Protection Act ( SIPA ), 15 U.S.C. 78aaa et seq., by and through his undersigned counsel, respectfully submits this memorandum of law in support of his motion ( Motion ) to intervene in the above referenced action. PRELIMINARY STATEMENT Under Rule 24 of the Federal Rules of Civil Procedure, the Trustee must be permitted to intervene in this matter in order to protect his interests in an assignment of claims against Fairfield Greenwich Group s ( FGG ) management entities and individuals. This assignment was one of the key elements of consideration in the negotiated settlement between the Trustee and the Liquidator of Fairfield Sentry Limited in the BLMIS SIPA proceeding. The settlement was approved by the Bankruptcy Court overseeing the BLMIS SIPA proceeding, as well the British Virgin Islands court responsible for Fairfield Sentry s liquidation. The approval was not appealed in either court, and after the settlement became final and non-appealable the parties took steps effectuating the settlement, including payments of in excess of one hundred million dollars. Morning Mist s argument that Fairfield Sentry s assignment to the Trustee is invalid under SIPA is without merit. This argument previously was rejected by the Bankruptcy Court in the BLMIS SIPA proceeding, was never raised in the approval of the settlement in the British Virgin Islands proceeding, was never appealed in the BLMIS SIPA proceeding, and, when raised by FGG Management, was squarely rejected by Judge Rakoff in his December 13, 2013 ruling. Until this point, the only issue ever before this Court was whether it should withdraw the reference of a possible, and, per the Trustee s view, under the express terms of the settlement
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 7 of 31 agreement an unnecessary, motion to approve the assignment in the Liquidators Chapter 15 proceeding. When Morning Mist sought to withdraw the reference, the Trustee had no reason to oppose Movant s motion. It made no difference to the Trustee s interests whether the issue of the assignment s propriety under SIPA was heard by the Bankruptcy Court or by this Court. In the interim, this very issue was decided by another Judge of this Court. It does not appear that this Court was advised that in May 2012, Judge Rakoff partially withdrew the reference of the Trustee s avoidance action against the FGG Management Defendants for the purpose of hearing this issue, or that Judge Rakoff s decision on this legal question in December 2013 concerned the exact assignment at issue in the Movant s motion. The Trustee seeks to intervene for the purpose of addressing the merits of the issue for which withdrawal was granted. No party will be prejudiced by the Trustee s motion, which is timely and necessary to protect the Trustee s direct, substantial, and protectable interest in his ability to accept this and other assignments under SIPA. Indeed, the Liquidator has already informed this Court that it does not oppose and consents to the Trustee s proposed intervention. The merits of this issue were implicated only after the Court withdrew the reference on January 8, 2014, following which there has been no litigation. By contrast, denial of his Motion and an adverse decision on the merits would prejudice the Trustee by: (1) creating inconsistent rulings within this District, (2) interfering with a significant element of a final, court approved settlement between the Trustee and the Liquidators, (3) preventing the Trustee from asserting claims in a separate action against the FGG management entities and individuals, and (4) undermining the Trustee s mandate to recover and equitably distribute monies to BLMIS customers victimized by Madoff s fraud. To prevent such dire consequences the Trustee must be permitted to intervene pursuant to Fed. R. Civ. P. 24. 2
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 8 of 31 BACKGROUND As is publicly well known, Madoff conducted the largest Ponzi scheme in financial history through the investment advisory business of BLMIS. See Picard v. HSBC Bank PLC, 454 B.R. 25, 33 (S.D.N.Y. Jul. 28, 2011). On December 11, 2008, Madoff was arrested by federal agents for criminal violations of federal securities laws, including, inter alia, securities fraud, investment adviser fraud, and mail and wire fraud. (Declaration of Tracy Cole, February 28, 2014 [hereinafter, Cole Dec.], Ex. 1 at 10.) Contemporaneously, the Securities and Exchange Commission ( SEC ) filed a complaint in this Court commencing a proceeding against Madoff and BLMIS, which remains pending in this Court. (Cole Dec., Ex. 2.) The SEC complaint alleged Madoff and BLMIS engaged in fraud through the investment adviser activities of BLMIS. Id at 1. On December 12, 2008, this Court appointed a receiver for the assets of BLMIS. (Cole Dec., Ex. 1 at 11.) On December 15, 2008, pursuant to 15 U.S.C. 78eee(a)(4)(A), the SEC consented to a combination of its own action with an application of the Securities Investor Protection Corporation ( SIPC ). (Cole Dec., Ex. 1 at 12.) On the same day, Judge Stanton of this Court granted SIPC s application and entered an order pursuant the Securities Protection Act ( SIPA ) which removed the receiver, appointed the Trustee, and removed the case to the United States Bankruptcy Court for the Southern District Court of New York (the Bankruptcy Court ) pursuant to 15 U.S.C. 78eee(b)(4) (the SIPA Proceeding ). (Cole Dec., Ex. 1 at 13.) Among the investors in Madoff s Ponzi scheme were so-called feeder funds, which were investment funds that had accounts at BLMIS and also had their own shareholders. (Cole Dec., Ex. 3 at 2.) Founded and managed by entities and individuals associated with the Fairfield Greenwich Group (the FGG Management Defendants ), Fairfield Sentry Limited ( Fairfield Sentry ) was the largest BLMIS feeder fund. (Cole Dec., Ex. 4 at 2.) Through a labyrinth of 3
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 9 of 31 companies and partnerships, the FGG Management Defendants operated Fairfield Sentry, its two currency feeders, and other funds in exchange for management and performance fees. (Cole Dec., Ex. 4 at 2.) Fairfield Sentry withdrew more than $3.2 billion from BLMIS during the six years prior to the filing date of BLMIS s liquidation, including $1.6 billion during the two years prior to the filing date. (Cole Dec., Ex. 1 at 536-37.) After the commencement of the SIPA Proceeding, the Trustee filed an adversary proceeding in the Bankruptcy Court against Fairfield Sentry, other FGG managed funds, and the FGG Management Defendants seeking to recover this money. (Cole Dec., Ex. 1.) In the SIPA proceeding, Fairfield Sentry filed a customer claim seeking in excess of $900 million based on the net equity in its BLMIS accounts. (Cole Dec., Ex. 6 at 13.) Shortly thereafter, at the request of various shareholders, Fairfield Sentry and its two currency funds were placed in court supervised liquidation in the British Virgin Islands ( BVI ) and joint liquidators were appointed (the Liquidators ). 1 (Cole Dec., Ex. 5.) The Liquidators filed a proceeding in the Bankruptcy Court under Chapter 15 of the Bankruptcy Code in aid of the liquidation proceeding in the BVI. (Cole Dec., Ex. 7 at 5.) On July 22, 2010, the Bankruptcy Court granted the Liquidators request for Chapter 15 recognition. (Cole Dec., Ex. 7 at 10.) Similarly, the Liquidators filed proceedings in the BVI and the Bankruptcy Court seeking recoveries against a number of parties that redeemed shares of Fairfield Sentry or received moneys from Fairfield Sentry during the applicable statutory periods prior to the filing of the Fairfield Sentry Liquidation and/or Chapter 15 proceeding. (Cole Dec., Ex. 9 at Ex. A.) Among those cases were claims filed against the FGG Management Defendants. (Cole Dec., Ex. 8.) 1 Originally, joint liquidators were appointed for Fairfield Sentry. After resignations and other appointments, currently Kenneth Krys is the sole liquidator of Fairfield Sentry. 4
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 10 of 31 Following the appointment of the Liquidators, the Trustee and the Liquidators began settlement negotiations to resolve the issues between them. I. THE TRUSTEE S SETTLEMENT WITH FAIRFIELD SENTRY The Trustee and the Liquidators ultimately were able to reach an agreement (the Fairfield Sentry Settlement ), requiring the approval of both the Bankruptcy Court and the Eastern Caribbean Supreme Court in the High Court of Justice, British Virgin Islands (the BVI Court ) where Fairfield Sentry s liquidation was pending. Because Fairfield Sentry s assets were insufficient to pay the Trustee s claims, the Fairfield Sentry Settlement consisted of several inter-related elements, including, among other things: The Liquidators agreed to pay the Trustee $70 million; The Liquidators agreed to reduce Fairfield Sentry s customer claim in the SIPA Proceeding by $720 million; The Liquidators agreed to immediately and unconditionally assign upon approval of the settlement Fairfield Sentry s claims against the FGG Management Defendants; 2 and The Liquidators and Trustee agreed to share the proceeds of certain recoveries made by either of them, including, but not limited to, the Trustee s recoveries against the FGG Management Defendants. (Cole Dec., Ex. 10 at 22-23.) As required by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, the Trustee filed a motion with the Bankruptcy Court seeking approval of the Fairfield Sentry Settlement. (Cole Dec., Ex. 10.) At the hearing on the Trustee s motion to approve, counsel for the movants in this proceeding ( Movant or Morning Mist ) objected to the settlement on the same grounds raised here. (Cole Dec., Ex. 11 at 30.) In addition to rejecting the merits of 2 The very claims previously filed by Fairfield Sentry against the FGG management and assigned to the Trustee are the same claims which Morning Mist incorrectly claims it can assert in its stayed derivative action. 5
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 11 of 31 Movant s challenge, as discussed below, the Bankruptcy Court noted Movant lacked standing to object to the settlement in the Bankruptcy Court proceeding, as it was not a creditor of BLMIS, and directed it to file any objections in the BVI Court when that court reviewed the settlement. (Cole Dec., Ex. 11 at 27, 30, 38.) Following the hearing, the Bankruptcy Court approved the Fairfield Sentry Settlement conditioned on the BVI Court s approval. (Cole Dec., Ex. 12.) Shortly thereafter the BVI Court approved the Fairfield Sentry Settlement, without any objection by Morning Mist. (Cole Dec., Ex. 13.) Movant appealed neither the BVI Court s nor the Bankruptcy Court s approval of the Fairfield Sentry Settlement, allowing the approval orders in both courts to become final. Since the Fairfield Sentry Settlement was approved and became final and non-appealable, and pursuant to its terms, the Trustee already has distributed more than $53 million on the Fairfield Sentry allowed customer claim; the Liquidators and Trustee have shared recoveries made against certain defendants; and following approval of the recently announced JP Morgan Chase settlement, the Trustee has subsequently distributed approximately $50 million to the Liquidator pursuant to a separate sharing provision of the settlement. (Cole Dec., Ex. 14 at 6.) II. THE FGG MANAGEMENT DEFENDANTS ATTACK ON THE LIQUIDATORS ASSIGNMENT OF CLAIMS AGAINST THEM TO THE TRUSTEE As this Court noted in its Order withdrawing the reference of this case, Judge Rakoff of this Court has been considering a number of issues arising out of the SIPA Proceeding. Of import to the present case is the Trustee s standing to assert claims against the FGG Management Defendants based on the assignment contained in the Fairfield Sentry Settlement. In his July 2011 decision involving HSBC Bank, Judge Rakoff held the Trustee could not obtain standing through the assignment of claims, relying on case law that predated amendments to the Bankruptcy Code and changes in New York substantive law. See Picard v. HSBC Bank PLC, 6
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 12 of 31 454 B.R. 25, 33 (S.D.N.Y. Jul. 28, 2011). At that time, the Trustee s standing as an assignee was hypothetical, as there were no allegations before the Court that the Trustee actually had received any assignments of claims. The FGG Management Defendants seized on the HSBC ruling and filed a motion to withdraw the reference in the Trustee s adversary proceeding against them, which was granted by Judge Rakoff as part of the common briefing process employed in the SIPA Proceeding matters. (Cole Dec., Ex. 15.) Following the withdrawal of the reference, the FGG Management Defendants filed motions to dismiss before Judge Rakoff raising the validity of the Liquidator s assignment to the Trustee of Fairfield Sentry s claims against them. (Cole Dec., Exs. 16, 17.) At the hearing on the consolidated motions to dismiss, the FGG Management Defendants counsel argued that pursuant to Judge Rakoff s prior HSBC ruling, SIPA invalidated the Trustee s assignment of Fairfield Sentry s claims against the FGG Management Defendants. (Cole Dec., Ex. 18 at 5-11.) In response, Trustee s counsel argued the assignment was a key element of the bargained for Fairfield Sentry Settlement, which received final approval by the Bankruptcy and BVI Courts and, in that sense, not unlike aspects of the Katz/Wilpon settlement Judge Rakoff previously approved. (Cole Dec., Ex. 18 at 14.) Trustee s counsel also noted that changes in the Bankruptcy Code and New York substantive law undermined the rationale of the prior decisions Judge Rakoff relied upon in HSBC when he held a SIPA trustee could not prosecute claims assigned to him. (Cole Dec., Ex. 18 at 17-18.) Judge Rakoff agreed with the Trustee, and on December 6, 2013, he ruled the assignment to the Trustee by the Liquidator was valid under SIPA. (Cole Dec., Ex. 3 at 23.) III. MORNING MIST S MOTION TO THIS COURT Movant first raised the argument it makes in this motion when it tried unsuccessfully to object in the Fairfield Sentry Settlement approval proceedings: Morning Mist filed an objection 7
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 13 of 31 to the Settlement on the basis that under the HSBC ruling, a SIPA Trustee does not have standing to accept an assignment of common law claims that would be valid under ordinary bankruptcy law principles. Before ruling Morning Mist lacked standing to object to the settlement, the Bankruptcy Court specifically rejected this argument, stating: You re conflating several different areas here and the issue there [in HSBC] involves standing perhaps under SIPA but what we have here is the normal kind of assignment of a claim, almost in a contractual basis. They are two different things. (Cole Dec., Ex. 11 at 30.) After its argument was rejected, Morning Mist did not move to withdraw the reference of the application for approval of the Fairfield Sentry Settlement from the Bankruptcy Court, nor did it seek reconsideration of or appeal the Bankruptcy Court s approval of the settlement. See generally Docket, Picard v. Fairfield Sentry Limited, et al., No. 09-01239 (Bankr. S.D.N.Y.). In any event, Judge Lifland stated that the BVI Court would be the proper forum to challenge the fairness of the Settlement from the perspective of the Fairfield Sentry estate. The Fairfield Settlement thus became final, and, pursuant to its terms, the assignment of Fairfield Sentry s claims to the Trustee became unconditional[] and irrevocabl[e]. 3 (Cole Dec., Ex. 6 at 5.) Instead, with notice to the Trustee and the Fairfield Liquidators, Morning Mist filed the instant motion to withdraw the reference on August 23, 2011. (Cole Dec., Ex. 19.) Because a motion to withdraw the reference must relate to an underlying proceeding in the Bankruptcy Court, Morning Mist cited to a derivative action it had filed against the FGG Management Defendants in 2009. (Cole Dec., Ex. 20 at 1.) However, before Morning Mist filed the motion to withdraw the reference, the derivative action was stayed by the Bankruptcy Court in July 3 For the avoidance of doubt, the Trustee believes no further action was or is required to effectuate the assignment as the Fairfield Sentry Settlement Agreement s terms required the unconditional and irrevocable assignment at the closing. 8
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 14 of 31 2010, following the Bankruptcy Court s recognition of the Fairfield Liquidators Chapter 15 action in the BVI as a foreign main proceeding. See In re Fairfield Sentry Ltd., 440 B.R. 60, 66 (Bankr. S.D.N.Y. 2010). By statute, the recognition of a foreign main proceeding triggers, among other protections, an automatic stay of all competing actions to collect on claims against or held by the debtor, including derivative actions like those brought by Morning Mist. See 11 U.S.C. 362, 1520(a)(1). Morning Mist unsuccessfully appealed the Bankruptcy Court s recognition of the Chapter 15 proceeding to this Court and the Second Circuit, see Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d. 127, 129 (2d Cir. April 16, 2013) (affirming in all respects the Bankruptcy Court s order granting the BVI proceedings foreign main proceeding recognition under Chapter 15 of the Bankruptcy Code), and did not petition for a writ of certiorari. Accordingly, its derivative action remains stayed unless and until Morning Mist successfully moves for relief from the automatic stay. Unable to challenge the application of the automatic stay, Morning Mist did not move to withdraw the reference of its derivative action. Instead, it requested this Court to withdraw the reference of an application that has not yet been made the anticipated or possible application to approve the assignment of claims against the FGG Management Defendants, which theoretically would be filed by Fairfield Sentry in its Chapter 15 proceeding. (Cole Dec., Ex. 20 at 3.) Morning Mist urged that withdrawal of the reference was mandatory because the Trustee s authority to accept assignments under SIPA requires substantial interpretation of federal law. (Cole Dec., Ex. 20 at 4-5.) Notably, Morning Mist did not ask this Court to determine the merits of its argument: Of course, whether SIPA authorizes the assignment of the claims to Mr. Picard is beyond the scope of this motion. (Cole Dec., Ex. 20 at 5.) (emphasis added). 9
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 15 of 31 Briefing on the motion to withdraw the reference was completed in September 2011. Nearly a year after the briefing on the motion was completed, on October 3, 2012, Morning Mist and the Fairfield Liquidators informed the Court they were engaged in discussion that may obviate the need for a ruling on the pending motion to withdraw the Bankruptcy Court reference and that they would advise the Court promptly if that status should change. (Cole Dec., Ex. 21.) Although the docket indicates a conference was scheduled for November 2012, no such conference is reflected. (Cole Dec., Ex. 22.) Instead, other than the reassignment of this case in May 2013, the only other docket entry after November 5, 2012 is a letter from the Liquidator on October 3, 2013 informing the Court that the parties did not come to an agreement and the withdrawal motion remained sub judice. (Cole Dec., Ex. 23.) The letter reiterated that no application to approve the assignment of claims, the subject of the withdrawal motion, had been filed. (Cole Dec., Ex. 23.) On January 8, 2014, this Court granted the motion to withdraw the reference. (Cole Dec., Ex. 24 at 1.) It found that it was not premature to decide the issue of whether withdrawal was required because judicial economy favored resolution of the issue and because the grounds for withdrawal were apparent from the face of the Settlement and from the Liquidators statement that they intended to file the application that was the subject of the withdrawal motion. (Cole Dec., Ex. 24 at n.5.) As to whether the Movant s arguments raised substantial issues of federal law, the Court noted that Judge Rakoff had determined that withdrawal was mandatory in order to determine the validity of the Trustee s receipt of assignments under SIPA, and held that because this Court must engage in statutory interpretation of SIPA, as Judge Rakoff did, to resolve this potential conflict, withdrawal of the reference was required because the issue implicated significant 10
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 16 of 31 interpretation of federal law. (Cole Dec., Ex. 24 at 9.) The Court noted that it expresses no opinion as to how this issue will be resolved. (Cole Dec., Ex. 24 at 9.) During the time period the parties appear to have been in discussions that might have obviated the need for action in this case, in May 2012, Judge Rakoff withdrew the reference of several of the Trustee s avoidance actions for the purpose of determining certain common standing and SLUSA issues that had been raised by multiple defendants. (Cole Dec., Ex. 25.) As detailed above, the Trustee s action against the FGG Management Defendants was among the cases withdrawn, and the Liquidator s assignment of Fairfield Sentry s claims was among the specific assignments upheld by Judge Rakoff s decision of December 6, 2013. (Cole Dec., Ex. 3 at 23.) The Trustee was notified of this Court s Order by the Fairfield Liquidators on or about January 8, 2014, and he contacted the Court to request a pre-motion conference on his proposed motion to intervene on January 28, 2014. 4 The Court ordered briefing on the Trustee s motion to intervene on January 30, 2014. ARGUMENT THE TRUSTEE S MOTION TO INTERVENE TO BE HEARD ON THE MERITS SHOULD BE GRANTED The Trustee respectfully requests that this Court grant his motion to intervene as of right under Federal Rule of Civil Procedure 24(a) because the Trustee plainly has an interest, unrepresented by the parties, in the same property and transactions that are the subject of this action that would be impaired if the Trustee were not permitted to appear. He satisfies all factors 4 Because of the lapse of time between the filing of Movants motion and the Court s decision, Trustee s counsel mistakenly stated that he had not been given notice of the motion at the time it was filed; he subsequently corrected that mistake after it was pointed out to him by counsel for Movant. 11
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 17 of 31 required by that rule. Alternatively, he requests that this Court permit him to intervene under Rule 24(b). I. THE TRUSTEE IS ENTITLED TO INTERVENE Under Rule 24 of the Federal Rules of Civil Procedure, a party may intervene in any action as a matter of right upon timely motion when the applicant: claims an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant s ability to protect its interest, unless existing parties adequately represent that interest. Fed. R. Civ. P. 24(a)(2). Rule 24 is liberally construed in favor of permitting intervention. See U.S. Postal Serv. v. Brennan, 579 F.2d 188, 193 n.2 (2d Cir. 1978). Courts consider four factors in considering intervention under Rule 24(a)(2): (1) whether the motion is timely filed; (2) the movant s interest in the litigation; (3) whether disposition of the action may, as a practical matter, impair or impede the movant s ability to protect its interest; and (4) whether the movant s interest is adequately represented by the parties to the action. Brennan v. N.Y.C. Bd. of Educ., 260 F.3d 123, 128-29 (2d Cir. 2001); Louis Berger Grp., Inc. v. State Bank of India, 802 F. Supp. 2d 482, 487 (S.D.N.Y. 2011) (observing that [u]nder Rule 24(a)(2)..., the Court must grant an intervention by right when a party satisfies the four factors (emphasis added)). A. The Trustee s Motion is Timely The Trustee moved to intervene promptly when this Court determined to hear the merits of Movant s argument, and therefore implicated the Trustee s interest in his rights to accept this and other assignments. The timeliness of a motion to intervene must be based on all the circumstances of the case. Dow Jones & Co., Inc. v. U.S. Dep't of Justice, 161 F.R.D. 247, 251 (S.D.N.Y. 1995); see also Pereira v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 2006 WL 12
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 18 of 31 1982789, at *10 (S.D.N.Y. July 12, 2006); Werbungs Und Commerz Union Austalt v. Collectors' Guild, Ltd., 782 F. Supp. 870, 874 (S.D.N.Y. 1991). Factors that inform the timeliness determination include: how long the motion to intervene was delayed, whether the existing parties were prejudiced by that delay, whether the movant will be prejudiced if the motion is denied, and unusual circumstances militating either for or against a finding of timeliness. See Pereira, 2006 WL 1982789, at *10. Each of these factors supports the Trustee. 1. The Trustee moved as soon as his interests were implicated. First, the Trustee did not delay in filing this motion. Morning Mist has argued that the Trustee s intervention is untimely because Morning Mist made the Trustee aware of its motion in August 2011, and the Trustee sat and did nothing until after the Court granted it. But whether intervention is timely sought cannot be so confined strictly to chronology. United States v. Pitney Bowes, Inc., 25 F.3d 66, 70-71 (2d Cir. 1994). Morning Mist s motion did not require any action from the Trustee because the only issue it raised was which court would hear its challenge to the assignment: this Court or the Bankruptcy Court. As this Court noted, the decision whether or not to withdraw the reference is based solely on whether a dispute requires a significant interpretation of federal law; it is not a determination of the merits of that dispute. (Cole Dec., Ex. 24 at 9 ( [T]he Court, in finding that this potential conflict poses a difficult question of non-bankruptcy federal law, expresses no opinion as to how this issue will be resolved. ).) A party has no obligation to intervene in an action until his interests are directly affected. See, e.g., Werbungs Und Commerz Union Austalt, 782 F.Supp.at 872-74 (although movant was directly and indirectly involved in litigation for two years prior to filing its motion to intervene, intervention motion was timely because it did not have a direct interest in the action until a party moved to compel payment of the bond secured by the movant); Pereira, 2006 WL 13
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 19 of 31 1982789 (intervention motion nearly two years after filing of action was timely when intervenors were not aware of their direct interest in D&O insurance proceeds until another case against them was remanded for trial); CARS (Citizens Against Retail Sprawl) v. U.S. Army Corps of Engineers, 2007 WL 2778605, *2 (W.D.N.Y. Sept. 18, 2007) (intervenors interest in land that was subject of litigation was not in jeopardy until court issued stay; intervention was timely). This is not a case in which the Trustee seeks to intervene in an ongoing litigation in which he had not previously participated. Multiple proceedings have been filed and litigated in the Bankruptcy Court involving Movant, the Liquidators and/or the Trustee since 2009, and those proceedings remain pending and, where not stayed, heavily litigated. Nor did Morning Mist bring any new or independent claim or action by filing its motion in this Court. Instead, the sole relief sought by its motion was the withdrawal from a bankruptcy court to an Article III court of an underlying proceeding (albeit one that has not been filed) in order to consider a discrete legal issue. Unless and until a motion to withdraw the reference is granted by the district court, the underlying proceeding remains in the bankruptcy court. See Fed. R. Bankr. P. 5011(c) ( The filing of a motion for withdrawal of a case or proceeding... shall not stay the administration of the case or any proceeding therein before the bankruptcy judge except that the bankruptcy judge may stay, on such terms and conditions as are proper, proceedings pending disposition of the motion. ) Thus, until this Court withdrew the reference in January 2014, the forum for the merits of this dispute to the extent any forum existed remained the Bankruptcy Court. It would have been inappropriate and unnecessary for the Trustee to seek intervention before this Court for the purpose of being heard on the merits. Once the district court refers the case to the bankruptcy court, unless the district court withdraws the reference, in whole or part pursuant to 14
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 20 of 31 28 U.S.C. 157(d), the case is within the subject matter jurisdiction of the bankruptcy court. Enron Power Mktg., Inc. v. City of Santa Clara (In re Enron Power Mktg., Inc.), 2003 WL 68036, *11 (S.D.N.Y. Jan. 8, 2003) (quoting Kashani v. Fulton (In re Kashani), 190 B.R. 875, 884 (9th Cir. BAP 1995)). Indeed, Movants themselves expressly admitted that, [o]f course, whether SIPA authorizes the assignment of the claims to [the Trustee] is beyond the scope of this motion. (Cole Dec., Ex. 20 at 5). Having acknowledged, as they must, that the merits of the legal issue they sought to bring before this Court was beyond the scope of their motion to withdraw the reference, they cannot now argue that the Trustee was obligated to oppose that motion or forever lose his ability to be heard on the merits of this issue. 2. The Trustee s intervention does not prejudice any party. The timing of this Motion does not prejudice any party to it. The determination of timeliness of a motion to intervene must be based on all the circumstances of the case. Dow Jones & Co., f Justice, 161 F.R.D. at 251(emphasis added); see also Werbungs Und Commerz Union Austalt, 782 F. Supp. at 874. The most important criterion in determining timeliness is whether the delay in moving for intervention has prejudiced any of the existing parties, Miller v. Silbermann, 832 F. Supp. 663, 669 (S.D.N.Y. 1993). Absent any significant prejudice to the existing parties, courts usually consider an application for intervention as timely. Home Ins. Co. v. Liberty Mut. Ins. Co., 1990 WL 188925 (S.D.N.Y. Nov. 20, 1990). Putting aside the question of when the Trustee s interests were implicated, the lack of any prejudice to Movants independently precludes any claim of untimeliness. [T]he time lapsed between notice of an interest in pending litigation and an application to intervene is only one of several factors a district court must weigh when deciding the issue of timeliness; the determination certainly is not confined strictly to chronology. Pitney Bowes, 15
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 21 of 31 Inc., 25 F.3d at 70-71 (emphasis added). Even if the Trustee s interests had been implicated in 2011 (which they were not), the motion to withdraw the reference in the current action was granted only on January 8, 2014, and briefing on the merits has not yet taken place. Between the time the withdrawal motion was fully submitted in late September 2011 and the Court s decision in January 2014, the only docketed activity in this matter was correspondence indicating that at least between October 1, 2012 and October 3, 2013, this Court was asked to refrain ruling on the motion while the parties were engaged in settlement negotiations. Thus, the Trustee s intervention, prior to any substantial movement in the litigation before this Court, would not cause prejudice to the parties. See Underwood v. State of N.Y. Office of Court Admin., 1983 WL 504 (S.D.N.Y. Apr. 29, 1983) ( the point to which suit has progressed is a factor to consider in determining whether the motion is timely); Miller, 832 F.Supp. at 669 (proposed intervenors motion was timely where they sought intervention three years after original complaint was filed but promptly after learning an amended complaint would be filed and case would be taken off the suspense docket; [h]aving suspended this action in the hopes that the parties would resolve their dispute, the Court will not now penalize the Proposed Intervenors for failing to move when the action was first brought. ). Moreover, the proceeding that is the subject of the withdrawal motion has, to this day, not been instituted. (Cole Dec., Ex. 23.) Indeed, one of the issues before this Court was whether Movant s motion was premature given that no application to approve the settlement had been filed. This Court withdrew the reference based on the Fairfield Liquidators statement that they will be filing an application to approve the assignment at some undetermined time in the future, which will implicate a legal issue that is apparent from the face of the settlement. While the Trustee disagrees that such an application is necessary, to the extent it is the basis for the 16
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 22 of 31 withdrawal this Court has recognized that the parties have not yet instituted, much less begun litigating, the underlying proceeding. For these reasons, the parties will suffer no prejudice by allowing the Trustee to intervene as a stakeholder in the action at this point. To the contrary, the Liquidator fully supports and welcomes the Trustee s intervention in the matter. (See Cole Dec., Ex. 26.) Under these circumstances, there is no basis for a finding of untimeliness. See Cook v. Bates, 92 F.R.D. 119, 122 (S.D.N.Y. 1981) ( In the absence of prejudice to the opposing party, even significant tardiness will not foreclose intervention. Since nothing has been done in this litigation but await a resolution of the related state proceedings, defendants will suffer no prejudice from a grant of the motion. ). 3. The Trustee would suffer significant prejudice if intervention were denied. By contrast, the Trustee will suffer significant prejudice if he is not allowed to intervene in the present action. The Court s withdrawal of the reference has implicated the Trustee s right to prosecute the claims assigned under the Fairfield Sentry Assignment and all other assignments he has or stands to receive in connection with the BLMIS Liquidation. Moreover, the Trustee has a global interest in ensuring the finality of settlement agreements and the related distributions he makes in connection with such final, non-appealable approval orders. As the Liquidators noted in their opposition, it is the Trustee s rights under SIPA that Morning Mist seeks to challenge rights that are directly implicated in numerous avoidance actions brought by the Trustee. While Morning Mist s motion to withdraw the reference was pending before this Court, the Trustee briefed, litigated, and argued before Judge Rakoff the merits of this very challenge to the exact assignment raised here, and the Court issued its decision permitting the assignment under SIPA. Putting aside whether the validity of the 17
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 23 of 31 assignment should be re-litigated at all, at a minimum, the Trustee is entitled to defend the results of that litigation and seek to protect himself from inconsistent decisions. Moreover, the possibility of inconsistent decisions, particularly if rendered without the Trustee s participation, would create a needless waste of judicial resources. New Jersey Carpenters Health Fund v. Residential Capital, LLC, 2010 WL 5222127, *3 (S.D.N.Y. Dec. 22, 2010) (finding motion to intervene was timely where failure to add the claims would cause significant prejudice to the proposed intervenors because prosecuting a new action would cause significant duplicative work that could be saved by adding them to the current action and where intervention would not cause great prejudice to existing parties). Finally, the Trustee and the Liquidators have both taken action in reliance on the Fairfield Sentry Settlement, including the distribution by the Trustee of more than $53 million on claims allowed under that Settlement. Moreover, a decision on the merits of this case will directly impact the Trustee s ability to collect and distribute funds for BLMIS customers pursuant to other assignments. See CARS (Citizens Against Retail Sprawl), 2007 WL 2778605, *2 (court found motion to intervene timely in part because the prejudice to proposed intervenor if its motion was denied would be significant where the movant had already committed nearly $8 million toward the development of the land at issue in the litigation, had entered into numerous contracts in preparation for development, and the existing parties face little prejudice from any delay if the movant was allowed to intervene); Pereira, 2006 WL 1982789 at *9-10 (court held motion was timely where proposed intervenors would be prejudiced if the motion was denied because disposition of the action may adversely affect the proposed intervenors' ability to secure insurance proceeds under Defendants' policies, could prevent the proposed intervenors from 18
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 24 of 31 receiving coverage of defense costs and future indemnification for any judgments against them now or in the future). The overwhelming prejudice to the Trustee resulting from the denial of intervention stands in stark contrast to the lack of prejudice, delay, or even inconvenience to the parties. See, e.g., Miller, 832 F. Supp. at 669 (intervention after three years timely where it would not cause any delay, inconvenience, or prejudice to existing parties). Indeed, the Liquidator supports the Trustee s motion. And despite Morning Mist s complaint of the Trustee s extraordinary delay, it has not identified any prejudice it will suffer by the Trustee s intervention but in fact acknowledged it had approached the Trustee about a stipulation allowing it. 4. The unusual circumstances of this case demonstrate timeliness. Finally, it is well settled that courts should consider any unusual circumstances militating for or against a finding of timeliness. In re Tribune Co. Fraudulent Conveyance Litig., 291 F.R.D. 38, 41 (S.D.N.Y. 2013)). Of the more than 1000 avoidance actions brought by the Trustee in connection with the BLMIS liquidation, the action against Fairfield Sentry and the related Fairfield Funds has been among the largest and most involved, with claims of more than $3 billion. The Fairfield Sentry Liquidation has itself spawned several hundred litigation proceedings across a number of countries. Morning Mist has brought, and lost, numerous challenges to the Fairfield Sentry Liquidation and the Fairfield Sentry Settlement since it first filed its derivative action in 2009. Even putting aside all the other factors, the time lapse since Morning Mist filed its motion in 2011 must be evaluated in the context of this case. Such an analysis must include such relevant time periods as the delay because Morning Mist s derivative action has been stayed in bankruptcy court (since 2010), the time between the completion of briefing and any action on this motion (2011 2014), the litigation of the identical issue before Judge Rakoff in the interim (2012 2014) and the time since the Fairfield Settlement was 19
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 25 of 31 approved in the Bankruptcy and BVI Courts and became final without any objection from Morning Mist (since 2011). Equally importantly, any timeliness inquiry must take into account the unusual circumstances that no application for approval of the assignment has been filed, and that before it could rely on any favorable outcome this Court might decide, Morning Mist would first need to move for relief from the automatic stay in the Bankruptcy Court. There has been no extraordinary delay here; to the contrary, in the unique context of this litigation, this motion is at an early and threshold stage. B. The Trustee Has a Direct, Substantial, and Legally Protectable Interest in the Matter of the Action that Cannot Be Adequately Protected by the Existing Parties A movant-intervenor under Rule 24 must show an interest relating to the property or transaction which is the subject of the action. Such an interest must be direct, substantial, and legally protectable, Brennan, 260 F.3d at 129, and be based on a right which belongs to the proposed intervenor rather than an existing party to the suit. Diduck v. Kaszycki & Sons Contractors, Inc., 149 F.R.D. 55, 58 (S.D.N.Y. 1993) (citations omitted). The Trustee s interest in his standing to receive the Fairfield Sentry assignment and in the validity of the Fairfield Sentry Settlement is self-evident. He has already defended against, and fully litigated, Movant s and the FGG Management Defendants challenges at both the Bankruptcy Court and District Court levels. The Trustee s ability to bring the claims assigned to him by the Liquidator is an integral element of the final Fairfield Sentry Settlement, pursuant to which the Trustee already has distributed millions of dollars on allowed claims, and potentially affects hundreds of millions of dollars of future recoveries in his action against the FGG Management Defendants alone. Indeed, Morning Mist has not, because it cannot, challenge the fact the Trustee has an interest to assert in this matter. See, e.g., Brennan, 260 F.3d. at 130 (city employees had direct, substantial and legally protectable interest in settlement agreement for 20
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 26 of 31 claims of employment discrimination reached by government and New York City Board of Education). C. The Trustee s Interest Is Not Adequately Represented by the Parties to This Action It cannot be maintained that the existing parties adequately represent the Trustee s interests. See Louis Berger Grp., Inc., 802 F.Supp.2d at 487-88 ( A party need only show that representation of his or her interest may be inadequate; and the burden of making that showing should be treated as minimal. (quoting and citing Dow Jones & Co. v. U.S. Dept. of Justice, 161 F.R.D. 247, 254 (S.D.N.Y. 1995) (internal quotations omitted)). Certainly Morning Mist, which seeks to abrogate the Trustee s assignment, cannot be held to adequately represent the Trustee s interests. The Liquidator, who would be the party charged with defending the Trustee s interests, has stated that he believes the Trustee s participation is warranted and appropriate. (Cole Dec., Ex. 26.) The Trustee is a fiduciary to all the customers and creditors of BLMIS. While the Liquidator presumably shares the Trustee s general interest in preserving the Fairfield Sentry Settlement, his interest is limited to the prejudice to that settlement associated with any undoing of the assignment that is challenged here. See, e.g., Werbungs Und Commerz Union Austalt v. Collectors Guild, Ltd., 782 F. Supp. 870, 875 (S.D.N.Y. 1991) (holder of collateral securing bond was entitled to intervene and join bonding company in opposing motion to direct payment of bond to plaintiff where bonding company was ultimately indifferent as to whether it paid plaintiff or intervenor). As representatives of Fairfield Sentry a defendant sued by the Trustee the Liquidator does not share, much less adequately represent, the Trustee s interest in protecting a SIPA Trustee s standing to receive and prosecute claims as an assignee under SIPA. See Aristocrat Leisure Ltd. v. Deutsche Bank Trust Co. Americas, 2005 WL 751914, *4 (S.D.N.Y. March 31, 2005) (bondholders entitled to intervene where party Trustee might not 21
Case 1:11-cv-05905-AT Document 28 Filed 02/28/14 Page 27 of 31 advocate potential arguments available to Bondholders that would be adverse to Trustee s interests); Hoblock v. Albany County Bd. Of Elections, 233 F.R.D. 94 (N.D.N.Y. 2005) (voters who may have voted against candidates did not adequately represent candidates interests in motion to enjoin certification of election results). Certainly, no existing party to this action represents the Trustee s interest in recovery of customer property under SIPA. Important interests are best championed by those most directly affected by their impairment. Katzman v. Victoria s Secret Catalogue, 923 F.Supp. 580, 583 (S.D.N.Y. 1996). The distinctions between the Liquidator s and the Trustee s interests amply demonstrate that the Trustee s representation by the existing parties would be inadequate. D. Without Intervention, The Trustee s Interests Will Be Compromised Without intervention, the Trustee will be substantially prejudiced. The Trustee s interest is not limited to theoretical legal implications of the Court s decision: he is a stakeholder. He holds the assignment that is the subject of Movant s challenge. See Russell v. Board of Plumbing Examiners of the County of Westchester, 74 F.Supp.2d 349, 351 (S.D.N.Y. 1999) ( Participation as an amicus curiae, as opposed to becoming an intervenor, is appropriate when the party cares only about the legal principle of the case, and has no personal, legally protectable interest in the outcome of the litigation. ). If successful, Movant s argument against the validity of the Fairfield Sentry assignment would contravene the ruling obtained in the Trustee s litigation before Judge Rakoff and might impair the Trustee s ability to obtain hundreds of millions of dollars in recoveries from the FGG Management Defendants, as well as jeopardize his ability to prosecute and recover on claims assigned to him by other defendants in connection with the BLMIS liquidation. If the Trustee is not permitted to intervene, he will be at a substantial practical disadvantage protecting his interest. See 7C Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure 1908 (2d ed. 1986 & Supp. 2004) ( [Rule 22