09-5296-bk

In re Bernard L. Madoff Investment Securities LLC 

UNITED STATES COURT OF APPEALS 

FOR THE SECOND CIRCUIT 

SUMMARY ORDER 

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON 

OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 

32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH 

THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE 

NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY 

NOT REPRESENTED BY COUNSEL. 

 At a stated term of the United States Court of Appeals 

for the Second Circuit, held at the Daniel Patrick Moynihan 

United States Courthouse, 500 Pearl Street, in the City of 

New York, on the seventh day of October, two thousand and 

ten. 

PRESENT: JON O. NEWMAN, 

 GUIDO CALABRESI 

 RICHARD C. WESLEY, 

 Circuit Judges. 

 

ROSENMAN FAMILY, LLC, 

 Plaintiff-Appellant, 

 -v.- 09-5296-bk 

IRVING H. PICARD, as Trustee for the SIPA Liquidation of 

Bernard L. Madoff Investment Securities LLC, SECURITIES 

INVESTOR PROTECTION CORPORATION, 

 Defendants-Appellees.*

 

 *

 The Clerk of the Court is directed to amend the 

official caption to conform with the caption above.
FOR APPELLANT: HOWARD KLEINHENDLER, Wachtel & Masyr, LLP, 

New York, NY. 

FOR APPELLEE: DAVID J. SHEEHAN, Seanna R. Brown, Baker & 

Hostetler, LLP, New York, NY. 

HERMANT SHARMA, Securities Investor 

Protection Corporation, Washington D.C. 

 Appeal from the United States District Court for the 

Southern District of New York (Buchwald, J.). 

 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED 

AND DECREED that the judgment of the district court be 

AFFIRMED. 

 Plaintiff-Appellant Rosenman Family, LLC (“Appellant” 

or “Rosenman”) appeals from a decision of the United States 

District Court for the Southern District of New York 

(Buchwald, J.), Rosenman Family, LLC v. Picard, 420 B.R. 108 

(S.D.N.Y 2009), which affirmed a decision of the United 

States Bankruptcy Court for the Southern District of New 

York (Lifland, J.), entered on February 24, 2009, granting a 

motion to dismiss the Rosenman Complaint, Securities 

Investor Protection Corp. v. Bernard L. Madoff Investment 

Securities LLC, 401 B.R. 629 (Bankr. S.D.N.Y. 2009). We 

assume the parties’ familiarity with the underlying facts, 

the procedural history, and the issues presented for review. 

 The courts below prematurely determined that Rosenman 
2

qualified as a “customer” under the Securities Investor 

Protection Act (“SIPA”), 15 U.S.C. § 78aaa et seq. We make 

no such determination at this time. However, we agree with 

the district court that the $10 million at issue qualifies 

as debtor property covered by SIPA. Therefore, Rosenman’s 

complaint seeking declaratory and injunctive relief for the 

immediate return of the $10 million was properly dismissed.1 

 When considering a motion to dismiss under Federal Rule 

12(b)(6), a court must accept all factual allegations in the 

complaint as true, even if the allegations are doubtful in 

fact. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 

(2007); see also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 

(2009) (“To survive a motion to dismiss, a complaint must 

contain sufficient factual matter, accepted as true, to 

state a claim to relief that is plausible on its face.”) 

(internal quotation marks omitted). On review of a 

dismissal under Fed. R. Civ. Pro. 12(b)(6), we accept all 

factual allegations in the complaint as true and draw all 

reasonable inferences in favor of the plaintiff. Kassner v. 

2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 

2007). 

 1 We review de novo the district court's conclusions of 

law. See In re New Times Secs. Serv., Inc., 463 F.3d 125, 

127 (2d Cir. 2006).
3

 

The courts below detailed the relevant history and 

purposes of SIPA as well as the structure of a SIPA 

liquidation proceeding. Generally, SIPA liquidations 

involve two kinds of claimants: customers and general 

unsecured creditors. To protect customers of failed 

brokerages, their claims are satisfied from a customer 

property estate,2 which is separate from the general estate 

used to satisfy the claims of general unsecured creditors. 

See In re Adler Coleman Clearing Corp., 195 B.R. 266, 270 

(Bankr. S.D.N.Y. 1996). To effectuate its purposes, SIPA 

accords “those claimants in a SIPA liquidation proceeding 

who qualify as ‘customers’ of the debtor priority over the 

distribution of ‘customer property.’” In re New Times Secs. 

Serv., Inc., 463 F.3d 125, 127 (2d Cir. 2006). Customer 

property can further be supplemented “out of a special 

[Securities Investor Protection Corporation (‘SIPC’)] fund 

capitalized by the general brokerage community,” id., which 

may provide up to $500,000 for each customer. 15 U.S.C. § 

78fff-3. 

 To qualify as a customer, a claimant must have 

2

 SIPA defines customer property, in relevant part, as: 

“cash and securities . . . at any time received, acquired, 

or held by or for the account of a debtor from or for the 

securities accounts of a customer, and the proceeds of any 

such property transferred by the debtor, including property 
4

“deposited cash with the debtor for the purpose of 

purchasing securities.” 15 U.S.C § 78lll.3 “[T]he critical 

aspect . . . is the entrustment of cash or securities to the 

broker-dealer for the purposes of trading securities." In 

re New Times, 463 F.3d at 128 (quoting Appleton v. First 

Nat'l Bank of Ohio, 62 F.3d 791, 801 (6th Cir. 1995)); see 

also In re ESM Gov’t Secs., Inc., 812 F.2d 1374, 1376 (11th 

Cir. 1987) (“[I]t is the act of entrusting the cash to the 

debtor for the purpose of effecting securities transactions 

that triggers the . . . provisions.” (emphasis in original) 

(citing Secs. Investor Prot. Corp. v. Exec. Secs. Corp., 556 

F.2d 98 (2d Cir. 1977)); Secs. Investor Prot. Corp. v. 

Stratton Oakmont, Inc., 229 B.R. 273, 279 (Bankr. S.D.N.Y. 

1999) (“SIPA protects customers of registered broker-dealers 

who have entrusted to those broker-dealers cash . . . for 

the purpose of trading and investing.”). Other claimants to 

assets in the estate generally qualify only as general 

unsecured creditors and do not receive the benefit of 

 

unlawfully converted.” 15 U.S.C. § 78lll(4). 3 15 U.S.C. § 78lll was amended by the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, Pub. L. No. 111-

203, 124 Stat 1376, as of July 21, 2010. Even if the 

amendments were to apply retroactively, they do not affect 

the analysis of the present case because the operative 

definition above — “any person who has deposited cash with 

the debtor for the purpose purchasing securities” — remains 

intact. 15 U.S.C. § 78lll(b)(2)(B)(i). SIPA citations are 
5

 

supplemental funds from SIPC. 

In all of the above cases, the courts were concerned 

with whether the putative investor attained customer status 

and thus qualified for preferred liquidation benefits under 

SIPA. They took for granted the preliminary question of 

whether the relationship between the claimant and the debtor 

gave rise to SIPA coverage in the first place. 

 In the present case, Appellant claims it is neither a 

customer nor a general creditor because, it asserts, the 

debtor never acquired title to the $10 million it wired to 

the debtor. Because the money never became the debtor’s 

property, Appellant argues, it cannot form part of the 

bankruptcy estate; rather, Appellant claims, the money was 

stolen or embezzled. But none of the facts alleged in 

Appellant’s complaint support such a conclusion, or any 

other conclusion that would exclude this money from the 

debtor’s property under either New York or bankruptcy law. 

The $10 million was voluntarily transferred by the 

Appellant, was never diverted by the debtor, cf. In re 

Newpower, 233 F.3d 922 (6th Cir. 2000), and remained with 

the debtor. Accordingly, we need not consider whether New 

York or bankruptcy law applies. Under either, given the 

to the statute prior to its amendment.
6

allegations in the complaint, the $10 million is part of the 

debtor’s estate. 

 This also means that the funds are subject to SIPA. The 

complaint shows Appellant’s intent to invest in the 

investment advisory fund of Bernard L. Madoff Investment 

Securities LLC (“BLMIS”). Appellant’s $10 million deposit 

in BLMIS’ JPMorgan Chase Bank account (“Chase Account”) was 

executed for that purpose, even if Appellant contemplated 

that any such investment would not take place until January 

2009 (less than a month after the deposit), and even if 

Appellant believed that further authorization would be 

required to effectuate the investment. 

Furthermore, four days after Appellant deposited the 

$10 million, BLMIS sent Appellant a “Confirmation” form 

containing a customer account number and stating that, on 

behalf of Appellant’s account, BLMIS had “sold short $10 

million in U.S. Treasury Bills that mature on March 26, 

2009.”4 Complaint ¶ 12. The statement contained an 

identification number for the transaction. Id. ¶ 13. 

Neither the fact that Appellant did not authorize this 

purported trade nor the fact that the trade never actually 

occurred negate Appellant’s SIPA status. See In re Klein, 

 4 Treasury Bills are “securities” as defined by SIPA. 15 
7

 

Maus & Shire, Inc., 301 B.R. 408, 419 (Bankr. S.D.N.Y 2003) 

(“The fact that the property is missing, perhaps due to 

unauthorized trading, does not affect ‘customer’ status.”) 

(citations omitted); see also Sec’s and Exchange Comm’n v. 

S. J. Salmon & Co., Inc., 375 F.Supp. 867, 871 (S.D.N.Y. 

1974) (holding that “[m]isappropriation would, of course, 

include the use of the customers' money to effect 

unauthorized purchases of securities” and thus, if the 

particular purchase of securities was found to be 

unauthorized, the claimant “would possess a valid customer 

claim”). 

Appellant’s phone call with Madoff expressing interest 

in investing in the BLMIS fund, Appellant’s wiring of the 

funds in accordance with that phone call, the confirmation 

of BLMIS’ purported (though fraudulent) purchase of 

securities for Appellant’s account, and the absence of any 

objection to that purported trade by Appellant all lead to 

the conclusion that Appellant willingly transferred its 

money to BLMIS in contemplation of engaging in ongoing 

business dealings with the brokerage. 

In light of this conclusion, we need not discuss 

Appellant’s other arguments. We similarly need not decide 

U.S.C § 78lll(14).
8

today whether the $10 million in the Chase account qualifies 

for the added protection given to customers or is general 

creditor property under SIPA. Either way, SIPA governs. 

 To be clear, we are not holding that Appellant is 

entitled to customer status under SIPA, a ruling that cannot 

fairly be made in the absence of general creditors; we are 

holding only that the allegations are sufficient to invoke 

SIPA coverage, that the disputed money is property of the 

bankruptcy estate, and that the issue of whether Appellant 

is entitled to customer status remains to be determined. 

 For the foregoing reasons, the judgment of the district 

court is hereby AFFIRMED. 

 

 FOR THE COURT: 

 Catherine O’Hagan Wolfe, Clerk