Court Opinion

ID: 176807
Source: CourtListenerOpinion
Date Created: 2010-10-07 16:16:05+00
Date Added: 2024-06-11T17:25:39.662216
License: Public Domain

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
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).

                              2
    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

                              3
“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

                              4
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.

                                5
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

                                 6
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).

                               7
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

                                8