picard v. katz rakoff denial of trustee's appeal

8/3/2019 Picard v. Katz Rakoff Denial of Trustee's Appeal

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK- - - - - - - -xIRVING H. PICARD,

P l a i n t i f f ,-v-

SAUL B. KATZ, e t a l . ,Defendants .- - - - - - - - - - - - - - - - - - - - - -x

JED S. RAKOFF, U.S.D.J .No pr inc ip le of fede ra l ju r i sp rudence has proved more

ef f icac ious than th e " f ina l judgment r u l e , II by which a d i s t r i c tc our t ' s in te r im ru l ings may no t normal ly be appealed u n t i l the casei s over and f i n a l judgment rendered . Natura l ly , any p a r ty t h a t l o se san important in te r im ru l ing wants to appeal immedia te ly , be l i ev ingt h a t a parade of h o r r ib l e s w i l l fo l low i f th e d i s t r i c t cour t s supposede r r o r i s no t immediately cor rec t ed . But, as many s t a t e j u r i s d i c t i onshave l ea rned to t h e i r det r iment , the r e s u l t o f pe rmi t t i ng in t e r imappeals vexat ious and dup l ica t ive l i t i g a t i o n , prolongedunce r t a in ty , and end less de lay . Since , moreover , in te r im appeals a ret yp ica l ly t aken before a f u l l record i s developed, the appe l la tecour t s t h a t permi t them must ru le withou t the broader pe rspec t ive t h a tcomes from knowing th e whole s to r y . Whether on the b a l l f i e l d o r incour t , " i t a i n ' t over till it's over" i s both shrewd observa t ion andsound advice.

Universa l ly a t t r i bu t e d to the g r ea t Yogi Berra . 1

11 Civ. 3605 (JSR)

OPINION AND ORDER

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no t recover on a theory o f negl igence, and t h a t th e defendan ts couldt he re fo re e s t a b l i sh t h a t they had rece ived the t r a n s fe r s from MadoffSecur i t i e s in "good f a i th" under 548 (c) of the Code by showing t h a tthey d id no t know o f , o r wi l fu l ly b l in d themselves to , MadoffSe c u r i t i e s ' f raud. Third , the Cour t ru l ed t ha t the Trustee cou ld n o tdisa l low the defendan t s ' own cla ims to th e Madoff Se c u r i t i e s e s t a t ebecause 15 U.S.C. 78f f f -2 (c ) (3 ) t r e a t s customers who rece ivedf raudu len t t r a n s fe r s as c re d i t o r s of such an e s t a t e .

Although th e t r i a l t ha t wi l l f i na l ly decide t h i s adversaryproceeding i s f i rmly s e t fo r March 19, 2012, th e Trustee seeks , ine f f e c t , to "s top the music" and take t he se ru l ings up on i n t e r l o cu to r yappeal . "Federa l p ra c t i c e i s s t rong ly b ia sed ag a in s t i n t e r locu to ryappea l s . Appeals from i n t e r l o cu to r y orders prolong j ud i c i a lproceedings , add delay and expense to l i t i g a n t s , burden appe l la tecour t s , and presen t i s sues fo r dec is ions on uncer ta in and incomple terecords , t end ing to weaken the preceden t ia l value o f j u d i c i a lopin ions . II In re September 11 L i t i g . , No. 21 MC 97 (AKH) , 2003 WL22251325, a t *1 (S.D.N.Y. Oct . I , 2003) . The Second C i r cu i t hasthe re fo re held t ha t "only ' e xcep t iona l c i rcumstances [wi l l ] j u s t i f ya depar tu re from the bas ic po l icy of postponing ap p e l l a t e review u n t i la f t e r th e en t ry of a f i na l judgment. ' /I Klinghoffer v. S. N. C. Achi l l eLauro Ed A l t r i Gest ione Motonave Achi l l e Lauro in AmministrazioneSt raord inar ia , 921 F.2d 21, 25 (2d Cir . 1990) (quot ing Coopers &~ b r a n d v. Livesay , 437 U.S. 463, 475 (1978)) .

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The Trustee never the s seeks to obta in an i n t e r locu to ry appealof some o r a l l of th e t h ree aforement ioned ru l ings through e i t he r o rboth o f two rou te s . As to the cla ims dismissed as a r e s u l t of thef i r s t of the t h ree ru l ings , the Trustee seeks to have the Cour t en t e r" f ina l" (and the re fo re appealab le) judgment on those cla ims pursuan tto Rule 54(b) , Fed. R. Civ. P ., which s t a t e s :

When an ac t ion presen t s more than oneclaim fo r r e l i e f - - w h e th e r as acla im, counterc la im, crossc la im, o rt h i rd -p a r t y c la im--o r when mul t ip l epa r t i e s are involved , the c o u r t mayd i r e c t en t ry of a f i n a l judgment asto one o r more, but fewer than a l l ,c la ims o r pa r t i e s only i f the cour texpress ly determines t h a t the re i sno j u s t reason fo r delay . (emphasisadded)

As th e p la in language of t h i s prov i s ion makes ev iden t , en t ry of f i na ljudgment under Rule 54(b) should be made spa r ing ly and onlywhen t he re no j u s t reason fo r delay . See genera l ly HarriscomSvenska AB v. Harr i s Corp. , 947 F.2d 627, 629 (2d Cir . 1991).

Alte rna t ive ly , the Trus tee seeks to c e r t i f y a l l t h ree ru l ingsf o r i n t e r l o cu to r y appea l pursuan t to 28 U.S.C. 1292(b) , whichs t a t e s :

When a d i s t r i c t judge, in making ina c i v i l ac t i o n an orde r n o t otherwiseappea lab le under t h i s sec t ion , s h a l lbe of th e opinion t ha t such orde rinvolves a co n t r o l l i n g ques t ion oflaw as to which the re i s su b s t a n t i a lground fo r d i f fe rence of opinion andt ha t an immediate appea l from th eo rd e r may mate r i a l l y advance th eu l t imate t e rmina t ion of theI i t i g a t i o n , he s h a l l so s t a t e in

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wri t i ng in such order . (emphasisadded)

The case law f u r t h e r makes c l e a r t ha t , s i m i l a r l y to Rule 54(b) ,c e r t i f i c a t i o n under 1292 (b) i s j u s t i f i e d only in "except iona lc i rcumstances . II Klinghof fe r , 921 F. 2d 21 a t 25. Moreover , ad i s t r i c t judge h a s " ' un f e t t e re d d i s c r e t i on to deny c e r t i f i c a t i o n ' ofan order i n t e r l o c u t o r y appea l even when a par ty has demonst ra tedt h a t th e c r i t e r i a of 28 U.S.C. 1292(b) a re met. 1I Gulino v . Bd. ofEduc. , 234 F. Supp. 2d324 , 325 (S.D.N.Y. 2002) (quo t ingNat ' lAsbes tosWorkers Med. Fund v . Phi l ip Morr is , Inc . , 71 F. Supp. 2d 139, 162(E.D.N. Y. 1999)) .

Afte r c a r e f u l cons ide ra t ion , th e Cour t concludes t h a t the Trus teehas e n t l y f a i l e d to demonst ra te th e kind o f ex t rao rd ina rycircumstances t h a t would warran t t h i s Cour t in gran t ing h is motionunder e i t h e r Rule 54(b) o r 1292(b) . Indeed, with th e trial of t h i scase f i rmly s e t to beg in j u s t two months from now, th e main e f f e c t ofgrant ing the T r u s t e e ' s motion would be to m a t e r i a l l y de lay , r a t he r thanmate r ia l ly advance th e u l t ima te terminat ion of th e l i t i g a t i o n .Although the Trus tee makes much of th e supposed impact of th e Decis ionon o t h e r adversa ry proceedings he has brought , none o f thoseproceedings i s r emote ly as fa r advanced as t h i s one. When the trialof t h i s proceeding i s completed and f i n a l judgment en te red , j u s t a fewmonths from now, an appe l l a te c o u r t wi l l be ab le to review, on a f u l lrecord , no t j u s t th e t h ree ru l ings of which t he Trus tee now complains ,

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Bankruptcy Code def ines a s tockbroker as one "engaged in th e bus ine ssof e f f e c t i ng t r a n sa c t i o n s in secu r i t i e s , " 11 U.S.C. 101(53A) (B),whereas th e Amended Complaint a l l eges t h a t th e p a r t o f MadoffSe c ur i t i e s ' bus ine ss t h a t involved th e defendan ts here , namely, itsinvestment advisory bus iness , never purchased s e c u r i t i e s fo r thedefendants ' accounts . Am. Cmpl. 31. While in the Cour t ' s view, t h i sa t tempt to subd iv ide and pa r se Madoff Secur i t i e s ' bus ine ss presen t sits own d i f f i c u l t i e s would a cus tomer be depr ived of the b e n e f i tof 546(e) if th e broker faked th e t r ades in t h a t cus tomer ' s accountbu t made t r ades in o t h e r such accoun ts , o r if the broke r faked 90% o fthe purpor ted t r ades in t h a t cus tomer ' s account bu t execu ted th e o the r10%? - th e evidence a t trial wi l l l i ke ly make c l e a r no t on ly what p a r to f Madoff Secur i t i e s ' bus ine ss was fake and what p a r t r ea l , bu t a l so ,and more impor tant ly in the Cour t ' s view, whether Madoff Se c ur i t i e swas f a i r l y viewed by th e defendan ts and o t h e r customers as engaged inthe bus ine ss o f e f f e c t i ng t r ansac t ions in s e c u r i t i e s . Put anotherway, if th e proof a t trial shows t ha t Madoff Se c ur i t i e s he ld i t s e l fou t as a s tockbroker as de f ined by 101(53A) (B) and th e defendants ,as they a l l ege , had no reason to suppose otherwise , th e Trus tee , ac t ingon beha l f of the es t a t e , may wel l be barred from contending otherwisewith r e spec t to th e a p p l i c a t i o n o f 546(e) .

More genera l ly , the Trus tee has himse l f argued i n r e l a t e dproceedings before t h i s Cour t t h a t th e s t a t e s of mind of defendan ts

defendan ts r ece ived . See Decis ion a t 11 n .6 .7


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may be re l evan t to how 546 (e) should be i n t e r p r e t ed and ap p l i ed . Seepages 13 14 o f th e Tr u s t ee ' s Memorandum of Law in Opposi t i on to HeraldFund SPC's Motion to Withdraw th e Reference , in 11 Civ. 6541 (JSR).Because th e s t a t e s of minds of the defendan ts in th e i n s t a n t case w i l lbe one of th e key i s sues in th e for thcoming t r i a l , th e f ac tu a l recordthus developed w i l l be u s e fu l fo r asse ss ing even those i s sues nowr a i s ed by the Trus tee .

Without mul t ip ly ing examples , the p o i n t i s t h a t the f ac tu a lrecord developed a t the upcoming trial w i l l both inform th e very i s suesthe Trus tee seeks to r a i s e on i n t e r l o cu to r y appeal and w i l l help tom a t e r i a l l y advance the de te rmina t ion of o th e r i s sues common to manyo f th e r e l a t e d ad v ersa ry proceed ings . This prov ides still an o th e rground fo r denying th e en t ry o f premature and p a r t i a l f i n a l judgmentunder Rule 54(b) and fo r denying c e r t i f i c a t i o n under 1292(b) .

One o t h e r p o i n t b ea r s mention. In h is papers in opposi t ion tothe defendan ts ' motion to dismiss t h a t was th e subj e c t of th e Decis ion ,th e Tr u s t ee ' s pr imary argument concerning th e language o f 546 (e) wast h a t a s e c u r i t i e s c o n t r a c t did n ot e x i s t unless th e p a r t i e s had "as p ec i f i c agreement to buy, s e l l o r loan a p a r t i c u l a r s ecu r i t y . /ITr u s t ee ' s Memorandum in Opposi t i o n to th e Ste r l ing Defendant s ' Motionto Dismiss o r , in the Al te rna t ive , fo r Summary Judgment d a ted July 8,2011 a t 90. This argument was e a s i l y r e fu t e d by examinat ion o f there l evan t s t a t u t o ry prov i s ions of the Bankruptcy Code. In p a r t i c u l a r , 741 (7 ) (A) (x ) d e f i n es " se c u r i t i e s co n t r ac t " to inc lude "a maste r

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agreement t h a t prov ides fo r [a con t rac t fo r th e purchase s a l e o r loanIof a se c u r i t y ] , " and 741 (7) (A) (xi) f u r th e r inc ludes wi th in thedef in i t i on "any s ecu r i t y agreement o r arrangement . . . r e l a t e d to anyagreement o r t r an s ac t i o n r e f e r r ed to in t h i s subparagraph, inc lud ingany guaran tee o r reimbursement o b l ig a t i o n by or to a s tockbroker . "Both d e f i n i t i o n s thus inc lude agreements t h a t do not spec i fypa r t i c u l a r s e c u r i t i e s .

Now, however, under th e guise of t ry ing to j u s t i f y th e requirementof 1292{b) t ha t t he re be a " s u b s t an t i a l ground fo r d i f f e r e n c e o fop in ion , II the Trus tee a t t empts to i n s e r t new arguments in to th e recordt h a t were never advanced in the papers p reced ing th e Decis ion . Thisi s a dubious p r ac t i c e a t b es t ; b ut u l t ima te ly it i s o f no moment, asth e new arguments a re no more p e r su as i v e than th e o ld ones.

S p ec i f i c a l l y , the Trus tee argues t h a t a brokerage customer i s noten t i t l ed to th e "sa fe harbor" pro tec t ions of 546{e), even if shebe l i eves she i s d ea l i n g with a s tockbroker , if th e purpor teds tockbroker , though l i c ensed as such and hold ing h imsel f o ut as such,i s r e a l l y conduct ing a "Ponzi scheme. II The Cour t has a l readymentioned above some of th e d i f f i c u l t i e s with t h i s i n t e rp re t a t i o n ,such as th e d i f f i c u l t i e s in drawing the l i ne between a l i c enseds tockbroker whose Ponzi scheme i s a l l -encompass ing and one who fakesonly p a r t of h is business , o r only p a r t o f h is t r ades with in a givenl i ne of bus iness , o r only p a r t o f h is t r ades fo r a given customer , e t c .But a more fundamental problem a r i s e s from th e f ac t t h a t , as a l r ead y

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s e t fo r th in the Decis ion , 546 (e ) on its face provides a sa fe harborno t j u s t fo r stockbrokers but a l so fo r inves to r s . Thus, ani n t e rp re t a t i o n t h a t would proh ib i t i t s a v a i l a b i l i t y to f raudu len ts tockbrokers would make no sense i f a l so app l i ed to f rus t r a t e thereasonable expec ta t ions of those broke rs ' customers . See gene ra l ly ,Todd D. Rakoff , Sta tu to ry In t e rp re t a t i o n as a M ul t ifa r ious En te rp r i se ,104 Nw. L. Rev. 1559 (2010) .

None of the cases on which the Trustee r e l i e s i s r e levan t to thei s sue of whether a l i c ensed s tockbroker engaged in a Ponzi schemeshould o r should n ot be considered a s tockbroker in determin ing whethero r no t to apply 546(e) on behal f of customers . , In reS la tk in , 525 F.3d 80S, 817 (9th Cir . 2008) ( " I t i s undispu ted t h a tSla tk in was n ot a l i c ensed s tockbroker . 1/) ; Wider v . Wootton, 907 F. 2d570, 571 (5th Ci r . 1990) (" [Cohen] wa s no t a l i censed s t o c k b r o k e r - h i sl i cense was suspended in the mid-1970s a f t e r making d i s c r e t i o n a r yt r ades withou t p r i o r approval . " ) .

The Tr u s t ee ' s purpor ted r e l i an ce on Judge Marrero ' s i n t e r e s t i ngdec ion in In re Adler , Coleman Clear ing Corp. , 263 B .R . 406 (S.D.N.Y.2001) fu r ther demonstra tes the po in t . In Adler Coleman, th e cour tconsidered a s i t ua t ion in which app ly ing 54 6 (e) threa tened top o t e n t i a l l y al low the e n t i t y t h a t had committed the f raud to reapb en e f i t s from the f raud by making t r a n s fe r s to i n s ide rs and o th e rr e l a t e d persons based on f i c t ious t r ad es . Id . a t 420 - 21, 440, 485.The cour t , invoking th e doc t r ine o f "absurd r e su l t s , " . a t 478 1

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concluded t ha t , notwi ths tanding the l i t e r a l language of 546 (e ) , sucha r e s u l t could not be pe rm i t t ed . I d . a t 485. Here, by cont ra s t , theonly e f f e c t of 546(e) , as cons t rued by the Decis ion in t h i s case ,i s to prese rve the sa fe harbor fo r r e tu rns on s e c u r i t s inves tmentst h a t the Trus tee cannot avoid under 548(a) (1 ) (A). In o the r words,whereas Adle r Coleman impl ied a f raud except ion to 546(e) in orderto prevent the def rauder from reaping benef i t s from its f raud , th eDecis ion focused on 546 (e ) 's e x p l i c i t f raud excep t ion -namely , itsexemption of 548 (a) (1 ) (A) from the sa fe h a r b o r - i n order todetermine what t r a ns f e r s t h i r d p a r t i e s may keep. There i s nothingabout the Deci s ion ' s r e s u l t t h a t i s in any way absurd , and Adle r Colemani s the re fo re i napp l i cab le . 5

The o the r case t h a t the Trus tee espec ia l ly emphasizes, JudgeKimba Wood's r ecen t dec i s ion in Picard v. Merkin, 2011 WL 3897070(S.D.N.Y. 2011) , i f any th ing , suppor ts t h i s Cour t ' s view. 6 Merkinwas, i r on i c a l l y , an a p p l i c a t i o n by the Receiver o f ce r t a in MadoffSecur i t i e s defendan ts fo r l eave to take an i n t e r l oc u t o ry appea l froma dec i s ion o f th e Bankruptcy Court , on a motion to d i sm iss , t ha t held

5 The Cour t the re fo re need no t reach the i s sue of whether the cour tin Adler Coleman c o r r e c t l y app l i ed the ex t remely l imi ted doc t r ine of\\ re t s . " More genera l ly , Judge Marrero ' s view t ha t " inprospec t ing profound ly i n to words in search of the sense o f p a r t i c u l a rl eg i s l a t i on , " one must "no t su r render purpose to l i t e r a l n e s s , /I id . a t478, i s reminiscent of the " lega l process" mode of s t a tu to r yin t e r p r e t a t i on t ha t th e Supreme Cour t in r e c e n t yea r s has r epea t ed lyre j ec t ed in favor , y e s , l i t e r a l n e s s .6 Merkin was decided on August 31, 2011, o r l e s s t han th ree weeks beforethe Decis ion , and ne i t he r the Cour t nor , apparen t ly , the p a r t i e s wereaware of it u n t i l s ho r t l y a f t e r the Decis ion was rendered .11


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t h a t it was premature to determine a t t h a t s t age whether , fo r purposesof app ly ing 546 (e) , Madoff S ecu r i t i e s qua l i f i ed as a "s tockbroker"t h a t had \\ s e c u r i t i e s con t rac t s " wi th its cus tomers . . a t *12. A llt h a t Judge Wood h e ld , in h e r b r i e f a n a l y s i s , was t h a t the Rece ive r ,by l ing to c i t e any cases t h a t es t ab l i s h ed t h a t t he re was as u b s t an t i a l ground fo r d i f fe rence of op in ion over whether it wasimproper to d e fe r these d e te rmin a t io n s u n t i l a f t e r the p leading s tage ,had fa i l ed to make o u t a case fo r a l lowing an i n t e r l o cu to r y ap p ea l .Id .

The r e a l l e s son of Merkin, the re fo re , i s t h a t i n t e r l o cu to r yappeals o f th e i s sues here presen t ed a r e n ot to be l i gh t l y granted .Moreover, if anything the under ly ing dete rmina t ion by th e BankruptcyCour t not to r each these i s sues a t the p leading s tage , while d i f f e r e n tfrom th e approach t aken in th e Decis ion , i s still an impl it re j ec t ionof the Tr u s t ee ' s argument t h a t t he re i s an au tomat ic "Ponzi scheme"excep t ion to the a p p l i c a t i o n of 546 (e ) . Furthermore , n e i t h e r JudgeWood no r th e Bankruptcy Cour t had occas ion to cons i de r most of th es p ec i f i c i s sues on which the Decis ion i s focused, such as whether ac o u r t must t ake cus tomers ' viewpoints and reasonab le r e l i ance in toaccount when i n t e rp re t ing 546 (e) , o r whether , rega rd le s s of th e i s sueof " se c u r i t i e s co n t r ac t s , " payments from Madoff S e c u r i t s to i t scus tomers co n s t i t u t ed "se t t l ement payments" under th e Code. See Inre Enron Cred i t o r s Recovery Corp . , 651 F.3d 329 ,336-38 (2d Ci r . 2011) .

Without e labora t ing fu r the r , the p o i n t i s t h a t n e i t h e r th e

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Tr u s t ee ' s new arguments nor th e a u t h o r i t i e s he presen t s persuades theCour t t h a t t he re i s a " s u b s t an t i a l ground fo r d i f f e r e n c e o f opinion"with respec t to th e Dec i s ion ' s i n t e rp r e t a t i on of 546{e). The sameholds t r u e , even more p la in ly , with re spec t to the o th e r i s sues r a i s edby the D ecis ion , see supra, as to which the Trustee i s unable to musterany persuas ive case law to th e con t ra ry .

The Trustee has , however, brought to th e Cour t ' s a t t e n t i o n oneove rs igh t in the Decis ion the Court now under takes t o c o r r e c t . Count9 of the Tr u s t ee ' s Amended Complaint sought to recover subsequentt r a n s fe r s p u rsu an t to 11 U.S.C. 544{b) & 550{a) . Sec t i o n 546{e)p r o h ib i t s avoidance under 544{b) , b u t does not address avoidanceunder 550{a). Sect ion 550(a) p ermi t s avoidance of a subsequen tt r a n s fe r " to th e ex ten t t h a t a [n i n i t i a l ] t r a ns f e r i s avoided undersec t ion . . . 548." Thus, s ince the Cour t concluded t h a t th e Trus teecould avoid a t r a ns f e r under 548 (a) (I ) {A} ( involving ac tua l in ten t ) ,it should have f u r th e r concluded t h a t the Trus tee could a l so avo id toth e same ex ten t subsequent t r a n s fe r s of the same funds under 550 (a) Applying t h i s ana lys i s , th e Cour t would have dismissed Count 9 onlyin p a r t . The co r r ec t response to t h i s e r ro r , however, i s n e i t h e r en t ryof f i n a l judgment under Rule 54{b) no r c e r t i f i c a t i o n on ani n t e r l o cu to r y appea l under 1292 (b) , b u t in s tead recons ide ra t ion ofth e Cour t ' s dec i s ion to dismiss Count 9 in f u l l . Under taking suchrecons ide ra t ion sua spon te , the Cour t now hereby r e ins t a t e s Count 9i n p a r t , b ut only i n s o f a r as it seeks to avoid subsequen t t r a n s fe r s

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under 550(a) wherever the Trustee could have avoided an i n i t i a lt r a ns f e r under 548{a) (1) (A). I t should also be noted t ha t there ins ta tement of the p a r t i a l Count w i l l in no r espec t warrantre-opening discovery nor change the t r i a l date , which remains f ixedand f i rm.

For the foregoing reasons , the Trus tee ' s motion i s denied in i t se n t i r e ty , but Count 9 of the Amended Complaint i s hereby re ins ta tedto the l imi ted ex ten t descr ibed above. The Clerk of the Court i shereby d i rec ted to c lose item number 45 on the docket of t h i s case .

SO ORDERED

Dated: New York, New YorkJanuary 17, 2012 ~ ~ D ' J '

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picard v. katz rakoff denial of trustee's appeal

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