Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities, LLC. et a

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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SECURITIES INVESTOR PROTECTION 	:
CORPORATION, 	:
:
Plaintiff, 	: 	SIPA Liquidation
: 	(Substantively Consolidated)
‒ against ‒ 	:
: 	Adv. P. No. 08-01789 (SMB)
BERNARD L. MADOFF INVESTMENT 	:
SECURITIES LLC, 	:
:
Defendant. 	:
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:
In re: 	:
:
BERNARD L. MADOFF, 	:
:
Debtor. 	:
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MEMORANDUM DECISION AFFIRMING THE TRUSTEE’S
DENIAL OF CERTAIN CUSTOMER CLAIMS
A P P E A R A N C E S:
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, NY 10111
David J. Sheehan, Esq.
Nicholas J. Cremona, Esq.
Jorian L. Rose, Esq.
Amy E. Vanderwal, Esq.
Stephanie A. Ackerman, Esq.
Of Counsel
Attorneys for Irving H. Picard, Trustee
for the Liquidation of Bernard L. Madoff
Investment Securities LLC
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Daniel C. Epstein
Pro se
Robert & Rebecca Epstein Living Trust
Pro se
STUART M. BERNSTEIN
United States Bankruptcy Judge
Irving H. Picard (the “Trustee”), the trustee for the liquidation of Bernard L.
Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor Protection
Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”), seeks to affirm his determinations denying the
customer claims filed by Robert & Rebecca Epstein Living Trust (the “Epstein Living
Trust”) and Daniel C. Epstein (together with the Epstein Living Trust sometimes
referred to as the “Epsteins”) and Keith Schaffer, Jeffrey Schaffer, and Carla R.
Hirschhorn (Keith & Jeffrey Schaffer and Carla Hirschhorn collectively referred to as the
“Schaffer/Hirschhorn Cotenants”). (Motion to Affirm His Determinations Denying
Claims of Claimants Holding Interests in Judy L. Kaufman et al. Tenancy in Common,
Richard B. Felder and Deborah Felder Tenancy in Common, and Keith Schaffer,
Jeffery Schaffer, Carla R. Hirschhorn Tenancy in Common, dated Jan. 13, 2017 (the
“Motion”) (ECF Doc. # 14844).) 1 	Only the Epsteins have opposed the Motion. For the
reasons stated, the Trustee’s Motion is granted.
1 	The Motion was adjourned to May 3, 2017 as to the claimants holding an interest in the Richard
B. Felder and Deborah Felder Tenancy in Common. (See ECF Doc. # 15562.)
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BACKGROUND
A. 	The Madoff Ponzi Scheme and the Claims Procedures Order
Madoff operated a massive Ponzi scheme from the investment advisory side of
BLMIS satisfying customer withdrawal requests with earlier deposits made by other
customers. See SIPC v. BLMIS (In re BLMIS), 424 B.R. 122, 125-32 (Bankr. S.D.N.Y.
2010), aff’d, 654 F.3d 229 (2d Cir. 2011), cert. denied, 133 S. Ct. 25 (2012). On
December 11, 2008, Madoff was arrested by federal agents and charged with securities
fraud, and on the same day, the Securities and Exchange Commission filed a civil
complaint in the District Court alleging that Madoff and BLMIS had operated a Ponzi
scheme. On December 15, 2008, the Securities Investor Protection Corporation
(“SIPC”) applied to the District Court seeking a decree that BLMIS customers were in
need of the protections afforded by SIPA. The District Court granted SIPC’s application,
appointed the Trustee to liquidate BLMIS, and removed the liquidation proceeding to
this Court. On March 12, 2009, Madoff pled guilty to an eleven count criminal
indictment and admitted to operating his investment advisory business as a Ponzi
scheme. Id. at 126.
On December 23, 2008, the Court entered an order (“Claims Procedures
Order”) 2 which, among other things, established the procedure for former customers to
file claims against the BLMIS estate. If the Trustee disagreed with a customer’s claim
amount, he would notify the customer in writing as to his determination that the entire
claim, or a portion of it, should be disallowed. (Id. at 6.) Thereafter, the customer could
2 	See Order on Application for an Entry of an Order Approving Form and Manner of Publication
and Mailing of Notices, Specifying Procedures for Filing, Determination, and Adjudication of Claims;
and Providing Other Relief, dated Dec. 23, 2008 (ECF Doc. # 12).
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object to the Trustee’s determination setting forth the basis for the objection, and the
Trustee would then schedule a hearing on the matter with the Court. (Id. at 6-7.)
B. 	The Kaufman Tenancy in Common
Dr. Judy L. Kaufman (“Dr. Kaufman”) opened Account 1CM100 with BLMIS in
September 1993 by executing a trading authorization, a customer agreement, and an
option agreement. (See Declaration of Vineet Sehgal, dated Jan. 12, 2017 (“Sehgal
Decl.”), Ex. 4 at AMF00243778-88 (ECF Doc. # 14845).) In December 1994, Dr.
Kaufman added her children Lisa D. Kaufman and Neal S. Kaufman to Account
1CM100, and renamed the account “Judy L. Kaufman-Family” with each member
holding an interest in the account as a tenant in common. (Id., Ex. 4 at AMF00243773-
76.) 3 In December 2003, Dr. Kaufman added the Epstein Living Trust as a fourth
cotenant, (id., Ex. 4 at AMF00243767), and in July 2008, added Daniel Epstein as a
fifth cotenant. (Id., Ex. 4 at AMF00243752.) I will refer to the tenancy in common as
the “Kaufman Tenancy in Common.”
C. 	The Customer Claims
The Kaufman Tenancy in Common filed a customer claim (the “TIC Customer
Claim”) for amounts held in Account 1CM100. (Sehgal Decl., ¶ 13.) The Trustee
disallowed the TIC Customer Claim in its entirety because Account 1CM100 was a “net
winner” account meaning that the amount withdrawn from the account exceeded the
3 	Lisa D. Kaufman wrote to BLMIS in November 1997 to inform it of her name change to Lisa D.
Kava. (Sehgal Decl., Ex. 4 at AMF00243772.)
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deposits. (Id., ¶ 14.)4 The Kaufman Tenancy in Common objected to the Trustee’s
determination on December 21, 2009. (See ECF Doc. # 1099.) The Trustee’s current
Motion does not seek a final adjudication of the TIC Customer Claim.
The Epstein Living Trust and Daniel Epstein also filed customer claims (together
the “Cotenant Customer Claims”) in the amounts of $352,355 and $40,000,
respectively. 5 The Trustee disallowed the Cotenant Customer Claims in their entirety
because the Epsteins did not have their own BLMIS accounts, and hence, were not
“customers” of BLMIS within the meaning of SIPA. The Epsteins each filed objections
to the Trustee’s determinations in January 2011. (See ECF Doc. ## 3760 & 3762.)
D. 	The Trustee’s Motion
The Motion contends that the Cotenant Customer Claims must be denied because
an account held by tenants in common is treated as a single customer (and is thus
entitled to a single customer claim) under Rule 105 of the SIPC’s Series 100 Rules,
(Motion at 14), and the Epsteins lack the characteristics indicative of customer status as
set forth in SIPC v. Morgan, Kennedy & Co., Inc., 533 F.2d 1314 (2d Cir.) (“Morgan
Kennedy”), cert. denied, 426 U.S. 936 (1976) and reaffirmed in Kruse v. SIPC (In re
BLMIS), 708 F.3d 422 (2d Cir. 2013) (“Kruse”). (Motion at 14-17.) 6
4 	The Trustee filed an adversary proceeding in November 2010 against the Kaufman Tenancy in
Common and the Epsteins, among others, to recover the fictitious profits withdrawn from Account
1CM100. See Picard v. Kaufman, Adv. P. No. 10-04527 (SMB).
5 	The Cotenant Customer Claims are annexed to the Seghal Decl. as Exs. 5 & 6.
6 	SIPC filed a memorandum supporting the Motion on January 24, 2017 (ECF Doc. # 14939)
reinforcing much of the Trustee’s arguments.
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The Epsteins objected to the Trustee’s Motion. (See ECF Doc. ## 15330 &
15424-1.) They argue that they made a written request to Madoff in 2003 asking for
separate account statements in their names (not aggregated with the other cotenants
comprising the Kaufman Tenancy in Common), but Madoff ignored it. The Epsteins
also assert that the Trustee possesses evidence establishing the amount of their deposits
and lack of withdrawals from Account 1CM100.
The Trustee filed his Reply Memorandum of Law in Support of Trustee’s Motion
and Memorandum of Law to Affirm His Determinations Denying Claims of Claimants
Holding Interests in Judy L. Kaufman et al. Tenancy in Common and Keith Schaffer,
Carla R. Hirschhorn Tenancy in Common on March 24, 2017 (“Reply”) (ECF Doc. #
15424). He represents that while he possesses four checks from the Epstein Living Trust
and one check from Daniel Epstein, each made payable to BLMIS, the checks were
intended to be deposited into Account 1CM100, the Kaufman Tenancy in Common’s
account, (Reply at 5) 7 , and were, in fact, deposited into that account. 8 In addition, the
Epsteins admitted in discovery that they sent their checks to Dr. Kaufman (or her
husband), and Dr. Kaufman or her husband sent the checks to BLMIS. (Id.) Finally,
while the Epsteins alluded to a 2003 letter requesting BLMIS to send separate customer
statements to them, they failed to produce the letter. (Id. at 6-7.) The Trustee’s attorney
7 	Four of the five checks included “Account 1CM100” in the memo portion of the check. The memo
portion of the fifth check was redacted.
8 	The Trustee’s complaint in the adversary proceeding brought against the Epsteins listed the five
deposits in the exhibit showing the activity in Account 1CM100. (See Complaint, dated Nov. 12, 2010, Ex.
B at MADC0261_00000004 (ECF Adv. P. No. 10-04527 Doc. #1).)
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represented at oral argument on March 29, 2017 that she has never seen a copy of the
2003 letter containing a direction to send separate statements to them.
DISCUSSION
A. 	Determining “Customer” Status Under SIPA
The issue before the Court is whether the Epsteins qualify as “customers” as that
term is defined in SIPA so that they may directly participate in the distribution of
customer property as described in SIPA § 78fff-2 and receive advances from SIPC on
account of their claims pursuant to SIPA § 78fff-3. SIPA defines a “customer” as a
person
who has a claim on account of securities received, acquired, or held by the
debtor in the ordinary course of its business as a broker or dealer from or
for the securities accounts of such person for safekeeping, with a view to
sale, to cover consummated sales, pursuant to purchases, as collateral,
security, or for purposes of effecting transfer.
SIPA § 78lll(2)(A).
Customers include “any person who has deposited cash with the debtor for the
purpose of purchasing securities” and “any person who has a claim against the debtor
arising out of sales or conversions of such securities.” SIPA § 78lll(2)(a)(i) & (iii).
“Judicial interpretations of ‘customer’ status support a narrow interpretation of the
SIPA’s provisions,” Stafford v. Giddens (In re New Times Sec. Servs., Inc.), 463 F.3d
125, 127 (2d Cir. 2006) (quoting SIPC v. Wise (In re Stalvey & Assocs., Inc.), 750 F.2d
464, 472 (5th Cir. 1985)), and the burden of proof is on the claimant to demonstrate
“customer” status under SIPA. Mishkin v. Siclari (In re Adler, Coleman Clearing
Corp.), 277 B.R. 520, 557 (Bankr. S.D.N.Y. 2002). While courts consider several factors
in determining the existence of customer status, including whether the claimant had a
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direct financial relationship with the debtor, a property interest in the assets invested,
accounts with the debtor, control over investment decisions, and/or was identified in
the debtor’s books and records, Kruse, 708 F.3d at 426-27; accord Morgan Kennedy,
533 F.2d at 1318, the “critical aspect” of the customer definition is “the entrustment of
cash or securities to the broker-dealer for the purposes of trading securities.” Kruse,
708 F.3d at 426 (quoting In re BLMIS, 654 F.3d 229, 236 (2d Cir. 2011)).
Rule 105 of the SIPC Series 100 Rules addresses the classification of “Joint
Accounts” including those held by tenants in common. 9 SIPC Rule 105(a) provides that
a joint account held by “tenants in common” where each cotenant “possesses authority
to act with respect to the entire account” will be deemed a “qualifying joint account.” 17
C.F.R. § 300.105(a). If at least some of the cotenants lack authority to act, the joint
account will also be deemed a “qualifying joint account” comprised of the cotenants
“having the exclusive power to act with respect to it.” 10 17 C.F.R. § 300.105(d). In either
case, “each qualifying joint account with a member shall be deemed held by one
separate customer of the member.” 17 C.F.R. § 300.105(b) (emphasis added); accord
Morgan Kennedy, 533 F.2d at 1320 (A “qualifying joint account” is a separate customer,
and the “co-owners will be required to divide the single award in proportion to their
ownership interests in the account.”) (footnote omitted).
9 	SIPC’s rules “have the force and effect of law.” Mishkin v. Ensminger (In re Adler, Coleman
Clearing Corp.), 218 B.R. 689, 699 (Bankr. S.D.N.Y. 1998).
10 	If only one cotenant possesses the power to act, then the account will be deemed an individual
account. 17 C.F.R. § 300.105(d).
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B. 	The Epsteins
It is undisputed that Account 1CM100 is a qualifying joint account within the
meaning of SIPC Rule 105. Consequently, the Kaufman Tenancy in Common is the
SIPA customer, and the tenants in common must look to the Kaufman Tenancy in
Common for any recovery.
Furthermore, the Epsteins have failed to satisfy the “critical aspect” of the
customer definition – “the entrustment of cash or securities to [BLMIS] for the purposes
of trading securities.” Kruse, 708 F.3d at 426 (quotation omitted). Their responses to
discovery confirm that:
 	they did not have BLMIS accounts in their own names, (Declaration of Stephanie
Ackerman, dated Jan. 13, 2017 (“Ackerman Decl.”), Ex. 5 at MCMDR_00000336
& Ex. 6 at MCMDR_00000413 (ECF Doc. # 14846));
 	they never received correspondence directly from BLMIS, (id.);
 	they had no communications with BLMIS employees, (id., Ex. 5 at
MCMDR_00000340 & Ex. 6 at MCMDR_00000417);
 	the Cotenant Customer Claims were based on investments in Account 1CM100,
(id.);
 	they never received account statements or tax documents from BLMIS, (id., Ex. 5
at MCMDR_00000337 & Ex. 6 at MCMDR_00000414);
 	they never entered into contracts with BLMIS, (id.);
 	their only relationship with BLMIS existed by way of their relationship to the
Kaufman Tenancy in Common, (id.); and
 	they lacked control, investment discretion or decision-making power regarding
their BLMIS investment. (Id.)
In short, while the Kaufman Tenancy in Common was a “customer” of BLMIS, the
Epsteins were not.
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The Epsteins’ contrary arguments are unpersuasive. First, they point to checks
they made payable to BLMIS for deposit into Account 1CM100, (see Ackerman Decl.,
Ex. 7 at MCMDP_00006631, 33, 35, 37 & Ex. 8 at MCMDP_00010529), to show a
relationship between them and BLMIS. However, they entrusted those checks to Dr.
Kaufman or her husband, and did not deal directly with BLMIS. Second, they allude to
a 2003 letter they sent to BLMIS requesting separate account statements (apart from
the statement sent for the Kaufman Tenancy in Common), but failed to produce it, and
the Trustee represented that he has never seen it. Accordingly, the Epsteins have failed
to carry their burden of proving that they were “customers” of BLMIS as defined in
SIPA.
For the same reasons, the branch of the Motion seeking to affirm the Trustee’s
denial of claims filed by the Schaffer/Hirschhorn Cotenants is also granted. Each of the
Schaffer/Hirschhorn Cotenants filed a customer claim against BLMIS in an amount
equal to one-third of the amount listed on the final BLMIS account statement of the
Keith Schaffer, Jeffrey Schaffer, Carla R. Hirschhorn Tenancy in Common (the
“Schaffer/Hirschhorn TIC”). (See Sehgal Decl., Ex. 12 at MWPTAP00597077; Ex. 13 at
MWPTAP00598855; Ex. 14 at MWPTAP00598884.) 11 The Schaeffer/Hirschhorn TIC is
the account holder and “customer,” the Schaffer/Hirschhorn Cotenants, like the
Epsteins, are not. Moreover, the Schaffer/Hirschhorn Cotenants failed to respond to
requests for admissions in connection with the claim dispute, (Ackerman Decl., ¶ 21;
Exs. 2-4), thereby admitting, inter alia, that they did not have BLMIS accounts in their
11 	The Schaffer/Hirschhorn TIC also filed customer claims against BLMIS, which the Trustee denied
because its BLMIS account was a “net winner” account. (Sehgal Decl., ¶¶ 13, 14; Ex. 1.) The Motion does
not seek a final adjudication on the claims filed by the Schaffer/Hirschhorn TIC.
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own names, did not directly receive BLMIS statements or tax documents, and did not
have control, investment discretion or decision-making power over BLMIS investments.
See F ED. R. CIV. P. 36(a)(3). Finally, they failed to object to the Trustee’s Motion.
CONCLUSION
The Trustee’s Motion is granted as set forth herein. Submit order.
Dated:New York, New York
April 7, 2017
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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