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

NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION
CORPORATION, 	No. 08-01789 (CGM)
Plaintiff-Applicant, 	SIPA LIQUIDATION
v. 	(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant.
In re:
BERNARD L. MADOFF,
Debtor.
IRVING H. PICARD, Trustee for the Substantively
Consolidated SIPA Liquidation of Bernard L. Madoff
Investment Securities LLC and Bernard L. Madoff,
Adv. Pro. No. 10-04570 (CGM)Plaintiff,
v.
Jacob M. Dick Rev Living Trust DTD 4/6/01;
Estate of Jacob M. Dick, as grantor of the Jacob M.
Dick Rev Living Trust Dtd 4/6/01;
Andrea J. Marks, trustee & beneficiary of Jacob M.
Dick Rev Living Trust Dtd 4/6/01, executor &
beneficiary of Estate of Jacob M. Dick, & trustee of
Article 8.1 Trust created under Jacob M. Dick Rev
Living Trust Dtd 4/6/01;
R. D. A., a minor, as beneficiary of the Article 8.1
Trust created under the Jacob M. Dick Rev Living
Trust Dtd 4/6/01;
Rio Jocelyn Breen, as beneficiary of the Article 8.1
Trust created under the Jacob M. Dick Rev Living
Trust Dtd 4/6/01;
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Article 8.1 Trust;
Suzanne Breen, as beneficiary of the Estate of Jacob
M. Dick and the Jacob M. Dick Rev Living Trust Dtd
4/6/01; and
Douglas J. Sturlingh, as beneficiary of the Estate of
Jacob M. Dick and the Jacob M. Dick Rev Living
Trust Dtd 4/6/01
Defendants.
MEMORANDUM DECISION GRANTING SUMMARY JUDGMENT
IN FAVOR OF THE TRUSTEE
A P P E A R A N C E S :
BAKER & HOSTETLER LLP
Nicholas J. Cremona, David J. Sheehan, Seanna R. Brown, Lan Hoang, Amy E. Vanderwal,
Attorneys for the Trustee, Irving H. Picard
45 Rockefeller Plz
New York, NY 10111
CHAITMAN, LLP
Helen Davis Chaitman, Attorney for the Defendants
465 Park Avenue
New York, New York 10022
CECELIA G. MORRIS
UNITED STATES BANKRUPTCY JUDGE
Irving H. Picard (“Trustee”), Trustee for the Substantively Consolidated SIPA1
Liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS2”) and the estate of
Bernard L. Madoff, brings this adversary proceeding to avoid and recover fictitious profits
transferred to the Defendant, Jacob M. Dick Rev Living Trust Dtd 4/6/01 (the “Living Trust”),
1 SIPA means the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq.
2 The term BLMIS is used only with reference to the LLC and not the sole proprietorship, which
sometimes used the similar name of Bernard L. Madoff Investment Securities.
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the Estate of Jacob M. Dick (the “Estate”), and others (collectively, the “Defendants”). The
Trustee moves for summary judgment as to count one of the Trustee’s complaint to avoid and
recover amounts transferred from BLMIS to the Defendants. The Trustee seeks to recover
$1,681,299 in fictitious profits transferred within the two years preceding the commencement of
the SIPA liquidation (the “Two-Year Period”). The parties waived oral argument on the motion
for summary judgment. For the reasons set forth in this memorandum decision, the Court finds
the Defendants liable for these monies.
Jurisdiction
This Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§
1334(b) and 157(a), the District Court’s Standing Order of Reference, dated July 10, 1984, and
the Amended Standing Order of Reference, dated January 31, 2012. In addition, the District
Court removed the SIPA liquidation to this Court pursuant to SIPA § 78eee(b)(4), (see Order,
Civ. 08– 01789 (Bankr. S.D.N.Y. Dec. 15, 2008) (“Main Case”), at ¶ IX (ECF No. 1)), and this
Court has jurisdiction under the latter provision. The Court has authority to enter a final order in
this case. To the extent that it does not, the Court asks the District Court to construe this decision
as proposed findings of fact and conclusions of law, pursuant to the Amended Standing Order of
Reference dated January 31, 2012.
Background
For a background of these SIPA cases and the BLMIS Ponzi scheme, please refer to the
findings of fact in Picard v. Nelson (In re BLMIS), 610 B.R. 197, 206–14 (Bankr. S.D.N.Y.
2019).
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The Living Trust was formed under the laws of the State of New York. Answer ¶ 7, ECF
No. 48.3 The Estate is the grantor of the Living Trust. Id. ¶ 8. Jacob M. Dick died on June 22,
2008. Id. The Living Trust held two accounts with BLMIS: Account 1CM325 under the name
Jacob M Dick Rev Living Trust Dtd 4/6/01 And June Dick TIC and Account 1CM883 under the
name Jacob M Dick Rev Living Tst Dtd 4/6/01 Dr Jacob Dick C/O AJ Marks. Def’s Opp’n and
Resp. ¶ 114, ECF No. 115. The 1CM883 account was opened in May 2004 with a $1,044,484
transfer from Account No. 1CM325. Trustee’s Stmt. ¶ 131, ECF No. 104; Def’s Counter Stmt. ¶
33, ECF No. 116.
Between December 11, 2006 and December 11, 2008, $1,681,299 in excess of principal
was withdrawn from Account No. 1CM883. Def’s Opp’n and Resp. ¶ 136, ECF No. 115. These
withdrawals were funded with checks drawn from the 509 Account, one of three accounts used
by BLMIS for the investment advisory business.4. Def’s Counter Stmt. ¶ 35, ECF No. 116. The
Defendants have provided checks evidencing these withdrawals. Chaitman Decl., Ex. Z, ECF
No. 114.
The Defendants deny that the 1CM325 and 1CM883 accounts were funded by payments
from BLMIS. Def’s Counter Stmt. ¶ 35, ECF No. 116. Defendants argue instead that the Living
Trust received payments from Bernie Madoff’s sole proprietorship and never from BLMIS. Id. ¶
36. Defendants dispute the admissibility of evidence establishing proof of the ownership of
BLMIS, the application of the Ponzi scheme presumption, and the Trustee’s entitlement to
prejudgment interest. Def’s Opp’n, ECF No. 113.
3 Unless otherwise indicated, all ECF references herein refer to the docket of adversary
proceeding, 10-04570.
4 BLMIS primarily used three bank accounts for the investment advisory business: JPMorgan
Chase Bank, N.A. (“Chase”) account #xxxxx1703 (the “703 Account”); Chase account
#xxxxxxxxx1509 (the “509 Account”); and Bankers Trust account #xx-xx0-599.
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Discussion
A. Summary Judgment Standard
Rule 56(a) of the Federal Rules of Civil Procedure, as applied by Rule 7056(c) of the
Federal Rules of Bankruptcy Procedure, provides that the Court “shall grant summary judgment
if the movant shows that there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A genuine dispute is one that
requires resolution by a “finder of fact because they may reasonably be resolved in favor of
either party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). This requires evidence
on which a jury could return a verdict for the nonmoving party. Rojas v. Roman Catholic
Diocese of Rochester, 660 F.3d 98, 104 (2d Cir. 2011). A material fact is one that might affect
the outcome of the case. Holmes v. Apple Inc., 797 F. App'x 557, 562 (2d Cir. 2019) (citing
Anderson at 248).
The moving party has the initial burden of establishing the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Failure to do so means that
the motion for summary judgment must be denied. Id. The burden of producing evidence shifts
to the nonmoving party after the moving party has met its burden. See Anderson, 477 U.S. at
248.
The nonmoving party “must do more than simply show that there is some metaphysical
doubt as to material facts.” Repp v. Webber, 132 F.3d 882, 889 (2d Cir. 1997). The nonmoving
party should oppose the motion for summary judgment with evidence that is admissible at trial.
See Fed. R. Civ. P. 56(e)(1); Crawford v. Dep't of Investigation, 324 F. App'x 139, 143 (2d Cir.
2009) (affirming award of summary judgment in favor of defendant, where plaintiff presented
testimony from uncorroborated source, as well as “speculation, hearsay and other inadmissible
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rumor, and conclusory allegations”). The nonmoving party must do more than make conclusory
or speculative assertions. Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290,
310–12 (2d Cir. 2008).
B. The SIPA Trustee May Avoid and Recover Transfers Under 11 U.S.C. §
548(a)(1)(A)
The Trustee moves for summary judgment to avoid and recover transfers of fictitious
profits made to the Defendants under 11 U.S.C. § 548(a)(1)(A). Avoidance and recovery under
Section 548(a)(1)(A) requires (i) a transfer of an interest of the debtor in property; (ii) made
within two years of the petition date; (iii) with “actual intent to hinder, delay, or defraud” a
creditor. Adelphia Recovery Tr. v. Bank of Am., N.A., No. 05 Civ. 9050 (LMM), 2011 WL
1419617, at *2 (S.D.N.Y. Apr. 7, 2011), aff’d, 748 F.3d 110 (2d Cir. 2014).
i. 	A Transfer of an Interest of the Debtor in Property
To avoid and recover the fictitious profits made within the two-year period, the Trustee
must prove that the transfers were an interest of the debtor in property. 11 U.S.C. §
548(a)(1)(A). The Trustee can do so by showing that the property was “customer property”
under SIPA § 78fff-2(c)(3). See Peloro v. U.S., 488 F.3d 163, 170 (3d Cir. 2007) (“‘[C]ustomer
property,’ as defined by SIPA, includes not only securities actually allocated to customer
accounts, but any ‘cash and securities . . . at any time received, acquired, or held . . . for the
securities account of a customer.’”).
Pursuant to SIPA § 78fff-2(c)(3), the Trustee may recover any property, which would
have been customer property except for a transfer that is void or voidable under the Bankruptcy
Code. SIPA § 78fff-2(c)(3). The property that was transferred in this way “shall be treated as
customer property” and is “deemed to have been the property of the debtor.” Id.; see also Picard
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v. JABA Assocs. LP, 528 F. Supp. 3d 219, 236 (S.D.N.Y. 2021). In this way, Section 78fff-2
allows the SIPA Trustee to “invoke the fraudulent transfer provisions in the Bankruptcy Code to
recover customer property.” Picard v. Gettinger (In re BLMIS), 976 F.3d 184, 199 (2d Cir.
2020).
The Trustee is seeking to avoid transfers made between April 18, 2007 and October 7,
2008, totaling $1,681,299. Defendants do not dispute that checks from the 509 Account were
used to fund withdrawals from Account 1CM883 (the “Living Trust Account”). Def’s Counter
Stmt. ¶35, ECF No. 116 (“Throughout the life of the Living Trust Account, withdrawals were
paid by checks drawn from the 509 Account in the name of ‘Bernard L. Madoff.’”). The
Defendants do not dispute that the investment advisory business placed customer deposits into
the 703 Account held with Chase. Def’s Counter Stmt. ¶¶ 20, 25, ECF No. 116.
The Defendants argue that there is a genuine issue of material fact as to whether the 703
and 509 Accounts were held in the name of BLMIS. Def’s Counter Stmt. ¶25 –31, ECF No.
116. Defendants argue that the Accounts were held in the name of Bernard L. Madoff and that
BLMIS did not acquire the investment advisory business: “[f]orm BD did not effectuate a
transfer of all the assets and liabilities of the sole proprietorship to the LLC. Form BD referred
only to a transfer of the PT and MM businesses. Form BD specifically stated that the LLC
would not be engaged in the investment advisory business.” Def’s Opp’n and Resp, ECF No.
115.
The Trustee has shown that all assets and liabilities of the sole proprietorship were
transferred to BLMIS in 2001. In 2001, Bernard L. Madoff filed an Amended Form BD with the
SEC using his SEC registrant number. Cremona Decl., Ex. 3, Amended Form BD, ECF No. 105.
On this Amended Form BD, Madoff attested that, “[e]ffective January 1, 2001, predecessor [the
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sole proprietorship] will transfer to successor [BLMIS] all of predecessor's assets and liabilities
related to predecessor's business. The transfer will not result in any change in ownership or
control.” Id. This form further certified that no customer accounts, funds, or securities are held
or maintained by any other person, firm, or organization. Id. BLMIS assumed all of the sole
proprietorship’s assets and liabilities in this form and all “accounts, funds, or securities of
customers” were transferred to BLMIS. Id.
The Trustee’s evidence establishing the transfer of the investment advisory business to
BLMIS is admissible. As stated by Judge McMahon, the expert reports and BLMIS records
have been challenged previously and have repeatedly been “deemed admissible including on the
Trustee’s motion for summary judgment in avoidance actions” in cases like this. In re BLMIS
LLC (“Epstein II”), No. 1:21-cv-02334-CM, 2022 WL 493734, at *20 (S.D.N.Y. Feb. 17, 2022).
The evidence offered by the Trustee shows that the accounts were transferred to BLMIS in 2001
along with the investment advisory business.
The Defendants have not rebutted any of the evidence offered by the Trustee. Instead,
the Defendants offer only speculation. The discrepancies Defendants point to—the names used
on checks and statements, Bernard L. Madoff’s failure to send a letter to Chase, and the failure to
check a box in 2001 on Form BD—are slights of hand that are expected to appear following a
Ponzi scheme. Picard v. BAM, L.P. (In re BLMIS), 624 B.R. 55, 60 (Bankr. S.D.N.Y. 2020).
The failure to check a box on the Form BD indicating that BLMIS would engage in investment
advisory services is “particularly meaningless,” as the investment advisory business was not
registered with the SEC until 2006. Epstein II, 2022 WL 493734, at *16. (“When Madoff did
finally register the IA Business in 2006, he registered it as BLMIS, using the same SEC registrant
number as BLMIS. The only conclusion that a reasonable trier of fact could reach is that the IA
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Business was transferred to BLMIS in 2001 with the rest of the business assets and was
registered under BLMIS in 2006. . . .”). The Defendants do not raise genuine issues of material
fact that would lead a reasonable trier of fact to conclude that Madoff withheld his fraudulent
enterprise after 2001.
In any case, the Trustee need not prove that the investment advisory business was
transferred to the LLC in 2001. The Trustee need only prove that the property he is seeking to
recover was “customer” property prior to the transfer. All monies transferred from the 509
Account are “customer property” and are deemed to have been BLMIS’s property for purposes
of these SIPA cases. BAM, L.P., 624 B.R. at 62 (“When the Defendants invested their money
into the IA Business, the deposits were placed into the Bank Accounts and commingled with all
of the Ponzi scheme victims’ deposits. The funds held in the Bank Accounts were meant to be
invested legitimately through BLMIS but never were. Thus, they were ‘customer property.’”);
see also Picard v. Nelson (In re BLMIS), 610 B.R. 197, 233 (Bankr. S.D.N.Y. 2019) (“All of the
transfers were made from the 509 Account held by BLMIS and consisted entirely of fictitious
profits. Under SIPA, the customer deposits are deemed to have been BLMIS’s property for the
purposes of these adversary proceedings.”).
Here, it is undisputed that customer deposits were deposited in the 703 Account and
transfers originated in the 509 Account. Def’s Opp’n and Resp. ¶¶ 72, 89, ECF No. 115; Def’s
Opp’n 4, ECF No. 113 (“Throughout the life of the Living Trust Account, withdrawals were paid
by checks drawn from Madoff’s ‘509 Account’ at JPMorgan Chase Bank, N.A. . . .”). The
Trustee has met his burden of demonstrating that the transfers were of an interest of the debtor in
property.
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ii. 	Made within Two Years of the Petition Date
Section 548(a)(1)(A) limits recovery of transfers made within two years of the petition
date. It is undisputed that the deposits and withdrawals at issue took place between December
11, 2006 and December 11, 2008. Def’s Opp’n and Resp. ¶ 115, ECF No. 115 (“Defendants do
not dispute the deposits and withdrawals reflected on Exhibit B to the Complaint from December
11, 2006 to December 11, 2008.”). The Trustee has established that the transfers occurred inside
of the Two-Year Period preceding the petition.
iii. With Actual Intent to Hinder, Delay, or Defraud a Creditor
Actual intent to hinder, delay, or defraud a creditor may be established by showing that
BLMIS operated a Ponzi scheme. Picard v. Cohmad Sec. Corp., 454 B.R. 317, 330 (Bankr.
S.D.N.Y. 2011) (“[T]he fraudulent intent on the part of the debtor/transferor . . . is established as
a matter of law by virtue of the ‘Ponzi scheme presumption’ . . . .”). “It is well established that
the Trustee is entitled to rely on a presumption of fraudulent intent when the debtor operated a
Ponzi scheme.” Picard v. JABA Assocs. LP, 528 F. Supp. 3d 219, 237 (S.D.N.Y. 2021). There
is no basis for disputing the application of the Ponzi scheme presumption to cases involving the
withdrawal of fictitious profits. Cohmad, 454 B.R. at 330.
Defendants allege that there was no Ponzi scheme, as Bernard L. Madoff continued to
operate a legitimate business through the sole proprietorship, and “Madoff purchased large
amounts of T-Bills for customers and held them through the time they were credited to
customers’ accounts.” Def’s Opp’n 31, ECF 113.
The unrebutted evidence of Bruce G. Dubinsky shows that BLMIS did not purchase T-
Bills for customer accounts. Dubinsky Rep. ¶ 227, ECF No. 107. The testimony of Frank
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DiPascali confirms that none of the T-Bills purchased by the investment advisory business were
those reported on the customer statements. Id. ¶ 226; Cremona Decl., Ex. 7, ECF No 105.
The Defendants argue that the Court should follow Judge Menashi’s concurrence in
Picard v. Citibank, N.A., 12 F.4th 171, 200–04 (2d Cir. 2021) and hold that the Ponzi scheme
presumption is inconsistent with federal and state law. This Court will follow all courts who
have opined on the issue and allow the Trustee to rely on the Ponzi scheme presumption. See
Epstein II, 2022 WL 493734, at *17.
The Court holds that the Trustee has met its burden of proof for summary judgment on
this issue. See Picard v. Legacy Capital Ltd., 603 B.R. 682, 688–93 (Bankr. S.D.N.Y. 2019)
(discussing in detail that BLMIS was a Ponzi scheme and why the Trustee is permitted to rely on
the Ponzi scheme presumption to prove fraudulent intent as a matter of law); see also Bear
Stearns Secs. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1, 11 (S.D.N.Y. 2007)
(“[T]he Ponzi scheme presumption remains the law of this Circuit.”).
The Trustee has met his burden on every element of his case. There is no genuine issue
of material fact as to the transfer of the interest of the debtor in property made within two years
of the petition date with actual intent to hinder, delay, or defraud a creditor.
C. The Trustee has Standing to Recover Transfers
The Defendants, citing In re Bernard L. Madoff Inv. Sec. LLC (“Avellino”), 557 B.R. 89,
110 (Bankr. S.D.N.Y. 2016), reconsideration denied, 2016 WL 6088136 (Bankr. S.D.N.Y. Oct.
18, 2016), argue that the Trustee lacks standing to recover transfers in this case, and that only
Bernard L. Madoff’s individual trustee, Alan Nisselson, has standing to recover transfers. The
Defendants’ reliance on this case is misplaced. As Judge McMahon recently held, Avellino
concerned transfers prior to 2001. Epstein II, 2022 WL 493734, at *11. The Avellino ruling
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“has no bearing on the Trustee’s standing” in cases concerning transfers made during the Two-
Year Period. Id.
D. Prejudgment Interest Shall be Awarded
The Trustee has requested prejudgment interest from the filing date of this case,
December 11, 2008, through the date of the entry of judgment at the rate of 4%. The Defendants
oppose this request. This Court has considered this issue on multiple prior occasions. See, e.g.,
BAM L.P., 624 B.R. at 62–66.
To determine whether prejudgment interest should be awarded, the Court must consider
“(i) the need to fully compensate the wronged party for actual damages suffered,
(ii) considerations of fairness and the relative equities of the award, (iii) the remedial purpose of
the statute involved, and/or (iv) such other general principles as are deemed relevant by the
court.” Wickham Contracting Co. v. Local Union No. 3, Int'l Brotherhood of Elec. Workers,
AFL-CIO, 955 F.2d 831, 834 (2d Cir. 1992). The purpose of prejudgment interest is to make the
Plaintiff whole rather than to punish Defendants or to provide Plaintiff with a windfall. Jones v.
UNUM Life Ins. Co. of Am., 223 F.3d 130, 139 (2d Cir. 2000) (citations and quotations omitted).
“Courts in the Second Circuit and in this district have recognized that the award of prejudgment
interest is discretionary, and absent a sound reason to deny prejudgment interest, such interest
should be awarded.” McHale v. Boulder Capital LLC (In re 1031 Tax Grp., LLC), 439 B.R. 84,
87 (Bankr. S.D.N.Y. 2010) (citations omitted). “The court must, however, explain and articulate
its reasons for any decision regarding prejudgment interest.” Henry v. Champlain Enter., Inc.,
445 F.3d 610, 623 (2d Cir. 2006).
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Prejudgment interest is “normally” awarded in avoided transfer cases “to compensate for
the value over time of the amount recovered.” Geltzer v. Artists Mktg. Corp. (In re Cassandra
Grp.), 338 B.R. 583, 599 (S.D.N.Y. 2006) (“To fully and fairly compensate Cassandra's creditors
for their loss—not only of $300,000 that was fraudulently conveyed to the Defendants, but of the
use of that money since the date of the demand—the Trustee should be permitted to recover
prejudgment interest.”); see also Messer v. McGee (In re FKF 3, LLC), 2018 WL 5292131, at
*13 (S.D.N.Y. Oct. 24, 2018) (awarding prejudgment interest to compensate for “loss of interest,
the diminished value of the damages award due to the passage of time, and Plaintiff's lost
opportunity to make use of the lost funds”). The District Court has affirmed this Court’s award
of prejudgment interest to the Trustee against parties who have insisted on relitigating issues that
the Court has already decided and who have forced the Trustee to expend resources defending
against legal arguments that have already been decided in these SIPA cases. Epstein II, 2022
WL 493734, at *16.
Prejudgment interest is warranted here. The Trustee has spent years prosecuting this case
and cannot be made whole without an award of prejudgment interest. He has spent time
defending against arguments that have already been decided. Although the Defendants may not
have been responsible for the fraud, the purpose of prejudgment interest is to make the Trustee
whole. The Court will award the Trustee prejudgment interest in the amount of 4% commencing
on the filing date of December 1, 2010 through the date of an entry of judgment.
Conclusion
For the foregoing reasons, summary judgment is granted in favor of the Trustee. The
Trustee shall submit proposed order(s) within fourteen days of the issuance of this decision,
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directly to chambers (via E-Orders), upon not less than two days’ notice to all parties, as required
by Local Bankruptcy Rule 9074-1(a).
Dated: June 6, 2022
Poughkeepsie, New York
/s/ Cecelia G. Morris
_______________________
Hon. Cecelia G. Morris
U.S. Bankruptcy Judge
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