Pleading a claim that a trustee cannot assert does not allow a creditor to sue a third party based on facts that are common to all creditors, according to an opinion that District Judge Gregory H. Woods handed down in the wake of the Bernard Madoff Ponzi scheme.
Judge Woods’ opinion is a handy compilation of Second Circuit authority drawing the dividing line between claims that only third parties can bring and those that belong only to bankruptcy trustees.
The appeal to Judge Woods involved the late Jeffry Picower, who was alleged to have helped Madoff propagate his Ponzi scheme and took out billions of profits in the process. Irving Picard, the trustee for Bernard L. Madoff Investment Securities LLC, sued Picower’s estate in 2009, soon after the liquidation began under the Securities Investor Protection Act, the adjunct of the Bankruptcy Code under which most stock brokers are liquidated.
The trustee’s fraud suit culminated in a $7.2 billion settlement where the Picower parties paid back 100% of the net profits they received from Madoff. In paying so much, the Picower parties wanted to ensure they would not have additional liability to anyone injured by the Madoff fraud. Consequently, the bankruptcy court’s order approving the settlement enjoined anyone from bringing suits that were “derivative of” claims the trustee brought “or which could have been brought” by the Madoff trustee. The settlement and injunction were upheld in the Second Circuit.
A&G Goldman Partnership attempted unsuccessfully on three occasions to “plead around” the Picower settlement injunction. In the most recent attempt at mounting a class action, Bankruptcy Judge Stuart M. Bernstein of Manhattan enjoined the Goldman parties in February 2016 from prosecuting a complaint filed in district court in Florida asserting claims under Section 20(a) of the Securities Exchange Act of 1934 based on allegations that Picower was a “control person” of Madoff’s brokerage.
In his Jan. 24 opinion, Judge Woods upheld Judge Bernstein’s injunction.
The Madoff trustee admitted he did not have standing to bring Section 20(a) claims. The Goldman parties therefore contended that they were entitled to sue the Picower parties for any losses the Madoff trustee could not pay.
Debunking the Goldman parties’ theory, Judge Woods addressed two questions: (1) Were the Goldman parties’ claims “duplicative or derivative of claims the trustee brought or could have brought,” and (2) Did the Goldman parties assert bona fide Section 20(a) claims?
Judge Woods upheld Judge Bernstein’s injunction because the claims in the Goldman parties’ third complaint could have been “brought by any [Madoff] creditor and [are] not based on conduct by the Picower parties that was directed to the Goldman parties or the putative class members in particular.”
He said the complaint was derivative, and thus barred by the settlement injunction, because what the “complaint does not allege are particular instances in which Picower, through conduct described in the complaint, directed [Madoff] to provide false or misleading information to [the Goldman parties] (or the proposed class members).”
Judge Woods said it was not proper to “look only to the titular cause of action.” Instead, he said the court must look to the substance of what the complaint alleges.
The denomination of the claims as arising under Section 20(a) was a subterfuge, Judge Woods said, because the Goldman parties did not allege that Picower made any misrepresentation to them, that Picower prepared any Madoff records, or that Picower told Madoff what information to put into the financial information that was sent to Madoff’s customers.
Whether the Madoff trustee lacked standing to assert Section 20(a) claims was irrelevant, Judge Woods said, because the complaint did not truly allege securities claims.
The Picower settlement is the largest single chunk of the almost $11.5 billion that the Madoff trustee has recovered so far. To read ABI’s discussion of Judge Bernstein’s opinion, click here.