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by Kathy Bazoian Phelps
Irving Picard, the trustee in the SIPA bankruptcy proceeding
of Bernard L. Madoff Investment Securities, LLC, has asked the Second Circuit
Court of Appeals to overturn two decisions from the Southern District of New
York dismissing his common law claims against financial institutions that had
done business with Madoff. In both
decisions, Picard's claims were dismissed for lack of standing.
In the first, District Judge Jed Rakoff dismissed Picard's
claims against HSBC Bank and others for unjust enrichment, aiding and abetting
fraud, and aiding and abetting breach of fiduciary duty for failing to
adequately investigate Madoff Securities despite "myriad red flags and indicia
of fraud." Picard v HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011) [an enhanced version of this opinion is available to lexis.com
subscribers]. Judge Rakoff
relied on two principles in dismissing Picard's claims. First, under Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416 (1972),
a bankruptcy trustee lacks standing to pursue claims on behalf of the estate's
creditors because the trustee stands in the shoes of the estate and not the
creditors. Second, under Shearson Lehman Hutton, Inc. v. Wagoner,
944 F.2d 114, 118 (2d Cir. 1991) [enhanced version], a bankruptcy trustee lacks
standing to bring a claim that is barred by the in pari delicto doctrine.
Judge Rakoff rejected Picard's several attempts to overcome these
obstacles, calling them "convoluted."
454 B.R. at 29.
In the other decision, District Judge Colleen McMahon
dismissed similar claims against JPMorgan Chase Bank, UBS AG and others. Picard
v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011). Judge McMahon relied on the same
propositions, which she stated were "convincingly
established in Judge Rakoff's recent opinion and equally applicable here[.]" 460 B.R. at 91.
Picard's response to these
rulings in his appeals to the Second Circuit is broad and comprehensive. In his briefs filed on February 16, 2012, he
On the issue of in pari delicto, Picard argues that the
Supreme Court decision in Bateman Eichler, Hill Richards, Inc. v. Berner,
472 U.S. 299, 310 (1985) [enhanced version / unenhanced version available from lexisONE Free Case Law],
supports the position that "[a] SIPA trustee who seeks to recover assets for
the benefit of a debtor's customers should not be impeded by the doctrine of in
pari delicto." In Bateman, the Court held:
private action for damages in these circumstances may be barred on the grounds
of the plaintiff's own culpability only where (1) as a direct result of his own
actions, the plaintiff bears at least substantially equal responsibility for the
violations he seeks to redress, and (2) preclusion of suit would not
significantly interfere with the effective enforcement of the securities laws
and protection of the investing public. "in pari delicto should not interfere
with enforcement of securities laws and protection of the investing public."
Bateman at 310.
As Picard noted:
the nature of the Trustee's appointment, the policy concerns underlying in
pari delicto are absent here. The Trustee
is, of course, not a wrongdoer himself. Further, the Trustee is the only party who can
assert claims to redress damage to the customer property estate. . . By imputing Madoff's wrongdoing to the
Trustee, the District Court impeded the Trustee's duties and powers under SIPA
and his right to assert common law claims to redress the harm JPMC inflicted
upon the customer property fund.
In summary on the in
pari delicto argument, Picard states, "The Trustee should not be burdened
with the inequitable imposition of a doctrine intended to admonish wrongdoers. The Trustee is not a wrongdoer, fraudster or
The Second Circuit's resolution of these important issues
will impact not only Madoff's victims, but also potentially the victims of the
countless other current and future Ponzi schemes.
Download Picard's appellate briefs and sign up for future
Ponzi news updates at www.theponzibook.blogspot.com.
Bazoian Phelps is the co-author of The
Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes available at