"An under-appreciated evil of substantial
frauds . . . is how they pit their victims against one another." United
States v. Dreier, 682 F. Supp. 2d 417, 418 (S.D.N.Y. 2010).
In the typical Ponzi case, some victims may
employ strategies to seek advantage over other victims. These may include asserting:
(1) equitable claims such as constructive trust to take the entirety of an
asset rather than a pro rata share;
(2) restitution claims in forfeiture proceedings; (3) a variety of legal claims
to recover damages on theories such as breach of fiduciary duty or aiding and
abetting against insiders and professionals; (4) the good faith defense to
clawback suits in an effort to hold on to money already paid; and (5) in equity
receivership actions, a more advantageous distribution scheme to one category
of creditors over another.
Now, however, the Attorney General of
California, Kamala D. Harris, has found a new and creative way to seek an
advantage for some of Madoff's victims. Not surprisingly, the victims for whom
she seeks an advantage are her constituents in California. She filed a civil
enforcement action against Stanley Chais and his probate estate in the
California Superior Court in Los Angeles, seeking restitution and damages of $270
million. Chais ran a major feeder fund for Madoff which she contends violated
state securities laws.
At the same time, for the benefit of
Madoff's customers, Irving Picard, the trustee of Bernard L. Madoff Investment
Securities, LLC, has a clawback suit against the estate of Chais pending in the
bankruptcy court in New York. Picard contends that Chais acquired all of his assets
through fraudulent transfers from Madoff.
And so Harris and Picard are competing for
the same assets - Chais' assets - and it's hundreds of millions of dollars. Who
This high-stakes issue is squarely
presented to the bankruptcy court in New York in a suit that Picard recently filed against Harris. Picard contends that Harris's suit in
Los Angeles violates the automatic stay of bankruptcy, and he has requested a
preliminary injunction to enforce the stay. Harris has filed a forceful
opposition. As of this writing, the motion has not yet been set for hearing.
Picard's brief in support of his motion
for a preliminary injunction argues:
In her brief in opposition, Harris argues:
relevant pleadings filed by Picard and Harris are available at www.theponzibook.blogspot.com.
tough question that Picard will have to answer is why he should be permitted to
block the victims of Chais' fraud from collecting against his probate estate
while at the same time refusing under SIPA to recognize the claims of those
very victims who invested, not directly with Madoff, but instead in feeder
funds like that of Chais. Picard previously argued, and the bankruptcy and district
courts held, that investors in Madoff's feeder funds do not qualify as
"customers" under SIPA. SIPC v. Bernard
L. Madoff Investment Securities, LLC, 454 B.R. 285 (Bankr. S.D.N.Y. 2011), aff'd sub nom. Aozora Bank Ltd. v. SIPC,
2011 U.S. Dist. LEXIS 150753 (S.D.N.Y. Jan. 4, 2012).
The tough questions that Harris will have
to answer are the slippery slope questions: If a state enacts a law making
failure to pay a debt illegal, with enforcement by the state's attorney
general, would § 362(b)(4) except such an "enforcement" action from the
automatic stay? And if that action is not excepted from the stay because it is
only an attempt to collect a debt, how is her present enforcement action any
different? Also, what if every state
attorney general filed a similar action against Chais' probate estate?
This litigation is immensely important to
Madoff's victims because of its potential impact on how Chais' assets will be
Issues relating to competing trustee and
victims claims, the automatic stay and competing victim claims are discussed in
The Ponzi Book: A Legal Resource for
Unraveling Ponzi Schemes, by Kathy Bazoian Phelps and Hon. Steven Rhodes, at
§§13.02[f], 16.07, and 20.06. The Ponzi Book is available
for purchase at www.lexisnexis.com/ponzibook.
More information about The
Ponzi Book can be found at www.theponzibook.com.
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