2nd Circuit: Madoff Trustee Cannot Sue Banks On Behalf Of Customers

2nd Circuit: Madoff Trustee Cannot Sue Banks On Behalf Of Customers

NEW YORK - (Mealey's) The Second Circuit U.S. Court of Appeals on June 20 affirmed a district court's ruling that Bernard L. Madoff Investment Securities LLC (BMLIS) trustee Irving H. Picard cannot sue JPMorgan Chase & Co., HSBC Holdings PLC, UBS AG and UniCredit SpA for the banks' alleged role in Madoff's Ponzi scheme, ruling that the trustee does not have standing to bring such claims (In Re:  Bernard L. Madoff Investment Securities LLC, Nos. 11-5044, 11-5051, 11-5175, 11-5207, 2nd Cir.; 2013 U.S. App. LEXIS 12551) [enhanced opinion available to lexis.com subscribers].


The panel of Chief Circuit Judge Dennis Jacobs and Circuit Judges Ralph K. Winter and Susan L. Carney affirmed the findings of the U.S. District Court for the Southern District of New York in several suits Picard filed. 

Picard brought the suits in his capacity as trustee under the Securities Investor Protection Act (SIPA) on behalf of the victims of Madoff's multibillion-dollar Ponzi scheme.  Picard alleged that the banks aided and abetted fraud and collected exorbitant fees while ignoring blatant warning signs.  The trustee's claims included unjust enrichment, breach of fiduciary duty, aiding and abetting fraud and negligence.   

In Pari Delicto  

In 2011, the District Court dismissed the suits, holding that Picard's claims were barred by the doctrine of in pari delicto and that he lacked standing to pursue claims on behalf of customers.  The trustee appealed to the Second Circuit. 

The panel agreed with the District Court that the doctrine of in pari delicto bars the trustee, who stands in Madoff's shoes, "from asserting claims against the Defendants on behalf of the estate for wrongdoing in which Madoff (to say the least) participated."  The panel said the trustee's claim for contribution "is likewise unfounded, as SIPA provides no such right." 

The decisive issue was "whether the Trustee has standing to pursue the common law claims on behalf of Madoff's customers," the panel added. 

"Two thorough well-reasoned opinions by the district courts held that he does not.  See Picard v. HSBC Bank PLC, 454 B.R. 25 22 (S.D.N.Y. 2011) (Rakoff, J.) [enhanced version]; Picard v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011) (McMahon, J.) [enhanced version]," the panel said, adding that its holding "relies on a rooted principle of standing:  A party must 'assert his own legal rights and interests, and cannot rest his claims to relief on the legal rights or interests of third parties,'" quoting Warth v. Seldin (422 U.S. 490, 499 [1975]) [enhanced version].  

'Inapt And Unconvincing' 

"Picard offers two theories for why a SIPA liquidation is a different creature entirely, and why therefore a SIPA trustee enjoys third-party standing:  (1) He is acting as a bailee of customer property and therefore can pursue actions on customers' behalf to recover such property; and (2) he is enforcing SIPC's rights of equitable and statutory subrogation to recoup funds advanced to Madoff's customers.  Neither is compelling," the panel found.  "Although a SIPA liquidation is not a traditional bankruptcy, a SIPA trustee is vested with the 'same powers and title with respect to the debtor and the property of the debtor . . . as a trustee in a case under Title 11.'  15 U.S.C. [U.S. Code] § 78fff-1(a).  At best, SIPA is silent as to the questions presented here.  And analogies to the law of bailment and the law of subrogation are inapt and unconvincing." 

Picard is represented by David J. Sheehan, Oren J. Warshavsky, Deborah H. Renner, Thomas D. Warren, Lan Hoang and Carrie A. Longstaff of Baker & Hostetler in New York.  The banks are represented by John F. Savarese, Douglas K. Mayer, Stephen R. DiPrima, Emil A. Kleinhaus, Lauren M. Kofke and Jonathon R. La Chapelle of Wachtell, Lipton, Rosen & Katz in New York.

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