IN RE BERNARD L. MADOFF INV. SEC., LLC
440 B.R. 243 (2010)
In re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.
Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,
J. Ezra Merkin, Gabriel Capital, L.P., Ariel Fund Ltd., Ascot Partners, L.P., Gabriel Capital Corporation, Defendants.
Bankruptcy No. 08-01789 (BRL). Adversary No. 09-1182 (BRL).
United States Bankruptcy Court, S.D. New York.
November 17, 2010.
Baker & Hostetler LLP, New York, NY, by David J. Sheehan, Marc E. Hirschfield, Marc D. Powers, for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.
MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS TRUSTEE'S COMPLAINT
BURTON R. LIFLAND, Bankruptcy Judge.
Before this Court are the motions (the "Motions to Dismiss") of (1) J. Ezra Merkin
("Merkin") and Gabriel Capital Corporation ("GCC," and together with Merkin, the "Merkin Defendants"), and (2) Ariel Fund Limited ("Ariel") and Gabriel Capital, L.P. ("Gabriel," and together with Ariel, the "Fund Defendants" or the "Funds") (collectively, the "Moving Defendants") seeking to dismiss the second amended complaint (the "Complaint") of Irving H. Picard, Esq. (the "Trustee" or "Plaintiff"), trustee for the substantively consolidated Securities Investor Protection Act1 ("SIPA") liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") and Bernard L. Madoff ("Madoff"), filed pursuant to SIPA sections 78fff(b) and 78fff-2(c)(3), sections 105(a), 502(d), 542, 544, 547, 548(a), 550(a) and 551 of the Bankruptcy Code (the "Code"), various sections of New York Debtor and Creditor Law2 (the "NYDCL") and other applicable law for turnover, accounting, preferences, fraudulent conveyances, damages, and objections to SIPA claims.
The Moving Defendants assert that the Complaint fails to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(6), made applicable herein by Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 7012, and should be dismissed in its entirety.
For the reasons set forth below and at oral argument, the Motions to Dismiss are GRANTED in part and DENIED in part. Specifically, the Motions to Dismiss are GRANTED with respect to Counts One and Two of the Complaint, seeking immediate turnover under section 542 of the Code and avoidance of preferential transfers under section 547(b) of the Code, respectively. The Motions to Dismiss all remaining counts of the Complaint are DENIED.
The Complaint arises in connection with the infamous Ponzi scheme perpetrated by Bernard L. Madoff for decades through his investment company, BLMIS. As recognized by the Securities Investor Protection Corporation ("SIPC"), "this is not a typical SIPC proceeding in which securities or cash were on hand at the time of the failure of the brokerage house." Letter from Stephen P. Harbeck, President of SIPC to the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises at p. 6 (dated Sept. 7, 2010) [hereinafter "SIPC Letter"]. Rather, it was a fraud of unparalleled magnitude "in which the only assets were other people's money or assets derived from such funds." Id. During the course of this fraud, there were approximately 90,000 disbursements of fictitious profits to Madoff investors totaling $18.5 billion. Id. at p. 5. Due to the longstanding nature of the Ponzi scheme, many of the customer accounts presented multiple generational investments, requiring the Trustee to conduct a full forensic analysis of all of BLMIS's books and records, dating back to at least the early 1980s. Id. at p. 7. As of November 12, 2010, the Trustee has determined 14,769 claims, denied 2,752 claims, and allowed 2,291 claims in the amount of $5,739,853,405.38. Moreover,
SIPC has committed $743,928,341.68 in SIPC advances to these claimants. See http://www.madofftrustee.com (last visited Nov. 16, 2010). The Trustee has reviewed, and continues to review, millions of documents to determine the thousands of customer claims filed in this SIPA liquidation. SIPC Letter at p. 7.