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PICARD v. HSBC BANK PLC
454 B.R. 25 (2011)
Irving H. PICARD, Plaintiff,
v.
HSBC BANK PLC, Alpha Prime Fund Limited, HSBC Securities Services (Luxembourg) S.A., HSBC Bank Bermuda Limited, HSBC Fund Services (Luxembourg) S.A., HSBC Private Bank (Suisse) S.A., HSBC Private Banking Holdings (Suisse) S.A., HSBC Bank (Cayman) Limited, HSBC Securities Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC Institutional Trust Services (Bermuda) Limited, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Ireland) Limited, HSBC Holdings PLC, Defendants.
Irving H. Picard, Plaintiff,
v.
Alpha Prime Fund Limited, HSBC Bank PLC, HSBC Securities Services (Luxembourg) S.A., HSBC Bank Bermuda Limited, HSBC Fund Services (Luxembourg) S.A., HSBC Private Bank (Suisse) S.A., HSBC Private Banking Holdings (Suisse) S.A., HSBC Bank (Cayman) Limited, HSBC Securities Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC Institutional Trust Services (Bermuda) Limited, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Ireland) Limited, HSBC Holdings PLC, UniCredit S.p.A., Pioneer Alternative Investment Management Limited, Defendants.
Nos. 11 Civ. 763 (JSR), 11 Civ. 836 (JSR).
United States District Court, S.D. New York.
July 28, 2011.
Evan A. Davis, Cleary Gottlieb Steen & Hamilton, LLP, Todd E. Duffy, Anderson Kill & Olick, P.C., James Elliot Lahm, Patrick Kevin Slyne, Stull Stull & Brody, New York, NY, Timothy Joseph Burke, Stull, Stull & Brody, Los Angeles, CA, Helen Davis Chaitman, Phillips Nizer LLP, New York, NY, for Defendants.
JED S. RAKOFF, District Judge. Though it sometimes seems otherwise, not every litigant has the right to appear in federal court. A would-be litigant must first establish "standing" to pursue his or her claims, by demonstrating, among other things, the existence of a "case or controversy" and a personal stake in the outcome of the case. In this particular case, the Court is called upon to determine whether Irving Picard (the "Trustee"), the trustee appointed pursuant to the Securities Investor Protection Act for the consolidated liquidation of Bernard L. Madoff Investment Securities ("Madoff Securities"), has standing to pursue common law claims against third parties who allegedly violated a duty to Madoff Securities' customers by failing to detect Madoff's fraud. For the reasons stated herein, the Court answers this question in the negative and thus dismisses the Trustee's common law claims against the "HSBC Defendants"1 and the "UCG/PAI Defendants."2 By way of background, after it was revealed in December 2008 that Madoff Securities was "a giant Ponzi scheme," SEC v. Madoff, 08 Civ. 7891 (S.D.N.Y. Dec. 11, 2008), the company went into bankruptcy. See Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities, LLC, Adv. Pro. No. 08-01789 (S.D.N.Y.Bankr.Dec. 11, 2008). Shortly thereafter, on December 15, 2008, the Trustee was appointed to manage the consolidated liquidation of Madoff Securities. On July 15, 2009, the Trustee commenced adversary proceeding No. 09-1364A (BRL) (the "Trustee's Action") in the Bankruptcy Court. The 165-page Amended Complaint in that action, filed on December 5, 2010, in addition to seeking to recover some $2 billion in preferential or fraudulent transfers (Counts 1-19), seeks to recover under various common law theories such as unjust enrichment, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty (Counts 20-24), no less than $6.6 billion in damages from the HSBC Defendants and approximately $2 billion in damages from a group of thirty-six other defendants, including the UCG/PAI Defendants — all premised on their alleged failure to adequately investigate Madoff Securities despite being confronted with "myriad red flags and indicia of fraud." Am. Compl. ¶¶ 1, 318, 332, 557. The question of whether the Trustee can pursue such common law claims, either on behalf of customers or on behalf of the estate, raises substantial, unresolved issues of federal non-bankruptcy law.3 Accordingly, on April 12, 2011, the Court withdrew the reference of this action to the Bankruptcy Court for the limited purpose of addressing two threshold issues of
non-bankruptcy federal law: (1) whether the Trustee has standing to bring his common law claims against the HSBC Defendants and the UCG/PAI Defendants, and (2) whether the common law claims against these defendants are preempted by the Securities Litigation Uniform Standards Act ("SLUSA"). See Order, April 13, 2011 (confirming April 12 ruling from the bench); Picard v. HSBC Bank PLC, 450 B.R. 406 (S.D.N.Y.2011) (elaborating the reasons for the withdrawal of the reference). Both the HSBC Defendants and the UCG/PAI Defendants subsequently moved to dismiss the common law claims, contending that the Trustee lacks standing to bring these claims and that these claims are barred by SLUSA. Because the Court concludes that the Trustee lacks standing to assert the common law claims, the Court need not address whether these claims are preempted by SLUSA. Standing under Article III of the United States Constitution "is a threshold issue in all cases, since putative plaintiffs lacking standing are not entitled to have their claims litigated in federal court." Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir.1991). To meet Article III requirements, the Trustee must demonstrate (i) a concrete and particularized "injury in fact," (ii) that can be fairly traced to the defendants' conduct, and (iii) that can be redressed by a favorable decision. Bogart v. Israel Aerospace Indus. Ltd., No. 09 Civ. 4783(LAP), 2010 WL 517582, at *3-4 (S.D.N.Y. Feb. 5, 2010) (citing Denney v. Deutsche Bank AG, 443 F.3d 253, 263 (2d Cir.2006)). Moreover, to satisfy "prudential" limitations on standing, "a party must `assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.'" Wight v. BankAmerica Corp., 219 F.3d 79, 86 (2d Cir.2000) (quoting Warth v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)).
1. The HSBC Defendants consist of HSBC Bank PLC, HSBC Holdings PLC, HSBC Securities Services (Luxembourg) S.A., HSBC Institutional Trust Services (Ireland) Limited, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC Securities Services (Bermuda) Limited, HSBC Bank (Cayman) Limited, HSBC Private Banking Holdings (Suisse) S.A., HSBC Private Bank (Suisse) S.A., HSBC Fund Services (Luxembourg) S.A., and HSBC Bank Bermuda Limited.
2. The UCG/PAI Defendants consist of UniCredit S.p.A. and Pioneer Alternative Investment Management Ltd.
3. The Trustee asserts that his common law claims are brought under the common law of New York State. See Am. Compl. ¶¶ 537, 542, 547, 554. However, the question of standing to bring such claims in federal court is a matter of federal law. See, e.g., Coyne v. American Tobacco Co., 183 F.3d 488 (6th Cir. 1999) ("[S]tanding is a matter of federal law not state . . . law.").
4. Under SIPA, "customer property" means "cash and securities . . . at any time received, acquired, or held by or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such property transferred by the debtor, including property unlawfully converted." 15 U.S.C. § 78lll (4).
5. The Trustee also suggests that a SIPA trustee's powers must be broadly construed because, according to the Congressional record, a SIPA trustee has "rights to reclaim specifically identified property . . . and shall have additional rights," see 116 Cong. Rec. S9096-9101 at 9099 (June 16, 1970) (emphasis supplied). However, it is now well settled that the unambiguous language of a statute cannot be broadened or changed by reference to the legislative history. Moreover, there is no warrant to imply broad standing authority that is not otherwise available to a bankruptcy trustee based on language found in the congressional record that is this vague.
6. SIPC argues that the federal common law, rather than New York common law, should be used to determine whether the Trustee has the authority to pursue claims under a bailment theory. In so arguing, SIPC contends that "through Rule 15c3-3 and SIPA . . . the SEC and Congress consciously adapted general principles of bailment law to custodial practices in the securities industry," see Memorandum of Law of the Securities Investor Protection Corporation in Opposition to the Motions to Dismiss of HSBC and UCG/PAI at 26. Of course, SIPC cannot dispute that the words "bailment," "bailee," and/or "bailor" appear nowhere in SIPA or in Rule 15c3-3. The mere fact that SIPA and Rule 15c3-3 mandate that customer property be maintained in a separate fund so as to elevate customers' claims above those of general creditors does not imply a bailment relationship whereby the Trustee is permitted to pursue common law claims against third parties on behalf of customers. In any case, whether the Trustee asserts bailee standing under the New York common law or the federal common law, the Court finds that, given the profound differences between the instant case and the typical bailee-bailor scenario envisioned by the common law, common law bailment principles, whether state or federal, cannot be extended to confer the Trustee with standing to assert common law fraud claims on behalf of customers.
7. The Trustee contends that the Supreme Court reversed on a "merits" issue rather than a "threshold" issue, citing Morrison v. Nat'l Austl. Bank Ltd., ___ U.S. ___, 130 S.Ct. 2869, 2877, 177 L.Ed.2d 535 (2010) ("[T]o ask what conduct § 10(b) reaches is to ask what conduct § 10(b) prohibits, which is a merits question."). However, Morrison can be distinguished from Redington in that it concerned whether an accepted cause of action brought under § 10(b) was properly pled, not whether a right of action existed at all. See, e.g., National R.R. Passenger Corp. v. National Ass'n of R.R. Passengers, 414 U.S. 453, 456, 94 S.Ct. 690, 38 L.Ed.2d 646 (1974) ("[I]t is only if such a [private] right of action exists that we need consider whether the respondent had standing to bring the action and whether the District Court had jurisdiction to entertain it.").
8. Although it seems clear that these claims would also have to be dismissed against any other defendant who appeared and so moved, no other such defendant has so moved.
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