Irving H. Picard v. Sage Associates

Background

Bernard L. Madoff Investment Securities was placed into liquidation after Madoff’s arrest. Irving H. Picard was appointed as the trustee responsible for administering the liquidation and distributing customer property under the Securities Investor Protection Act (SIPA), a federal law governing the liquidation of failed broker-dealers.

The Trustee brought related adversary proceedings in bankruptcy court against Sage Associates, Sage Realty, and individual defendants. He sought to avoid and recover a $13,510,000 transfer to Sage Associates and a $3,370,000 transfer to Sage Realty, and sought to hold the individual defendants jointly and severally liable based on their alleged roles as partners or joint venturers. The defendants answered, discovery concluded, and the proceedings were described as nearly ready for trial.

The Trustee used the “Net Investment Method” to calculate customer claims. That method subtracts a customer’s cash withdrawals from cash deposits. The defendants argued that their account statements reflected securities they had directed Madoff to purchase and should not be treated like the entirely fictitious statements involved in the Second Circuit’s earlier Madoff ruling. The Trustee argued that the Net Investment Method remained appropriate.

Motion to Withdraw the Bankruptcy-Court Reference

The cases had been automatically referred to the bankruptcy court. The defendants moved under 28 U.S.C. § 157(d) to withdraw that reference, meaning that the district court would take over the proceedings. They argued that withdrawal was mandatory because resolving the cases would require substantial and material interpretation of SIPA, a federal statute outside the Bankruptcy Code. They also argued in the alternative that withdrawal was permitted for cause because the individual defendants had demanded a jury trial.

The court focused on whether SIPA presented unsettled legal questions requiring more than routine application of established law. It identified several such questions. First, if the defendants’ account statements reflected trades they authorized but that BLMIS never actually executed, the court would need to decide whether those statements accurately represented their “securities positions” under SIPA. Second, it would need to decide whether the Net Investment Method was legally permissible in those circumstances. Third, even if that method were permissible but less favorable than the Last Statement Balance Method, the court might need to decide whether the Trustee had discretion under SIPA to select it.

The court noted that the Second Circuit had not resolved these questions. Its earlier decision had approved the Net Investment Method for the fictitious split-strike accounts involved there, but had stated that the method might not be appropriate in other situations, including situations involving customer-authorized stock purchases. The Second Circuit had also suggested, without deciding, that a SIPA trustee might have discretion to choose a method for calculating customer claims.

Ruling

The court held that mandatory withdrawal applied because the proceedings required substantial and material consideration of SIPA. It explained that the bankruptcy court would have to address significant, unsettled interpretive questions rather than merely apply settled law to the facts. The court therefore did not reach the defendants’ alternative request for permissive withdrawal.

Judge Alison J. Nathan granted the defendants’ motions. The references to the bankruptcy court in both related proceedings—20-cv-10109 involving Sage Realty and 20-cv-10057 involving Sage Associates—were withdrawn. The court ordered the parties to submit a joint letter updating it on discovery and proposing next steps. The opinion did not decide the merits of the Trustee’s claims, whether the transfers were recoverable, or which method should be used to calculate the defendants’ net equity.